Rulemakers: Take Politics out of Accounting

A top audit regulator and a former FASB member slam the SEC's timetable for moving U.S. companies to global accounting standards.

The Securities and Exchange Commission has set up “arbitrary” dates in its proposal to move all U.S. publicly traded companies to international financial reporting standards by 2010, says Ed Trott, a former member of the Financial Accounting Standards Board.

Trott joined Public Company Accounting Oversight Board member Charles Niemeier at the CFO Rising West conference in Las Vegas in calling for the SEC to slow down the pace of its timetable and give accounting standard-setters more time to improve and meld their rules. “My issue is the speed and arbitrariness of the SEC making decisions for…political reasons rather than for the benefit of the capital markets,” said Trott.

To be sure, advocates of speedy IFRS adoption in the United States say that using the same standard as the one used by companies in more than 100 other countries will help American businesses stay competitive and make financial statements more comparable worldwide. The SEC designed the roadmap, which could lead to small companies adopting the standard by 2016, “in response to the fact that more U.S. investors are investing in more foreign companies in more international markets than ever before, which suggests the need for an international language of disclosure and transparency to protect investors and facilitate their comparisons of corporate financials,” SEC spokesman John Nester told CFO.com last month.

A growing number of dissidents, however, are publicly doubting that the ideal of creating easily comparable financials could be reached under current regulatory regimes. That’s because several of the differences between the IFRS and U.S. GAAP have yet to be worked out by the standard-setters. Further, some accounting experts say, the IFRS allows for more judgment and more leeway in interpretation, which could prompt similar companies to record their financial results in different ways.

IFRS critics also observe that the SEC’s “rush” toward replacing GAAP with the global rules may have slowed recently in favor of more pressing concerns. Indeed, the U.S. financial-reporting system is at a crossroads and on the brink of being thoroughly reviewed by lawmakers and regulators in the coming months, they contend.

Soon after the SEC commissioners voted unanimously to release an IFRS timetable in late August, Lehman Brothers collapsed, AIG was given huge government loans, and the stock market began its jaw-dropping, seesaw behavior. In the meantime, the SEC and its chairman, Christopher Cox, have come under congressional scrutiny concerning their responses before and after the financial crisis. The SEC has also been called upon by Congress to review fair-value accounting rules.

Perhaps sidetracked by all those issues, the SEC hasn’t publicly shared its IFRS roadmap since making the summer vote.

Trott claims the European Union’s decision to require its countries to adopt the IFRS was politically motivated, and he hopes that won’t be the case here. “You will hopefully see improvements through convergence that’ll be voted on based on input from the investor, auditor, and preparer community rather than it being done in Washington by politicians,” he said.

The issue of oversight and political involvement is a touchy one, however. The International Accounting Standards Board, which sets the IFRS, is a rulemaker that’s independent of government regulation. At the same time, while FASB is also considered independent, the SEC determines who sets the rules in this country, and the commission’s actions are seen by Congress.

Niemeier has been a vocal opponent of the SEC’s increasing preference for the IFRS over GAAP for the past year, following the commission’s decision to eliminate the requirement that some foreign companies reconcile their financial statements with GAAP. He has said the original idea behind convergence meant the accounting standard-setters would eliminate the differences between their rules. But the meaning of “convergence” has strayed from creating one set of high-quality standards, he contends.

He supports the convergence work being done by the IASB and FASB, but thinks the boards shouldn’t be hurried into finishing that job. “The emphasis has to be on high quality. [The actions we're] seeing of late, I think, take us down a different path,” said Niemeier, adding that the current version of the IFRS is too recent and untested to replace GAAP in the meantime.

Critics also contend that the IFRS and American culture fit uncomfortably together. Indeed, both Trott and Niemeier have doubts the United States could ever truly embrace the IFRS. Further, the country is taking a risk of “becoming like everyone else” and could put its reputation as the country with the lowest cost of capital in jeopardy, Niemeier said.

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