The right balance…

by John Hughes

Accounting standard-setting, we should all concede, isn’t easy. It requires a vast span of knowledge and appreciation of complexity, but also the ability to distill all that into a workable simplicity. There’s probably never enough time to reflect on things as you’d ideally want to. It involves a lot of travel and a potentially mind-crushing volume of meetings. And it’s not just an abstraction – your decisions have real financial consequences. It probably takes years to develop full effectiveness in the role.

Of course, having said all that, standard-setting probably isn’t any more difficult and pressured than most other high-paid jobs, and many of the people involved in it might never find anything else that suits them as well. If one monitors such things, there’s a group of people who spend a large chunk of their careers within that community, perhaps moving between international and national standard-setting, or between standard-setting and securities regulation, or between active and oversight roles. I’ve spent some time in the securities regulation world myself, and it was very satisfying – it wouldn’t have been hard to ease into that musical chair game (assuming I would have been welcome, which must be in severe doubt). But it’s not what I wanted, so I got out while the going was good.

Perhaps as a reaction to that, I don’t pay much attention any more to the individuals involved in this. But three things hit my mind all at once. First, I saw that the IFRS Foundation finally chose a successor to David Tweedie as Chair of the IASB – Hans Hoogervorst. Hoogervorst, says the bio: “is currently chairman of the Netherlands Authority for the Financial Markets (AFM), the Dutch securities and market regulator, chairman of the Technical Committee of the International Organization of Securities Commissions (IOSCO) and co-chair of the Financial Crisis Advisory Group (FCAG), an independent body of senior leaders formed to advise accounting standard-setters on their response to the global financial crisis.” He’s plainly highly qualified (even though he’s not an accountant!). But he’s not, in any meaningful sense, you know, new.

Around the same time, I was reading the highly entertaining and informative Accounting Onion blog, written by Tom Selling. Selling seems to enjoy the political aspect of standard-setting as much as the conceptual, and occasionally focuses on the backgrounds and motivations of the people involved. In a recent post, he dissected the background and possible motivations of the FASB’s newest board member, including the possible conflict of interest embodied by that individual being married to a partner in a Big Four accounting firm. He concluded, among other things: “restocking the Board from the Accounting Establishment pipeline will not fix the many problems with GAAP and the inexorable erosion in the public trust in financial reporting coming from the waves of accounting scandals that have rocked our economy in the decades since the FASB was formed.” Then Selling announced his own application for one of the remaining Board seats, and good luck to him with that I say.

More broadly I was thinking, as I often do, about the wretched state of politics, especially in the US, and its apparent mad rush toward rampant idiocy. In a Slate  article titled The Politicians We Deserve, Christopher Hitchens asked rhetorically : “What normal person would put up with the inane indignities of the electoral process?… would consider risking their career and their family life in order to undergo the incessant barrage of intrusive questioning about every aspect of their lives since well before college?” And so on. His answer, seemingly supported by the evidence, is that not many would. And so the landscape is left to tired insiders and flagrantly unqualified (if not plain mad) insurgents.

Standard-setting, by its nature, wouldn’t seem at great risk of being taken over by people lying too far outside the box. Even so, the IASB has made a real effort to involve investors more deeply in the process. But it seems to me that the “investor perspectives” published on its website read increasingly like summaries of the latest developments rather than explanations of them. People with little or no relevant experience (whatever that might even be) can aspire through the political electoral process to some of the most powerful jobs in the world. On the other hand, no one would ever think of electing a heart surgeon in such a way – some jobs are all about the experience and knowledge. Standard-setting lies somewhere in the middle I think. One obviously needs knowledge of the materials, but too much time spent in the pipeline, as Selling calls it, hardly helps you appreciate real-world risks and needs. But then, I expect it’s not easy to find qualified (and interested) external voices with the ability to absorb and shape such a varied agenda (without merely channeling their own narrow pre-existing interests). Not easy but, on the other hand, this is an international board after all, and it’s an awfully big world.

My point here isn’t to throw stones or to suggest we should start fixating on the personalities behind the projects; I definitely don’t think we should do that. But there’s also no point claiming to believe the IASB’s proposals and decisions all flow from some perfectly balanced scientific machine: it’s a human process, and probably subject to as much inherent quirkiness, neurosis and occasional dysfunction as any other. In the press release announcing his appointment, Hoogervorst said: “As a securities and market regulator I have investor protection in my DNA.” Sounds good I guess. Then he continues: “I strongly believe that a global set of accounting standards, set for investors by an independent standard-setter, is an essential component for the world’s financial markets. These will remain my priorities.” But this already causes questions to pile up in my head; for example, should a DNA-inscribed passion for “investor protection” morph so quickly into a grand prescription about the needs of the “world’s financial markets”? Is it practically possible anyway to demonstrate how a greater commitment to investor protection would lead to making different decisions about the content of standards (the only meaningful test in this context)? If for example you’re against the proposed new revenue accounting model, does it follow you must not care as much about investors? That would be a pretty sweeping assessment of one’s motivations…

Perhaps we’ll gain more insight into this in future Hoogervorst speeches and elsewhere (although more likely we won’t). What’s most important I think is that we retain (as accountants say) a healthy skepticism, and that we grapple for ourselves with the limitations of the process, through localized conversations, discussion seminars, blogs, forums, and so on. As with politics, we don’t all need to run for office, but we’re surely falling short of our full capacities if we don’t engage in some way.

The opinions expressed are solely those of the author.