repoliticalization of accounting standard setting—the iasb, the eu and the global financial crisis

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Critical Perspectives on Accounting 22 (2011) 567–580 Contents lists available at ScienceDirect Critical Perspectives on Accounting journa l h o me pa g e: www.elsevier.com/locate/cpa Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis Elias Bengtsson Sveriges Riksbank, Financial Stability Department, 103 37 Stockholm, Sweden a r t i c l e i n f o Article history: Received 23 March 2010 Received in revised form 30 March 2011 Accepted 3 April 2011 Keywords: IASB Accounting standard setting Global financial crisis Power struggles a b s t r a c t Since its inception, the IASB has been able to set standards with relatively little political influence in its governance or standard setting process. But this changed with the outbreak of the global financial crisis. Political bodies began to view accounting standards as a con- tributing factor that amplified the consequences of the crisis on banks, financial markets and the overall economy. Regaining control over accounting standard setting was seen as imperative. In this article, we investigate how the EU sought to gain control over the IASB and how the global standard setter responded to limit political influence. Our findings show that a re-balancing of power in favor of political interests has occurred between the stake- holders of international accounting standard setting. Further research in this area looks promising. We suspect that the heightened influence of political actors may lead to further power struggles and efforts to cope with on-going changes in the institutional environment. © 2011 Elsevier Ltd. All rights reserved. 1. Introduction 1.1. International accounting standards from controversy to crisis During the past months, EU seems to have revised its policy of disengagementtowards accounting standard setting Chiapello and Medjad (2008:463) wrote in mid-2008. In retrospect, it is striking how right they were. Yet, the magnitude of the EU’s newfound interest in accounting standards was difficult to anticipate in the early days of the global financial crisis. What started as disharmonic grunts from individual politicians and the occasional banker, turned into a serious questioning of the standards and even the raison d’être of the International Accounting Standards Board (IASB). 1 The principal controversy surrounded the concept of fair valuation of financial instruments. Fair value is the price that would be received if an asset were sold in an orderly transaction between marketplace participants at the measurement date. In principle, fair value accounting requires financial institutions to mark certain financial instruments at market prices. 2 If a mark-to-market price is lower than the historical cost then it leads to write-downs of assets and vice versa. Consequently, fluctuations in the fair value of the financial assets often have large impacts on the balance sheets of financial institutions. E-mail address: [email protected] 1 For a list of abbreviations, please see Appendix A. 2 According to IAS 39, the International Financial Reporting Standard (IFRS) on financial instruments that remained in force until 2009, assets were classified in four categories: held for trading, available for sale, held to maturity, and loans and receivables. The first two categories were measured at fair value, while the last two were measured on an historical cost basis. There was also a so called Fair Value Option (FVO) through which an entity could recognize financial assets in amortized cost categories at fair value if there was an accounting mismatch. For an overview of the current IFRS on financial instruments (IFRS 9), please see Section 3.5. 1045-2354/$ see front matter © 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.cpa.2011.04.001

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Page 1: Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis

Critical Perspectives on Accounting 22 (2011) 567– 580

Contents lists available at ScienceDirect

Critical Perspectives on Accounting

journa l h o me pa g e: www.elsev ier .com/ locate /cpa

Repoliticalization of accounting standard setting—The IASB, the EU andthe global financial crisis

Elias BengtssonSveriges Riksbank, Financial Stability Department, 103 37 Stockholm, Sweden

a r t i c l e i n f o

Article history:Received 23 March 2010Received in revised form 30 March 2011Accepted 3 April 2011

Keywords:IASBAccounting standard settingGlobal financial crisisPower struggles

a b s t r a c t

Since its inception, the IASB has been able to set standards with relatively little politicalinfluence in its governance or standard setting process. But this changed with the outbreakof the global financial crisis. Political bodies began to view accounting standards as a con-tributing factor that amplified the consequences of the crisis on banks, financial marketsand the overall economy. Regaining control over accounting standard setting was seen asimperative. In this article, we investigate how the EU sought to gain control over the IASBand how the global standard setter responded to limit political influence. Our findings showthat a re-balancing of power in favor of political interests has occurred between the stake-holders of international accounting standard setting. Further research in this area lookspromising. We suspect that the heightened influence of political actors may lead to furtherpower struggles and efforts to cope with on-going changes in the institutional environment.

© 2011 Elsevier Ltd. All rights reserved.

1. Introduction

1.1. International accounting standards – from controversy to crisis

“During the past months, EU seems to have revised its policy of disengagement” towards accounting standard setting Chiapelloand Medjad (2008:463) wrote in mid-2008. In retrospect, it is striking how right they were. Yet, the magnitude of the EU’snewfound interest in accounting standards was difficult to anticipate in the early days of the global financial crisis. Whatstarted as disharmonic grunts from individual politicians and the occasional banker, turned into a serious questioning of thestandards and even the raison d’être of the International Accounting Standards Board (IASB).1

The principal controversy surrounded the concept of fair valuation of financial instruments. Fair value is the price thatwould be received if an asset were sold in an orderly transaction between marketplace participants at the measurement date.In principle, fair value accounting requires financial institutions to mark certain financial instruments at market prices.2 If amark-to-market price is lower than the historical cost then it leads to write-downs of assets and vice versa. Consequently,fluctuations in the fair value of the financial assets often have large impacts on the balance sheets of financial institutions.

E-mail address: [email protected] For a list of abbreviations, please see Appendix A.2 According to IAS 39, the International Financial Reporting Standard (IFRS) on financial instruments that remained in force until 2009, assets were

classified in four categories: held for trading, available for sale, held to maturity, and loans and receivables. The first two categories were measured atfair value, while the last two were measured on an historical cost basis. There was also a so called Fair Value Option (FVO) through which an entity couldrecognize financial assets in amortized cost categories at fair value if there was an accounting mismatch. For an overview of the current IFRS on financialinstruments (IFRS 9), please see Section 3.5.

1045-2354/$ – see front matter © 2011 Elsevier Ltd. All rights reserved.doi:10.1016/j.cpa.2011.04.001

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568 E. Bengtsson / Critical Perspectives on Accounting 22 (2011) 567– 580

No wonder then that the International Accounting Standard (IAS) 39 on the recognition and measurement of financialinstruments has been controversial since its issuance in 1998 (Hitz, 2006; Power, 2009).

But once the global financial crisis of 2007–2009 broke out, the debate intensified to unprecedented proportions. Formany financial instruments (both stocks and fixed income but primarily credit derivatives) market liquidity dried up. Thismade valuation difficult. Many financial firms were forced to use valuations based on prices from very few trades, obtainingvery low prices that reflected the liquidity that was available to the buyers (Allen and Carletti, 2007). For some instruments,resorting to valuation models became standard practice in the absence of reliable market pricing.3

Some claimed that fair valuation thereby contributed to the difficulties the financial institutions experienced. Fair valua-tion was seen as causing losses, even in cases where there was little evidence of impairment or changes in fundamentals ofthe underlying assets. It put pressure on the balance sheets of financial institutions. It forced banks to sell assets at depressedprices (so-called “fire sales”) to avoid breaching capital requirements, which in turn stimulated further mark-to-mark losseson other banks’ balance sheets. Ultimately, fair valuation was seen as causing a negative spiral of price contagion (for adiscussion see Allen and Carletti, 2007; Appelbaum, 2009; Jones, 2009) and contributing to the rapid dissemination anddepth of the financial crisis.

