Herz: No Convergence for 10-15 Years

At a meeting in London, global financial experts discuss what counts as "substantial" accounting convergence, how to fend off political pressure, and when the U.S. should cut bait.

With 30 people around the table, and more participating by phone, it was sometimes difficult to follow the proceedings of the Financial Crisis Advisory Group (FCAG) in London today. The body, assembled by the International Accounting Standards Board and the Financial Accounting Standards Board last year to provide high-level advice on financial reporting issues stemming from the credit crunch, also found itself wrestling with a host of complicated problems.

The most pressing is the rising political pressure being exerted on standard setters, such as that which led to the hasty release of amendments to fair-value standards by FASB earlier this month. Encouraged by FASB’s changes, European finance ministers recently urged the IASB to follow suit and further relax its rules for mark-to-market accounting. Following a two-week comment period on FASB’s actions that ends today, the IASB will decide its next steps during a three-day board meeting that begins on Wednesday.

FASB chairman Robert Herz opened today’s meeting of the FCAG by putting into context the “virtual cornucopia” of actions that the standard setter has taken recently. Herz remarked, for instance, that at a Congressional hearing, he was “fairly strongly urged” to act. However, he added that a ”steady diet” of the sort of expedited changes that FASB enacted this month would be unwelcome, “but these are extraordinary times.”

Most parties agree that convergence with international accounting standards is an important goal, but the will to “flick the switch” on committing to a hard date on adoption is difficult, Herz said. Until then, politicians will focus on the “exigencies of the day,” which may, or more likely, may not advance the convergence project. Herz asked the group for any recommendations on how he could better manage the task of merging international financial reporting standards with U.S. generally accepted accounting principles.

Everyone in the room had a “degree of sympathy” for Herz, noted Hans Hoogervorst, chairman of the Dutch markets regulatory and co-chair of the FCAG. It sounded like the American standard setter was being asked to “ride two horses,” the Dutchman added. “I’ve got chapped legs,” Hertz retorted.

Harvey Goldschmid, a former commissioner of the U.S. Securities and Exchange Commission and Hoogervorst’s fellow co-chair of the FCAG, acknowledged Herz’s “exquisite diplomacy” referring to the abuse he took before Congress, adding that the need to “shield” standard setters from political pressure was an “imperative of our time.” In a perfect world, with full resources and free from outside influence, “when could we get convergence?,” he asked Herz.

“Ten to fifteen years,” the FASB chairman replied.

This seemed to surprise many in the room. After all, the so-called Norwalk Agreement, a memorandum of understanding between the FASB and IASB, calls for the completion of all “major joint projects” by 2011. David Tweedie, chairman of the IASB, noted that it took 12 years to develop IAS 39, the standard covering financial instruments, so the developing a single, simpler set of standards could not be rushed.

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