Robert Herz, the former chairman of the Financial Accounting Standards Board, and Sir David Tweedie, the former chairman of the International Accounting Standards Board, said Tuesday that the Securities and Exchange Commission needs to make a decision soon on committing to International Financial Reporting Standards, or other major countries could drop their support for IFRS.
Speaking at a panel discussion at the American Institute of CPAs’ offices in New York, co-sponsored by the AICPA and the Institute of Chartered Accountants of Scotland, over which Tweedie now presides, Tweedie warned that Japan, India and China are now hesitating with their commitment to IFRS after watching the SEC repeatedly delay its decision.
“As someone who is very pro-U.S., you have such a huge impact,” he said. “The SEC and [former SEC chairman] Arthur Levitt shaped the vision for the IASB,” adding, “the IASB is still a fragile organization.” He noted that a U.S. presence is also still needed on the international Monitoring Board of financial regulators overseeing the IASB. SEC chair Mary Schapiro currently sits on that board.
“We need the U.S. on the Monitoring Board to say no,” he said.
Tweedie also cautioned that with two U.S. members of the IASB nearing the end of their terms, the U.S. would lose influence over the shape of IFRS unless the SEC commits to international standards. Other countries are eager to step in and set the future agenda for IFRS, including more attention to agriculture accounting and foreign currency exchange.
“The SEC hasn’t made a decision yet, and it’s the end of April,” he said. “You have to take [SEC chief accountant] Jim Kroeker at his word that they’re not there yet.”
He warned that the IFRS adoption process could spin out of control without U.S. involvement. "The U.S. has the key to international standards in its hand," said Tweedie. "The SEC needs to give an indication. The world is waiting and waiting and waiting."
“The U.S. decision is going to be a very important one,” said Herz. He said he believes the SEC will ultimately go down the road of “endorsement,” also known as “condorsement,” but he wondered what the contours would be, and whether the existing IFRS standards would be incorporated. “That’s what happens in standard-setting,” he said. “You’re not going to please everybody all the time.”
Paul Cherry, the chairman of the IFRS Advisory Council and former chairman of the Canadian Accounting Standards Board, described how Canadian standard-setters initially wavered between support for U.S. GAAP through its close cousin, Canadian GAAP, and IFRS. “We started down the road of keeping a foot on both paths,” he said. “We called it harmonization.” The goal was to harmonize the principles of IFRS with U.S. GAAP, but he noted that it created “incredible frustration” with the system. Canada ultimately decided on transitioning to IFRS over a five-year period. “The world did not end,” he said.
There are still some problems with getting industries such as the utilities industry on board, which have objections to writing off some of their assets and liabilities.
“We tell industries to get engaged,” said Cherry. “Don’t wait until the standards are issued.”
Herz said he agreed with Cherry. “We have a pretty good financial reporting system here in the United States,” he said. “It’s important that the U.S. be proactively involved in shaping the future of the global reporting system. We’re at the point where we need some clarity from the U.S. on where we’re going. Europe is the anchor tenant.”
Herz acknowledged that the SEC had made a significant decision back in 2007 when it voted to allow foreign companies to submit their financial filings in IFRS without first reconciling them with U.S. GAAP. That had lent credibility to IFRS and gave foreign companies a “passport” to use it more widely and raise money on the U.S. capital markets. “Unless the SEC reverses its 2007 decision, the world might just move on,” he said.
Private Company Accounting Standards
The panelists also discussed the question of standard-setting for private companies. Cherry noted that IFRS is available as an option to all private companies in Canada, and that the standard-setter had tried to sort out the differences that might apply to private companies. However, they found that the IASB’s set of stripped-down IFRS for Small and Medium Enterprises would not solve the problem in areas such as consolidations and income taxes. So far, IFRS for SMEs is not getting “significant take-up” among Canadian businesses.
Tweedie contended that 70 million businesses around the world are using IFRS for SMES, although he admitted he did not know where the figure came from. Many of the users are in small countries without their own well-developed accounting standards. “We never said everybody should use it,” he said. “But it has been a howling success.”
Herz acknowledged that FASB had set up a Private Company Financial Reporting Committee, and FASB’s parent organization, the Financial Accounting Foundation, is now deciding what to do about setting up a differential framework for private company accounting standards. He noted the work done by the Blue-Ribbon Panel on Standard Setting for Private Companies, but did not come down on one side or the other over the question of whether a separate board for private company standards needs to be set up. He said it needed to make sense from a user point of view and there should be a cost benefit advantage when setting up any differential standards for private companies. “It’s a matter of weighing the evidence and having a robust process,” he said.
The panelists also talked about how they responded to political pressures on the standard-setting process, particularly during the financial crisis. “Politics drove me absolutely nuts in my day,” said Tweedie.
He recounted how he was called into an emergency meeting of European finance ministers who were demanding changes in IAS 39 international accounting standards for financial instruments. He was asked why the standards shouldn’t conform to European accounting rules, and he countered with asking why they shouldn’t conform to Australian standards. The French “absolutely hated” the financial instruments standards, he noted. However, he is gratified that U.S. GAAP and IFRS are finally getting close to a converged standard for financial instruments. He said the board was accused of not having any due process, or oversight by a government regulator like the SEC, so they quickly “cobbled together” the Monitoring Board, on which SEC chair Schapiro now sits. But he emphasized that it is crucial for the U.S. to adopt the standards, or else there will be no counterweight to the European Union on the Monitoring Board.
Herz said he was not disturbed by the political incursions, such as pressure to change the stock option standards and later the fair value measurement standards for mark-to-market accounting.
“In a democratic society, people have the right to go to their elected officials,” he pointed out. “They seek redress through political means.”
However, he acknowledged that FASB had to push back when Congress wanted to give the Financial Stability Board the ability to override accounting standards during the drafting of the Dodd-Frank financial reform bill. While the provision was included in the House version of the legislation, the accounting profession was able to keep it out of the Senate bill. “The accounting community rallied and defeated the amendment,” he said.