Others took the opposite view. They claimed that fair valuation allowed markets and regulators to better assess the trueposition of financial institutions (Turner, 2008; Veron, 2008). It became quite obvious during the crisis that there was littleconfidence in the values of assets reported at historical cost. More transparent valuation was seen as necessary to distinguishbetween distressed and healthy financial institutions. Reducing this ability only meant unjustified contagion between banksand a general dry-up of liquidity in general (and funding markets in particular) since market actors would treat all bankswith utmost caution.

Since the outbreak of the crisis there has been a surge in academic writing on whether fair value accounting caused arti-ficial volatility and contagion through fire sales, and whether historical cost accounting worsened information asymmetriesand suppressed market actors’ confidence in reported figures (cf. Laux and Leuz, 2009; Magnan, 2009; Sole et al., 2009; Ojo,2010; Plantin et al., 2008).

This article does not seek to add anything further to that body of knowledge or pass judgement on which accountingmethod is preferable under what circumstances. Instead, the purpose of this article is to shed light on the power strugglethat has raged on the appropriate shape and purpose of accounting standards since the outbreak of the crisis. Adopting aEuropean perspective, we describe how political actors have sought to influence the global standard setter – the InternationalAccounting Standards Board – and how the IASB has responded to such pressure. We also seek to understand the relationshipsof power that underlie the IASB and the mechanisms through which power is exercised in the standard setting process andsurrounding institutional system.

In answering these questions, our article contributes to the body of knowledge on accounting standard setting in severalrespects. Firstly, it answers calls for a better understanding of the politics of accounting standard setting and how accountinginteracts with macro politics and economics (Arnold, 2009a; 2009b; Perry and Nölke, 2006). Much has been written oninfluences from the corporate sector (Hopwood, 1994; Martinez-Diaz, 2005; Perry and Nölke, 2005) or the accountingprofession (Botzem and Quack, 2006, 2009; Brown, 2004; Cooper and Robson, 2006) throughout the history of the IASB,but less attention has been devoted to outright political interference. The limited research on this topic has concluded thatEU largely remains outside the direct sphere of influence and has shown little interest in challenging the standard settingof the IASB (see further Section 2). But, as shown in this article, this changed dramatically during the crisis. Secondly, thearticle also contributes to a refined understanding of the wider trend towards increased privatization in the governance ofinternational economic activity (Botzem, 2008) by demonstrating how public and political actors have reclaimed their rolein accounting standard setting. Finally, the article demonstrates the usefulness of relying on an interdisciplinary approachto grasp developments in international accounting standard setting.

1.2. Methodology and article outline

The article is primarily based on data collected on the internet. We started the research process by becoming wellacquainted with the standard setting process and the various bodies involved in it (through the informative website of theIASB, the European Commission (EC) and the Committee of European Securities Regulators (CESR)) as well as the relevantregulations (Directives; recommendations, etc.). While this served as useful background knowledge for the subsequent datagathering and analysis, it is not described in detail in this article.4 To gain a rich understanding of the chain of events, amultitude of sources were used. Firstly, we relied upon articles from newspapers and magazines, such as Financial Times,Wall Street Journal, Risk Magazine, etc. Second, we used political statements, communiqués, press releases and discussionpapers. These came from both IASB, from the political sphere (such as Financial Stability Board (FSB), Group of 20 (G20)

3 However, according to the US GAAP and the new IASB proposal fair value based on quoted prices should be used only in a case of an orderly transactionand not forced liquidation or distressed sale. Thus, in a case when there are no quoted prices (or prices are based on forces sales) other valuation techniquescan be used. Prices can in this case be obtained using following three-level fair value hierarchy: quoted prices (level 1), inputs other that quoted prices, i.e.from transactions in non-active markets (level 2), and unobservable inputs to valuation models (level 3).

4 This is done in an informative manner elsewhere. See, for instance, Perry and Nölke (2006).

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Fig. 1. IASB and its key stakeholders - interrelations and modes of influence.

and EC) and the private sector (such as International Corporate Governance Network (ICGN), Chartered Financial AnalystsInstitute (CFA Institute) and Federation of European Accountants (FEE)). This enables us to provide insights on how theprivate and the public interact in accounting standard setting, and illustrate how conflicting perspectives and juxtaposingviews arose or intensified during the financial crisis. A caveat is nevertheless necessary – it is of course impossible to providea comprehensive account of all aspects of the interaction between IASB and its stakeholders during the global financial crisis.Still, this article strives to capture the main events and the most vital actions and responses of the key actors involved. Fig. 1below illustrates these key actors and their principal interrelations and modes of influence.

In the following section, we introduce the theoretical foundations that underpin the analysis. Thereafter, we illustrate howIASB interacted with its key stakeholders during the global financial crisis. Section 3 focuses on the controversies surroundingaccounting for financial instruments. Section 4 illustrates the disputes on IASB’s governance. Section 5 discusses the broaderimplication of the findings and outlines suggestions for further research.

2. Understanding accounting standard setting – an interdisciplinary approach

Theories on the development of accounting standard setting vary considerably in their underlying assumption of whatcauses change and characterizes outcomes. According to the modernist tradition, rationality of accounting policy-makersand market forces drive change. While the actual process of standard setting is not theorized in this framework, standardsetting outcomes tend to be seen as attained solely on the basis of considerations of efficiency and growth (for a discussion,see Arnold, 2009b; Botzem and Quack, 2006).

But changes in accounting standards has also been shown to result from actors striving to gain, maintain or strengthensocial and economic power (see Martinez-Diaz 2005 for a discussion). According to this strand of thinking, standard-settingoccurs and evolves only when there is a shift in the balance of power between the actors that seek to influence accountingstandards in order to pursue their self-interest (e.g. Judge et al., 2010; Mattli and Büthe, 2003). In essence, politics and powerdrive accounting standard setting processes and outcomes.

In the area of international accounting standard setting, this theoretical perspective has often portrayed IASB as capturedby private interest. Not least since the EU adopted IFRS in 2002 (with transposition in 2005), and thereby renounced directpolitical influence by outsourcing accounting standard setting to a private body over which it had no formal control (Chiapelloand Medjad, 2009). This endorsement, in turn, provided the necessary backing for IASB to gain momentum in its globalproliferation of IFRS (Martinez-Diaz, 2005).

