One Accounting Standard for All?

Former SEC accounting chief Donald Nicolaisen wants the commission to require U.S. companies to abandon GAAP in favor of another set of accounting guidelines, possibly international ones.

U.S. companies and their overseas counterparts should eventually use the same accounting standard, according to Donald Nicolaisen, the former Securities and Exchange Commission chief accountant who drafted a 2005 plan for the SEC to recognize the European Union’s equivalent of U.S. generally accepted accounting principles.

Nicolaisen’s recommendation during Tuesday’s SEC roundtable on International Financial Reporting Standards (IFRS) was the second time that the discussion moved away from the main topic: whether the commission is ready to accept foreign companies’ financial statements prepared using the international standard. Foreign private issuers are currently required to reconcile their IFRS statements with U.S. GAAP.

The SEC’s acceptance of IFRS statements by 2009 will fuel the desire among many U.S. companies to use the international standard, said Nicolaisen, who now sits on the boards of Verizon Communications, and Morgan Stanley, and other corporations. But unlike other speakers during the three-panel roundtable, he said it would be a mistake to give U.S. companies a choice between two accounting standards. Instead, the SEC should strongly consider making all U.S. companies use the same standard as foreign companies, he said, whether that would be IFRS or a completely new set of guidelines.

Giving American companies a choice would create a “sort of creeping system that would be hard for investors to follow who is using what and where,” he said. “My vision of the future is along the lines of ‘We ought to adopt a good accounting model and we ought to do it broadly for all companies.’”

Prompted by SEC Chairman Christopher Cox to provide a timeline for companies to start using another accounting standard, Nicolaisen demurred, saying that it’s too early to make that determination. The SEC should continue with its plan for recognizing IFRS for foreign issuers and also explore making IFRS mandatory for U.S. businesses, he said. (Cox has hinted that the commission is considering whether to give U.S. issuers the choice of using IFRS or U.S. GAAP.)

J. Phillip Jones, director of external reporting and accounting policy and procedures for DuPont, hopes a single global GAAP standard will result from the discussions. The sole representative of a U.S. company on the panel discussing the effect of standards convergence on issuers, Jones said one accounting standard would mean better “consistency and comparability” among companies for investors, he said. He also agreed with the recommendations of an earlier panel that suggested U.S. issuers should have the right to decide between IFRS and U.S. GAAP. “We ought to have a choice in that matter, if not right away, then at some point in the future,” he said.

If standard-setters decided to stick with one accounting standard, they might be inclined to expand IFRS, which is considered more principles-based than U.S. GAAP, noted several panelists. They would also need to consider adopting a matching auditing standard, Jones noted.

Before any such discussion begins, however, William Widdowson, head of group accounting at London-based UBS, suggested, U.S. companies should start learning all they can about IFRS. If he were a U.S. issuer, he said, “I would be concerned with getting my organization up to speed on IFRS,” he said. “I would invest now in building knowledge and resources around that framework.”

The roundtable marked a milestone in the SEC’s so-called convergence roadmap, first described in 2005 by Nicolaisen and affirmed last February by Cox. According to the roadmap, the SEC would eventually eliminate the existing costly requirement that foreign firms reconcile their IFRS statements with GAAP. Duverne estimates his company would save $25 million.

Nicolaisen recommended that the SEC move more quickly. He reminded the commission that the roadmap specified that the SEC make the change by 2009 or earlier. “I still believe what I wrote a couple of years ago, that we should do away with the reconciliation with U.S. GAAP,” he said. “The SEC should do it earlier rather than later.”

Under the current process, foreign companies issue their reconciliation reports in June, leaving investors with six-month-old information, noted Duverne. Based on the few — if any — questions from investors on the reconciliation reports, Duverne and other roundtable panelists believe the results aren’t useful.

Although UBS’s Widdowson said he couldn’t put a dollar figure on the cost savings to his company, he said it would free up time for the company’s 3,000 accountants to concentrate on other, more important matters. Few analysts and investors are looking at UBS’s 30-page reconciliation reports, he said; rather, they refer to the original IFRS results. The SEC should eliminate the reconciliation requirement by next year, he added.

Considering that even analysts — who crave as much information about companies as they can get their hands on — have said they would be comfortable without the reconciliation reports, the SEC should also feel comfortable ditching the requirement, according to Meredith Cross of Wilmer Cutler Pickering Hale and Dorr LLP and a former SEC deputy director and chief counsel. The change, she thinks, would encourage more companies to invest in the U.S.. “It’s incomprehensible that we still have this requirement,” Cross said.

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