Sir David Tweedie is on a quest. The 59-year-old chairman of the International Accounting Standards Board (IASB) is overseeing the development of a single set of international accounting standards for the European Union (EU) by March and intends to converge those standards with U.S. rules.
Can it be done that quickly? It must be, according to Sir David. The engine of capital formation and investment has been stalled long enough by the anachronism of 26 separate European accounting methods, with another in America. Developing a single international system is "not about arcane bookkeeping matters," says the former head of the UK's accounting standards board. "It's really about something much bigger." Indeed, what the IASB is really targeting when it designs an accounting system for the world "is inward investment, growth, employment, and world trade," he says.
The accounting scandals infecting both the New and Old Worlds give convergence more urgency. While Sir David won't blame the Enron and Parmalat fiascos on an absence of international standards, he believes that some frauds would be much harder to pull off. Having a set of standards based on principles, rather than mere rules, might dissuade executives from simply "checking the boxes and not looking at the whole picture."
Sir David's quest, however, has not been uniformly well received. There's been much displeasure among European banks and the French government over the new rules for financial instruments. And the implications for expensing stock options have already met opposition in the States. Meanwhile, critics everywhere charge that without a European enforcement agency on the scale of the U.S. Securities and Exchange Commission, the rules will lack teeth. Sir David says that a plan to address enforcement is in the works.
He firmly believes that now is the time for international standards. In January, during a break at an IASB meeting in London, he sat down with CFO deputy editor Lori Calabro and CFO Asia editor Tom Leander to discuss the board's hopes and his vision of a "three-legged-stool" arrangement—rules combined with good corporate governnace and auditing standards—for deterring abuses.
The IASB promised a workable set of standards by March, and the European Commission mandated that all European companies switch to international standards by 2005. How has the process evolved?
When we started in the summer of 2001, we inherited 34 standards from our predecessor body [the International Accounting Standards Committee]. Now, of those inherited standards, 30 had been an attempt to get together with the International Organization of Securities Commissions [IOSCO] to produce standards of appropriate quality, so that users could list on any stock exchange worldwide. But 14 of the standards were heavily criticized. Then, only about a month or two after we began, the EU announced this 2005 deadline. So we had a choice. We knew we had to fix these [inherited] standards, if international standards were going to be acceptable to New York and the SEC. But we also had the 2005 deadline. So should we just gradually change them, meaning that anyone coming on board would have to change twice in a matter of a year or two? Or should we have a real blitz on these standards, and really change them? That's what we did. We ended up publishing in November, and we actually changed 17 of the 34—pretty fast for a standard setter in two and a half years.
Are the changes drastic?
We've tried to keep the fundamentals as best we could. But we did make changes. And we also produced a standard last year [that covers] what you do the first time you switch to international standards. Broadly speaking, you have to show in 2005 all the assets and liabilities that we require, measured as we require them, with certain cost-benefit allowances. We are not, for example, going to make you undo all business combinations you've done before.
The upgrades were to be completed in enough time for companies to meet the 2005 deadline. Is there any flexibility?
None.
None?
They've known for ages that it was coming. We've had the standards up on our Website since October. We said here are the 17 we altered. There may be cross-reference differences, which is why we aren't publishing them officially. But all the standards are here. So they've had a year before they really had to do this. There are two complicated standards—the financial-instrument standards—so we've said don't do the comparatives. But basically, we were given the 2005 deadline, so we have to meet it.
There is also the ongoing convergence project with U.S. accounting standards. Is there any tension between the standards you're publishing and the ones the United States intends?
Not really. Take share-based payments. We are going out with one standard, but there's a very similar one in the U.S. There's a slight difference in the tax situation [concerning allocation methodology for the income tax benefit]. The Financial Accounting Standards Board is going to describe what we do for tax and ask [for feedback], and if the response suggests that the U.S. is right, then we'll look at whether we should change ours. And if we don't think the U.S. is right, we should argue until we've gotten them both the same. There is a willingness to do that.
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