The Securities and Exchange Commission should hurry up and dump the requirement that foreign issuers listed on U.S. stock exchanges reconcile their financial statements prepared under International Financial Reporting Standards to U.S. Generally Accepted Accounting Principles, panelists at a recent roundtable on the topic urged.
While a roadmap for the convergence of U.S. and international accounting standards commits the SEC to eliminating the reconciliation requirement by 2009, a number of issuers, auditors, and investors who participated in the March 6 roundtable to gather input on the effect of eliminating the requirement said they would support eliminating it even sooner.
Grabar
The purpose of the reconciliation “is falling away because of convergence,” said Nicolas Grabar, a partner at the law firm Cleary Gottlieb Steen & Hamilton, who spoke at one of the roundtable sessions. “When reconciliation goes, it won’t be missed.”
Grabar and other panelists said GAAP reconciliations don’t get much attention from investors, because the information sometimes comes as late as six months after foreign private issuers have reported their IFRS results. Grabar said issuers and investors are already learning to live without reconciliation by using other tools to understand the significance of GAAP differences.
The elimination of the reconciliation requirement is viewed as a crucial step in the move toward the long-term goal of convergence in global accounting. The Financial Accounting Standards Board and its counterpart in the European Union, the International Accounting Standards Board, have been working together to make their standards compatible since 2002.
The EU, which has required IFRS reporting since 2005, aligned its timetable with the SEC’s to permit listings according to GAAP until 2009. Meanwhile, more than 100 other jurisdictions around the world have decided to allow or require IFRS.
In his opening remarks, Securities and Exchange Commission Chairman Christopher Cox reiterated the SEC’s commitment to convergence and to the roadmap: “We’re committed to this and we’re not looking back.” He also said the SEC doesn’t expect to see total convergence or “a specific level of convergence” before eliminating the reconciliation requirement.
“Elimination of the reconciliation requirement is not dependent on the FASB and IASB resolving all major differences between their regimes,” Cox said.
Kinney
Catherine Kinney, president and co-chief operating officer of the NYSE Group, said removing the requirement, coupled with proposed changes to the implementation of Section 404 of Sarbanes-Oxley and new deregistration rules for foreign private issuers, would attract more issuers to list in the United States.
“We encourage as much work as can be done, and certainly the mutual recognition, as quickly as possible,” Kinney said. “Any way it could be accelerated or any pilots that could be conducted would be useful.”
Auditors at the roundtable also supported the elimination of GAAP reconciliation. David Kaplan, leader of the international accounting and SEC services group at PricewaterhouseCoopers, said doing so will take costs out of the system. He also added that PwC’s foreign issuer clients said they get few questions on their reconciliations.
Both Kaplan and Sam Ranzilla, a partner in charge of professional practice at KPMG, noted that if reconciliation is eliminated, the SEC and the Public Company Accounting Oversight Board will then have another dilemma: whether to keep a requirement under the PCAOB’s quality-control standards that filings of FPIs be reviewed by individuals who know both U.S. GAAP and independence standards.
Does Reconciliation Matter?
At a second session on reconciliation’s affect on investors in U.S. capital markets, a steady stream of speakers said they don’t bother to use GAAP reconciliation anyway. “In lot of instances, we’ve adopted IFRS type of accounting even for our U.S. companies,” said Joe Joseph, chief investment officer on the small- and mid-cap core equity team at Putnam Investments. “I don’t see anything changing if reconciliation goes away.”
Jonas
Gregory Jonas, a managing director at Moody’s Investors Services, said Moody’s analysts don’t use reconciliation in their analyses either. “Our analysis of FPIs is done in IFRS,” he said. “The majority of our analysts are outside the U.S. and are thinking in a language that’s different from U.S. GAAP.”
REMARKS
An excerpt from SEC Chairman Christopher Cox’s remarks on IFRS follows.
As the world's securities markets continue to integrate, it's easy to imagine that the process of continued harmonization of standards is inexorable — somehow impelled by forces of nature. But it isn't so. As everyone in this room knows, you shoulder a heavy burden each day to turn that vision of seamless integration into reality.
And a great deal rides on your eventual success. As issuers and investors increasingly look beyond their borders for opportunities to invest and raise capital, it is critical that the financial information they use to make their decisions be accurate and timely. One of the obstacles that investors have to overcome in making investment decisions is the different ways that this information can be reported. Sometimes the differences are due simply to the happenstance of the country in which an issuer happens to find itself. That's why virtually everyone — issuers, investors, and stakeholders alike — agrees that the world's cap markets would benefit from the widespread acceptance and use of high-quality global accounting standards.
