Transnational expert-driven standardization accountancy governance from a professional point of view

Transcription

1 Transnational expert-driven standardization accountancy governance from a professional point of view Sebastian Botzem botzem@wz-berlin.de Paper presented at the ECPR Meeting Granada, April 2005 Workshop: Transnational Private Governance in the Global Political Economy This paper is a first draft. Comments and discussions are very welcome, but please do not quote without the authors permission. Social Science Research Center, Berlin / Free University of Berlin 1

2 Abstract Transnational standard-setting in accountancy has been under way for three decades. The governance structures are analysed to provide some insights for the debate on transnational private governance. A historical view on the development of transnational standardization underlines the roots of private rule-making in which professional experts and their associations have played an important part. Current governance arrangements display less associational influence, but still rely on core principles such as self-regulation and highlight the importance of expertise. Theoretical inspirations can be drawn from the sociology of professions in which social closure and the struggle over professional jurisdictions are emphasized. Empirically, the paper traces the developments in accountancy with particular reference to the organisational genesis of a self-regulatory body for the auditing profession on the one hand and a transnational regulatory agency for accounting standards on the other. The historical asymmetry is reflected in the paper, giving more room to the case of accounting standards. In a first step, the paper aims at identifying the particularities of transnational governance structure in accountancy. Distributed agency and dispersed authority are at the center of the findings. The concluding section tries to draw some lessons for systematic thinking of private transnational governance considering the role of professionals under these conditions. 2

3 1. Introduction In the debate about transnational private governance in the global economy, private standardization is a feature increasingly arousing attention. In addition to technical standardization, rule development and rule-setting is particularly prominent in international financial markets. Even in financial market regulation, the field of accountancy seems to be an exception: Whereas in other areas such as monetary and fiscal policy, corporate governance or financial regulation and supervision, the issuing bodies are intergovernmental organisations, such as the IMF, OECD or Basel Commission for Banking Supervision, standardization in accountancy is dominated by two private sector bodies 1. Considering the tremendous corporate failures in the past years, such as Enron, Worldcom, Parmalat and others that were blamed on flawed application of accounting standards and the misuse of the auditing profession, it seems particularly intriguing that standardization in accountancy is still in the hands of private international organizations. As transnational standardization is increasingly relevant for corporate actors but also for national regulatory agencies, the governance structure of accountancy deserves some more detailed attention. The paper sets out to analyze transnational private governance arrangements in the accountancy field looking at professionals, their associations and the mechanisms to secure professional rule beyond the nation state. As accountancy is considered a vital determinant of corporate governance structures potentially affecting national economic systems as a whole, the research questions to be answered are: How do professional experts shape and influence transnational standardization? What are the consequences for transnational private governance? The paper starts out with a brief theoretical overview and than turns to the empirical case of accountancy from a historical perspective. Governance structures are analyzed and some particularities highlighted. The paper 1 The Financial Stability Forum, founded in 1999 by the G7 Ministers and Central Bank Governors has identified 12 standards vital to sound financial systems. See 12 standards in Table 1 of Appendix. For the genesis of the FSF, see 3

4 closes with drawing some preliminary conclusions for the debate on private transnational governance. 2. Theoretical background For the discussion on transnational governance in the field of accountancy two points of departure are considered, the debate on global standards as well as the sociology of professions. 2.1 Global standards Increasing cross-border activity and economic integration, customer demands and professional services offerings are part of the globalization of economics (Simmons 2001). Closer economic interaction has led to the development of rules and regulations beyond the nation state. Standards are one such form of rules to regulate cross-border economic activities (Braithwaite/Drahos 2000). Their character as voluntary rules (Brunsson/Jacobsson 2000) makes standards particularly suitable because they can be introduced alongside existing regulation and be confined to precisely defined areas. Regardless of the social and political character expressed in standards, the individuals involved paint a rather technical picture of their task. Striving for the most appropriate solution, discussing advantages and disadvantages in a rational manner seems to be the understanding of experts involved, even though social science research has pointed to the political dimension of standardization (Tamm Hallström 2004, Voelzkow 1996). Differing interests play an important role in the processes of drafting and disseminating standards. From an institutional economics point of view, standards are considered central to establishing cross-border coordination (Abbott/Snidal 2001, David/Greenstein 1990, Genschel/Werle 1996). However, the global dimension of standards has also been identified by the institutionalist literature on rationalization (Boli/Thomas 1999, Meyer et al. 1997). This approach stresses the importance of global diffusion of rationalized governance, in particular underlining the role of professionals in theses processes (Drori et al. 2004: 4f.). Other streams of literature, particularly in 4

