By Huw Jones
LONDON (Reuters) - The group which writes global accounting rules said the European Parliament was threatening its independence by calling for a fundamental change to the way it sets standards, and linking it to future funding.
The parliament wants the International Accounting Standards Board (IASB) to include a specific reference to "prudence" in its basic tenets, to put pressure on accountants to err on the side of caution when scrutinising losses at banks.
In a draft law, it wants to make future contributions from the European Union - which provides about a third of funding for the IASB - effectively conditional on this reform.
Lawmakers believe the prudence reference could help avoid a repeat of the 2007-09 financial crisis in which EU taxpayers had to put billions of euros into struggling banks.
IASB Chairman Hans Hoogervorst described the parliament's stance as "highly worrisome".
"This is something we cannot accept," he told a meeting of his body's advisory council on Monday.
"If Europe is going to do this, other parts of the world might be encouraged to do so. It's a threat to our independence," he said.
The European Parliament's work is being led by lawmaker Theodor Dumitru Stolojan, who said there were concerns about how the IASB is run and about some of its standards.
"The MEPs have to respond to these concerns. There is no threat," Stolojan said.
The IASB writes book-keeping rules used in over 100 countries, including the European Union, but not the United States.
In 2012, the EU provided 7.1 million pounds or roughly a third of the 20 million pounds the IASB received that year.
In an amendment to a draft law on future contributions to the IASB, the European Parliament wants to make funding conditional upon the body giving serious consideration to amending its basic tenets, known as the conceptual framework, and wants it to insert a reference to "prudence".
"Cofinancing should be given to the bodies in question only if it is clear that... accounting concepts, in particular with regard to 'prudence' ... are appropriately considered in the revision of the conceptual framework," says the amendment, seen by Reuters.
A specific reference to prudence was dropped by the IASB in 2010 to help align IASB and U.S. accounting rules.
U.S. critics say prudence introduces a bias into financial reporting when it is meant to be a neutral snapshot. There is also a risk of creating "cookie jar" accounting, meaning companies downplay profits in good years to smooth out a rockier performance in tougher years, the critics say.
Hoogervorst said many of the EU member states, who have joint say with parliament over funding, oppose the linkage. Britain, however, has just thrown its weight behind the re-introduction of prudence.
The spat over funding is a further sign of policymaker frustration at the speed of reform in accounting rules for banks after the financial crisis.
In 2008, during the financial crisis, world leaders called on the IASB and its U.S. counterpart, the Financial Accounting Standards Board, to force banks to recognise souring loans much earlier so they can take speedy action and avoid calling on taxpayers.
So far the two boards have failed to find a common solution despite several drafting changes.
"We have to think about the credibility of standard setting. We have had five years and six models. It's decision time," Hoogervorst said. "We have certainly not thrown in the towel. We are determined to get this done."
He was "quite confident" the reform being proposed by the IASB would lead to a significant increase in provisioning by banks to quell U.S. criticism it was being too light touch.
(Reporting by Huw Jones; Editing by Pravin Char and David Evans)