The Role of the IASB and Auditing Standards in the Aftermath of the 2008/20091 Financial Crisis

• Published date: 01 September 2010
• Author: Marianne Ojo
• Date: 01 September 2010
• DOI: http://doi.org/10.1111/j.1468-0386.2010.00525.x

eulj_525604..623

The Role of the IASB and Auditing

Standards in the Aftermath of the

2008/20091Financial Crisis

Marianne Ojo*

Abstract: The primary argument of this article is, namely, that the International

Accounting Standards Board (IASB) is in need of an enforcement mechanism. In

drawing attention to this argument, the article not only proposes considerations which

are to be taken into account if such a mechanism is to be implemented, but also considers

areas in which the regulation of accounting standards, and auditing standards in par-

ticular, have contributed to the recent global financial crisis. The impact of such stan-

dards on pro-cyclicality, the level of success achieved by the IASB and other

international standard setters, such as the Basel Committee on Banking Supervision,

relates to how effectively the accounting and audit standard setting is implemented. As

well as identifying the importance of convergence in contributing towards high quality

audits and the consistent application of auditing and accounting standards, this article

also acknowledges the difficulties and challenges encountered in attempting to achieve a

convergent framework. Furthermore, through a discussion of recommendations aimed at

consolidating transparency and accounting, as proposed by the G20, ways in which

accounting standards, and, consequently, the IASB, could contribute further to the

improvement of transparency and accountability of the framework for fair value mea-

surements and evaluation, are considered. The absence of enforcement mechanisms, the

fact that enforcement actions are carried out at national level in various EU Member

States, present sources of obstacles to attempts to realise the proposals put forward by

the G20. This article not only attempts to address such factors, but also to suggest ways

in which the IASB, to an extent, could realise its goals. Through a consideration of two

enforcement regimes in Europe, namely Germany and the UK, two related standards

which govern enforcement in Europe, principles on which harmonisation of the institu-

tional oversight systems in Europe may be achieved , and the vital contribution made by

the Committee of European Securities Regulators and the European Financial Reporting

Advisory Group, this article will consider how enforcement could be implemented by the

IASB at a European level.

1It is acknowledged that the recent financial crisis broke out in 2007. Hence reference will be made to 2007

in relation to incidences prior to the financial crisis.

* Researcher, Centre for European Law and Politics (ZERP), University of Bremen; Teaching Associate

School of Social Sciences and Law, Oxford Brookes University.

European Law Journal, Vol. 16, No. 5, September 2010, pp. 604–623.

© 2010 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

I Introduction

Accounting, and the regulation of auditing standards in particular, have contributed to

the current global crisis.2Other causes of the financial crisis are attributed to the

following factors:3macroeconomic causes (for example ‘ample liquidity’, low interest

rates and excessively loose monetary policy); risk management by firms, supervisors

and regulators; credit rating agencies (failures in the ratings procedures of such agencies

and conflicts of interests); corporate governance (‘weak shareholders, management of

firms and remuneration schemes’ which generate inappropriate incentives); regulatory

and supervisory failures (inclusive of pro-cyclical4issues, mark-to-market accounting,

lack of regulation of derivatives markets); and lack of global coordination between

institutions such as the International Monetary Fund (IMF), Financial Stability

Forum (FSF) and G20. The Report of the High Level Group on Financial Supervision

in the EU considers means whereby the organisation of supervision of financial insti-

tutions, the consolidation of European cooperation on financial stability oversight,

early warning and crisis mechanisms can be undertaken.5Furthermore, it recommends

ways whereby EU supervisors could collaborate on a global basis.6

Despite these efforts, the report does not accord as much level of attention as one

would have wished, to important issues such as maturity mismatches7and pro-

cyclicality. These issues are acknowledged minimally in the report, and the High Level

Group’s recommendations in relation to such issues are considered to be too passive.8

An international standard setter such as the International Accounting Standards Board

(IASB) with enforcement mechanisms would be able to add the ‘bite’ required in

activating and enforcing standards related to pro-cyclicality and maturity mismatches.

The Basel Committee for Banking Supervision is another international standard setter

who faces problems attributed to lack of effective enforcement mechanisms. Proposals

made by the High Level Group to the Basel Committee are therefore considered passive

where the Basel committee continues to lack effective enforcement mechanisms

required to activate and enforce its standards.

2See Report of the High Level Group on Financial Supervision (February 2009), available at http://

www.iasplus.com/restruct/euro2009.htm and particularly Brief Summary of the De Larosiere Report,

available at http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225.pdf, at 3.

3See Brief Summary,ibid,at2.

4This is the tendency for periods of financial and economic downturns or booms to be further exacerbated.

Certain economic or financial policies could also be pro-cyclical; eg Basel II’s pro-cyclical effects have

been criticised.

5See EU Supervision Report Criticises IASB, available at http://www.iasplus.com/restruct/euro2009.htm.

6ibid.

7A situation which arises where disparity exists between the duration of maturity of assets and liabilities.

It could occur where the duration of maturity for liabilities exceeds that of assets (short term) and also

where the duration of term for assets exceeds that of liabilities (medium and long term). For example,

where an undertaking possesses more short-term liabilities than short-term assets or more assets than

liabilities for medium- and long-term obligations. The disparity between the periods of maturity for assets

and liabilities could determine the state of the company’s liquidity.

8See Report, at 43, available at http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_

en.pdf. The High Level Group proposed, a fundamental review of the Basel II rules’ with the Basel

Committee of Banking Supervisors being called upon to make amendments to such rules for the purpose

of increasing minimum capital requirements in a gradual manner, reducing pro-cyclicality through the

facilitation of dynamic provisioning or capital buffers, introducing more stringent requirements for off

balance sheet items, introducing stricter rules for the management of liquidity, and consolidating rules for

banks’ internal control and risk management; see Report of the High Level,op cit n2supra.

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