5 political science have focus on standardization arrangements from a multilevel perspective (Mattli 2001, Mattli/Büthe 2003, Schmidt/Werle 1998). Mattli describes in detail the interrelatedness of public and private governance structures. He focuses on multi-level dependencies and the public private interactions and labels it joint standards governance (2003: 217ff.). The broader context for the discussion of transnational standardization can be seen in the debate on private authority. It underlines the growing importance of non-state actors in global affairs (Cutler et al. 1999, Higgott et al. 2000, Kahler/Lake 2003). Contrary to what the term private authority might suggest, public actors still play a role. What is stressed by Cutler and others is the focus on alternative sources of authority outside the state (Cutler et al. 1999: 4ff.). Particular importance is given to corporate actors and their capacity to self-regulation, but business associations are also considered relevant in spanning national borders. The literature on global governance is also debating certain organizational forms of transnational governance. Particularly networks (Thompson 2003) and expert communities come into focus. Epistemic communities (Haas 1992) emphasize the role of technical experts and their involvement in regulatory arrangements. Instead of limiting epistemic communities to the formulation of ideas as part of the agenda-setting process, communities can be ascribed other tasks. Van Warden and Drahos (2002) point out the importance of epistemic communities as channels for exchange and information that makes them a source for cross-border policy convergence. A similar understanding is the basis of Brunsson s concept of normative communities (Brunsson 2000: 28f.). Sugarman operates with the notion of interpretative community (Sugarman 1995) when stressing the contestations between differing professionals and their representative organizations. The emphasis on rule-shaping by argumentation is underlined by concepts such as transnational discourse communities (Bislev et al. 2002). 2.2 Professional self-regulation The sociology of professions is focussing on professionals and their associations to asses their governance contribution in modern societies. The 5

6 approach centres on selected groups of actors that display a high degree of autonomy and self-organizing capacity, such as lawyers, engineers, doctors, consultants or accountants. Their roles and the contributions in capital market societies are analyzed. To differentiate between professional groupings, Reed (1996: 586) suggests three characteristics, namely knowledge base, organizational form, and power strategy of the different expert groups 2. These three elements have been debated in detail in the literature of professions. Participants of standardization processes often characterize the knowledge base in accounting as technical but influenced by academia. In practical terms, the relevant knowledge for auditing is influenced by business aspects of customer relationships. More than the other two categories, knowledge base reflects national variations. In the continental European systems the contribution of academics is considered to be more important, while in Anglo- Saxon countries the knowledge base is characterized much more by practical considerations in a case oriented and therefore more localized system of knowledge generation (Nobes/Parker 1985, Nobes/Parker 2004). Traditionally, the dominant organizational form in accountancy (self-) regulation is the professional association. Associations are organized as collegiate bodies with clearly defined tasks. To a high degree, power is derived from the control of entry barriers via education and issuing of certificates (Ramirez 2001). This is a basic feature of associational organization of self-regulation (Macdonald 1995). Prestige and credibility were important to secure the status of accountants and auditors, particularly in early times, when professionals established their businesses to earn money with corporate failures and fraudulent behaviour of others. Especially in countries like the UK and the US where capital market investments historically play an important role for the funding of enterprises, financial auditing was vital (Covaleski et al. 2003: 327). In the UK the profession developed out of bankruptcy legislation in the second half of the 19 th century 2 In Reed s setting, accountants are not explicitly mentioned. However, they are most similar to lawyers with a collegiate form of organization and a power strategy aiming at monopolization. Reed s division along the lines of knowledge base is less convincing. His suggestion of the knowledge base categories such as abstract, rational and esoteric knowledge (1996: 584) remains rather cryptic. 6

7 (Willmott 2000), in Germany and the US auditing was made mandatory after the economic crises in the 1920s. Their quasi-public role, makes auditors view themselves as independent treasurers auditing corporations (Willmott et al. 2000). Closely related to the disposal over knowledge and the self-regulatory organization is the power strategy. Its strongest expression can be seen in the establishment of jurisdictional configurations. It is crucial for an occupational group to control its abstract system of knowledge in order to claim professional stature (Abbott 1988: 8f.). Jurisdictions comprise formal control over key definitions of professional services and the language used in describing the techniques and the actual conduct of work performed by practitioners (Abbott 1988: 62). Professional associations are competing with other, neighbouring professions over the construction of the professional field (Dezalay/Sugarman 1995). The sociology of profession has put particular emphasis on rivalling professions. Due to its status as semi-public auditors in accountancy, formal control is particularly relevant. This needs to be balanced out with a wide array of other actors, amongst which are the state, other occupations, educational institutions, and customers (Macdonald 1995: 189). Control needs to be re-established over time, making the contestation over jurisdictional control a continual endeavour. Such formal control provides power, but as soon as a professional field is fully translated into the rules and programs or becomes codified, the profession s power disappears. Therefore, it is necessary for a profession to continually re-generate its abstract system of knowledge, thereby extending its jurisdiction to possible enrcoach upon that of adjacent professions (Covaleski et al. 2003: 325). Particularly between the field of law and accountancy competition is quite intense (Dezalay/Sugarman 1995, Sugarman 1995). After World War II, accountancy has successfully invaded the sphere of law. Mainly through an increase in the market for taxation and management services (Sugarman 1995: 228). However, jurisdictional competition is not simply to be seen as accountancy triumphing over law. Particularly in Anglo-Saxon countries, law remains the language of the state. Intellectually and culturally law is still 7