The rationale for a global standard, rather than the Babel of competing and sometimes contradictory national standards, has been often stated. But it is so important that it bears repeating. Global accounting standards would improve investor confidence in the market, so long as the standards are high-quality, comprehensive and rigorously applied. They'd allow investors to draw better comparisons among investment options. They'd also lower costs for issuers, who would no longer have to incur the cost of preparing financial statements using different sets of accounting standards. And those lower costs would benefit the company's shareholders, who ultimately bear the burden of the entire cost of the financial reporting system.
The purpose of today's Roundtable on the Roadmap is to consider the possibility that International Financial Reporting Standard and U.S. GAAP might co-exist in U.S. capital markets — and to assess the impact that this would have on the markets, on the decisions investors make, and on our program of investor protection.
Not only the European Union but also many other jurisdictions including Canada, Australia, New Zealand, Israel, China, and Hong Kong are adopting IFRS — and so, without question, it is becoming a widely used set of standards. But we should not forget that it is also a new set of accounting standards. IFRS has existed as a truly comprehensive set of accounting standards for only a few years. And because of that relative newness, it necessarily has a limited history of interpretation and application. We are all now engaged in the exercise of ensuring that IFRS is being applied consistently, faithfully, and transparently.
This exercise is important to our friends at the European Commission because consistency and faithfulness in the interpretation and application of IFRS are critical to the creation of a seamless, integrated capital market comprising the EU's 27 member states. The exercise is also of critical importance to the SEC. Allowing the use of two different sets of accounting standards in the United States would mark a significant change for us. But allowing two standards is as nothing compared to two dozen — and for that reason, we have got to be able to demonstrate that IFRS is indeed a single set of international accounting standards, and not a multiplicity of standards going by the same name.
Source
Securities and Exchange Commission (March 6, 2007).
Throughout the day, the discussion strayed from the topic of reconciliation, as several commenters stressed the need to move to one set of global accounting standards. Some also noted the need for global auditing standards. While Jonas said the reconciliation imposed a “discipline” into the reporting process that has been helpful, he also said he’d support eliminating the requirement “if it’s viewed as critical to getting to the end game” of a single set of global accounting standards.
Others noted that if the SEC gives foreign issuers the option to report here in either GAAP or IFRS, U.S. issuers may want the same choice. Ranzillia said the SEC should ponder that idea, and even of adopting IFRS generally, as part of its overall drive to reduce complexity in financial reporting.
Likewise, Donald Nicolaisen—a former SEC chief accountant and author of the 2005 convergence roadmap—said reconciliation has become “a compliance exercise” that might as well be scrapped now. Then, he added, the SEC should consider whether to require U.S. companies eventually to file in IFRS.
Nicolaisen
Nicolaisen opposed making filing in IFRS a voluntary election, because it would create a “creeping system that would make it hard for investors to follow who’s using what, when.” He believes international accounting standards will ultimately prevail over U.S. GAAP set by FASB, because of the “overwhelming” desire for one set of standards around the globe.
Duverne
During the final panel of the day, to consider the effect of reconciliation requirements on issuers, foreign private issuers said analysts and investors show little interest in their GAAP reconciliations, which makes them mostly a drain on resources. Denis Duverne, chief financial officer of AXA Group, estimated that his company would save $25 million if the reconciliation requirement is dropped. William Widdowson, head of group accounting policy at UBS, said the reconciliation adds 30 pages to the Swiss bank’s filing, contributing to the problem of “information overload.”
Phillip Jones, director of external accounting and reporting procedures at Dupont, also said he’d support elimination of reconciliation, “as long as the drive to get to one global GAAP isn’t impaired by doing that.”
Meredith Cross, a partner at the law firm WilmerHale and former deputy director of the SEC’s Division of Corporation Finance, supports eliminating the requirement, but noted that “implementation and oversight are critical.” “Issuers, particularly foreign issuers, will need clarity and predictability when they hear from the [SEC],” she said.
Meanwhile, leaders of the PCAOB and its EU counterpart agreed to increase their cooperation on audit inspections. EU Internal Markets Commissioner Charlie McCreevy met with PCAOB Chairman Mark Olson last week to discuss stepping up cooperation between the two oversight bodies, with a goal of moving toward full reliance by 2009.
McCreevy and Olson will meet again in October to review their progress. Roughly 265 of the more than 760 non-U.S. firms that are registered with the PCAOB are located in the EU. The PCAOB said it will consider issuing further policy guidance regarding its reliance on non-US regulators.
No comments yet