In his first speech in the U.S. as chairman of the International Accounting Standards Board, Hans Hoogervorst made the case for why the U.S. should adopt International Financial Reporting Standards.
Speaking at a conference in Boston sponsored by the American Institute of CPAs and the IFRS Foundation, Hoogervorst tried to dispel criticism of the international approach to setting standards.
“The U.S.’s current share of global market capitalization now stands at just over 30 percent, compared to an average of 45 percent between 1996 and 2006,” he noted. “U.S. financial markets have not shrunk; it’s just that other parts of the world—in particular the Asian financial centers—have become global players. These developments call for the United States to play a key role in developing global standards.”
Hoogervorst, a former minister of finance and minister of health in the Netherlands, argued that multinational companies such as Archer Daniels Midland, the Bank of New York Mellon, Chrysler, Ford Motor Company, Kellogg, and United Continental Holdings, along with large pension funds like the California Public Employees’ Retirement System, have all supported the adoption of IFRS.
“First of all, I am convinced that you stand a better chance of developing standards that have teeth, if you do so at an international level,” he said. “If everyone is committed to the same objective, then we can raise the financial reporting bar internationally without fear of disadvantaging those nations that are trying to do the right thing.”
The Securities and Exchange Commission is expected to render a decision by the end of the year on whether to incorporate IFRS into the U.S. financial reporting system, and Hoogervorst defended the quality of the standards. “I have often felt that arguing about the relative superiority of IFRS vs. U.S. GAAP is not very productive,” he said. “Academic studies have concluded that both IFRS and U.S. GAAP are high-quality standards. A decade of joint work to improve and align IFRS and U.S. GAAP means that both sets of standards have improved and are moving closer together. Each is used within major capital markets. Each has its relative strengths and weaknesses. While I am not dismissing these differences, I am not convinced by the arguments that one set of standards is clearly superior to the other. So I could not imagine that concerns about quality would play a major role in the decision to adopt IFRS.”
Hoogervorst also dismissed critics who contend that IFRS is not as widely adopted as claimed by the IASB.
“I have heard it argued that few major economies actually use IFRS,” he said. “Some even say that Europe does not use IFRS due to the optionality of nine paragraphs of IAS 39, ‘Financial Instruments.’ Yet this option is used by less than 30 companies. That is less than 1 percent of listed companies in Europe. The other 99 percent, some 8,000 listed European companies, all use full IFRS. It is also a fact that the world has moved to IFRS at an astonishing pace. In the Americas, almost all of Latin America and Canada are going to be fully on board. In Asia-Oceania, Australia, New Zealand, Korea, Hong Kong and Singapore are or will be full adopters. South Africa and Israel are fully on board. In Europe, countries outside the EU, such as Turkey and Russia, are also full adopters. The majority of the G20 members are full adopters of IFRS.”
However, he acknowledged that inconsistent application of IFRS makes international comparison more difficult, as in the case of valuations of Greek debt, about which he wrote a letter to European banks last month chastising them for using different approaches to writing down their losses.
“There is certainly some truth in this argument, as we have witnessed with the accounting for Greek sovereign debt,” he said. “However, the same is true when you have different accounting standards. You can only work towards consistent application if you have one single language. We are very much committed to working with securities regulators and the accounting profession to enhance consistent application around the world. It will take time, but it can be done. If you do not have a single language, international consistency in financial reporting will always remain an illusion.”
He insisted that the SEC would not be ceding its enforcement authority by allowing IFRS.
“A major comfort to the United States should be that if you adopt IFRS, the SEC will remain in full control of enforcement,” said Hoogervorst. “So there is absolutely no danger of importing different enforcement standards from abroad into the United States. Indeed, it is much more likely that international standards of IFRS enforcement will benefit from the SEC’s rich experience and active participation.”
Hoogervorst acknowledged that the costs of IFRS might be high for some companies, however. “Many American companies worry about the costs of adopting IFRS,” he said. “Let’s not beat about the bush; these are real costs. Therefore it would be reasonable that a relatively long transitional period is provided, particularly for smaller publicly traded companies. An option to allow early adoption of IFRS also seems sensible for those companies that can already see substantial net benefits of IFRS. At the same time, the difficulties of transition should not be exaggerated. Convergence has brought IFRS and U.S. GAAP much closer together. There is already a lot of IFRS knowledge in the United States. The SEC has built up a substantial IFRS competence, overseeing the financial statements of a growing number of foreign private issuers listed in the United States. Many large preparers already have IFRS expertise within their organizations through international subsidiaries.”