8 influencing accountancy. Remarkably, both rivalling professions see the state in a very similar way. They are united by their common ideological inclinations, their commitments to laissez fair and individualism and their mutual hostility to the state, their common enemy (Sugarman 1995: 235). Another way to describe the power strategy of professions aiming at monopolization is social closure (Macdonald 2000). By means such as education, membership control, and certain behaviour, insiders determine the rules for others to participate. In the case of accountancy, studies have identified the multiple roles experts play and underline the social and political dimensions of their actions. Particularly striking is their role in standardizing. Experts are characterized as policy players that choose their roles according to what suits them best. In setting accounting standards, experts are members with several organizational affiliations besides that of being an expert belonging the accountancy profession (Tamm Hallström 2004: 92f.). Central actors are largely, but not exclusively stemming from professional accounting associations. They consider themselves to be technical experts looking for optimal solutions. However, in the processes of rule-making it becomes quite clear that they also act interest-oriented. They are both neutral experts and representatives of certain interests (Tamm Hallström 2004: 94). Recent literature has pointed to shifts within the accountancy field and put emphasis on auditing firms as powerful organizational units. Auditing firms intermediate between differing contexts and span the boundaries of nations as well as organizations (Ansell/Weber 1999). Under the circumstances of globalization, auditing acquire global scope (Greenwood et al. 1999). Also, they are increasingly dominating the configuration of associations challenging the national logics inherent to associations (Greenwood et al. 2002: 64f). Recent research suggests a clear shift from professional associations to professional services firms in terms of organizational power (Suddaby et al. 2005). Despite the shifts in actor constellations audit firms have always played important roles in the associations. What is changing, however, is that instead of having a disproportionate say in its (a professional association s) affairs (Macdonald 1995: 203), big firms to greater extend now exercise their 8

9 influence openly and directly, which means independently of professional associations. 3. Cross-border dynamics in accountancy Even though accounting rules and their application and evaluation through auditing procedures appears rather technical, the social and political dimensions in accountancy are evident (Hopwood/Miller 1994). For corporate actors, accounting rules are vital because they determine how economic realities are displayed and influence publicized profits of firms 3. Other actors also have a high stake in accounting rules and auditing procedures, such as stock exchanges and financial investors that use financial reports as guidelines for investment. Public agencies that aim at ensuring investors protection, risk control and in some cases draw in accounting rules for taxation purposes. National differences need to be considered when thinking about harmonization and standardization on a global scale. In their model of accounting systems, Nobes and Parker used to differentiate between the micro and macro approaches of accounting, and the type of regulation applied (2004). The duality between countries following Anglo-Saxon accounting principles on the one hand (US, UK, Canada, Australia, and the Netherlands among others) and the ones following a continental European approach on the other hand (Germany, France, Belgium, Italy but also Japan) resembles differences in a variety of spheres (Nobes/Parker 2004: 66). Generally, Anglo-Saxon countries can be characterized as capital market based. Accounting rules are developed incrementally and resemble a common law understanding. The rules are investor oriented and put emphasis on the representation of a true and fair view, which means they aim at identifying the companies situation for a defined period of time. 3 International comparisons underline the consequences of differences in financial reporting. In 1993 the German Daimler Benz corporation issued group accounts under the more conservative German accounting norms as well as the US-Generally Accepted Accounting Principles (US-GAAP) to be able to list on the New York Stock exchange. While the German group earning were reported to be of 165 million DM for 1993, under US-GAAP Daimler Benz group claimed a loss of 1,8 billion DM (Glaum 2000: 37). 9