In research on IASB’s standards and standard setting, private interest has in essence meant either influences from thecorporate sphere or the accounting profession. Illustrating corporate influence has a long history in accounting research.Hopwood (1994) observed that financial statements users do not have many channels of influence on standard setting,despite the fact that international accounting standard setting is claimed to be driven by the needs of capital markets.More recently, scholars have primarily concluded that the IASB tends to serve the interests of multinational enterprises(MNEs) and advocates of Anglo–Saxon accounting traditions (Perry and Nölke, 2006). The stakeholders have granted IASBfunding and support in exchange of formal channels of influence, such as being co-opted into IASBs various advisory bodies(Martinez-Diaz, 2005).

More recently, accounting scholars have turned their attention to the role of the accounting profession – and especiallythe big international accounting firms – in influencing IASBs standard setting (Suddaby et al., 2007; Whittington, 2005).Based on its global scope, economic power and political influence (Arnold, 2009b) combined with expertise and industryconcentration (Botzem, 2008), the accounting profession has been able to exert far more influence than other stakeholders

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(Botzem and Quack, 2006, 2009; Brown, 2004; Cooper and Robson, 2006; Mattli and Büthe, 2003). This has also meant thatthe IASB has become less responsive to lobbing from elsewhere, such as users, regulators and politicians (Power, 2009). Thisshift in power has fostered international standard setting based on an underlying logic of capital markets orientation, wherea wider use of market valuation practices is seen as responding to investors’ needs (Perry and Nölke, 2005).

Despite this loss of control by public bodies and shift towards market oriented accounting, the EU chose to give its activesupport to IFRS. The Single Market needed common accounting standards. The question on which national accountingstandards to base the common EU standards was highly controversial at the time. Opting for a more politically neutralsolution with a more independent standard setter was the easiest way of solving the deadlock (Van Hulle, 2004). Also, it wasbelieved that an independent organisation with technical expertise would better serve the needs of investors than hard lawprepared by civil servants (cf. Trubek et al., 2005).

Such endorsement of public and political actors has been regarded as necessary for the success of accounting standards(Botzem and Quack, 2009; Botzem, 2008; Kerwer, 2005; 2007; Martinez-Diaz, 2005). But while the backing of public actorsis recognized as important, there is less research on the concrete steps and measures political and public actors have taken toinfluence accounting standards and standard setting. The current understanding suggests that the IASB has been successfulin resisting political influence on its standard setting (Whittington, 2005). Not least since the EU has merely influencedoutcomes at the last stages of the standard setting process, and thereby been unable to proactively influence the IASB(Botzem, 2008). However, political influence seems to be returning to accounting standard setting, especially following theglobal financial crisis. For instance, Arnold (2009a) observed that pressure is mounting on the IASB to consider financialstability implications of their standards. Likewise, Chiapello and Medjad (2009) note that the EU has taken steps to reinstatesome power over the IASB’s standard setting process.

This newfound political interest makes a strong case for seeking a better understanding of the interrelationship betweenpolitics and accounting standard setting, and the ways in which political power is exercised in standard setting processes.Grasping how the financial crisis contributed to a re-politicalization of accounting standard setting also sheds light on howmacro-economic changes influence the balance of power and power struggles between political and other actors (cf. Arnold,2009a, 2009b). But to better understand underlying dynamics of political processes and power struggles, the dominanttheoretical perspective of political economy needs to be broadened to encompass complementary explanations.

In order to capture the ways power operates and the factors that limit its influence, there is need to consider the insti-tutional system in which power struggles and political processes take place. Such systems of norms, values, beliefs aretypically ignored in accounting research based on political economy (Mattli and Büthe, 2003). But they are important sincethey empower or weaken actors by providing them with power to influence others or withstand influence from them. Powerdoes not only entail economic power or formal sanctioning powers, but also informal sanctions that follow from being per-ceived as legitimate by other powerful stakeholders. This in turn is contingent on the organization’s objectives and actionsbeing congruent with the system of norms, values, beliefs in which they act (Jepperson, 1991). Institutional theory has beenused in research on accounting standard setting to complement the explanatory frameworks of rational theory and politicaleconomy (cf. Judge et al., 2010; Touron, 2005). But focus has been on how cognitive and normative pressures influenceadoption of accounting standards, and not on how the playing field of political power struggles is formed and influenced bynormative or cognitive traits.

In this article, we allow institutional factors to influence our analysis of power struggles and their outcomes (as advo-cated by Arnold, 2009b). But we seek to accomplish this without being limited by the principal shortcomings of mainstreaminstitutional theory – by neither assuming that institutional systems are inherently stable nor that actors are passive respon-dents with little or no ability to withstand changes in their institutional environment or influence it in any way. Changes ininstitutional systems may be triggered by an external event or a crisis (Suchman, 1995). In the altered institutional system, adifferent set of values, norms and beliefs prevails (Meyer and Rowan, 1977). In the new institutional system, novel conflictsof interest may arise. And since it typically involves a rebalancing of power (Suchman, 1995), a changing institutional systemoften leads to power struggles (Ashford and Gibbs, 1990).

But while a rebalancing of power will influence outcomes of organisational interaction in an institutional system, it doesnot mean that actors suddenly discover their new set of powers and a new equilibrium of power is established. Rather, actorshave opportunities to strategically adapt to the new circumstances, and thereby lose, regain or maintain power. The reasonis that following a sudden shift, the likelihood the institutional system being consistent in its prescribed actions and scriptsis reduced. On the contrary, institutional heterogeneity, in the sense that there may be inconsistent or competing institutionalpressures from a variety of stakeholders, is more likely to prevail (Clemens and Cook, 1999; D’Aunno et al., 2000; Greenwoodand Hinings, 1996; Oliver 1991; Seo and Creed, 2002). In such an institutional environment, signals are less clear and actorsare able to choose between which institutional norms, values or beliefs they follow and reject. These options are likely todepend on the degree to which the institutional script corresponds to the core beliefs of the actor (Greenwood and Hinings,1996) and the power of the stakeholder backing it. If the actor can easily withstand the influence from a stakeholder, theactor is likely to embark on a strategy of more active resistance. This could involve ignoring pressures or contesting rules,principles or other institutional scripts. However, the more dependent an actor is on a certain stakeholder, it is more likelyto compromise or adapt even if the institutional script violates the actor’s core beliefs. Actions range from adapting to theinstitutional script completely by promising change and acting decisively to remedy problems (Perrow, 1991) to balancingscripts and bargaining (Oliver, 1991). This could for instance involve co-opting vital audiences into processes of organisationaldecision making; especially by creating of monitors and watchdogs (Pfeffer, 1991).

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But restoring or gaining power is fraught with difficulties and unexpected feedback may plague any such attempts.Firstly, adapting to new circumstances may be inherently contradictory. It may make the organisation appear unstable andunreliable (Hannan and Freeman, 1977). The organisation may also violate key values on which it gained power in the firstplace. By abandoning established and respected procedures, the organisation’s ability to influence or withstand influencemay take another blow.

