KPMG International chairman Michael Andrew believes the U.S. runs the risk of being passed by in the global financial markets unless it commits to International Financial Reporting Standards.
“I think the global financial crisis has really highlighted the need for complete transparency across global markets to give confidence to investors,” he said in an interview Tuesday. “The question you have to ask yourself is why hasn’t this occurred? It’s fair to say historically while national accounting standards have been a significant advancement, they have at times been a little academic and a little subject to political interference, say, in Europe. I think those days are well past now and the concerns that the U.S. had initially quite rightly are now disappearing. There is much more of a business focus and much more of an investor focus in the formulation of accounting standards now. It is in my view inevitable that the U.S. participate and contribute toward the development of these standards and start to converge U.S. GAAP. Otherwise it’s going to find that the whole world will have changed except the U.S.”
The Securities and Exchange Commission has recently delayed its decision on whether or not to incorporate IFRS into the U.S. financial reporting system and has sent some mixed signals about its intentions (see U.S. Official “Optimistic” on Global Accounting Move and SEC Resists Pressure on IFRS Decision).
But Andrew thinks that global investors are going to demand adherence to an international system. “These days, when capital is mobile and looking for different stock markets, it’s incredibly important to the U.S. capital markets that international investors are able to look at and compare alternative companies operating in the same sector,” he pointed out.
However, he is seeing more international coordination on the tax enforcement front between the U.S. and other countries involved with the Organization for Economic Cooperation and Development.
“It’s fair to say historically the U.S., the IRS, has been almost a thought leader and a stimulator to a lot of the OECD’s work, but I think over the past 10 years there’s been much more activity from all of the OECD countries to try to get a common standard in this area,” said Andrew. “While gaps remain, it’s relatively consistent now across the world, at least in the major countries, on what are the appropriate principles that you apply to international profit allocation. Then the second question is how you actually tax those profits, and that’s where you see a bit of tax competition, some of which is fair and some of which is unfair. You are now seeing this backlash in the United States and in Europe regarding the use of tax havens and tax incentives and concessions by some countries as really being an unfair trade or foreign investment activity and you’re seeing significant pushback. So I would observe some of the pressure that the U.S. is bringing to bear on a number of the old Swiss banks about secrecy and confidentiality is really starting to up the pressure on those countries who don’t conform with international tax principles.”