10 Continental European logic puts much more emphasis on the protection of creditors. The linkage of financial reporting and taxation has also led to a wide spectrum of reserves and an approach to financial reporting that focuses on long-term stability. Accounting rules complement a system of bank financing. In this sense, accounting principles fit to traditional national economic configurations and resemble institutional complementarity (Hall/Soskice 2001). Recent classifications of national accounting regimes have considered the increasing importance of financial markets and divide the developed economies along another line of thinking. The proposal aims at differentiating between strong and weak equity. In practice, this leads to the same categories, grouping Anglo-Saxon countries in the strong equity class and the continental European ones in the weak class (Nobes/Parker 2004: 69). The duality is also displayed in the national governance of standard-setting. Particularly in Anglo-Saxon contexts, above all in the UK, professional associations are powerful and resourceful actors that have managed to implement self-regulation and thereby influenced standard-setting. In continental Europe, associations have also been important in standardsetting, but public actors have played a bigger role. In all cases however, it is the task of national associations to determine auditing rules. They set ethical standards and ensure their application. They participate in and sometimes oversee the education of new professionals. 3.1 Historical roots of international standardization Since the late 19 th century experts in accounting and auditing were interested in cross-national exchange to improve their own knowledge and to provide better services to customers. Back then, professional congresses were the first important fora (Mueller 1979: 2). Congresses continued between the two world wars, particularly in continental Europe, but it was not until after WW II that accountancy became an issue of intergovernmental activities. Initiatives were first debated under the auspices of UNESCO and later on by the OECD with a focus on developing sound macro approaches in public accounting as 10

11 well as international harmonization of private accounts of multinational enterprises (Samuels/Piper 1985). Early steps in standardization were taken by the European Commission. A first drafts of accounting directives to harmonize corporate reporting was issued as early as 1964 (Nobes 1985). However, the accession of the UK, Ireland and Denmark made it necessary to include the more capital market oriented principles into the directives. Under these circumstances, the two central directives to European accounting (the 4 th and 7 th directives of and respectively) were rather general guidelines accepting all differing national accounting principles and procedures. Coherent and precise standards could not be developed without resolving the differences between the continental European and Anglo-Saxon accounting principles. As a reaction to these problems the European Commission abandoned the idea of setting its own standards on the basis of the directives. In 1995 it drastically changed its position on accounting standardization. In its New Strategy vis-a-vis International Harmonisation (European Commission 1995) the EU decided to accept the International Accouting Standards (IAS) issued by the International Accounting Standards Committee (IASC) if they were in congruence with European directives. The harmonization project of the IASC is based on an Anglo-Saxon initiative of professional self-regulation. First step was the creation of the Accountants International Study Group (AISG) in 1966, a union of British, Canadian and US-American accountings practitioners with the aim to issue comparative studies as to accounting thought and practice in participating countries (Thomas 1970: 60). Professional sprit and expertise were regarded vital criteria for participating in the AISG. In Thomas view this meant being fully au fait with international developments and having a wide professional background as well as an aptitude for research (Thomas 1970: 63). 4 5 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies. Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts. 11

12 The strategy of the study group was to strengthen private standard-setting as an alternative to supranational regulation and clearly reflects the influence of Anglo-Saxon professions and their tradition of self-regulation. Also, the private mode of standard-setting was in the interest of Anglo-Saxon auditing firms trying to open up new markets in continental Europe. The IASC s primary goal was to establish a set of universally acceptable standards: It was intended that the IASC would produce basic standards that would be capable of rapid acceptance and implementation worldwide (Samuels/Piper 1985: 70). The professional project was explicitly established to counterbalance the European attempts of developing a set of conservative accounting standards. Above all, British professionals were uncomfortable with a regulation that was developed under statist European influence: It is claimed that the hidden agenda of the IASC was to issue standards that reflect Anglo-American practice, which the UK (and similarly minded countries) could use as ammunition in its endeavours to stop the European Union from imposing accounting rules that conflicted with British practice (Flower 1997: 288). The establishment of the IASC laid the foundation of a governance structure for standardization beyond the nation state. In the beginning, the focus was clearly on accounting standards. Up until the late 1990s the issues of auditing were not in the spotlight of global accountancy. Only recently has auditing become a global issue. 3.2 Organisational differentiation: the dual structure of standardization Transnational governance in accountancy is closely related to the IASC which is the centre of the transnational network in accountancy (Braithwaite/Drahos 2000: 121). The committee was founded in 1973 after a decision of the 10 th international congress of accountants. It took another five years, however, to found an organization that would steadily represent national accounting associations world-wide. The International Federation of Accountants (IFAC) was established in 1977 to have an institutionalized body to deal with global matters in auditing. IFAC and IASC were linked up through a mutual agreement in 1982 with IFAC becoming the organization overseeing 12

