Peeling away financial reporting issues one layer at a time

A Brief Exchange with an IASB Member on Hedge Accounting

A reader of my post on the CFA Institute's critique of the IASB's hedge accounting exposure draft suggested that I write to the two members of the IASB, Patrick Finnegan and Patricia McConnell, who had a close association with the Institute prior to joining the IASB. So, I did, and Pat Finnegan was kind enough to respond. This post is based on our very brief correspondence.

Why Would I Do Such a Thing?

Writing to the board members was a departure from my modus operandi, which is to limit my sources to what I happen to read as I pursue my nerdy interests, plus other items brought to my attention by readers and others. I simply don't have time to do much more than that. But, in this case, I couldn't resist reaching out to IASB members. Here's why:

  • Pat Finnegan was associated with the CFA Institute until relatively recently, and presumably he helped determine, and advocated for, the Institute's positions on financial reporting issues. (Pat McConnell's direct association with the Institute was longer ago.) Hence, I was looking for an explanation of the inconsistency between Finnegan's present endorsement of the hedging ED and the present disagreements on practically all aspects of the ED expressed by his previous employer. Moreover, these disagreements involve core conceptual issues that go beyond hedge accounting (e.g., fair value, comprehensive income, management intent, etc.) 
  • The ED also contains a dissenting view, which the CFA Institute supports, and which IASB members could have joined. It happens to have been written by another U.S. member, John Smith, who is reputedly the most informed and technically capable board member when it comes to financial instruments accounting.
  • The utter passivity of the SEC with respect to the actual substance of "convergence" of financial reporting standards suggests that it may be using the votes of the IASB "investor" members as justification for remaining on the sidelines.  Finnegan and McConnell must be aware of the significant influence they have, especially as the SEC approaches closure on its own IFRS policy questions; and for this reason alone, providing greater transparency of their views is the right thing for them to do.*

I Got Criticized, but I Didn't Get an Answer to My Question

In my email, I asked only one question: "Given your former intimate connection with CFA Institute, I would like to ask you whether you agree with their comment letter; and if you disagree, kindly explain why."

And, here is Pat Finnegan's response in its entirety:


Dear Tom,

Many thanks for your email, and for sharing your recent posting on our work to reform hedge accounting. I am on your distribution list and read your posting last week.

 You will not be surprised to learn that I do not agree with your assessment of our extensive due process as a 'political circus'. I suspect that most of the 250 or so respondents to the Hedge Accounting consultation would also disagree with your assessment. 

It also seems odd to substantiate your arguments based on just two comment letters. If you are interested in investor views, why ignore, for example, the Investment Management Association (whose members manage over £3 trillion of assets) that broadly supports our proposals? There are a range of views expressed in the comment letters received – some supportive, others offering constructive criticism, which is the whole point of having such an extensive due process.

I understand from my colleague Pat McConnell that you have sent her a similar request for opinion. I am copying her on this reply.

The board is planning to discuss the staff's analysis of comment letters and outreach visits during the next several weeks.  Those discussions will inform the Board's decision making (including my own) before determining how to proceed. I believe the key questions and observations raised in the CFA Institute's letter will be addressed during those discussions. I invite you to listen and if you would like to discuss our tentative decisions as we proceed, please do not hesitate to contact us.


I am flattered that Pat reads my blog, and I hope he understands why I singled him out. I am going to respond to his concerns, below. But first, I must note that he has declined to respond to my request: to have an explanation for the inconsistency of his vote with the positions of his previous employer.

As to my inferences from only one comment letter and an analysis by E&Y, I should first point out that I have been following the IASB's "due process" for some time. I invite Pat to read my post on the revisions made to IAS 23 (interest costs), and tell me that "political circus" is not a better descriptor than "due process" for the way in which those revisions were made. But, more directly to his point, if that IMA comment letter is the best that Pat could come up with for investor input that I overlooked, then I clearly did not miss very much.

The CFA Institute's letter that I discussed contains almost 40 pages of solid analysis, including numerous reasoned and detailed responses to specific questions that the IASB asked commenters to address. In stark contrast, the IMA's letter is two pages in total, with barely more than one page of substantive comments. The IMA letter contains no responses to the specific questions in the ED, and it provides no explanations for why investors should be supportive of the IASB's proposals. The CFA Institute's letter, on the other hand, is thorough not just for its depth and breadth, but for its lucid explanation as to why the ED is inimical to investor interests.

Hedge accounting is the poster child for rules-based accounting.  It owes its existence to a highly-politicized process in the first place that made an explicit exception to principles-based accounting. But, even if the ED were actually principles-based, how should one weigh the IMA's two-page letter from an organization representing members that manage over £3 trillion of assets with the Institute's letter and its 100,000 members? Evidently, Pat Finnegan thinks the IMA letter is significant in comparison to the Institute's, but I disagree. A staff analysis of comment letters that could consider the IMA's contribution to be in the same ballpark as the CFA Institute's is precisely the kind of "political circus" I had in mind when writing my post that Pat disagrees with.

As to what the receipt of 250 comment letters actually says about "constituents'" perceptions of due process, unlike Pat, I don't see that it says much of anything. For example, commenters could be just as cynical as I am, and still find it in their interests to register their views. And, I wouldn't be surprised if that's the way the signers and drafters of the CFA Institute's letter regard the process – they have no real choice except to participate in a charade.

The IASB would do well to commission an independent survey of "constituents" (most especially, investors, academics and journalists) for their perceptions of the efficacy of the Board's "due process." That such a survey has not already been conducted is, in and of itself, telling. 

* * * * * * *

Unfortunately, accounting reform is turning out just like banking reform: politics and influence, as opposed to economics and principles, are the deciding factors. I see only political reasons for Pat Finnegan and Pat McConnell to decline to explain their votes on the hedging ED. And, the IASB's analysis of comment letters on their hedge accounting ED, under the name of "due process," can be nothing more than pretense.


*In a previous version of this post I incorrectly stated that hedge accounting was not discussed at the IASB's most recent meeting.  I apologize for the error.  


  1. Reply David Merkel May 17, 2011

    Hey Tom, what do you make of this?

  2. Reply Steve May 18, 2011

    I applaud your effort. However, sadly, you are not getting any straight answers from these board members. As “investor representatives” on the board, how could they get comfortable with the serious concerns raised by their colleague John Smith?
    Like many other IASB board members, Pat McConnell rarely raised issues or challenged the staff on the hedging accounting project. At least, that is my impression of them at the board meetings. When the chair asked their opinion at the meeting, all they can say is “I agree with the staff”.
    The public should hold these board members to a higher standard. Like politicians, they have too easy a life. They get paid well to just attend meetings, especially many of have little idea of what they are voting on?!

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