“Political” Lobbying on Proposed Standards: A Challenge to the IASB

INTRODUCTION Now that the International Accounting Standards Board (IASB) has emerged from the restructuring of the International Accounting Standards Committee's (IASC) board, it seeks to establish high-quality International Financial Reporting Standards (IFRSs) and to engineer convergence at that level with eight leading national standard setters via a formal process of liaison. One obstacle lying in the IASB's path is the set of "political" pressures that may be triggered by any board initiative to prescribe specific accounting treatments, eliminate alternative treatments, impose additional disclosure requirements, or tighten the allowed interpretations. I define "political" to mean self-interested considerations or pleadings by preparers and others that may be detrimental to the interests of investors and other users, a phenomenon that has been associated with the term "economic consequences" (see Zeff 1978). The IASB's initiatives will prescribe acceptable standards with greater specificity and provide less room for flexibility. Because the European Commission (EC) has given notice that, no later than 2005, all listed European Union (EU) companies must adopt "endorsed" IFRSs in their consolidated statements, EU companies will see the stakes as being much higher than they were with the standards issued by the old IASC board. Much depends, of course, on how effectively the several countries' regulators enforce compliance with IFRSs. This article relates numerous attempts by industry and other affected parties, both in the U.S. and other countries, to move aggressively to prevent an accounting standard setter from imposing an objectionable requirement. They exemplify the lengths to which the powerful critics of proposed standards will go to defend their self-interests. RECENT DEVELOPMENTS The "political" pressures may emerge in very different degrees and strength of feeling across the eight countries whose standard setters are to act in liaison with the IASB. (1) Such pressures could impede the effort to achieve convergence at a high level of quality. Lobbying may originate in other countries as well. Already, at the IASB's inaugural meeting with its Standards Advisory Council (SAC) in July 2001, it was reported that a major Swiss company, later revealed to be Novartis, had written to Sir David Tweedie, chairman of the IASB, that it will consider switching from IFRSs to U.S. GAAP if the IASB does not change its standard that requires the amortization of goodwill over 20 years. It was said that Novartis was concerned that it will be placed at a strategic disadvantage if the IASB does not adopt a standard on goodwill that converges with the FASB's Statement of Financial Accounting Standards (SFAS) No. 142. As a Swiss company, Novartis will not be required to continue using IFRSs in its primary financial statements under the EC's 2005 initiative unless the Swiss government passes a law to that effect. Some European companies have other reasons for considering a switch to U.S. GAAP. One researcher has found that the chief financial officers (CFOs) of a number of major Swiss companies are attracted to U.S. GAAP because preparers in the U.S. are well organized and constitute a powerful lobby--a source of comfort to CFOs. (2) As noted below, such bodies as Financial Executives International (FEI, formerly the Financial Executives Institute) and The Business Roundtable have forcefully presented industry's views on proposed accounting standards to the FASB for many years. (The Business Roundtable is composed of the chief executive officers of some 150 of the largest U.S. corporations.) Also at the SAC/IASB meeting in July, Phil Livingston, the full-time president and chief executive officer of FEI, told the IASB that it should leave stock option accounting off of its agenda. He described the exchange of views as "tense," and, in a subsequent report to FEI members dated July 25, he recounted what he said as follows: I gave a strong statement that we had been through 10 years of debate on this subject in the U. …