13 IASC s activities. Officially, IFAC nominated the Board members and provided funding for IASC. IFAC s task was to foster the worldwide proliferation of International Accounting Standards (IAS) among other things through influencing national standard setters (Haller 1993: 1297). 3.3 Setting accounting standards: The creation of the International Accounting Standards Committee (IASC) 6 In 1972 the Accountants International Study Group invited professional bodies of six other nations to set up a proper organisation to organize crossborder standard-setting. In 1973 the International Accounting Standards Committee (IASC) was founded and included representatives from the national professional associations of Australia, France, Germany, Japan, the Netherlands, and Mexico in addition to the study group members form UK, US and Canada. Three different phases can be distinguished. The first phase comprises the establishment of IASC as the standard-setting arena by building up links with other important actors ( ). The second phase can be characterized as the consolidation of IASC when standards were brought in line with financial market requirements and the institutionalization continued ( ). The third phase (see 3.4) marks the organisational separation between IASC and IFAC and transformation from IASC to IASB 7 (since 2001) : establishing first ties and extending relationships From the beginning, IASC attempted to connect to international organizations in the field of financial markets. In 1976 they sought relations with the Group of Ten Bank Governors, later met with the OECD s and the UN s working group on accounting and reporting. Contrary to the UN initiative, which aimed at supporting developing countries to make corporate actors behave 6 7 For historic development see IASPlus (DeloitteToucheTohmatsu 2003) and IASC discussion paper Shaping the Future (IASC 1998). From its establishment in 1973 to a major organizational overhaul in 2001 the international standard-setting body was called International Accounting Standards Committee (IASC). In 2001 the name was changed to International Accounting Standards Board (IASB). 13

14 responsibly and giving governments and civil society a useful tool to measure and react to corporate activities, the OECD gave much consideration to the needs of corporate actors from the North (Hopwood 1994: 252, in Note 1.), thus being close to the IASC in its attempt to link up with corporate actors and financial market players. In addition to intergovernmental cooperation, IASC began joint projects on specific accounting issues with national standard-setters from the Netherlands, the UK and the US in In the mid 1980s the organization developed closer ties with the US-American Securities and Exchange Commission (SEC) which is an independent regulatory agency overseeing securities markets in the US. The most important changes were opening up the IASC board and to co-opt powerful actors into advisory bodies. The board is the central organ of power in which the relevant decisions are taken. Board members were delegated by national professional associations. Each country has one vote but usually sends two delegates and in addition a technical non-voting expert. In 1977, the constitution was amended for a first time, allowing for two more countries to be members of the board. In 1982 a special constitutional bias in favour of the nine founding members was abandoned and the number of board members rose to 17. Up to the reform in 2001, board members were executing their assignment without salary of IASC. Like other individuals involved, they were sent to the organization by their national associations and were in most cases on the payroll of private actors, often international auditing firms of which many board members were partners. Of the additional board members agreed upon in 1982, 4 seats were reserved for representatives of organisations with an interest in financial accounting. This marks a departure from territorial representation allowing for organized interests of financial market actors to have the same say as national professional associations. Departing from the mode of territorial representation underlines the eagerness to incorporate specialized expertise, in particular strengthening the position of users of financial reports. In 1986, the International Coordinating Committee of Financial Analysts is the first such organisation getting a seat on the IASC s board. The enlargement of the 14

15 board, however, never threatened the dominance of Anglo-Saxon professions or those likeminded. In fact, the inclusion of financial analysts can be seen as an additional way of linking up to the private sector establishing communication with them and allowing them privileged access. In addition to the expansion of the board, in 1981 the Consultative Group was formed to advise IASC on projects and priorities. The group grew in size and at a later stage comprised representatives of users and preparers of financial statements as well as from national standard-setting bodies. Representatives form intergovernmental international organizations were also included to formalize and strengthen the relationship between IASC and other actors. From the beginning IASC showed great flexibility in modifying its internal structures and altering the organizational configurations : linking up with the heavyweights and co-opting veto-players In 1988 IASC introduced another institutional innovation, which was opening its political nucleus for special organisations granting them an observer status. The observer status on the IASC board was given to the US- American standard-setter the Financial Accounting Standards Board (FASB) in 1988, to the European Union in 1990 and the International Organization of Securities Commissions (IOSCO) in In the 1990 s IOSCO was the single most important player in transnational accounting influencing the procedures and outputs of IASC. Historically, IOSCO s development is rather recent as the organisation acquired global scope only in Before that, IOSCO was an inter- American regional association (created in 1974) to supervise securities exchanges to maintain efficient and sound markets 8. IOSCO powerful vetoplayer position derives from its authority over national stock markets. As a representative body of national supervisory agencies of stock markets, IOSCO issued requirements the International Accounting Standards (IAS) needed to reflect in order to be eligible to be used by corporate actors when listing at foreign stock markets. Starting in 1988, IOSCO and IASC agreed on the comparability and improvements projects that aimed at defining capital