The success of an organization in managing this process of adjustment to institutional change will determine its futurepower and ability to influence. It thus affects the balance of power between the actors of an institutional field and ultimately,the outcomes of power struggles. We argue that the global financial crisis represented an external event that altered thevalues, norms and beliefs in the institutional system of international accounting standard setting. This caused actors toembark various on strategies to (re)gain and maintain power, which together altered the balance of power in the institutionalfield. Both individual accounting standards and the process of standard setting were influenced. In the next two sections,we present the empirical foundations of this claim by outlining the events and power struggles that surrounded the IASBduring the global financial crisis.

3. Accounting for financial instruments

3.1. The EU and IAS 39

IAS 39 – the standard on the recognition and measurement of financial instruments – was controversial long before thecrisis. Although there was little public debate outside specialized financial circles (Perry and Nölke, 2006), the drafting processwas filled with power struggles among the IASB and various stakeholders. European banks opposed the draft proposal’s ideason hedge accounting on the basis that it would create artificial volatility. Also, the ECB rejected the wide application of thefair value principle on the grounds that it gave banks to much leeway to engage in creative accounting and increase theircapital ratios (Kerwer, 2007). Perhaps these were the main causes why IAS 39 failed to pass the EU’s endorsement procedurefor determining which IFRS are deemed suitable.5 In 2004, after much debate, the EU created a hybrid EU-endorsed standardby omitting certain sections of IAS 39.6

Following the EU’s decision, IASB Chairman Sir David Tweedie warned that, “[I]f political pressures in a national orregional context are able to overrule standards that have been developed in a deliberate and open manner, then it may leadto a system of ‘beggar thy neighbour’ which will not provide the consistency and quality of accounting standards that theworld’s markets demand.” (Tweedie, 2004:4). Still, shortly after, the IASB approved an amendment to IAS 39 that eliminatedsome controversial issues in the standard. The EU followed suit and officially approved the changes in December 2005.

3.2. Financial crisis and reclassification of financial assets

Once the global financial crisis had burst out, the requirement of IAS 39 to measure certain financial assets using thefair value approach caused major concern among bankers and politicians. Fair valuation (and mark-to-market valuation inparticular) was perceived to create a negative spiral. In this spiral, banks’ sales pushed market prices down, forcing additionalfire sales and further declines in asset prices (Appelbaum, 2009; Jones, 2009).

But it took a couple of months from the first signs of financial stress in summer 20007 before the European Parliamentformally voiced its concerns. In February 2008, it issued a Committee report on the IASB in which it urged IASB to “limit the scopeof the fair-value principle” (European Parliament, 2008a:8). Shortly after Charlie McCreevy, the European Commissioner forInternal Market and Services, reported to the European Parliament’s Committee on Economic and Monetary Affairs: “Thereis a growing debate on whether fair value and mark to market measurements may have aggravated the crisis by bringing pro-cyclicality in financial statements. I want to make it clear that I believe that there are some real accounting issues and anomaliesto examine” (McCreevy, 2008:2).

After the fall of Lehman Brothers in September 2008, the controversies on IASB’s standard for financial instruments soared.It became increasingly clear that politicians were not going to sit idly and watch the banks’ balance sheets deteriorate.In October 2008, pressure mounted on IASB to ease rules for valuing financial instruments. Rumours flourished that theEuropean Commission would carve out certain sections of the valuation rules in IAS 39 or even form its own rule maker,abandoning IFRS altogether.

In the end, asset classification became the focal point, and the EU put pressure on the IASB to limit the types of assetssubject to fair value accounting. This was seen as particularly important since reclassification of assets from the tradingbook (i.e. applying fair valuation) to the banking book (i.e. valuing according to historical cost) was already permitted in raresituations under US GAAP. Less than a week after Lehman Brothers’ collapse, the Heads of State of France, Britain, Germanyand Italy together with the head of the European Central Bank and the President of the European Commission agreed on aplan to address global financial problems. The plan highlighted the need for the IASB to react quickly on the issue:

5 Apart from IAS 39, the EU has completely endorsed all IFRSs to date. For an overview of the EU endorsement process, see Perry and Nölke (2005).6 The EU carved out paragraphs 9b, 35, and 81a from IAS 39. See EC (2004).

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“We will ensure that European financial institutions are not disadvantaged vis-à-vis their international competitorsin terms of accounting rules and of their interpretation. In this regard, European financial institutions should be giventhe same rules to reclassify financial instruments from the trading book to the banking book including those alreadyheld or issued. We urge the IASB and the FASB to work quickly together on this issue in accordance with their recentannouncement. We also welcome the readiness of the Commission to bring forward appropriate measures as soon aspossible. This issue must be resolved by the end of the month.” (European G8 members 2008:1)

In response, the IASC Foundation Trustees waived the IASB’s due process procedures. This enabled the IASB to rushthrough an amendment to IAS 39 and IFRS 7.7 Later, in IASC Foundation Annual Report of 2008, the decision was justifiedas follows: “Had the Trustees and subsequently the IASB not acted, the likely outcome would have been a change, resulting in noguidance in the rules as to when such transfers are permitted, no guidance of required disclosure, and the possibility for greaterinconsistency in application between IFRS and US GAAP.” (IASC Foundation, 2008a, 2008b, 2008c:5). But while the AnnualReport sought to justify the move on the basis of better guidance and disclosure, the Co-chair of the IASB’s Financial CrisisAdvisory Group later admitted: “We understand why there was pressure. But it becomes undue when changes are prescribedand that line has been crossed a couple of times” (Hughes, 2009:1)

On 13 October 2008, the IASB published the amended standards, allowing banks to reclassify financial instruments fromthe trading book to the banking book. Thereby, banks could avoid recognizing unrealized losses on their reclassified assets.The publication coincided with the issuance of a Joint Statement on Financial Market Turmoil by the European BankingFederation and Business Europe issued. One of the recommendations in the statement related to fair value measurement:

“The pro-cyclical nature of fair value measurement of financial assets appears to have worsened the impact of thecrisis on financial and non-financial corporations. It is vital that accounting standard-setters take up the issue andseriously consider amending fair value accounting rules for assets in markets where liquidity suddenly disappears.”(European Banking Federation and Business Europe 2008:2).

With the backing of the European banking industry, two days later the EC endorsed the newly issued IASB amendments(EC/1004/2008).

Apparently satisfied with this temporal ease on the banks’ balance sheets, the EU decided to pursue further changes usingthe IASB’s regular processes and subduing further calls for rushed through emergency measures (FCAG, 2009; Sandersonand Tait, 2009a; Whitall, 2009). Still, in a letter to the IASB, the EC urged the standard setter to develop solutions regardingvaluation of collateralized debt obligations (CDOs) and adjust impairment rules (EC, 2008). The changes were expectedbefore December 2008 in time for preparers to draw up their financial statement using the new rules.

