PCAOB Told to Plan for Global Standards

Does GAAP have staying power?

Members of the Public Company Accounting Oversight Board’s advisory group are split on the question of how hard it would be for the auditing profession to adapt to International Financial Reporting Standards.

In light of a recent Securities and Exchange Commission proposal that U.S. companies should be given the choice between IFRS and U.S. generally accepted accounting principles, some PCAOB advisers worried that such a choice would overly burden accounting professors who are already strapped for resources. They also questioned whether the International Accounting Standards Board’s version of IFRS is of high enough quality to meet U.S. regulators’ and investors’ expectations. The IASB expressed similar worries on Thursday.

The larger accounting firms, however, assured the advisory group that they have been training their staffs on using IFRS. Perhaps surprisingly, a member of the Financial Accounting Standards Board spoke in favor of a move to international standards.

Indeed, momentum toward the use of IFRS-based financial statements in the United States could threaten the existence of FASB. Nevertheless, FASB member Thomas Linsmeier encouraged the group to accept the inevitable — that the United States will have to jump on the IFRS bandwagon. After all, he said, Canada, China, and Japan have recently joined the ride. “We’re getting to the point where we’re going to stay isolated if we decide to stay with U.S. GAAP,” he said.

Acting as an observer for the PCAOB’s Standing Advisory Group, Linsmeier stressed that that was his own opinion, not that of the other FASB members. Still, his views aren’t far off from FASB’s chairman. Last month, Robert Herz said he is not in favor of a “two-GAAP system” and predicts that U.S. companies will eventually follow only IFRS.

Linsmeier and Herz agree that giving U.S. companies a choice between two standards would not be an ideal situation. Herz has said that it would interfere with his goal of setting up a single accounting standard. And Linsmeier noted at Thursday’s meeting that a two-choice system would cause conflicts within accounting education programs.

As Linsmeier sees it, convergence isn’t a long-term solution. “We can’t work together with IASB permanently and remain converged,” he said.

Linsmeier’s comments came during a day-long SAG meeting. Most of the discussion focused on the lack of education regarding IFRS, and protests against the SEC’s proposals to expand the use of the foreign standard in the United States abounded.

The SAG spent less time discussing how the PCAOB’s standards could be affected. The advisory group, which meets a few times a year, includes finance executives, attorneys, investor advocates, and representatives of such big audit firms as PricewaterhouseCoopers and Deloitte & Touche.

One of the SEC’s recent proposals would allow some foreign companies to stop reconciling their financials with GAAP if they use the IASB’s version of IFRS. Another proposal would give U.S. companies a choice between GAAP and IFRS.

On Thursday, some SAG members asked if allowing the widespread use of IFRS would lead to disagreements between auditors and their clients about whether a company used proper judgment. That discussion focused on the belief that IFRS is more principles-based than GAAP, which is generally considers rules-based, and therefore requires more judgment by companies and auditors that use the foreign standards. The result may be a “my judgment versus yours” standoff between company management and their auditors, suggested Robert Kueppers, Deloitte’s deputy CEO.

The SAG members also fretted about the risk involved in an unknown and seemingly more flexible set of standards. Joseph Carcello, director of research for the University of Tennessee’s Corporate Governance Center, suggested that companies would choose IFRS because it may provide leeway for managing income.

Regardless of the problems that may ensue if more U.S. companies can use IFRS, the issue can’t be ignored, according to some SAG members. “It’s changing our philosophy of what we’re doing,” said Vincent Colman, a partner for PricewaterhouseCoopers. “We have no choice because the market is changing, and we have to change with it.”

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