VideoOlli-Pekka Kallasvuo, CFO and executive vice president of Nokia Corp., seems a prince of transparency as he sits in Nokia House, a steel and glass corporate temple in Helsinki, Finland. The 47-year-old talks with confidence of Nokia's information disclosure practices under international accounting standards (IAS), a body of accounting rules now under consideration by the U.S. Securities and Exchange Commission (SEC). Critics say the rules aren't stringent enough and would give powerhouses like Nokia a lower bar than U.S. generally accepted accounting principles (GAAP) to raise capital in America--and therefore an unfair competitive advantage.
But Kallasvuo is a staunch defender of IAS. Seventy percent of Nokia is owned outside of Finland; it has more than 1 million U.S. shareholders; and it has long disclosed discounted cash flow figures and economic value added. The company listed on the Big Board in 1993, then decided that its global ownership merited a conversion to IAS.
"Realizing that our shareholders would always be largely outside of Finland," says Kallasvuo, "we decided to primarily report in IAS."
Across the Atlantic, Lynn Turner, the SEC's chief accountant, sits in the agency's drab and workaday Washington, D.C., headquarters mulling the SEC's initiative to open the door for IAS. The decision, expected by the first half of 2001, isn't one he's taking lightly. Allowing IAS without its current requirement of lengthy reconciliations to U.S. GAAP would greatly expand foreign companies' access to the U.S. market. And Turner is wary because of companies like Nokia.
With reason. The SEC asked for comment on the quality of IAS last February, and one letter, which complained of companies claiming to disclose fully in IAS in reports to investors but actually omitting crucial details, cited Nokia. "Nokia claims full compliance with IAS in a statement of its accounting policies, but does not disclose geographical segment information or many of the required disclosures of retirement benefits," contends the letter's author, one Kenneth Blair, citing a study published in the Financial Times of London last year by accounting specialist David Cairns.
Cairns, an author as well as a former secretary general of the International Accounting Standards Committee (IASC) in London, is no less harsh. "It's a serious breach," he says. But since there's no global SEC to stop companies from claiming, but failing, to meet IAS, they can do so without suffering any penalty.
In Helsinki, Kallasvuo, who has never seen the letter, reacts with shock. "This can't be true," he says, but then concedes that he doesn't know. He falls back with, "We are among the most transparent companies in the world." His chief accountant, controller Maija Torrko, admits that Nokia fell short of full geographical segment disclosure in 1998, but was in full compliance in 1999, when the IASC released new guidelines. Cairns disagrees, saying it still didn't reveal enough. About the pension disclosure, Torrko echoes Kallasvuo's confusion on the requirements. Nokia has adopted a wait-and-see attitude, because "we don't know what to disclose."
Why didn't the SEC catch Nokia's apparent noncompliance when the company reconciled its financial statements to U.S. GAAP? IAS and U.S. GAAP apparently didn't require the same disclosures.
New World Disorder?
The discrepancy may not in fact be that unusual. Nor, for that matter, are U.S. companies beyond reproach when it comes to adhering to U.S. GAAP. But the relative vagueness of IAS on such matters, coupled with the lack of enforcement, helps explain the SEC's skepticism about the standards. That, in turn, is holding back progress on a universal set of accounting rules, which CFOs around the world agree would make it easier to raise capital and complete acquisitions in foreign markets. But they are likely to be disappointed until the SEC is satisfied that investors will be treated no less well under IAS than under U.S. GAAP. "Noncompliance is a serious problem with a lot of companies that say they fully disclose under IAS," says Turner.
Yet even Turner admits that in the fight over the quality of international accounting standards versus the sanctity of U.S. GAAP, CFOs can get lost in the ledger lines. And since the SEC has a strong interest in allowing foreign companies to list, SEC chairman Arthur Levitt and Turner responded last year to one of many frequent pleas to consider IAS by putting out the request for comment letters. Then, last summer, the SEC quietly stepped up its influence with the restructuring of the IASC.
In a clear sign of the SEC's interest in IAS, Levitt asked Paul Volcker, former chairman of the U.S. Federal Reserve Board and most recently chairman of the committee to repatriate money from Holocaust victims in Swiss banks, to oversee the IASC's restructuring.
"I was talking with Arthur Levitt," recalls Volcker, "and I said, 'Isn't it arrogant that we believe that everyone should report in GAAP?'" Levitt was bemused, but asked Volcker to chair the committee. "I'm not an accountant," the plain-spoken former Fed chairman admits. "I have a semi-consumer's view of these things."
And he will apply that view as he selects and nominates the new board of the IASC, which will be responsible for modifying the current body of standards and aligning them to U.S. GAAP and other accounting standards in use around the world. He's also going to have to raise enough money to get the new, more powerful IASC rolling in perpetuity, much of it from companies themselves. Success, then, will ultimately depend on Volcker's ability to get companies to agree that they need a global standard that's better than GAAP. "There are basic questions about accounting models that nobody feels comfortable with at this point," he says.
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