3.3. Calls for additional reform: EU and G20

It was evident that accounting standards would become a topic at the G20 summit of November 2008. Before the meeting,the IASC Foundation sent a letter to the summit chair President Bush. It defended fair valuation and emphasised the vastsupport it enjoyed from both investor organizations, such as the ICGN and the CFA Institute, as well as certain regulators andsupervisors (mentioning especially Banque de France). The letter also stressed the need to maintain an independent standardsetting process since: “steps taken outside the well-established and supported standard-setting process to amend fair-valueaccounting would undermine already scarce confidence in financial markets.” (IASC Foundation, 2008a, 2008b, 2008c:2)

The IASB’s anticipations proved correct. At their November 2008 meeting, the G20 leaders called for immediate actionby accounting standard setters. A number of areas in need of particularly urgent reform were identified, including guidancefor valuation of securities and addressing weaknesses in accounting and disclosure standards for off-balance sheet vehicles(G20, 2008).

An expert group established by the EC followed in G20’s footsteps. The High Level Working Group on Financial Super-vision in the EU issued its so-called De Larosière Report. The report urged the IASB to “open itself up more to the viewsof the regulatory, supervisory and business communities” and make its governance structure “far more responsive, open,accountable and balanced” (EC, 2009:22). Otherwise, the international community should set limits to the application of themark-to-market principle.

However, FEE, representing associations of accountants and auditors of 33 European countries, was of a different opinion.In a letter to IASB’s Financial Crisis Advisory Group (FCAG)8 dated 1 April 2009, FEE emphasised that:

“Financial reporting has been blamed by some commentators for its pro-cyclical influence, thus aggravating thesituation in markets that have become distressed or illiquid. We are of the opinion that the effects of the currentmarket volatility are captured, but not caused by fair value accounting. Fair value provides a timely and relativelyobjective measure of existing value. Failure to report such values would leave investors and policy decision makersless aware or even unaware of credit and liquidity challenges.” (FEE, 2009:2)

7 IFRS 7 covers financial instruments disclosures.8 A more detailed description of FCAG is provided in Section 4.

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Clearly, the accounting profession defended fair value accounting on the basis that timely and objective valuation ismore important than any concerns with procyclicality and financial instability. But following the decision of the US standardsetter – the Financial Accounting Standards Board (FASB)- to soften its mark-to-market and impairment rules followingcomplaints from banks and members of Congress (Rapoport, 2009), the informal Economic and Financial Affairs Council(ECOFIN) followed suit and called for the IASB to make appropriate changes to the valuation rules and ensure a more levelplaying field for those affected by the diverging rules:

“Ministers therefore call on the IASB to cooperate closely with the FASB in order to immediately address these issues,with the aim of achieving equivalent treatment and application of parallel standards in the IFRS and US GAAP systems,in order to avoid risks of competitive distortions emerging.” (Informal ECOFIN, 2009:1)

3.4. Supervisory involvement: BCBS

In April 2009, the G20 repeated their message from the November 2008 meeting. In the meeting statement, accountingstandard setters were called upon to: “Work urgently with supervisors and regulators to improve standards on valuation andprovisioning [. . .]” (G20, in press:2).

On April 24, the IASB confirmed that it would replace IAS 39. The proposal was to be published within six months (Whitall,2009). In June 2009, IASB Chairman Tweedie confirmed that the proposal would address the concerns with provisioning andfair valuation. Also, he promised that the IASB would ensure that financial institutions in Europe would be able to use thenew IFRS in their financial statements for 2009 (Tweedie, 2009). Yet this detailed prescription by public bodies induced theIASB’s FCAG to voice their concern:

“[T]he excessive pressure placed on the two Boards to make rapid, piecemeal, uncoordinated and prescribed changesto standards, outside of their normal due process procedures. While it is appropriate for public authorities to voicetheir concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-settingoutcomes” (FCAG, 2009:5)

The G20’s urge on greater supervisory involvement in accounting standard setting, resulted in Basel Committee of BankingSupervisors (BCBS) issuing a set of guiding principles to the IASB in August 2009 (BCBS, 2009).

According to BCBS, the principles reflected key accounting lessons from the crisis and “. . .help [] produce standards thatimprove the decision usefulness and relevance of financial reporting for key stakeholders, including prudential regulators.”In addition, BCBS’ principles were meant to ensure that issues relating to procyclicality and systemic risk are taken intoconsideration in the accounting reform agenda. The BCBS principles state that the new accounting standards should:

• Reflect the need for earlier recognition of loan losses to ensure robust provisions;• Recognize that fair value is not effective when markets become dislocated or are illiquid;• Permit reclassifications from the fair value to the amortized cost category; which should be allowed in rare circumstances

following the occurrence of events having clearly led to a change in the business model;• Promote a level playing field across jurisdictions.

These principles were later endorsed in the September 2009 G20 statement, encouraging IASB to “to take account of theBasel Committee guiding principles on IAS 39” (G20, 2009b).

3.5. IFRS 9 and EU resistance

The IASB issued the exposure draft of the first part of its amended IAS 39 (now incorporated in IFRS 9) in June 2009.Initially, the IASB proposed that if an asset earned predictable cash flow such as a loan, then it could be valued by amortisedcost. If it delivered an unpredictable return such as a share portfolio or derivative, then it had to be subject to fair valuation.The EC was dissatisfied with the proposal and demanded a number of changes in the consultation response (such as providingopportunities to apply more flexible valuation rules)(Sanderson and Tait, 2009). As a result, the IASB incorporated many ofthe changes proposed by the EC in its final amendments. Also, the IASB decided to delay a rethink of how banks account forliabilities until 2010.

Nonetheless, this failed to please the EC. Just days before the standard was issued, the Director General of Internal Marketsat the EC sent a letter to the IASB, calling for the IASB to “urgently” consider further changes. The EC’s concern was primarilysparked by fears that more assets might be fair valued under the new system:

[the] current draft may not yet have struck the right balance between “fair value accounting” and “amortised costaccounting”, and may lead to more instruments being classified at fair value through profit or loss compared to theexisting IAS 39, thus potentially exacerbating income volatility. . ..We would encourage the IASB’s board to urgentlyreflect further and assess the extent to which the input from stakeholders (in particular from the EC, but also fromEuropean regulators and supervisors) has been effectively translated into the new text, especially as regards settingthe right balance on fair value accounting and possible impact on financial stability” (Holmquist, 2009:1).

