The G20’s communique following the London summit in April 2009 welcomed recommendations that addressed the procyclicality of certain accounting treatments, and called on “the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards”.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) identified a number of weaknesses in accounting standards and their application that had surfaced during the global financial crisis and affected the credibility of financial reporting. These weaknesses primarily involved: the valuation of instruments traded in illiquid markets; the complexity of classification and measurement requirements for financial instruments; delayed recognition of credit losses by financial institutions; an inconsistent accounting treatment for insurance contracts; undue headroom for off-balance sheet financing structures, through special purpose vehicles or operating leases; or the criteria for revenue recognition.

The accounting standard-setters have substantially addressed these weaknesses. Given their relevance to the financial sector, particular attention has been focused on the timely recognition of credit losses, which is deemed to contribute in mitigating procyclicality, and the accounting for insurance contracts, which had for many years provided unreliable insight into the financial position and performance of insurers and prevented the understanding of insurance risks.

The FSB acknowledges the importance to stable financial systems of high-quality standards that are developed under rigorous due process and interpreted and applied consistently. As a member of the FSB, the IASB regularly updates the FSB Plenary on standard development activity.

Effective financial reporting also requires independent, challenging and consistent external auditing of the resulting financial statements. In 2003, a number of international financial organisations including the FSB established the Monitoring Group, to oversee the development of effective auditing standards that appropriately capture public interest considerations connected to the importance of reliable financial information to the integrity of capital markets, the safety and soundness of financial institutions, and more generally financial stability.

The FSB convenes regular roundtables that bring together key parties, including the global audit networks and the International Forum of Independent Audit Regulators (IFIAR), to promote constructive dialogue and coordinated efforts to support and advance audit quality, with a differentiated focus on the audits of global systemically important financial institutions and the financial stability implications of audit. The results of IFIAR’s annual surveys of audit inspection findings are used as a basis to monitor progress and foster effective discussion.