The American Institute of CPAs has given a thumbs-up to a Securities and Exchange Commission plan that would allow U.S. corporations to abandon generally accepted accounting principles and report their financial results using international accounting standards.But critics warn that a shift to International Financial Reporting Standards would drive up audit costs for U.S. companies, lower the quality of information available to investors, and put smaller accounting firms at a distinct disadvantage.
At issue: a concept release from the SEC seeking input on whether U.S. public companies should be granted the option of using the IFRS published by the International Accounting Standards Board, instead of the GAAP now required for domestic financial reporting.
That concept release was issued on the heels of a separate SEC proposal that would permit foreign companies filing with the SEC to use IFRS without reconciling to U.S. GAAP.
During a hearing before the Senate Banking Committee’s Securities Subcommittee, Chuck Landes, vice president for professional standards and services at the AICPA, said that his group believes that U.S. companies should be given a choice between GAAP and international accounting standards.
Given today’s global economy, Landes told lawmakers, “One common accounting language will benefit all participants in the capital markets. A single worldwide set of accounting standards would help investors by facilitating the comparison of financial results.”
Landes testified that such a change would also benefit CPA firms, because it would allow them to simplify their training of auditors of public companies by allowing them to focus on one core set of standards.
The proposal also drew support from other witnesses, including Sen. Charles Schumer, D-N.Y., who said that, “IFRS is well on the way to becoming the global language which the rest of the world uses.”
Calling IFRS standards “robust and high-quality accounting principles that serve investor interests well,” Schumer said that those standards have now been embraced by more than 100 nations — “including all of the major financial centers outside of the U.S.”
The current U.S. rule requiring foreign companies listed on domestic exchanges to reconcile their financial results to GAAP is, according to Schumer, “a very costly, and in my view, unnecessary one, and is a deterrent for many foreign companies that might otherwise choose to list in the United States. IFRS will be the language of worldwide business for future generations, and we must start allowing it to be spoken in the U.S.”
NOT SO FAST ...
Other witnesses at the Senate hearing delivered a somewhat dimmer view of U.S. regulatory changes to facilitate the use of international accounting standards in this country.
Lynn Turner, a former SEC chief accountant and former managing director at proxy researcher Glass Lewis, told Congress that the IASB’s standards are less robust than FASB’s, and that IFRS is far from universally accepted abroad.
Approximately 70 countries prepare their statements in accordance with a jurisdictional adaptation of IFRS. He described that as “a way of saying their countries have picked and chosen among the IFRS they like and don’t like. The U.S. markets will not maintain their current prominence if they simply become the equal of other markets, employing the same strategies and approach to business.”
As for the SEC’s plan to stop requiring foreign registrants to reconcile their financial statements with GAAP, Turner warned that this could lead to a significant weakening of investor protections in the U.S. “I believe strongly if the SEC reconciliation is eliminated, it will also eliminate the incentive for standard-setters to work together,” he said. “Indeed, each of the standard-setters is likely to go their own way, and I suspect within 10 years, if not sooner, FASB will cease to exist, leaving the U.S. without a viable private standard-setter responsive to the needs of U.S. investors.”
Turner also warned Congress that smaller auditing firms are already challenged to comply with existing U.S. auditing standards, and that very few of those have the resources, including staff who are knowledgeable of IFRS.
Other witnesses felt that the SEC’s plan is, at best, premature. “Eliminating the reconciliation before genuine convergence is achieved simply because there is a process in place to reach the goal is like choosing to smoke a pack of cigarettes a day because there’s a process in place to find a cure for lung cancer,” accounting analyst Jack Ciesielski testified. “You might be right, but the timing might not save your life.”
Significantly, even supporters of new rules allowing the use of international accounting standards in the U.S. acknowledge the likelihood of problems with such a change.
For his part, Landes said that if a large number of U.S. companies were to immediately switch from GAAP to IFRS accounting standards, “systemwide readiness” could become an issue. While he said that he doubts large numbers of companies will switch at once, he said that the AICPA would recommend that the SEC base the timing of the rule change on a study of the number of U.S. companies likely to switch immediately.
Despite his support for the use of IFRS standards, Schumer expressed a separate concern during the hearing that other countries may not be rigorous enough in protecting their accounting standards-setting process from political interference.
Schumer said that he will ask FASB, the IASB and the SEC to “consider measures to strengthen the independence of the IASB from the political considerations of member nations as this debate goes forward.”
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