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Nevertheless, the finalized standard (on phase I of the project) was published by the IASB in November 2009 and is duefor implementation in 2013.9

Shortly after, on November 11, the EC advisory body – European Financial Reporting Advisory Group (EFRAG) – decidedto delay the endorsement of the newly issued standard. EFRAG declared that it would revisit the issue in January 2010, butrumours suggested that EFRAG preferred waiting until the complete standard was published (Wood, 2009). According tomany analysts, the delay was due to political concerns about some French, German and Italian banks with large investmentbanking activities. These banks would be hit disproportionately by the changes, forcing them to book substantial losses ontheir derivative portfolios. The decision implied that banks in Europe would not be able to use the new standard for their2009 accounts, while companies outside the EU could (Sanderson and Tait, 2009b). Thus, despite having repeatedly calledfor rushed through changes to IAS 39, the EC did not approve the amended standard for classification and measurement offinancial assets.

3.6. Accounting for financial instruments – power struggles during institutional change

The capital markets logic and focus that has characterized IASB’s accounting standard setting has been controversial inthe area of financial instruments (Perry and Nölke, 2005). Even at the establishment of IAS 39, IASB was under politicalpressure. Their adjustment of the standard in the face of political influence from the EU is a clear example of an institutionalstrategy in response to institutional pressure (cf. Oliver 1991; Perrow, 1991).

As the global financial crisis broke out, the general turbulence on financial markets and difficulties of banking systems inEurope altered the institutional system surrounding accounting standard setting. Previously held beliefs were questioned(cf. Meyer and Rowan, 1977). Prevailing norms of capital market logic and standard setter independence were challengedand institutional heterogeneity arose (cf. Clemens and Cook, 1999). Together with a shift in the balance of power in favor ofpoliticians (not least because their backing by European general and banking industry) power struggles were inevitable.

As illustrated by the events described above, one such area of institutional heterogeneity concerned the purpose ofaccounting standards (and ultimately accounting information). Beliefs took hold that systemic risk and excessive volatilitylimited the information content of accounting information based on fair value, contrasting the previously accepted capitalmarkets logic with its emphasis on timeliness and objectivity. European dissatisfaction with fair value was fuelled by concernsthat European financial services industries were suffering from regulatory disadvantage vis-á-vis their US counterparts. Alsocertain European banking systems were particularly hard hit under fair valuation rules.

In this novel institutional environment, the EU took a range of actions to pursue change. Through reports, speeches andletters and via other actors (G20; BCBS), the EU threatened to limit mark-to-market valuation and even abandoning IFRSaltogether if standards were not amended. Strict deadlines were also set for which important changes to IAS 39 should bemade by the IASB.

Despite resistance to alter fair value in accounting standards on basis of its objectivity and timeliness (supported by theaccounting profession), the IASB made several concessions, including altering its due process and delaying the rethink overaccounting for liabilities. But the IASB did not just passively adapt to the new institutional environment and correspondingpolitical pressures. The standard setter also embarked on a number of strategies to resist or minimize political influence (cf.Oliver, 1991). It publicly voiced concern through its FCAG; it warned that pressure would undermine confidence in financialmarkets; and it also took proactive measures before the G20 meeting to influence the debate.

The following section demonstrates how the global financial crisis induced incongruence between the IASB’s key stake-holders, leading to a power struggle that forced the Board to embark on the difficult strategy of reform of its governancestructure so as to maintain the support of vital stakeholders.

4. Governance of the IASB

Just like IAS 39, the governance and accountability of the IASB has long been controversial for the EU. Already in 1998, theEU pushed for more representation at the IASB and its board of trustees. The EU wanted to increase its number of seats at theexpense of the US. The basic argument was that those that endorse and implement the standards should have a greater sayin the process of setting them (Kerwer, 2007). But the EU’s efforts fell short. The review resulted in strengthened influencefrom preparers (especially from the big global auditing firms) and Anglo-Saxon national standard setters (Botzem, 2008).After the IASC Foundation’s (IASCF) constitutional review of 2005, it was clear that the EU once more had failed to increaseits influence.10

9 The first phase of the reform project concerns measurement and classification. The second phase, dealing with impairment and hedge accounting, waspublished on 5 November 2009 with a comment period open until June 2010.

10 International Accounting Standards Committee Foundation (IASCF) is the former name of the parent entity of the International Accounting StandardsBoard (IASB). It is currently called IFRS Foundation.

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4.1. IASCF’s second constitutional review

In 2007, IASCF began outlining a strategy for its second constitutional review. This time, the EU was determined to increaseits weight in the governance of IASB. Not least since the global financial crisis had erupted in summer 2007 and accountingstandards were increasingly blamed for contributing to financial instability (see previous section).

While IASCF was working out its strategy for the constitutional review, the European Parliament’s Committee of Economicand Monetary Affairs (ECON) prepared a report that was published just before the IASC Trustees formally initiated theconstitutional review in February 2008. The report took a very critical stand vis-à-vis IASB’s governance and the EU’s inabilityto exert influence over the standard setter:

“[The European Parliament n]otes that the IASCF is a private self-regulatory body which has been given the role oflawmaker for the EU by Regulation (EC) No 1606/2002; underlines that the IASCF/IASB lack transparency, legitimacy,accountability and are not under the control of any democratically elected parliament or government, without the EUinstitutions having established the accompanying procedures and practices of consultation and democratic decision-making that are usual in its own legislative procedures.” (European Parliament, 2008a:2)

In light of this, the ECON urged the EU to become proactive rather than reactive in its relations with the IASB. This shouldbe accomplished by (among other solutions) pressing the IASB to establish a formal forum for political influence. To this end,the IASB was urged to set up:

“[. . .]a public oversight body involving all IASCF/ IASB public stakeholders including in particular legisla-tors and supervisors; and setting up a body allowing representative market participants, including preparersand users from jurisdictions where IFRS is mandatory, to deliver annually a report on the functioning ofinternational accounting standard setting to the governing bodies of the IASCF/IASB.” (European Parliament,2008a:2)

Addressing the concepts of ‘fair value’ and ‘market-to-market’ in light of financial stability implications were highlightedas particularly urgent. ECON believed that these issues should be addressed by adjusting the IASB’s due process of standardsetting so that “[. . .] IASB develops accounting solutions that are not only technically correct but also reflect what is necessaryand possible from the point of view of all users (investors and supervisors) and preparers;” and that “[. . .] there should bean open debate about accountancy standards; to this end, believes that the IASB should strengthen its due process as regardsstakeholders so that the views of all IFRS users and investors are taken into account;” >(European Parliament, 2008a:2). Inparticular, the IASB was urged to “carrying out impact assessments for all projects, so as to check the costs and benefits (includingthose for user firms) of draft texts and, in particular, to highlight the implications for financial stability;” (European Parliament,2008a:2).

The report was later adopted as a Resolution of the European Parliament (European Parliament, 2008b). Clearly, EUdemanded more influence over IASB and a stronger emphasis on the implications on financial stability that arise fromdifferent accounting valuation methods.

As the strategy for the constitutional review was formally initiated on 11 February 2008, it was clear that the pro-posal of the IASB included much stronger public oversight and accountability towards official bodies. The IASB suggestedthat a Monitoring Board consisting of public authorities should be established before the end of 2008. The Moni-toring Board would be mandated to oversee the IASC Foundation and it’s Trustees (IASC Foundation, 2008a, 2008b,2008c).

