Stress Testing International Financial Reporting Standards (IFRS): Accounting for Stability and the Public Good in a Financialized World

Abstract

The recent Maystadt report (2013) challenged the European Parliament to modify governance arrangements surrounding the design and endorsement of international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB). In addition the Maystadt report constructs an argument that accounting information has the capacity to also modify behaviour and that this might not be conducive for the European public good, financial stability and economic development. In this paper we argue that IFRS need to be stress tested for their impact on firm-level financial stability in a financialized world. The financialized firm can revalue a range of assets to their market value crystalizing future earnings into current values but these valuations can become impaired. Asset value impairments will be charged to shareholder equity but this is being hollowed out because a higher proportion of earnings are being distributed to shareholders. Accounting disclosures are not only an information feed to users they inform the stewardship and control of a firm’s resources and in the financialized firm the potential for financial instability is heightened and this can translate into a moral hazard for society.

Debunking the myth of shareholder ownership of companies: Some implications for corporate governance and financial reporting

“…A shift towards a stakeholder model of corporate governance would need to be accompanied by changes to the current system of financial reporting which reinforces the shareholder primacy model of governance and has played a key role in manufacturing short-term shareholder returns and hollowing out companies (Cooper, 2015;Haslam et al, 2015). The contemporary financial reporting system remains primarily focused on the provision of financial information to "existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.…”

The Current Challenges for EU Company and Financial Law and Regulation

“…Therefore, the maintenance of corporate financial capital is being undermined, and so does the corporate accountability to a broader set of stakeholders, including but not limited to financial market investors. At the same time, this leaves enterprise groups exposed to a process of shareholder value extraction through dividends and share buybacks, thus vulnerable to economic risks -including asset impairments -because reserve provisions can be hollowed out (Haslam, Tsitsianis & Hoinaru, 2016). Moreover, the financial investor logic undermines the accountability over the whole enterprise group, facilitating the opacity of intra-group relations.…”

“…Transactions with shareholders should be better reported and controlled (Biondi & Graeff, 2017), including dividend distribution, own share active management, and own securities use for payments (executive remuneration; business combinations). Distributions to shareholders should be balanced against the needs to maintain reserves that are buffers available to absorb economic risks, including risks arising from both trading losses and asset impairments (Haslam, Tsitsianis & Hoinaru, 2016).…”

Rethinking Financial Reporting: Reinstating the Social License of Limited Liability

“…Limited liability sought to decouple shareholder interests from the stewardship of a firm's resources but it has now become a shield employed to protect shareholder-value extraction that is hollowing out the capacity of companies to absorb financial risk. This gaming of the social license of limited liability presents a moral hazard to society because the principle of accounting for a 'going concern' has been sacrificed (Haslam, Tsitsianis, Hoinaru, Andersson, &Katechos, 2017a and2017b).…”