Does the SEC Want to Control Accounting?

Countries play tug-of-war over their accounting principles, and fret over the possible extent of American influence.

Experts from outside the United States last week publicly aired their suspicions about a U.S. land grab—in the area of accounting rulemaking, that is.

As the SEC’s comment period on its proposal to eliminate the need for reconciliation between the U.S. generally accepted accounting principles (GAAP) and the International Financial Report Standards came to a close last week, several observers expressed anxiety that the commission could begin to overstep its bounds. “There’s a paranoia around the world that the SEC might become the world standard-setter,” Anthony Cope, a recently retired member of the IASB, said Thursday during a speech in Boston. “It’s a risk.”

Nonetheless, the idea of a single, global set of accounting standards got a remarkable boost Friday morning when Robert Herz, chairman of the Financial Accounting Standards Board, called for a
national plan that would essentially move U.S. companies off U.S. GAAP
and toward international financial reporting standards (IFRS). The FASB, which creates U.S. GAAP, has been working for some time with the IASB to reconcile the two standards, but Herz’s speech seemed to suggest a far more dramatic shift in favor of the newer IFRS system.

Yet even as IFRS seemed to get a huge boost over its American cousin, many observers expressed fears that America might exert influence over accounting standards through a different channel: regulatory interference from the Securities and Exchange Commission.

The move toward a more principles-based standard will leave added room for judgment and interpretation, which observers say the SEC could use to gain influence on international standards. In letters to the SEC, groups such as the International Swaps and Derivatives Association (ISDA), Citigroup, and the Investment Management Association (IMA) echoed the concerns voiced by Cope.

“We also respectfully urge the SEC to work closely with the existing IASB framework, and not to create U.S. specific interpretations of IFRS,” wrote Robert Traficanti, vice president and deputy controller of Citigroup, in a letter to the SEC.

The SEC had no response to Cope’s remarks, and spokesman John Nester said it is now analyzing letters received during the comment period.

Many interpretations of IFRS already exist, and companies have expressed concern that being forced to comply with local varieties could pose a stumbling block to reconciliation. Already, the different versions of IFRS pose a potential stumbling block to the SEC’s plan to eliminate reconciliation with IFRS. The European Union, Australia, and Hong Kong have already carved out their own exceptions to the IASB’s “pure” version of the standard.

“There’s a lot of tension between the IASB and the European Union,” said Cope. “The [EU] always wanted a standard-setter of their own.” The European Association of Listed Companies sent a letter to the SEC this week saying that, while it supports reconciliation between GAAP and IFRS, it sees European Union laws as requiring them to adopt the version of IFRS approved by the EU, rather than the pure version issued by the IASB.

“While European companies would prefer that there be only one ‘IFRS’ (and not an IASB version plus jurisdictional variants), they are faced with the reality that they are legally bound to publish financial statements in accordance with IFRS as adopted by the European Union,” the association wrote. Although the European version is very similar to standard IFRS, it uses a different method of accounting for derivatives.

Despite recent progress, IFRS and GAAP still have room to converge further. Cope noted differences in revaluation of fixed assets, impairment, the definition of equity, and when to recognize a liability as areas where the two standards differ. William Seltz, a professor of accounting at Boston University, suggested that the SEC take more time to bridge differences between the two standards before eliminating reconciliation.

Meanwhile, Cope was hopeful about the future of a global accounting standard. “I’m optimistic that we will get to that one high-quality set,” he said.

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