But simultaneously, the developments in IASB’s governance caused concern in the private sector. Users of financial state-ments feared that political influence over the IASB would lead to less useful accounting standard. ICGN – the InternationalCorporate Governance Network – a lobbying organisation consisting primarily of institutional investors, stated the following:

“We have expressed criticisms on the quality of one of the standards recently adopted by the IASB (IFRS 8), andremain concerned about the risk of undue interference by third parties, be they governments or specific private-sectorstakeholders, into the IASB’s agenda.” (European Parliament, 2008a:2)”

“ICGN considers that placing investor viewpoints at the core of IFRS standard-setting has been in the past, and shouldcontinue being in the future, a crucial driver of the IFRS success. Conversely, the ICGN considers that, were IFRSstandard-setting to diverge significantly from the interests of investors taken as a group (and notwithstanding thedifferences that undoubtedly exist between different subgroups of investors), past successes of IFRS may be put intoquestion”. (ICGN, 2008a:1)

In particular, the ICGN expressed concern regarding the lack of investor representation in the proposed Monitoring Boardof the IASB:

“ICGN thinks that the composition and powers of the Monitoring Group must be directly linked to a broader clarifica-tion of the stakeholders to which the Foundation should be considered accountable. We think that it would be mostdangerous for the sustainability of IFRS adoption and use if investors were not to be given any direct representationin what will be in effect the highest body in the IFRS governance framework.” (European Parliament, 2008a:2)

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4.2. Post Lehman Brothers: the debate intensifies

Following the Lehman Brothers debacle and the general turmoil on financial markets, the debate on the IASB’s governanceintensified. Again, the ICGN felt obliged to re-emphasise the need for limiting public influence over the IASB:

“We agree that the accountability of the IASB and Trustees needs to improve; however, not vis-à-vis ‘official insti-tutions,’ but improve towards all stakeholders of accounting standard setting, and in particular investors and otherusers. The formation of a Monitoring Group is likely to politicize the process needlessly and result in having formalrepresentatives that may not possess the necessary and desired expertise. The focus should and must be on the usersof financial information. However, we strongly recommend that if a Monitoring Group is established, at a minimum,the Group should have a clear and limited scope, should not be able to influence the standard setting process andshould publicly commit to providing for significant IASC Foundation Trustee level investor representation.” (ICGN,2008b:2)

Various bodies representing the political sphere took an opposing view. On 9 October 2008, the European Parliamentadopted a resolution on the constitutional review http://www.iasplus.com/europe/0810euparliamentiascf.pdf (EuropeanParliament, 2008c). Among other things, the Parliament stressed the need for political accountability of the standard setter.Another similar challenge to the IASB’s governance and operational structure came at the G20 November 2008 meeting.In the meeting declaration, the G20 leaders called for an immediate fundamental review so that “the governance of theinternational accounting standard setting body should be further enhanced, including by undertaking a review of its membership,in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body andthe relevant authorities.” (G20, 2008)

Shortly after, the IASB and the FASB established the joint Financial Crisis Advisory Group (FCAG). The role of the group wasto discuss standard-setting implications of the financial crisis and potential changes in the global regulatory environment.The independence of accounting standard setters and governmental actions in the crisis was also among the topics. TheFCAG members were senior leaders with broad international experience in the financial markets, joined by official observersrepresenting key global banking, insurance and securities regulators, such as the CESR, the BCBS, the FSB and the IAIS (FCAG,2009).

The first meeting of the FCAG took place in January 2009, and its first report was issued in July 2009. The report stressed thatan increasing concern about the political pressures put on the two standard setters and warned about the “rapid, piecemeal,uncoordinated and prescribed changes to standards” (FCAG, 2009:18). It also expressed worries about the deterioration in theindependence of the standard setting process due to the increased pressure from politicians:

“Concern for the Boards’ independence has traditionally focused on pressures that may be applied by special interestsin the private commercial sector. Protecting the Boards from those special interests remains a critically importantfactor in their independence. The financial crisis has also, however, elicited a second set of intense pressures on theBoards from the public sphere. Because governments are more often now owners and guarantors of major industrialcompanies and financial institutions, it is particularly important that they support, and are seen to support, theindependence of the standard setters.” (FCAG, 2009:14)

4.3. Outcome and responses

Judging by the outcome of the IASB’s constitutional review,11 the changes directly address the recommendations onpublic accountability and membership issued by the G20:12

• The creation of a Monitoring Board in January 2009. The role of the Board is to ensure that the Trustees discharge theirduties as defined by the IASB Founding Constitution as well as approving the appointment or reappointment of Trustees.The goal is to enhance public accountability of the IASC Foundation while not impairing the independence of the standard-setting process. It is presently constituted by the International Organization of Securities Commission (IOSCO), the JapanFinancial Services Agency, and the U.S. Securities and Exchange Commission (SEC). The BCBS sits as a formal observer atmeetings (IASCF, 2009b). The EC joined in December 2009.

• The expansion of the IASB from fourteen to sixteen members by 2012. Although the selection criteria remains the same (i.e.professional competence and practical experience), there will normally be a specific geographical composition in order toensure broad international representation: Four members from the Asia/Oceania region, Europe and North America; oneeach from Africa and South America and two from any region.

• Enhanced liaison with investors by strengthening the membership of investors in the Standards advisory Council (SAC).

11 The first part of that review was concluded in January 2009 for effect on 1 February 2009 (Appelbaum, 2009; IASB, 2009).12 Following the G20 November 2008 meeting, the G20 has issued a number of similar calls on the need for adjusting the governance of IASB. For instance,

in its September 2009 meeting, G20 emphasised that IASB’s review “should improve the involvement of stakeholders, including prudential regulators and theemerging markets” (G20 2009b:2).

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The response from the global investment community was lukewarm. ICGN emphasised that: “the perspective providedin the Review of the Constitution does not sufficiently address the role of investors and shareholders in their capacity asproviders of long-term capital to the global capital markets. It should be a fundamental principle that the standard settersare accountable to those that use their standards.” (ICGN, 2009:2). Likewise, the CFA Institute – a global organization offinancial analysts, portfolio managers and other investment professionals – was disappointed with the Monitoring Board,the regulatory bias and lack of investor representation the new governance structure entailed. In its comment letter on theconstitution review, the CFA Institute stated:

“[W]e reiterate what we see as primary issues. Namely these include: greater investor representation at the IASC Foun-dation, further clarification on the scope of the Monitoring Board (MB) activities and its engagement with investors, andensuring the secure and diversified funding of the International Accounting Standards Board (IASB).” (CFA Institute,2009:1)

“An important issue that remains unaddressed by the Constitution is the limited investor representation at the Inter-national Accounting Standards Committee Foundation (Foundation) Trustees level. In an earlier comment letter westressed that increased investor representation would enhance the effectiveness of the Trustees and contribute topublic confidence in their oversight of the IASB.” (CFA Institute, 2009:1)

Perhaps the criticism from the investment community came as little surprise. What is surprising though, is the fact thatthe Constitution review was a setback also in the political sense. Although the EC pushed for a rapid restructuring of theIASB’s governance, it chose (in April 2009) not to sign the Memorandum of Understanding and take up its place at theMonitoring Board. The official reason at the time was that the EC needed to consult with the European Parliament beforesigning (Sanderson and Tait, 2009a).

