Table of contents
Accounting for the European Private Sector: Reconsidering Accounting Objectives for Economy and Finance
“Accounting for Europe’s Economy and Society: Considerations for Financial Stability, Economic Development and the Public Good” by Yuri Biondi, https://doi.org/10.1515/ael-2017-0018
“On the Accounting Regulation for the European Private Sector” by Arnaldo Canziani, https://doi.org/10.1515/ael-2017-0015
“The Need to Reform the Dangerous IFRS System of Accounting” by Jacques Richard, https://doi.org/10.1515/ael-2017-0017
“International Financial Reporting Standards (IFRS): Stress Testing in Financialized Reporting Entities” by Colin Haslam, https://doi.org/10.1515/ael-2017-0016
“Open Debate on Accounting for the European Private Sector” by Imke Graeff, https://doi.org/10.1515/ael-2017-0024
This article contains the proceedings of the open debate that followed the plenary panel on ‘Accounting for the European Private Sector: Reconsidering Accounting Objectives From Economy and Finance’ at the international workshop on ‘Which Accounting Regulation for Europe’s Economy and Society?’ organised under the auspices of the European Parliament in Strasbourg, on 20 May 2015.
Identified participants comprise Yuri Biondi (Cnrs – IRISSO and Labex Refi), Arnaldo Canziani (Brescia University), Omiros Georgiou (London School of Economics), Colin Haslam (Queen Mary University of London), Karthik Ramanna (University of Oxford), Jacques Richard (Dauphine University of Paris; Autorité des Normes Comptables (ANC) Committee), Claudia Schwarz (European Central Bank), Shyam Sunder (Yale University).
Raised questions were: (i) Why has there been this proliferation of fair value accounting and the shift to the financialisation of accounting?; (ii) What is it that makes accounting regulation so durable?; (iii) What are the advantages, disadvantages, and consequences of having academics serve as decision makers in regulatory bodies?
Why has there been this proliferation of fair value accounting and the shift to the financialisation of accounting?
Raised by Karthik Ramanna (University of Oxford)
I thought it was very interesting to hear the perspectives of all of the panellists. There is one theme that I have been grappling with and I would love to get the panel to react to this is: Why there has been this proliferation of fair value accounting and why there has been this shift to what Mr Colin Haslam called the financialisation of accounting. It is a subject I have been deeply interested in as well; and my hypothesis is ideological capture. This is distinct from the pure version of capture, as George Stigler described it. Ideological capture is subtler. It involves the co-option of certain frameworks or ideologies by self-interested players as a way of advancing their interest. And that co-option requires as part of the process at least some academics to be either wittingly or unwittingly implicated in the process. So, for example, theories such as efficient markets or the Black-Scholes valuation model have been co-opted by special interests in the financial services industry, from the ‘Big 4ʹ audit firms, to advance self-interested agendas. And some academics must have played a role in legitimising this co-option. I would love to get some thoughts or feedback on this notion of ideological capture: Is that something that holds currency in your view, or do you have a different hypothesis? Perhaps you think it is just self-interest driving the process? I will stop here.
Colin Haslam (Queen Mary University of London)
I think it is a complex thing that is going on. Certainly an ideological capture around the notion of economics, capital markets, efficiency, and resource allocation driven by a broad ideology around free market economics – a sort of market efficiency fundamentalism definitely. This is reflected in the adoption of fair value accounting justified in terms of how it promotes transparency, the information needs of investors and capital market efficiency. But alternative practical readings of these changes are possible if we frame and conceptualise the system of accounting within the ‘financialised firm’. So that when we, say look at goodwill, which captures the fair value of business combinations – this line item is accumulated and awaiting to be impaired against retained earnings but in the financialised firm these are being hollowed out by dividends and share buy-backs. The contribution of accounting academics is to generate alternative conceptual frameworks that shift the field of the visible so as to challenge the dominant cultural and technical authority of financial economics over accounting practice.
