Is there going to be another financial crisis just like 2008?
There are two big questions. Are accounting standards now good enough and are they being enforced?
A lot of work is being carried out to tackle these questions but I’m still not hearing good enough answers.
This morning I delivered a speech to the Local Authority Pension Fund Forum outlining my thoughts on the issue and to explain why as a politician, I am so concerned about this issue.
Speech to LAPFF December 2015
Good morning everyone, thank you very much for inviting me to speak today.
My name is Syed Kamall, I have been a Conservative Member of the European Parliament for London for the last ten years and I now lead the third largest group in the European Parliament, the ECR Group.
The first thing I am always asked when I speak about the Accounting Standards debates is – how did I become involved?
This question usually comes in two forms.
Firstly from the genuinely bemused- wanting to know why such an apparently niche subject gets me so riled up.
And then from the incredulous- questioning what place a politician has in this debate. What right do I have, as non-expert, to start asking all of these experts all of these questions?
Now it is true that I am not a technical expert in accounting, I am a politician with a background in Trade statistics and telecommunications policy. So I am not a technical expert but I do have a technical mind.
And I became involved in this subject through my work on the European Parliament Economic and Monetary Affairs committee.
A few years ago I was putting my technical mind to good use (hopefully) by working on the european Audit Regulation.
My work on this file lead me to meet with a number of UK stakeholders, including a number of investors with whom I would discuss auditing and how they saw their experience of auditing.
I found myself talking time after time about the same issues, attempting to answer the same questions.
Each time the discussion seemed to end:
“Look, it’s not only about auditing and the policy of auditing; you’ve got to start asking questions about accounting standards”
And so I did.
I began to ask;
Why do Accounting Standards seem to advocate box ticking as opposed to professional scepticism?
Why is it that during the crisis Banks were able to build up such big losses without provisioning for these losses?
How come there was no sort of robustness or what Nassim Nicholas Taleb would call ‘antifragility’ built into the system to deal with this?
How it is that no one foresaw this, why did it come as complete surprise?
Why did we have one of the most extreme examples of AIG Financial products exposed to 2.8 trillion?
At a far more simplistic level, what are accounting standards for? What are they trying to achieve
Now usually I wouldn’t provide such a long winded answer when questioned about my interest in this subject.
I usually just say:
I am a politician- I was asked a question – and I couldn’t answer it.
So I did the logical thing and I went to the experts in that field. I asked them the same question – and they couldn’t answer it.
Unsurprisingly, this surprised me.
So I continued to ask and I continued not to receive proper answers to my questions. And it’s been about four years now
And to those people who ask, why are politicians getting involved?
I reply – that’s what a politician should be doing. We should be asking these questions.
As a politician, I’m contacted by constituents with particular questions. If I don’t know the answer, it’s my duty as their Member of the Parliament, to submit a question to the European Commission, or to the relevant government, or to their ambassador and find an answer for them.
It’s my job to help ensure that we have a proper debate on this issue and I am pleased to say that we are starting to have this now in the European Parliament.
And so, I would like to use the rest of my time today to update you and talk you through this debate and this process.
The role of the European Parliament in this procedure is often described as one of ‘safeguarding’. It is played out in conjunction with various other European Institutions- the European Commission & the European Financial Reporting Advisory Group (EFRAG) to name a few.
In 2009 the G20 tasked the Financial Stability Board (FSB) and the International Standards Board (ISB) with devising a new set of Financial Standards. They wanted them to bridge the Atlantic and resolve the flaws the financial crisis has exposed in the previous system.
These Standards were duly devised and then adopted by the IASB, becoming what we refer to as IFRS9.
This brings us somewhat up to date, as the next step is the endorsement of IFRS9 by the European Commission. This process is currently ongoing, following the official decision of EFRAG.
EFRAG are enlisted by the Commission to act as an independent body that will assess and provide advice. In September they wrote to the Commission advising them to accept IFRS9.
On top of this consultation, the Commission also seeks the advice of a group a Member State experts, the excitingly named Accounting Regulatory Committee.
Following the accumulation of this advice, if the Commission does decide to endorse these Standards, they will be sent to the European Parliament as a delegated act.
The Parliament will then have 3 months to scrutinise the delegated act before deciding to vote in favour or against.
So what kind of reception can it expect if and when it arrives?
Well. Within the Parliament there already exists a standing group of MEPs established to monitor the IFRS debate.
A fairly new body, this group was formed on the advice of the Maystadt report.
This was a report commissioned by Michel Barnier, the former European Commissioner for the Internal Market. Barnier wanted to take a closer look at the endorsement mechanism in the EP and ensure that IFRS was more accountable.
I am a part of this group, along with Members from all the other political groups in the Parliament. I am in good company – a former Prime Minister of Romanian is a member!
The questions and reservations we have as a group were voiced earlier in the week in a Parliamentary hearing that took between Members, stakeholders and academics.
MEPs raised the topics of divergence between US and EU models, the re-drafted loan loss provisions & the governance of the IFRS foundation amongst others.
My question related to how we could rely on the technical expertise provided by EFRAG and others on IFRS9 when high profile academics have openly commted on the same experts “outsmarting the law”?
Suffice to say, this wasn’t the most popular question amongst our guests!
It is against the backdrop of these concerns, these interest groups and numerous other developing factors that we in the Parliament may have to make our decision.
EFRAG’s admission to ECOFIN in June for example, of the serious concerns Member States are expressing on IFRS9.
The IASB’s announcement that IFRS9 will enter into force in January 2017 regardless, implying that this political process is simply a venire.
The lectures that are being given at today’s event.
We as politicians must play our part to ensure that these Standards, which have wide reaching consequences, are no longer simply designed by accountants for accountants.
This debate underpins European financial stability and I am determined to ensure that its components are heard and that our scrutiny is up to standard.