The transition to the Obama administration provides a unique opportunity for rethinking existing government policy, especially proposed changes left on the table by the previous administration. One place that deserves a good hard look is the Securities and Exchange Commission's pending proposal for U.S. convergence to International Financial Reporting Standards. It was certainly reassuring for us to hear that Mary Schapiro, Obama's new SEC chair, favors going slower in moving to IFRS.During her mid-January nomination hearing before the Senate Banking, Housing and Urban Affairs Committee, Schapiro was asked about a range of issues. Regarding IFRS transition, Schapiro indicated that she didn't feel bound by the ambitious schedule laid out in the SEC's "Convergence Roadmap" released last November, and that she intends to proceed cautiously. This thoughtful position makes extremely good sense, as it is much more important to get this decision right than to make it quickly.


We have already written about some of our reservations concerning the SEC's proposed IFRS convergence plans. One overriding concern has to do with concentrating the world's entire accounting rule-making authority in a single entity located across the Atlantic. For one thing, it will effectively reduce the number of people searching for improvements in accounting standards. With today's capital market turmoil, it is a better idea to get more people involved in the activity, not fewer.

For another, convergence will remove an element of competition. Currently, the International Accounting Standards Board and the Financial Accounting Standards Board both direct substantial time and energy to improving financial reporting practice. While it's true these activities are carried out in a congenial and collaborative way, we think a friendly rivalry surely pushes each entity to strive harder for high-quality results.

We worry about what would happen if the IASB attained what amounts to a monopoly position. We don't doubt the earnestness or sincerity of the folks at the IASB, but human nature is such that people tend to back off, at least a little, without competitive pressures. We wonder whether removing FASB could cause the IASB to ease up, ever so slightly. Again, now is not a very good time to slow the pace of progress in financial reporting.

There are other issues, as well.

The roadmap sets 2014 as the target date for large public U.S. companies to adopt IFRS in place of GAAP, assuming certain milestones are met along the way. Among them, the SEC will be looking in 2011 to see whether the IASB has sufficiently enhanced its ability to operate as an independent standard-setting authority.

In particular, the commission will assess whether the board successfully replaces its current donation-based funding model with another that will provide "a stable funding mechanism" to negate the threat to independence fostered by relying on voluntary corporate contributions.

In addition, the SEC will check to see whether the board is under the oversight of an appropriate "monitoring group" that can assess the quality of its performance and output.

The SEC's demand for these milestones is a result of the U.S. standard-setting experience. FASB always faces substantial criticism from the preparer and auditor constituencies when it seeks to improve on the status quo. A donations-based funding arrangement can intimidate board members, while also creating an entitlement mentality in too many preparers and auditors, in the sense that they come to believe that their "gifts" endow them with the right to influence outcomes. The SEC has been instrumental in many, but certainly not all, cases in keeping this pressure from subverting FASB and compromising its true goal of providing financial statement users with the information they need.

Beside independent financial support, the IASB needs the strong backing of security regulators in its affected countries to insulate it against inappropriate pressure. The difficulty is figuring out how to create this protection. Unfortunately, it's probably not a wise move to emulate the U.S. approach, because what works in a single, somewhat cohesive country is not likely to work in a global environment.

More than 100 nations have tied their accounting regulation to the IASB's output and they are a diverse lot, economically, culturally and politically. Getting these countries' securities regulators to cooperate in support of the common good will be a real challenge, particularly when a proposed reform could have unsettling ramifications back home. Expecting an effective monitoring scheme to coalesce in short order seems like a wildly optimistic hope, not a bankable plan.

These milestones will undoubtedly motivate the IASB to become more capable and mature. Nevertheless, the short time horizon until the 2014 evaluation feels rushed, especially when this issue was on the Christopher Cox-led SEC's front burner for only a relatively short time. We worry that political pressure will be laid on the Schapiro SEC to stick with the proposed timetable, even if the milestones are not accomplished. That would bode poorly for everyone.

As a result, we applaud Schapiro for expressing her reluctance to shoulder the burden for her predecessor's plan. Too much is at stake, too much uncertainty exists in the world, and too much could be lost if FASB is shut down.


Our long-standing concerns about the IASB's independence were made visible during events that transpired across the pond last fall. European bankers sought political relief at the European Union headquarters when they were faced with the gut-wrenching prospect of revealing the truth by writing down loan portfolios in compliance with IFRS mark-to-market standards. They somehow argued that they were at a disadvantage when compared with their U.S. counterparts, who supposedly had greater latitude in avoiding some mark-to-market writedowns. (We are bemused that these financial experts somehow think that sending less-informative reports to the capital markets creates a competitive advantage. We have no idea what sound theory supports this absurd idea.)

Key officials at the EU supported the bankers' pleas and subsequently put pressure on the IASB to create an easy way out. The board initially resisted, but then ultimately caved when it became clear the EU really would make good on its threats to carve out the existing mark-to-market rules from the list of acceptable practices.

It turns out this risk of rejection will be ongoing, because IFRS standards don't actually become effective in member nations until the EU enacts legislation specifically recognizing them. It's also true that a vote can suspend a previously approved IFRS.

Sir David Tweedie, the IASB's chairman, has admitted that he strongly considered resigning over the EU's strong-arm tactics. By way of explanation, he lamented that his organization had spent so much time "trying to build a global accounting system, and we are pretty close to it, and then suddenly out of left field this thing appears. It's just absolutely exasperating."

This precedent-creating EU action should certainly undercut the SEC's confidence in the IASB's ability to successfully stand firm when its decisions are not favored by corporate interests, which is to say all the time. It's hard enough for standard-setters to oppose direct assaults by powerful managers without having overt flanking pressure from government bodies as well.

How could the IASB overcome this vulnerability? That question is difficult to answer. Because this EU trump card has already been played successfully, disaffected managers and politicians will readily call for it to be played again on other issues. Furthermore, with so many disparate interests at play in the IASB's far-reaching jurisdiction, we know this issue will come back again and again and again. The only questions are by whom and when?


This independence threat emphasizes the need for the IASB to take enough time to establish both its funding platform and its regulatory support system. Innovative solutions are needed and they must have real teeth. Until they can be crafted, U.S. managers, auditors and educators should stop their highly premature rush to get on the IFRS bandwagon. It looks to us like the wheels might fall off before it starts rolling.

Our final word is encouragement to Chairwoman Schapiro to apply the brakes now, before the standard-setting process is driven over a cliff by those with ulterior motives.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at

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