While issues of immigration, trade and freedom of the Fourth Estate are dominating the media cycle, there are other significant areas of policy flux worthy of consideration as President Donald Trump’s term gathers momentum. This includes rules for corporate governance and disclosure that may move in new and less regulated directions under fresh leadership at the Securities and Exchange Commission. New policies will most certainly have implications far beyond the territorial boundaries of the U.S.
If we accept the narrative about driving jobs growth by empowering companies to do more business around the world, then the door would seem to be open to allowing more widespread adoption by U.S. corporations of the accepted global language of business for reporting financial performance, International Financial Reporting Standards.
With his recent executive order for a review of financial system regulation, President Trump delivered on a campaign promise to make addressing overregulation a priority for his administration. He’s said corporate rules have “gotten out of control” and has flagged “cutting regulation massively” by up to 75 percent or “maybe more.” The roll-back process is underway.
There’s no doubt that overregulation is what businesses large and small, be it in the U.S. or Australia, wrestle with on a daily basis and that a nation’s international competitiveness can be handicapped by too much regulation.
It’s equally true that fixing it is not a new conversation, as every market crisis seems to bring a new round of regulation that acts as a handbrake on business. Whether it was the Glass-Steagall Act that followed the Great Depression, the Sarbanes-Oxley Act that followed the Enron debacle, or the Dodd-Frank reforms that followed the 2008-2009 financial crisis, too often regulations are created in reaction to something going wrong in the financial system.
No surprise then that Dodd-Frank is in Trump’s regulation-busting crosshairs, with a particular focus on the Volcker rule, which bars banks from using depositors’ funds for speculative bets.
It is in this environment that the President has tapped the pro-business Jay Clayton as his choice for SEC chairman. A corporate lawyer whose credentials have been built on advising Wall Street firms, his confirmation hearing before the Senate Banking Committee is scheduled for Thursday and is not one of the new Administration’s more controversial picks.
Clayton’s nomination is entirely consistent with Trump’s preference for less regulation and reduced red tape to help unleash the competitive spirits of the business community.
Given this heavy emphasis on building a business framework that encourages strong capital market growth, could the adoption of IFRS be in the prospective new chairman’s regulatory reform mix?
Certainly, in one of her last public statements, outgoing SEC chair Mary Jo White called on her successor to continue pursuing “high-quality, globally accepted accounting standards” as one of the Commission’s “highest priorities.”
White noted that while the U.S. GAAP framework will continue to coexist with IFRS for the foreseeable future, she was clear that “global standards facilitate decision making about cross-border investments, transactions and acquisition opportunities.”
In light of these potential investor protection and market growth benefits, she warned that the U.S. “cannot afford to be myopic about this issue.”
For many in business, the reality is that IFRS is the established global financial reporting language. The International Accounting Standards Board says 125 jurisdictions around the world have already moved to IFRS. China and India are well on the way to IFRS convergence and Japan is not far behind.
It is already the case that IFRS touches U.S. public companies in many ways. Foreign companies whose securities are listed on U.S. stock exchanges are already permitted to prepare and file IFRS financial statements. U.S. investors in these companies, which represent a worldwide market capitalisation in excess of $7 trillion, are already relying on the IFRS numbers in making their investment decisions. U.S. companies are already exposed to IFRS in many instances, through their trading relationships overseas, through joint ventures and other similar arrangements, and through subsidiaries and other controlled entities that produce IFRS financial statements.
The IASB and the U.S.’s Financial Accounting Standards Board have been working at convergence between IFRS and U.S. GAAP for many years. Although some success has been achieved, total convergence is some way off and enthusiasm for the process has waned in recent years. A new administration and new blood at the SEC with a pro-business agenda and enthusiasm for capital market growth may change all that.
A universally accepted financial reporting language will serve the needs of both investors and companies with global reach and aspirations. With an incoming corporate regulator-in-chief, let’s hope that IFRS is in the SEC’s deregulation mix.