Yuri Biondi (Cnrs – IRISSO and Labex Refi)
Thanks for this question. This is what we have been discussing. Let me remember a conversation we had with Mr Jérôme Haas and Mr Shyam Sunder in a café in Cambridge (MA), where we organised the SASE academic conference in 2012. We were addressing this kind of ideological and ideational capture – which is certainly the deepest degree of capture with major social and cultural implications. This capture involves hiding the inherent flaws from the public debate. Constituencies and decision-makers remain then quite unaware of the socio-economic consequences which are underpinned and involved by accounting technicalities. Meeting people who are not accounting experts, I have often personally experienced this ideological capture, which pervades mind-sets and beliefs of academics, policymakers, lawmakers, financial journalists and even financial analysts. They are not aware that this ideological capture was partly purposefully designed: A part of it consists of shared beliefs; another part is more akin with advertising and propaganda.
During my conversation with Mr Jérôme Haas and Mr Shyam Sunder, the latter raised the following insightful example of propaganda: In a public debate, who can stand-up and argue against ‘fair value’? Who wants to be identified as the claimant of the ‘unfairness’? Throughout the work we had been doing together, raising the public debate on accounting regulation throughout the world before various audiences, the three of us were aware of this issue and we tried to challenge it.
That day, it came to our minds that we should seriously organise a different kind of transnational forum, to establish the accounting debate on a complete different basis. Many participants would certainly remain the same, but the discussion may be reframed in a way that makes them sitting together and discuss – because we cannot accept advertising and propaganda as a proper basis to standard setting. This has been our belief and our position. We really thought that it was important to foster a forum where policymakers, academics, the standards setters and the professionals do not only seek for rules or best practices to be established, but also take time to think and test them prior to this establishment. This forum may enable to share ideas and raise issues, debates and even disagreements, as for constructive disagreement is certainly the best remedy against propaganda.
Arnaldo Canziani (Brescia University)
I fully take your point not to answer but, with your permission, just to react immediately. Never to reply as the Marxist I never was, but to ascribe the dynamics to the so-called capitalistic society driven by self-interest in the sense you teach in the US.
Sure you fully remember the controversies and debates about big business from broadly speaking the 40’s to the 70’s. That is why some people – rightly or wrongfully so – prefer codes and laws to get clear-cut rules, well-defined boundaries. The problem obviously becomes how to apply those clear-cut rules in different cases.
Shyam Sunder (Yale University)
The situations in Europe and the US seem to be somewhat different, as you can see reflected in this panel and in other writings and conferences. My impression is that in Europe many more professors are willing to take positions independent of the regulators and from the accounting profession. A large number of our colleagues in the US universities – I hope you will excuse me for saying this – see themselves as loyal implementers of what regulators promulgate and often of what the Big 4 want. The financial support of academic programs in US universities from the accounting profession has not been without its consequences. Whether these consequences are seen to be positive or negative is a matter of personal judgment. There is also the question of efficient markets: Few people, especially after the last financial crisis, believe that markets are fully efficient. I do not find followers of efficient markets in economics or finance but in accounting: It is a different story. In US academia, it is mostly accounting from the markets and not accounting for the markets. The direction or the relationship between accounting and markets has been reversed and it is very difficult to conduct any serious conversation about it because few are interested. Having said that, let us hear other points of view.
What is it that makes accounting regulation so durable?
Raised by Omiros Georgiou, London School of Economics
I am not sure about your comments, Mr Shyam Sunder, about European academics because there are two US academics who have gone onto standard-setting bodies, and have influenced the debate massively and these are Catherine Shepherd and Mary Barth. Both of them are not European. But that is a side point. What I wanted to ask Mr Yuri Biondi is that he mentioned some disagreements between EU constituents and the IASB, but there is this European post-crisis; nothing substantial changed in accounting even though we had the monitoring board for the IASB or the reorganisation of EFRAG. Compared to other institutions such as banking regulation or the FSA in the UK, we have had no change in accounting. So there are two questions here: What is that makes accounting regulations so durable, so stable and if this is a problem is there something that can be done for this? And maybe also there is a question for Richard that despite the many crises we have had with fair value, I do not think we have had any major changes through it?
Jacques Richard (Dauphine University of Paris; Autorité des Normes Comptables (ANC) Committee)
I have no illusion about the difference of situation between Europe and the US for example, but nevertheless there are certain signs of optimism. In my field of environmental accounting, there has been a larger development in Europe than in the US – if I am not mistaken. I can quote the works in England of Bebbington and Gray: They have been working for more than forty years on this subject, and in the German speaking world there is for example the work of Schaltegger. There is no equivalent in the US. For the first time – for a long period of time – Europe is ahead in matter of innovation for accounting and I hope that this advance will be realised in form of a development for new accounting standards that could bring the treatment of human and natural capital on a equal footing with that of financial capital. This is all I can say.
