What determines stakeholders’ indirect participation in the development of IFRS? – New evidence published in TIJA

The development of IFRS Accounting Standards is not merely a technical but a political process. Stakeholders can easily participate in this process by submitting comment letters in consultations on proposed regulations. Europe features a unique institutional setting: Stakeholders may not only participate directly in the consultations of the International Accounting Standards Board (IASB). As a substitute for or complement to direct participation, they may choose to participate in corresponding consultations of the European Financial Reporting Advisory Groups (EFRAG) serving as an intermediary.

© Gäumann & Dobler (2024), S. 7 (Figure 1)

In a recent paper published in The International Journal of Accounting (TIJA), Martin Gäumann and Michael Dobler (Chair on Business Administration, esp. Accounting, Auditing, and Taxation at TUD Technical University of Dresden) exploit the special institutional setting in Europe. Based on a large sample and multivariate regression models, the authors provide the initial evidence on the determinants of stakeholders’ indirect participation via EFRAG (as a substitute for or complement to direct participation at the IASB). The findings have important implications, not only for EFRAG’s role as an intermediary. The paper is available open access.

Gäumann, M. & Dobler, M. (2024). Choice of participation method in setting International Accounting Standards: Evidence from EFRAG as an intermediary for indirect participation. The International Journal of Accounting, 59(1), 2450001. https://doi.org/10.1142/S109440602450001X

Synopsis

• The research problem: Prior empirical research on constituents’ participation in setting international accounting standards has focused on their decision whether or not to participate directly in the standard setter’s due process. However, because that focus neglects constituents’ choice between direct participation and indirect participation via an intermediary, we investigated the determinants of using an indirect method of participation as a substitute for, or in complement to, direct participation.
• Institutional setting: We exploited the European institutional setting, where the European Financial Reporting Advisory Group (EFRAG) serves as an intermediary for indirect participation in the due process of the International Accounting Standards Board (IASB).
• The test hypotheses: Based on rational choice theory, we hypothesized that constituents from EFRAG’s inner circle and from countries with smaller capital markets, lower English-language proficiency, and/or an accounting value profile more different from that embodied in International Financial Reporting Standards (IFRS) have a higher probability of choosing to use indirect participation.
• Adopted methodology: Using a sample of 7,766 comment letters (CLs) from 2005 to 2017, we focused on individual constituents and traced their use of indirect participation (i.e., sending CLs to EFRAG) versus direct participation (i.e., sending CLs to the IASB). We employed logistic regression models using the methods of participation as dependent variable to test our hypotheses. Controlling for factors used in prior research on direct participation, we estimated a primary model for the full sample of constituents and a secondary model with firm-specific variables for the subsample of constituents classified as corporate preparers.
• Findings and implications: We found strong evidence that the constituents’ membership in EFRAG’s inner circle is positively related, and capital market size in the constituents’ home countries is negatively related, to choosing to use indirect participation. Country-level English-language proficiency and differences in the accounting value profile in relation to IFRS also determine the choice of participation method. Our findings suggest that a preference for indirect participation relates to the barriers to using direct participation. We provide initial evidence of a neglected aspect of Sutton’s (1984) rational choice model and implications for EFRAG’s role as an intermediary.