Accounting - All for one, and one for all

Two significant events are taking place this summer, both of which firmly
underline the objective of the International Accounting Standards Board. At the
end of June, the IASB joined forces with the US Financial Accounting Standards
Board and the US Securities and Exchange Commission to host a convergence
conference in London. At the conference, the IASB and FASB set out their plans
for convergence of financial reporting standards and the SEC highlighted its
implications. The other event, the IASB European roadshow, is due to visit 17
European countries over the next five months. Organised in conjunction with
national standard setters, the number one objective is to focus on “convergence
of IFRSs with national accounting standards, with a particular emphasis on US
generally accepted accounting principles”, says the IASB.

This convergence of accounting standards was blessed by SEC chairman William
Donaldson and EU Internal Market Commissioner Charlie McCreevy in late April
when they set out a roadmap of steps needed for the elimination of the US GAAP
reconciliation for non-US companies listed in the US. The roadmap establishes a
goal of eliminating the requirement by 2009 at the latest.

Some believe that convergence – the concept of one global accounting language
– is within the grasp of the financial community: a prize which would be
magnificent partly because until recently it had seemed improbable. On the other
hand, many FDs on this side of the Atlantic applaud the concept but fear how it
may pan out.
The head cheerleader for convergence is IASB chairman Sir David Tweedie. For him
global accounting standards are not about arcane bookkeeping but about reducing
the cost of capital in an international world. And as for the standards
themselves, well, just take the best of the bunch. If it turns out to be the
FASB standard, great; if it’s the IASB’s, great.

Simple, eh? Well, at the top level yes. But then the voices of doubt speak u
p. The doubts run like this – when we talk about global standards we are really
talking about US standards. And US standards are not shiny principle-based
standards, they are detailed, rule-based ones that run to hundreds of pages,
reflecting the character of the litigious society that holds sway in that
country. There is no way that the US accounting standard setters could shift the
accounting standards they produced even if they wanted to, though they do have a
long-term simplification project. So Tweedie may talk a good game but, in
essence, it’s just international standards based on US standards with a few
minor concessions. And, at the moment, there is no appetite among FDs and
auditors, bruised by Sarbanes-Oxley, for walking down the US accounting
standards path.

So the standard setters are chasing convergence, the politicians are making
encouraging noises but FDs are dragging their feet. Such legitimate fears of not
wanting to comply with US standards wrapped in an IASB cover may be legitimate,
but they may also be overstated.

The introduction of international accounting standards in Europe – and also
in other economies across the globe – is still a work in progress, and a rather
flawed one at that. But with Japan and China also expressing interest, the
IASB’s standards have legitimacy.

While FASB and the IASB appear to be moving together on accounting
principles, the fundamental question is the attitude of the SEC and, especially,
its new chairman Christopher Cox. While the US may presently be the biggest
capital market, it sees competition not only from Europe but from Japan and
China. In that case, the US may be prepared to accept standards which at first
glance appear to give less investor protection.

“When I speak of IFRS/US GAAP convergence,” says SEC chief accountant Donald
Nicolaisen, “I do not expect the two sets of standards will necessarily produce
identical financial statements. But I do consider it necessary that convergence
results in close alignment of the accounting for the same, or essentially the
same, transactions, generally comparable results in trends and a continued
co-operative will to reduce differences over time, as well as the transparent
understanding of any significant differences.”

There may never be a single volume of global accounting standards, and it may
always be necessary to maintain national or regional differences, but that does
not prevent the SEC accepting unreconciled the standards of the IASB. The
decision over whether that happens lies with regulators and politicians on both
sides of the Atlantic. Such an achievement will be extremely hard, but not
impossible.