He added that the U.S. Financial Accounting Standards Board would also retain its authority. “The SEC Staff Paper [on possible approaches to incorporation of IFRS] specifically addresses this point,” he said. “It makes it clear that the FASB and the SEC will continue to have ultimate responsibility for accounting standards regardless of whether the United States moves forward with IFRS. Obviously, participation in any international agreement, whether it is the World Trade Organization or IFRS standards, requires negotiation and cooperation. The United States will continue to have a great deal of input into the standard-setting process. The knowledge base within the FASB is too valuable to the IASB to be excluded.”
Hoogervorst assured the audience that the United States would continue to have a great deal of influence within the IASB. Some IASB officials have suggested that the U.S. would lose its seat at the table unless the SEC made a decision soon to support IFRS.
“Four out of the 15 board members are American and they certainly play a significant role,” said Hoogervorst. “American sovereignty will also be protected by the SEC’s intention to adopt similar endorsement mechanisms to those used elsewhere in the world. Such endorsement mechanisms provide an important ‘circuit-breaker’ if the IASB produced a standard with fundamental problems for the United States. An endorsement process would also ensure that the FASB continues to play a prominent role. It is important that the IASB and the FASB, along with other standard-setting bodies, continue to work in close co-operation once the convergence project has ended.”
Hoogervorst said the IASB, like FASB, has enhanced the due process of its standard-setting activities since it was established in 2001, including the introduction of analyses of the possible effects of new standards and post-implementation reviews of major standards. “I have never worked in an organization that is so transparent in its activities, and that consults so widely,” he said. However, he acknowledged that, like its U.S. counterpart, the IASB is subject to pressures from politicians and businesses.
“As for political pressure, I can only admit that it can be there,” he said. “But this is not unique to the IASB. In the heat of the financial crisis, both the IASB and the FASB were put under intense pressure to relax our rules. It was not a pretty picture. Pressure on the boards is a fact of life. Our work affects many business interests that often find the willing ears of politicians. But I think that, as the IASB grows and diversifies, it will become much more difficult for special interests to force their issues onto the board. On a more personal note, I did not leave politics to make accounting political. Quite the opposite; I will use all my political skills to keep accounting as apolitical as possible.”
Hoogervorst was joined at the conference by former SEC Commissioner Harvey Goldschmid, who is currently a trustee at the IFRS Foundation. Goldshmid called U.S. incorporation of IFRS a “national imperative.”
“The words ‘national imperative’ are not hyperbole,” he said. “This is a critical moment. The future path of financial reporting—and of investor protection and effective financial markets on a global scale—may well be determined in the next few months.”
He added that failure to move forward on IFRS would be “a tragic mistake” for the U.S.
“In my first scenario, the coalition of nations supporting IFRS would break apart,” said Goldshmid. “Rather than two sets of accounting standards, IFRS and U.S. GAAP, we would have a number of regional GAAPs, or we would go back to pre-2000 fragmentation. At a minimum, a number of national or regional accounting systems would exist. The cost of fragmentation, in terms of lack of transparency and comparability, higher accounting expenses, inefficiency, etc., would be extremely large.”
Goldschmid said the U.S. would become isolated from other countries if the SEC declined to support IFRS and ultimately would be forced to adopt IFRS eventually anyway.
“The second scenario is far worse from a U.S. perspective,” he said. “The coalition in support of IFRS would hold together, and the U.S. would become isolated in this area. There would be few, if any, U.S. members of the International Accounting Standards Board or U.S. trustees. The SEC would be removed from the Monitoring Board. The U.S. would no longer play the large and constructive role it now plays in IFRS development and oversight. I believe that without active U.S. participation the overall quality of the international accounting standards would deteriorate. Remember, there is less concern about transparency and investor protection in some other parts of the world. I also believe that the U.S. could not remain out of a global system forever. In a year like 2020 or 2030, the U.S. would be forced to adopt international accounting standards, but I predict, it would be adopting weaker IFRS standards than now exist. The U.S. would then—as opposed to now—have only a very small seat at IFRS drafting and governance tables.”