16 market friendly characteristics of IAS. The decision not to approve IAS up to 2000 (IOSCO 2000) can be seen in the light of internal quarrels between different members of IOSCO and points to a clear US-American dominance. While most European members were in favour of instant endorsement of the 14 standards considered acceptable in 1993, it was the Securities and Exchange Commission s (SEC) position to recognize and endorse IAS only after a complete set of core standards had been developed. A list of core standards was decided upon in 1993 and completed in In Europe many stock exchanges allowed the use of IAS for foreign listed companies long before While some encouraged IASs use, Germany s Neuer Markt even required the use of non-local GAAP (Generally Accepted Accounting Principles) from 1997 onward. This means, that German companies were reporting either under IAS or US-GAAP when listed at the Neuer Markt was also the first year when regular members of the board were expelled in favour of new members. During the 1990s the rotation of countries from the global South and Asia continued, but did not weaken the position of Anglo-Saxon and Commonwealth countries which were never rotated out of the board once they occupied a seat. Of the four board seats reserved for other organisations with an interest in financial reporting, only three were occupied up to the organisational make-over in After the early accession of the Financial Analysts in 1986 it took a number of years until the Federation of Swiss Holding Companies (1995) and the Association of Financial Executives (1996) moved on board. The integration of the European Commission in 1990 was an important step in paving the way for change in the Commissions accounting strategy. All along, IASC had also developed close ties with the European association of professional accounting bodies, the Fédération des Experts Comptables Européens (FEE). FEE was always a strong advocate in convincing the Commission that adopting IAS rather than developing its own standards is a superior strategy. The official change of the Commission towards a new strategy for harmonising accounting standards in 1995 also has to do with an increasing number of big European corporations opting for US-GAAP as 16

17 internationally accepted standards. The increasing trend of big corporations to use US-American standards posed a threat to European institutions and led to the Commission s decision to endorse IAS after an examination of the Commission (European Commission 1995). A third body was set up in The so called advisory council was made up of 10 personalities of the financial community was set up to foster reputation and to provide alternative financing (Kleekämper 1995: 420). The changes of the 1990s also include an amplification of the Consultative Group. It included the US-American standard-setter, the Financial Accounting Standards Board (1988), the European Commission (1990), and representatives of actuaries (1997). The objective of this body that assembles more than a dozen international organizations 9 was to discuss particular standards under development with the board (Kleekämper 1995: 420). While the reputational aspect was important and securing international recognition of IASC improved, it was vital for the organizational development to come to terms with the forces that had to decide about the implementation of accounting standards. In addition to the national standard-setters these were stock exchanges and their oversight bodies. In its quest for authority, the IASC managed to incorporate the relevant players of the field and to work with the forces of securities markets to gain acceptance for their regulatory output (Tamm Hallström 2004). 3.4 Changes in accountancy governance: transnationalization of standard-setting The year 2001 marks a turning point with the formal separation of the International Federation of Accountants (IFAC) and the International Accounting Standards Committee (IASC). The division of labor between the two bodies is being resembled in the new governance structure. IFAC s responsibility was refocused on the self-organization of the global accounting 9 The Consultative Group included intergovernmental and private international organizations such as the International Chamber of Commerce, the international Federation of Trade Unions, the International Banking Association, the World Bank, OECD, and United Nations bodies. 17

18 profession while the future IASC was exclusively dedicated to setting accounting standards. As the global body of national professional associations, IFAC currently comprises 163 member bodies of 119 countries and represents more than 2,5 million accountants of public practice, industry, commerce, government and academia (IFAC 2005). Its governance rests with its council, in which each member organisation is represented. The IFAC board is made up of 17 indivduals responsible for setting policies and overseeing the organisation s operations, the implementation of programs, and the work of committees and task forces. The objective is to strengthen the accountancy profession, to contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, and to further international convergence of standards (IFAC 2004). This stresses the self-regulatory character of the profession, setting standards for its members and practitioners associated to member organizations. Currently IFAC is undergoing a process of reorganization. While the structure is not yet entirely clear, the position of the big auditing corporations will be strengthened. They have founded a new organ called the Forum of Firms which they use to centralize their power and to influence IFAC. Via the Forum, the interest of the global auditing firms can be inserted into the IFAC. A reform proposal dating from September 2003 explicitly includes the Forum into the IFAC leadership group (ILG): The ILG members are the President, Deputy President, and the Chief Executive of IFAC, the chairs of the IAASB 10, the TAC, and the Forum of Firms, and up to four other members designated by the IFAC Board (IFAC 2003: 18). The executive committee of the Forum of Firms is the Transnational Auditors Committee (TAC). By way of the IFAC constitution, TAC is one if its committees, but separated organizationally (IFAC 2004). The Forum will bring together firms which perform transnational audits and involve the firms more closely with IFAC s activities in audit and other assurance-related areas 10 The International Auditing and Assurance Standards Board (IAASB) is where IFAC s most important standards, the International Standards on Auditing (ISA) are drafted and decided upon (IFAC annual report 2003: 21). 18

