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9/15/2006

A new book describes how the International Accounting Standards Board (IASB) went from an obscure committee to one of the most influential organizations in the world. Charged with standardizing accounting practices for European Union member countries in 2000, the IASB has since had a profound impact on global business. Rice University's Stephen Zeff examines how this group has evolved since its beginnings (as the International Accounting Standards Committee) in 1973.

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Since 2000, the International Accounting Standards Board (IASB) has vaulted from relative obscurity to the world's center stage, affecting nearly every public company -- and many private companies -- across the globe. Stephen Zeff, a Rice University faculty member since 1978, traces the IASB's roots, spreading influence and fast-forward evolution in his new book, "Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973-2000," scheduled for release in March 2007.

Why the surge in interest in the IASB?

Because now the IASB can profoundly impact global business. Very few people had ever heard of the London-based International Accounting Standards Committee -- its original name -- because for years the body had no authority whatsoever. The big turning point occurred in 2000 when the European Union, in an effort to standardize accounting practices in member countries, stated that all listed EU companies must follow IASC standards by 2005. That gave the IASC real authority, widespread attention and a name change.

What about compliance by other countries?

The IASB sets international accounting standards for around 100 countries. And companies in every country in the developing world, whether or not they are required to comply, are affected by these standards when they participate in global capital markets and do business in a borderless market place.

Will there ever be genuine comparability in financial accounting around the world?

This is an interesting question that people don't know how to resolve beyond comparable accounting standards, hoping that in most cases this produces comparable financial reporting. But there are different ways of doing business in every country -- different tax rules giving incentives or disincentives. Traditions and customs differ, so the same accounting standards might do no more than accentuate the differences. Also, there's the matter of who is enforcing the standards. Some countries don't even have regulators.

What is the United States' relationship with the IASB?

Having spent decades encouraging the development of a national standard setter and all the parameters surrounding it, the SEC believes that the Financial Accounting Standards Board (FASB) should continue to set financial accounting standards for U.S. companies traded in U.S. capital markets. The way [the SEC] is complying with the spirit of the international accounting standards is by encouraging both bodies, the FASB and the IASB, to converge their standards in such a way that there won't be any salient differences between them. They have been working very actively toward this, and it's expected that in three to six years there may be very little difference between the two.

If the U.S. has long had standards in place, why was there an Enron?

One of the arguments that arose out of Enron is that we spent too much time following the rules and not the substance of transactions. The mentality before Enron was, "Tell me a rule that doesn't allow me to do this." The idea now is to put more emphasis on principle. That's not going to be easy in a highly litigious country like the U.S. Beyond that, there were lots of other issues at work, including corporate governance, the role of audit committees, whether auditors are doing a proper job, the greed of investment banks and the role played by securities law firms. It was not just accounting, but that was a part of it.

How does politics play into setting accounting standards?

Politics and self-interest play a big role. Various companies and industry lobbying groups have pressured House and Senate members and risen in wrath against several proposed accounting standards and have forced the FASB to dilute the standards or not issue them at all. I point out in my classes, if you want to understand accounting standards and financial reporting, you have to realize that the standards are far less than perfect, not because the standard setter didn't know what to do, but because the standard setter was prevented by powerful self-interests from doing it. The IASB is now seeing the same kind of political intrusion the FASB has experienced for decades.

Zeff is author or editor of 25 books and more than 100 articles and comments. He serves on the editorial board of more than 25 research journals edited in 10 countries. Zeff is the only non-British member of the academic panel of the Accounting Standards Board of the United Kingdom, and since 1981 he has been the only non-European on the executive committee of the European Accounting Association. In 2002, he was inducted into the Accounting Hall of Fame.

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For more information, contact Stephen Zeff at sazeff@rice.edu or Laura Hubbard of the Jesse H. Jones School of Management at lhubbard@rice.edu.