Convergence consulting lulls as transition to IFRS remains stalled
New York-Firms waiting for convergence consulting business to pick up will most likely have to wait a little longer - at least until the roadmap for the meshing of U.S. GAAP and International Financial Reporting Standards is approved by the Securities and Exchange Commission, thus prompting companies to accelerate the transition to a single set of global standards.
It's been a disappointing and frustrating situation for many firms - especially since former SEC Chairman Christopher Cox was seen as the regulatory point person in accelerating the adoption of IFRS, and under his auspices, the SEC had unveiled a proposed convergence roadmap complete with adoption dates, under which most public companies would be required to make the switch to IFRS by 2014, with the 20 largest companies transitioning by 2010.
However, since Cox's departure, momentum has slowed under the new commission chair, Mary Schapiro, leaving firms waiting for guidance on how to proceed.
Still, many firms anticipate that change is coming, and are therefore gearing up to assist their clients in answering preliminary questions and transitioning over - a service many see as almost as lucrative as Sarbanes Oxley work, even if requests are few right now.
A majority of clients interested in convergence services are those that have a foreign parent in one of the 113 countries that are already required to file IFRS statements.
"There's going to be a whole lot of opportunities for accounting firms to take advantage of this," said Ken Stephens, one of the lead principals in the SEC practice at Rothstein Kass in Roseland, N.J. "It's almost going to be like what SOX was, although there will be a fall-off after the first year ... . But effectively you're creating a whole business opportunity that hadn't existed in the past."
Still, the expected demand has yet to materialize.
"We anticipated a higher demand for the services this year, but certainly Mary Schapiro has cooled things off a little bit, and I think this is all attributable to the global crisis and the tremendous pressure on the SEC to focus on regulatory issues," said Wayne Kerr, senior consultant at AuditWatch, a brand within the Tax & Accounting business of Thomson Reuters.
Still, Kerr said that he does see a difference between SOX and convergence-related work. The repercussions, he said, are broader, especially if publicly traded companies are required to report under IFRS. The training that goes into that process, he said, is substantial.
"The accountants at the company itself all need to be trained in a new framework, all the auditors do as well, but it's beyond that," he said. "Academics will need training, stakeholders will need training. Under SOX, you could still pick up a set of financial statements and read them, because they hadn't changed. ... With IFRS, people will need help figuring out what they are looking at and how it's different than what they were using before."
At Ireland San Filippo in Fremont, Calif., attention on the topic has shifted. There was more interest in learning about what conversion - full-scale adoption of IFRS - work needed to be done, but that interest waned once the economy took a turn for the worse, according to John Sensiba, the firm's managing partner. People are focused on the economy and how to maintain the viability of their companies. Add in the stalling from the SEC and the issue of converging to global financial standards has been placed on the back burner.
"Coming on the heels of all the false starts with SOX, I think people are skeptical with how serious the SEC is," Sensiba said.
Despite the cool-down in interest from clients, firms that want to offer guidance to their clients in this area have already started getting ready for the windfall of business when it comes.
And many believe that it will come - it's just a matter of time.
"It's something we're going to have to learn if we are to stay viable in the profession," Sensiba said. "Clients with any level of sophistication at all are going to want to know how it's going to impact them."
Sensiba's firm has been actively offering convergence-related services for just over a year, with the firm's audit partners trained and working double duty.
Ireland San Filippo offers IT consulting related to IFRS, which is centered on the need for different applications, data, infrastructure and reporting. The firm also provides accounting support for people considering what the change will do to their balance sheet, loan covenants and equity structure. Revenue recognition, according to Sensiba, is one of the biggest issues that draws the most questions.
"Nobody really has the answers yet," he said. "There's not really a lot of guidance in International Financial Reporting Standards around revenue recognition. That's probably the thing that has people the most scared, and there's probably the least amount of information out there."
At McGladrey & Pullen, conversion consulting has been offered formally for about 18 months. Part of that consulting includes a four-part IFRS convergence methodology originally created by RSM International member firms in Europe that had previously gone through the transition. The methodology has since been tweaked to apply to U.S. companies.
Most clients have been asking for training and awareness around the topic, which is preliminary to implementing the methodology, according to Bob Dohrer, a partner in the firm's International Assurance Services Group in Raleigh, N.C. "We've got clients and prospects that have been expressing interest in understanding what this is all about and learning outside of the technical accounting issues that may come about through a conversion process," he said. "We have not seen many clients, nor do we know of a lot of companies that have gone much further than that preparatory first phase of preparing for what may come."
The first part of the methodology is investigative, where firm members sit down with clients, talk through statements and identify at a high level where the major areas of difference would most likely occur in respect to IFRS and U.S. GAAP, according to Dohrer.
The second phase is a move into more detailed analysis. Work teams are assigned to begin what the firm recommends the company start to do to prepare to implement an IFRS "accounting manual," which will help to develop their policies. Next up is the "rolling-up-the-sleeves phase, where the numbers are crunched, the source documents are analyzed and the actual debits and credits start to flow," Dohrer explained.
Ultimately, the client will have the deliverable - an IFRS-based set of financials, along with a full cadre of footnotes as reference.
At Rothstein Kass, a gap analysis can be performed, which examines how things would differ under IFRS, according to Stephens. Once the analysis is done, the next phase is creating and mapping out a specific plan to convert to IFRS.
"Each industry in business may have different nuances as it relates to IFRS convergence," Stephens said. "Some could be more revenue-recognition-driven, some could be more inventory-driven, so a gap analysis is going through a company and understanding where the differences are from an accounting standpoint and mapping that out for a client."
At WithumSmith+Brown in New Jersey, consultations and advice are tailored specifically to client needs, according to Bob Van Arnum, partner in the Technical Resources Department in the firm's Princeton, N.J., location. He said that the assistance that clients want will come in various forms (e.g., audits, consultations, etc.).
"This is a growth area that will accelerate over time and, therefore, you want to be able to offer the services," Van Arnum said of IFRS consulting. "You have to stand up and say we provide the service and be in a position of strength, so when the requests come in, we're ready to service the clients."
(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.
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