When Sir David Tweedie ran the UK accounting standard setting regime, pride of place in his office went to a newspaper billboard proclaiming “Britain’s most hated accountant”. A similar billboard today might opt for something like “World’s luckiest accountant”.
Who could blame Tweedie for thanking his lucky stars for the accounting and auditing failures in the US? The US-made crisis has given him and his colleagues on the International Accounting Standards Board a once-in-a-lifetime opportunity to overcome resistance to a single set of global accounting standards. Moreover, those standards could be based on Tweedie’s particular and clear vision. Try and imagine the world as it was pre-Enron. It is impossible to believe Tweedie would have had the opportunity to present his strategy for global accounting standards to a US Senate committee and a UK parliamentary select committee.
Before Enron, US opinion makers, legislators, standard setters and regulators would not have accepted international standards on anything other than their own terms. In other words, IAS (or International Financial Reporting Standards as they will soon be known) would have had to have been made in the US.
Recent events have given the IASB a hook to persuade the world’s biggest economy that in some crucial ways foreign accounting standards are better than their own. But even that may not be enough for the IASB to succeed.
The politicians huff and puff and have hearings, but they are not the decision-makers – the power rests with the US Financial Accounting Standards Board (FASB) and the Securities & Exchange Commission (SEC).
US accounting standards are detailed and specific because the FASB’s constituents like them that way. Companies want detailed guidance because details eliminate uncertainties about how transactions should be structured.
And securities regulators want them because detailed rules are thought to be easier to enforce. However, Tweedie doesn’t want US-style standards because he believes it encourages a rulebook mentality of “Where does it say I can’t do this?”
The FASB board with its new chairman, Robert Herz, who has recently moved from the IASB, is probably happy to move from its traditional stance.
The views of his staff are reputedly more entrenched. Certainly, anyone who reads FASB’s exposure draft on the consolidation of Special Purpose Entities (SPEs) – which was published post-Enron – will notice that it is pretty complex. It doesn’t look like evidence of an overnight conversion to principles. Still, FASB and the IASB are talking, and the two boards were due to get together early this month to informally discuss SPEs.
The IASB must also be wondering if the SEC will continue to impose the requirement that foreign issuers have to reconcile from IAS to US GAAP.
Back in the early summer, when the European Commission formally required all quoted companies to comply with IAS by 2005, Mike Rake, chairman of KPMG International, said: “The adoption of IAS across Europe is a key step in greater financial transparency and is an important milestone towards achieving one common accounting language around the world, which should boost investor confidence … but for this to become reality, the US will play a pivotal role. We hope Europe’s move will encourage the SEC to seriously consider lifting its present requirement for foreign registrants to reconcile IAS statements to US GAAP. It would be great progress if SEC acceptance of IAS could also be achieved by 2005.”
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There are indications that individuals within the SEC are sympathetic to the idea. For instance, Bob Herdman, the SEC’s chief accountant, gave a speech in Germany earlier this year which gave pretty strong hints that the reconciliation requirements could be reduced. But since then no one else in the SEC has taken up the theme.
The problem for international standard setters is that the SEC is under no domestic political pressure to act on the reconciliation question.
It issued a paper on the subject in February 2000, got its responses by May 2000, and has sat on them ever since. Now it is too busy wrestling with regulation of the accounting profession. And, imperfect though US GAAP is, there are many in the US who would rather stick with the devil they know.
Tweedie will lobby hard, but even the luckiest accountant in the world may not have it his own way.