The SEC Rules

Five years after Sarbanes-Oxley, the SEC is flexing its regulatory muscle as never before.

In June, the SEC voted to propose allowing foreign companies listed in the United States to file under international financial reporting standards, or IFRS, a more principles-based system created by the IASB, rather than U.S. generally accepted accounting principles (GAAP). The decision is now out for comment.

Going one step further, SEC chief accountant Conrad Hewitt announced just a week later that the commission would release a concept draft to test the idea of allowing domestic companies to do the same.

Also in June, the SEC established the Advisory Committee on Improvements to Financial Reporting, to be led by Robert Pozen, chairman of MFS Investment Management. The group is charged with studying the complexity of the existing U.S. system and making recommendations on how to make financial statements more user-friendly. The committee is explicitly tasked with evaluating the impact of “the growing use of international accounting standards.”

The SEC is not alone in embracing the idea of a global standard. “There is a growing consensus around the need to have international standards,” says Robert Kueppers, deputy CEO of Deloitte & Touche USA. “It’s striking how quickly that consensus has formed, as very senior people in the Administration, from the SEC to the Department of the Treasury, are focusing on the issue.” While FASB and the IASB have been working methodically to converge standards, “I think the policymakers have made it more of a priority, and they’re saying we can accelerate it,” says Kueppers.

Finance executives seem to agree. A CFO survey last year found that 47 percent of finance executives supported a shift to principles-based accounting, while just 10 percent opposed such a move.

If the United States moves to IFRS, the SEC could extend its reach far beyond the PCAOB and FASB to the international arena. As more foreign issuers would presumably list in the United States thanks to the change, the SEC’s compliance umbrella would cover that many more companies, establishing the commission as the preeminent global financial regulator. In fact, Cox appeared to be paving the way for a greater international SEC presence during a European tour last spring in which he discussed cooperation and information-sharing with European securities regulators.

As for FASB, chairman Robert Herz has acknowledged that the organization could change as it moves toward international convergence. Indeed, says David Sherman, an accounting professor at Northeastern University and a onetime candidate for a seat on FASB, “when people talked about hiring me at FASB, they didn’t seem to assume that it was going to exist forever.”

But even if the United States does move toward IFRS, the board needn’t rush to pack up its Connecticut headquarters. “Down the road I think we will see more and more acceptance of international accounting standards,” says Archambault, the Grant Thornton partner. “But I can’t even give you a guess on the number of years before we would have a single set of worldwide standards.” Herz has noted that despite the adoption of IFRS by many countries, many national accounting regulators still exist to oversee implementation of the standards.

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