19 thereby supporting IFAC's mission (FoF 2003: Part 1.2). Part seven of the Forum s constitution defines the institutional cross-over relationships: The Forum of Firms shall have the right to be represented by up to five members on the International Auditing and Assurance Standards Board and up to two observers on IFAC s other assurance-related committees and the Education Committee (FoF 2003: Part 7.63). In turn, the board of IFAC shall have the right a) to be represented at meetings of the Forum, the TAC and their subcommittees and task forces by up to two representatives and b) to propose matters for consideration by meetings of the Forum, the TAC and their sub-committees and task forces; such matters may include recommendations for changes to this Constitution. The Forum, the TAC and their sub-committees and task forces as appropriate shall consider such matters and shall report the results of such consideration to the IFAC Board (FoF 2003: Part 7.64). This structure makes quite clear how power is distributed in IFAC. While the Forum has the right to be represented in the IFAC organisation, IFAC bodies in turn only the right to be present. This important difference characterizes the power relations within IFAC. Global auditing firms successfully managed to reserve for themselves a secure position within the IFAC structure to directly influence the organizations policies. In contrast to IFAC s rather slow emancipation, changes in the sphere of accounting standardization were more profound. The transformation from IASC to the International Accounting Standards Board (IASB) aimed at improving the organizational structure. After having completed the core standards programme with IOSCO, new organizational challenges came up. In addition to developing and issuing standards, the new IASB had to ensure the global diffusion and implementation of its regulatory output. In terms of the advisory structure, the external relations of IASC were continued by IASB. During the reconfiguration, the organization has taken over most of the IASC s advisory bodies such as the Standards Advisory Council (49 members) and the International Financial Reporting 19

20 Interpretations Committee (12 members) both appointed by IASB s new trustees and an advisory group appointed by the board. The most drastic change can be seen in the exchange of board members. Instead of having delegates from national professional associations, IASB established special relationships with national standard-setters. The organization s new structure needed to be suitable to bring about convergence between national accounting standards and practices and highquality global accounting standards. To this end, IASC needs an effective infrastructure the will bring its experience and current work together with those of national standard setters (IASC 1998: 3). To this end, the IASC itself initiated the debate over the new structure. In a number of ways IASB is different from its predecessor. Instead of being officially controlled by the worldwide association of professions (IFAC), now a foundation, the International Accounting Standards Committee Foundation (IASCF) has the task of securing funding and nominating the new board members of IASB. The foundation is made up of a Board of Trustees with 19 members that largely come into their position through cooptation. The trustees were able to generate more than 10 million Pounds Sterling for the yearly operations coming from corporate actors (50%), auditing companies (30%), national and international governmental entities (8%) and associations (6%). The considerable increase in expenses arose because IASB operational staff increased considerably. Also, the position of the now 14 members of the IASB board has changed to full-time membership (with two being on a part-time assignment) and includes payment. The new IASB constitution applies different criteria for the composition of the board and the idea of jurisdictional representation for national delegations is further weakened. Except for seven core countries in financial reporting (US, UK, CD, AU/NZ, JP, FR, DE) which can nominate one delegate to the board, no regional representation is provided for. Even though, the foremost qualification for membership of the IASB shall be a technical expertise (IASCF 2002: section 20) there is a clear reference that regional representation is no longer the guiding principle: The selection of members of the IASB shall not be based on geographical representation (Section 21). 20

21 The importance of global audit firms is further underlined by the constitutional provision of IASB board members. To achieve a balance of perspectives and experience, a minimum of five members of the IASB shall have a background as practicing auditors, a minimums of three a background in the preparation of financial statement, a minimum of three a background as users of financial statements, and at least one an academic background (IASCF 2002: section 22). To issue drafts and standards a majority of 8 out of the 14 members is required. This makes it unlikely to come to relevant decisions that seriously threaten the positions of global auditing firms. The structural reform of IASB in 2001 can be characterized in two ways. First, IASB reorganized its institutional setting and streamlined its operations. Second, the organization spun an even denser net to influence and incorporate national and international organisations holding power to implement, evaluate, and enforce accounting standards. IASB acquired legitimacy to extend its objectives well beyond the original stated task of standard development. In particular, the special relations IASB is keeping with the seven national standard-setting bodies points to the special status of the most powerful countries. IASB has established a stable network crossing organisational, sectoral and also national borders. IASB appeals not only to Anglo-Saxon countries, but more importantly to countries with a different regulatory background. These countries, namely France and Germany and to a lesser extend Japan, have given up their traditional ways of generating standards characterized by the once dominant principles of prudence and long term consideration. It has been argued elsewhere that one key to successful integration of differing national, sectoral and organisational logics is to be seen in the procedures of international standardization, namely the organizations due-process (Botzem/Quack forthcoming). The current governance arrangements in accountancy can be characterized by a separation between standardization for auditing and accounting, by organizational growth in terms of services, manpower and financial resources, by a reconfiguration of the modes of representation, and by an increasing influence of globally active auditing firms. An overview of the 21

