When a tide turns you can hear, down on the foreshore, a huge noise. It is
the sound of pebbles being pulled this way and that as the waters change
direction. Journalists love the idea of tides turning. It is a wonderful
metaphor and an easy one to use. But often when we speak of tides turning we are
describing an idea rather than a process. Often we are describing something
which we think ought to come about rather than something which is actually
happening. Often the roar of pebbles being upturned in a changing flood of water
But I do think that when it comes to describing what is happening in the
world of American financial reporting and regulation we can genuinely say that
the tide is turning. There is a distinct sound of turmoil down on the foreshore.
For years the American market has sat there unchanging. Most companies in
America depend on the internal market for their competitive advantage and
profits. What happens in the rest of the world is less important. And for years
its regulatory authorities, like the Securities and Exchange Commission, and
standard-setting bodies, like the Financial Accounting Standards Board, have
intoned their mantras. These have been unchanged. Only in America is there
rigorous regulation. Only in America is due process in financial reporting
properly observed. After all, in both cases – the existence of a regulator like
the SEC and the existence of accounting standards – long pre-date any comparable
efforts elsewhere in the world. For very good reasons America has felt that it,
and only it, produced financial reporting and accounting standards which were
properly implemented and properly regulated and thus provided security to
Enron was only the first breach of this confidence. And it could, along with
WorldCom and several others, be seen as an unfortunate aberration which could be
cleared up swiftly with the judicious application of Sarbanes-Oxley legislation.
But the haemorrhage of confidence did continue. And the rest of the world
embarked on changes which would tilt the global balance.
Now, it is impossible for anyone on the American corporate scene to deny that
around the world international financial reporting standards are becoming the
global standard in financial reporting. The growth in confidence in stock
markets other than New York has dealt a comparable blow. The standard model for
a global company now is that it lists in London or Hong Kong and provides its
financial disclosures under IFRS. The idea that this is the norm has come as a
huge shock to the American business and regulatory world.
This is why the tide is turning. One sign is a simple one. Diehards in
America argue that their system of corporate governance is fine. But at the top
of the process the first moves are being made to prepare for change. The
chairman of the SEC, Christopher Cox, has commissioned a study of how Europe and
much of the rest of the world deals with such issues as shareholder powers. The
gulf between the cosy American world where shareholders have hardly any power to
bring about change and where the idea of the chairman and the CEO being one and
the same all-powerful, buccaneering tyrant is seen as fine, has now opened up to
such an extent that it is embarrassing.
The American system is now seen by the rest of the world as old-fashioned,
inefficient and far from being in investors’ interests. Once upon a time it
would not have mattered whether the rest of the world felt that way. Now, to
corporate America, it does. The study which Cox has commissioned is the first
step towards saying, quietly, that, well, these European ways of doing things
are, well, pretty effective. From there it is a short walk to producing
proposals for reform of the American system. You can start to hear the pebbles
At the same time, concepts which would have been unthinkable in the
pronouncements of senior American regulators even last year are starting to be
aired. Look at what Cox said in early March. Talking about the prospects for the
convergence of IFRS and US generally accepted accounting principles, US GAAP, he
introduced what, to American ears, would once have sounded simply incredible.
“That original commitment [to convergence] was enormously consequential,” he
told a roundtable in Washington, “because it implied a great deal. It meant that
IFRS and US GAAP would someday compete freely in America’s capital markets, and
that two accounting systems would operate side by side – at least until the
process of convergence concludes with actual convergence and there is truly one
global accounting standard and seamless international comparability of
reporting. It meant that issuers, markets and investors would have a choice –
because they, not the government, will decide between IFRS and GAAP”.
Anyone listening to that would probably find it quite hard to hear for all
the noise of a tide most definitely turning.