While U.S. financial executives are buried in Sarbanes-Oxley compliance, their counterparts in Europe are racing against a deadline to overhaul entire accounting methods—a shift Ernst & Young called “the biggest change in financial reporting in a generation and on a global basis.”
The European Union has set Jan. 1, 2005, as the date by which some 7,000 public companies under EU authority must begin reporting financials using International Financial Reporting Standards. The published standards span more than 3,000 pages. E&Y published a guide to IFRS that is more than 2,000 pages long.
While companies and account users have generally been on board with the benefit of converging to a single system, the road to IFRS has been long, complex and controversial. Tempers particularly flared as standard-setters and financial institutions clashed over valuing derivatives. Ultimately, the European Commission agreed recently to adopt an amended version of the international standard, much to the chagrin of convergence supporters.
The standards have been in development for years under the International Accounting Standards Board and its predecessor, and—except for a few lingering amendments—have been final since spring 2004. IFRS replaces nearly 100 different sets of national accounting standards with a single system.
Wilson
Allister Wilson, E&Y’s UK head of financial reporting, says valuation presents the greatest area of change for most companies. “The biggest change in adopting IFRS is the greater use of fair value vs. historical cost,” Wilson said, creating the likelihood of volatility in balance sheets.
It will be up to companies to communicate well with investors to assure they understand what’s happening, he said. “The biggest challenge facing CFOs is to ensure that the publication of their first IFRS information does not have an adverse share price impact that is not justified by the underlying facts,” Wilson said.
The Royal Dutch/Shell Group is feeling the valuation effects of conversion. The company announced recently that its net assets took a $4.7 billion hit with the restatement to IFRS from Netherlands Generally Accepted Accounting Principles, primarily because of the new method of accounting for employee benefits. Wilson says companies and investors can expect more such revelations.
Ernst & Young and KPMG, among others, have cautioned the market isn’t ready for the conversion to IFRS. E&Y estimated 500 companies in the United Kingdom alone, where existing country standards most closely resemble new international standards, are not prepared.
KPMG said a recent survey revealed nearly half of investment analysts had not yet been briefed on how to analyze new figures. Mark Vaessen, head of KPMG’s IFRS team, echoed Wilson’s warnings. “IFRS won’t change the underlying performance of a business or cash flows, but the markets may not see it that way,” Vaessen said. “Companies must do all they can to keep the investment community in the loop.”
CPCAF Issues Second Version of Audit Framework
The Center for Public Company Audit Firms has issued a second version of its framework to guide auditors in implementing Section 404 of Sarbanes-Oxley. The joint framework, developed by nine accounting firms and a Georgia State University professor, was first issued by the CPCAF in late October.
The framework is a guide for auditors and issuers studying exceptions and deficiencies that are discovered in the 404-required internal control evaluations. It is designed to be used alongside the Public Company Accounting Oversight Board’s Audit Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.
Version 2 of the framework addresses information technology general control deficiencies that were not included in the first version. Like the first version, the latest framework was developed cooperatively by the Big Four firms–Ernst & Young, PricewaterhouseCoopers, KPMG, and Deloitte & Touche—plus four firms in the next tier—Grant Thornton, BDO Seidman, Crowe Chizek and McGladrey & Pullen.
The CPCAF is a voluntary membership organization for firms that audit or are interested in auditing public companies to help improve the audit process.
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