Monday, November 19, 2007

Towards a more transparent world

TJN is delighted with recent statements from Transparency International about their latest shift in thinking. But there is something else, more subterranean but at least as important, that we have been watching. For those who don't know much about this seemingly arcane issue, some of the facts described here will be quite shocking.

In a motion submitted on November 14, the European Parliament approved legislation that will have enormous implications for the transparency of multinational companies and for their relationships with nation states and citizens around the world. And almost nobody noticed.

This legislation originated with the International Accounting Standards Board (IASB,) a curious organisation that decides how companies publish their company accounts. Despite its grand-sounding name, the IASB – which takes decisions that will profoundly affect all of us – is a wholly private company based in London and registered in the American secrecy jurisdiction of Delaware. It is funded by the Big Four accountancy companies and by some of the biggest multinationals in the world. In effect, this private company, which is subject to no democratic processes, is writing some of our most important laws. We are not talking about "soft" laws like guidelines or codes of conduct -- but hard European law. In the past, the latest accounting standard would simply have been nodded quietly through, and it would become law. But a few activists have noticed what is happening -- and they are alarmed.

A process of "convergence" is underway - whereby European accounting standards and American standards are being brought into line, with the end goal of truly global, harmonised standards that will enable global comparability. The goal itself is excellent: having different sets of accounting standards around the world enables companies to exploit fabulous loopholes. But in fact, the convergence is pretty much in one direction only: stronger European standards on company transparency are now giving way to lax American ones.

The parliamentary motion concerned an arcane-sounding accounting standard that the IASB produced, known as IFRS-8 (IFRS stands for International Financial Reporting Standard). This is about how companies slice up their company reports – and the implications for transparency are enormous.

Under current accounting rules, a company that earns profits in ten African countries can scoop all those numbers together and publish a single profit figure for "Africa." The poor countries where that multinational operates cannot unpick that "segment" (as it is known) and find out the company's local profit. Sometimes they can't even work out who really owns the companies operating in their terrritory. Mix that opacity with the murky world of tax havens, add an army of clever company accountants schooled in how to shift profits to tax havens -- and you have a system where multinationals can run rings around the countries where they operate – rich and poor.

What we want is very simple: Country-by-Country Reporting. Under this, international accounting standards would require companies to unpick their accounts for each country where they operate. A group called Publish What You Pay has been calling for Country-by-Country reporting for companies in extractive industries (like oil or copper,) partly to boost transparency in places like oil-rich Nigeria or Kazakhstan. TJN's Richard Murphy (see his work on IFRS-8 here) designed their country-by-country accounting standard for them. Now TJN is hunting much, much bigger game: it wants Country-by-Country reporting for all sectors. The sums involved are truly colossal; at a stroke, this simple change in the accounting rules could achieve far more for poor countries than all the world's foreign aid, combined.

IFRS-8 not only fails to secure Country-by-Country reporting – but it weakens current standards. Astonishingly, it is an almost a word for word copy of the American version (think "Enron" or "Subprime"), which only requires that companies publish three quarters of their activity in these broad segments, leaving the remainder undisclosed. And, just as bad, in making these calculations they can use accounting rules that differ from those used for the rest of the accounts – so the numbers need not even add up. This is not just a concern for poor countries. According to a new study, when US accounting standards were weakened and firms were no longer required to report by geographical area, the result was predictable: profitability of companies fell.

Fortunately, we have powerful allies: some arch-capitalists are alarmed too. A group of institutional investors, representing up to 40 percent of the London Stock Exchange, don't like IFRS-8 either. They understandably worry about the quality of governance of companies they invest in, and want them to publish solid accounts. The European Economic and Monetary Affairs Committee of the European Parliament has spotted the problem too, and was understandably outraged recently when the IASB tried to tell them that the European parliament had no right to amend its work. In a meeting on November 6th, committee members approved the standard but slapped all manner of caveats on its use and demanded the development of an accounting standard requiring Country by Country reporting for the extractive industries as well.

The stealthy IASB juggernaut has been seriously challenged for the first time (despite shabby efforts by groups like the One World Trust to burnish its image.) A parliament has told it to change its methods, and to produce a standard to meet the needs of civil society. It is shaping up for an enormous battle, with enormous implications for democracy, poverty and corruption around the world.


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