What are the advantages, disadvantages, and consequences of having academics serve as decision makers in regulatory bodies?
Raised by Shyam Sunder (Yale University)
Arnaldo Canziani (Brescia University)
Excuse me please, it depends on the kind of academics.
Shyam Sunder (Yale University)
I think academics tend to be more ideological and less practical. Accounting is a practical discipline of running a business efficiently while we professors are more likely to get carried away by our ideas and not care much about the practical consequences of what we do. Ideological purity counts for more in academic debates. I will not hold IASB guilty of yielding to Chinese pressure to avoid requiring consolidation of state-controlled enterprises. Had they not yielded on that issue, some 70-80 % of Chinese corporations would have been consolidated into one entity. When a large part of the entire Chinese economy reports as if it were a single corporation, what are the non-state investors going to get? Will that be adoption of IFRS or not? I have not yet figured out the answer; perhaps somebody here has.
Yuri Biondi (Cnrs – IRISSO and Labex Refi)
I would recommend to not asking the IASB to do too much. On the one hand, they pretend to act as developers of the best accounting practices. On the other hand, they were actually at the ideological frontier, acting as the fiercest advocators of revolutionary accounting ideas and concepts, especially those related to fair value and mark-to-market. This becomes very clear by looking at the conceptual framework. After having developed this conceptual dimension of accounting, the IASB declares that preparers must go ahead with application standard by standard: “This Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific IFRS. The Board recognises that in a limited number of cases there may be a conflict between the Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements of the IFRS prevail over those of the Conceptual Framework. […]” (IASB 2010, The Conceptual Framework for Financial Reporting, Purpose and Status). In fact, preparers go on referring to the IASB’s official interpretation of its own standards, and even engaging informal dialogue with the IASB when some concerns occur. A similar game features tax regulation. This regulation is actually enforced through a negotiated dialogue between regulators and regulatees, making tax law a cursed jungle of loopholes and exceptions. One reason of this uncomfortable outcome may be that the IASB has been playing too many different roles: Thought leaders, standard setters, rule- and interpretation-makers. We should probably try to disentangle what the IASB has been doing to achieve a better organisation of the accounting standard setting of Europe.
Claudia Schwarz (European Central Bank)
I just want to give you an answer on your question whether academics should sit in regulatory bodies. I do not know if you are familiar with the European System of Financial Supervision but we have the European Systemic Risk Board whose Secretary is provided by the ECB – actually I have been working there until last month – and the European Systemic Risk Board is doing the macro-prudential oversight for financial markets in the EU. In the General Board we have, among others, the 28 Central Bank governors or presidents. However a very important Committee in the European Systemic Risk Board is the Advisory Scientific Committee, which comprises mostly professors. And just to give you a flavour of their power: The voting rights are shared among the 28 governors – one country, one vote –, plus the European Supervisory Authorities (ESAS) –, the ECB, the Commission and the Chair of the Advisory Technical Committee plus the Advisory Scientific Committee, which has three votes. Therefore, these ‘professors’ have the same voting power as France, UK and Germany together. That can make a huge difference. The views taken by the scientific committee are sometimes very different from the views of the politicians or the National Central Banks. I can reassure, the decision-making has been significantly influenced by the analyses made by the Advisory Scientific Committee – for me there is merit-having academics in such a regulatory body.
This Q&A session on ‘Accounting for the European Private Sector’ was included in the international workshop on “Which Accounting Regulation for Europe’s Economy and Society?” organised under the auspices of the European Parliament in Strasbourg, on 20 May 2015, in tribute to Mr Jérôme Haas (1963–2014), first chairman of the Accounting Standards Authority of France (ANC). It was organised by the Laboratory of Excellence on Financial Regulation (Labex ReFi), which is supported by PRES heSam under the reference ANR-10-LABX-0095. It benefitted from a French government grant by the National Research Agency (ANR) under the funding program ‘Investissements d’Avenir Paris Nouveaux Mondes (Investments for the future Paris – New Worlds) reference ANR-11-IDEX-0006-02.