Members of the European Parliament have warned the International Financial Reporting Standards Foundation (IFRS Foundation) that it must address investor concerns about prudence in accounting and clean up its corporate governance act.

The Delaware-based Foundation is the parent body of the International Accounting Standards board (IASB), charged with setting international accounting standards such as IAS19, the pensions-accounting rulebook used by listed companies across the European Union (EU).

MEPs voted to stump up €43m of public money over six years to fund the activities of the London-based IASB, the Public Interest Oversight Board, which oversees international audit, ethics and education standards for the accounting professions, and the EU’s own adviser on accountancy issues, the European Financial Reporting Advisory Group (EFRAG).

Release of the funds, however, will be conditional on the Foundation meeting the demands of an increasingly militant Parliament.

Among the issues to emerge during a 12 March debate in Parliament on the funding arrangements are concerns about returning to the concept of prudence to financial reporting, whether financial statements prepared under IFRSs portray a true and fair view of a company’s financial health, and governance woes at the IFRS Foundation.

Sharon Bowles MEP, the British chairwoman of the European Parliament’s influential Economic Affairs Committee, warned in a statement released on 13 March, after a vote in Parliament on the funds, that the IASB and EFRAG were drinking in the last-chance saloon.

“My parliamentary colleagues have done a great job in highlighting the much-needed reform of these accounting quangos, which will improve public confidence in how accounting standards are implemented in Europe,” she said.

“We have, for the first time, shone a light on how bodies such as the IFRS Foundation and EFRAG are constituted and governed, which has not made for pretty reading.

“Any potential conflicts of interest have to be weeded out, and, if they are not, then the Parliament has shown it has the power to withhold funding, which sends a powerful message.”

Although Bowles steps down from the EP at the next elections in May, the IFRS Foundation can expect no let-up in the pressure they will face from MEPs when the new Parliament convenes.

UK Conservative MEP Syed Kamall is widely expected to return to Brussels after the elections, and has carved out a reputation among Brussels observers as a fierce critic of the London-based accounting quango.

Speaking during the 12 March debate ahead of the vote, Kemall asked whether it was “right for the EU to outsource standard-setting to what is in effect a private-sector body, funded by taxpayers’ money.”

Among the areas where Kemall is expected to bring pressure to bear on the IASB are investor demands for a return to prudence as a basis for standard setting.

In December, IPE obtained a copy of a letter from senior players in the UK asset management industry to the Financial Reporting Council, the UK Securities regulator, in which the investors demanded a return to prudence.

The three signatories to the 25 November letter – the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds – collectively manage around £7.2trn (€8.7trn) of assets.

Also figuring among the investor concerns were the true and fair view override and the question of capital maintenance.

The investors wrote in the letter: “We believe it materially correct to err on the side of caution – i.e. be prudent – in the face of uncertainty at an individual item level and view prudence as a predisposition.”

The IASB removed references to prudence, or caution, from its conceptual framework in 2010.

It substituted instead the concept of neutrality in a bid to align the IASB’s conceptual framework closer to the US GAAP framework.

Fundamental to the increasingly politicised battle over the purpose of financial reporting and the role of IFRSs is the question of whether financial reporting should serve investors, on the one hand, or shareholders, a company’s owners, on the other.

Any failure by the IASB and its parent body, the IFRS Foundation, could have serious consequences – among them politicians turning off the flow of cash.

The EU currently contributes 17% to the Foundation’s annual budget by way of a grant.

IFRSs are mandatory for all listed entities within the EU.

Responding to comments from Dutch MEP Saïd El Khadraoui about the IFRS Foundation’s base, European Commission member Neelie Kroes said: “Things have changed. The centre of gravity of the IFRS has moved to the EU, so we need to review whether this structure remains appropriate.

“The Commission, as a member of the IFRS Monitoring Board, will quickly ask for clarification and for the IFRS to address this issue as part of its next governance review.”

Kroes acknowledged that the Foundation, whose governance structure is broadly comparable with that of the US Financial Accounting Standards Board, had used Delaware as a legitimate conduit for donations from US donors.

In a statement posted on the IFRS Foundation website, the chairman of the foundation’s trustees, Michel Prada, confirmed the organisation would mount a review of its governance structure in 2015.

He said: “We will give consideration to any recommendations related to enhancements of the governance arrangements of the Foundation as part of our public consultation on the structure and effectiveness of the IFRS Foundation, due to begin in 2015.”

The IFRS Foundation was hit with penalties following an investigation by UK tax authorities into its income tax and national insurance affairs.

“More recently, the Foundation’s compliance with company filing requirements for its UK Incorporation was found wanting.”

Having robustly defended the Foundation’s filing compliance in an 11 February open letter, its chief executive Yael Almog was forced to concede just two weeks later that an internal review had thrown up “historic filing shortcomings” that were “inconsistent with our initial public response”.