4.4. Governance of the IASB – power struggles during institutional change

The global financial crisis did not just lead to questioning of the purpose of accounting standards. It also altered beliefs onwho are the legitimate stakeholders of accounting information. Previously, the (albeit contested) notion of an independentstandard setter serving the needs of users of financial information was seen as a prerequisite for the IASB having politicalsupport (Van Hulle, 2004). As the crisis deepened, alternative views of the purpose and legitimate stakeholders arose. TheIASB defended its view that users should be in focus and that political independence is vital for capital market confidence. Butwhile the IASB was supported by user representatives, the EU and other political bodies challenged the purpose of accountingby questioning its usefulness for supervisory purposes. The concept of a standard setter without accountability with limitedtransparency and legitimacy began to grow. In this institutional heterogeneity (Clemens and Cook, 1999), conflicting beliefsin combination with a shift in the balance of power in favor of politicians (Ashford and Gibbs, 1990; Suchman, 1995) againled to struggles between the EU and the IASB.

The EU took several steps to strengthen its influence over the IASB’s governance, accountability and purpose. Openlyquestioning the usefulness of IFRS for supervisory purposes is one example. Urging the IASB to set up an oversight body anddeclining to join the monitoring board once established is another.

The IASB again struggled to resist by adopting several institutional strategies (cf. Oliver, 1991). Expressing warnings thatthe quality of standards would wither as a consequence of piecemeal and prescribed changes is one example of resistance.But the IASB also sought to bargain with its political stakeholders by opting them into its advisory and oversight bodies.Providing the CESR with an observational status in the FCAG was the first move, that later was extended to inviting EU andother political actors to its newly created monitoring board. This clearly corresponds to the institutional strategy of co-optingvital audiences into processes of organisational decision making and by creating of monitors and watchdogs (Pfeffer, 1991).

5. Discussion

In the previous sections, we have shown that the global financial crisis contributed to a repoliticalization of accountingstandard setting. Prior to the crisis, the IASB was largely successful in maintaining its independence from political influence(Power, 2009; Whittington, 2005), while the accounting profession and to lesser extent users had a bigger say in standardsetting (Perry and Nölke, 2005). But since the crisis, a rebalancing of power has occurred, where political actors have gainedinfluence at the expense of other stakeholders (such as the IASB itself, the accounting profession and users). No longer arepolitical actors limited in their influence by being confined to commenting on accounting draft proposals late in the process(cf. Botzem, 2008). The EU even managed to alter both the IASB’s standard setting process and its governance structure. Thepower struggles during the crisis contributes to accounting research in that it illustrates how macro events affect accountingand the process through which accounting standards are shaped.

The success of EU efforts to reinstate power over the IASB’s standard setting process also brings new evidence to theunderstanding of the developments in the governance of international economic activity. While increased privatization wasthe general trend in recent years (Botzem, 2008), in international accounting standard setting, the global financial crisiscaused this trend to reverse. It is likely that this is also the case for other areas of economic activity. Our findings alsoshow that while transnational governance of economic activity is often subverted by corporate interests, it may still hinge

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on a necessary backing of public actors (Kerwer, 2007; Botzem and Quack, 2009). This suggests that prior research mayhave underestimated the power of political actors, or at least their ability to muster support in a changing institutionalenvironment.

This may in turn be the result of theoretical shortcomings stemming from single handed reliance on one particular theo-retical perspective. In this article, an interdisciplinary approach was used to show how macro developments and institutionalchange interplay, and how that altered power balances among the stakeholders of international accounting standards. Asinstitutional beliefs shifted from capital markets logics towards more concern for systemic risk and procyclicality of valua-tion, the EU was empowered to pursue the changes in accounting standard they deemed desirable. But the IASB’s strategiesto resist change also demonstrate that institutional elements (at least partially) can be dodged and influence resisted.Particularly in situations where multiple actors struggle and institutional elements are heterogeneous and conflicting.

The implications of the new balance of power surrounding international accounting standard setting are difficult to assess.But institutional theory may provide some indications; it tells us that conflict and negative feedback loops may plague effortsto both exert influence and adjust to change. And such unintended consequences may affect both the EU and the IASB.

It is clear that the IASB cannot take the political support that is necessary for its survival for granted. Adaptation hasbecome necessary. But adapting to the wishes of the EU, the IASB risk being perceived as less independent. As the IASBrepeatedly warned, this may undermine the confidence of capital markets in accounting standards. Also further dissem-ination of international accounting standards may be hampered by the IASB’s succumbing to political pressure from theEU.

The EU, on the other hand, faces a similar conflict; the IASB’s political independence was a precondition of the EU’sadoption of IFRS (Van Hulle, 2004) but when pressing needs relating to financial stability and its consequences of certainbanking systems arose, this independence was sacrificed. The question is whether market actors will perceive the events thattook place as isolated events or whether they can be taken as evidence of increasing political meddling in the institutionalsystem surrounding Europe’s financial sector.

It is however too early to draw any final conclusions on the long term effects of the global financial crisis on the balance ofpower and institutional system in which accounting standards are developed. A decisive time lies ahead, with the finalizationof the constitution review and completion of its work on global convergence in 2011. Researcher should carefully follow theseevents unfold. They represent a historical opportunity of studying an institutional developments and politics of accountingstandard setting in almost real time.

Appendix A. List of abbreviations

CDO – Collateralized debt obligationCESR – Committee of European Securities RegulatorsCFA – Chartered Financial AnalystEC – European CommissionECON – Committee of Economic and Monetary AffairsED – Exposure DraftEFC – Economic and Financial CommitteeEFRAG – European Financial Reporting Advisory GroupFASB – Financial Accounting Standards BoardFCAG – Financial Crisis Advisory GroupFSB – Financial Stability BoardG20 – Group of 20IAIS – International Association of Insurance SupervisorsIAS – International Accounting StandardsIASB – International Account Standards BoardIASC – International Accounting Standards CommitteeIASCF – International Accounting Standards Committee FoundationICGN – International Corporate Governance NetworkIFRIC – International Financial Reporting Interpretations CommitteeIFRS – International Financial Reporting StandardsIOSCO – International Organization of Securities CommissionsMNE – Multinational enterpriseSAC – Standards advisory CouncilSEC – U.S. Securities and Exchange Commission

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