22 organizational characteristics of standardizing bodies in accountancy is provided by table 2. - Table 2 about here - In practice, IASB remains the most important organization in international standardization in accountancy. So far, standardization in auditing has largely been in the shadow of accounting. IFAC is in the midst of reformation establishing new governance arrangements. Currently, its task is defined by developing guidelines for international auditing practices, accounting training, and organizing future international congresses 11. Behind the façade of conflict-free standardization lies continued contestation of rules, procedures and standards contents that are constantly fought over by the participating actors. Both cases of accounting and auditing reflect these dynamics in their governance structure. Actor constellations are constantly in flux and are being reshaped by the actors themselves but also by outside influences when dealing with application and enforcement. Private actors such as stock markets are able to compete with but also complement public actors. On the other hand, the EU is becoming more involved in international accounting standardization. In terms of audit control, the US- American Securities and Exchange Commission (SEC) has reacted with traditional regulatory policies to the corporate scandals. Private actors influence IASB and IFAC through financial contributions. As the addresses of international standards, multinational corporations become involved in their development. Stock exchanges decide about cross-border listings and financial analysts determine the credibility of harmonized rules by making them the foundations for their investment decisions. However, special attention needs to be given to the remaining global auditing companies, called the Big 4. Professional services firms (PSF) are the single most important type of actor in international accountancy today. They provide finances and know-how. Most of the individual experts are or have been employed by them. The wide acceptance and their powerful role is clearly displayed in the reorganization processes. They have managed to be directly

23 integrated into the governance structures and their position is largely unchallenged. They have established themselves as credible organizations in providing expertise to global standard-setting. 4. Conclusion and theoretical implications: governance under the conditions of distributed agency and dispersed authority The empirical analysis of the accountancy field displays a transnational governance structure with certain characteristics in terms of agency and authority: First, actor constellations have been in constant flux. Over time, differing actors and groupings have shaped developments. Two features become visible. On the one hand, there is an increase in the number of actors participating. The development of IASB showed how different types of actors have been systematically integrated. Actors relying on and fostering a financial market logic were the most prominent. On the other hand, there have been changes in the organizational forms of professionalism. In standardization, they are marked by a clear shift away from professional associations to professional services firms. In both cases, in auditing and accounting, it can be concluded that agency is distributed over a wide variety of actors. Even though the number and constellation of actors varies in the two spheres of standard-setting, the multiplicity of actors is evident. Second, authority is not confined to public actors. A number of sources and locations of authority have developed. At the moment, less influence of state actors appears to be visible, but powerful veto players like the US-American Securities and Exchange Commission, IOSCO, or in recent times the EU play a role. In addition, private actors such as users and preparers of financial statements, as well as stock exchanges are also becoming vital in the accreditation of standards. They exercise private oversight and give legitimacy to standards developed by private organizations. In terms of authority it can be argued, that the multiplicity of important actors has lead to 23

24 diffused authority. Authority is dispersed between public and private actors and across different levels of governance. Distributed agency and dispersed authority make up the background for the debate on the relationship of governance structures and professional standardization. To conclude, three points will be suggested, on how professional thinking can inspire the discussion of private transnational governance. (1) Changes in organizational forms: Actor constellations point to more complex and sophisticated regulation. Therefore it becomes easier for resourceful actors such as large accounting firms and transnational corporations to play the game. In addition to resources, these actors also dispose over most of the expertise deemed relevant in the field. At the same time, their economic weight enables them to influence governance arrangements. It is not by coincidence, that from the beginning global services firms have had a high stake in harmonizing cross-border accountancy rules. In contrast, small firms often lack sufficient resources and expertise. They do not have the same tools available as big corporate players and continue to rely on associations. Increasing complexity could also prove to be a barrier for public agents as they often do not dispose of the relevant expertise and resources to deal with transnational accountancy issues. In contrast the national arena, they also lack the authority to regulate professional behaviour. Therefore, globally operating economic actors embody the most important organizational forms in transnational standardization. (2) Shifts in the power strategies: Shifts from associations to private actors (both PSF and transnational corporations) can be observed on all levels, the national as well as the transnational. Professional associations have lost their positions as central actors, but the professional conviction of such selfregulation has remained important. This has led to a transformation of social closure. Traditional power strategies of professional associations serve no longer in transnational standardization. Nevertheless, professional 24