Accounting: See through

The idea that US companies will be reporting under global accounting
standards in a few years’ time is not quite the open-and-shut case it would
first appear. While there is a remarkable level of acceptance of the idea of
using international financial reporting standards in the US, that acceptance is
not universal.

The Americans can elucidate the benefits of IFRS, but listen carefully and
you can hear reservations as well. The Securities & Exchange Commission is
certainly not counting any chickens, labelling its recently announced roadmap
“careful and cautious”.

But why is the US thinking of embracing standard-setting as laid out by the
International Accounting Standards Board? The main answer to that question is
that the country can see which way the wind is blowing. SEC chairman Christopher
Cox summed up the reasons for pursuing the roadmap by saying that “An
international language of disclosure and transparency is a goal worth pursuing
on behalf of investors who seek comparable financial information to make
well-informed investment decisions.”

Behind this principled approach lie two facts Cox thought worth pointing out.
First, two-thirds of US investors own some sort of security issued by a foreign
company accounted for under IFRS. So, like it or not, IFRS is already a force in
US capital markets.

Perhaps more impressively, by July 2008 35% of the world’s capital markets by
value had adopted IFRS, with that percentage set to increase steadily.

As the US capital markets represent 28% of the value of the global capital
markets, it is possible to appreciate that the US fears it is being left behind
in the accounting revolution. As Cox put it, if the US does nothing, then
comparability will decrease. He could have added that nearly 100 foreign private
issuers have elected to file accounts in the US using IFRS since the SEC
provided that option in November 2007.

However, to embrace IFRS, US regulators expect some benchmarks to be
achieved. The SEC expects accounting standards to be crafted in the interest of
investors; the standard-setting process to be transparent; standard-setters to
be accountable and independent from ‘special pleading’ from particular nations,
regions of the globe, or powerful industry sectors.

That’s quite a shopping list, although others, including the European
Commission, have called for improvements to the transparency and legitimacy of
the IASB’s standard-setting processes. The SEC accepts that corporates want to
use IFRS, but it now wants to ensure that adequate safeguards are put in place
for investors.

The fears over the adoption of IFRS in the US have been well articulated by
Rudolph Jacob, professor and chair of the accounting department at Pace
University’s Lubin School of Business in New York. Jacob says the proposed road
map is a clear signal to the world’s capital markets by the SEC that IFRS are
high quality and the convergence project is forging through some of the
roadblocks that were impeding due process.

However, he adds that “Since political lobbying for accounting standards is
here to stay, the SEC is rightly concerned about true independence of the IASB.”

Criticism focuses on the voluntary funding of the IASB. When the IASB was
founded in 2001, its financing model was taken, as much else was, from the FASB
set-up.

Sarbanes-Oxley in 2003 saw FASB funding come through the SEC, which allowed
it to stop begging from corporates and this, crucially, allowed it to become
more independent.

Now the IASB is seeing more funding coming through national bodies collecting
levies and, although this is a decreasing element of voluntary funding, it looks
set to stay.

The IASB has heard the criticism of its set-up, which is why it has started a
constitutional review. Look out in late October for an announcement along the
lines that the trustees of the International Accounting Standards Committee
Foundation have formed a monitoring group, comprising bodies such as the SEC, t
he EC and the International Organization of Securities Commissions.

The establishment of the monitoring group is aimed at enhancing the
transparency and public accountability of the IASCF, while not impairing the
independence of the standard-setting process. At the same time, the membership
of the IASB looks set to increase from 14 to 16 members and new guidelines
regarding the geographical diversity of its members are to be added.

The foundation is due to make further constitutional changes during 2009,
which will come into effect at the start of 2010. That would be just in good
time for the SEC to decide by 2011 whether it can carry on with its proposed
adoption of IFRS or whether it should scrap the process altogether. America, of
all countries, knows about the business of political lobbying. The objections to
IFRS may well be a fine example of that very same dark art.

If the international accounting standard-setting process has to be improved
and further finessed to meet the approval of the US, it should be performed in a
way that is a victory for all.