When the Activists Attack
The increasingly aggressive and rising level of investor activism leveled against corporations has been both a cause of concern to managements and boards and a sign of greater corporate responsiveness to investor stakeholders. Among the major companies recently targeted are Amgen, Apple, Microsoft, Sony, Hess, P&G, eBay, Transocean, ITW, DuPont, and PepsiCo. Yet even as critics decry such moves as an encouragement to short-termism, advocates contend they can lead to greater corporate effi ..
Six years ago, the International Accounting Standards Board took over as an international standard-setter, using its U.S. counterpart as a model — except for one key difference. Unlike the Financial Accounting Standards Board, which has the Securities and Exchange Commission on its back, the IASB acts autonomously.
Critics repeatedly have called the lack of IASB oversight into question, but particularly in recent months after the SEC made two proposals that would raise IASB’s stature in the United States by allowing companies listed there to use International Financial Reporting Standards.
To address concerns about the IASB’s governance, the board’s trustees are creating a monitoring body whose members would include securities regulators who would approve trustee appointments and review the group’s budget. Currently, many view the IASB as freely issuing the equivalent of European law without formal scrutiny.
At the same time, the oversight the IASB’s standards receive once approved by the board and put into practical use varies by the many regulatory bodies that review companies’ financial statements. They vary from country to country, even though more than 100 countries are either using the standards or are in the process of converting to them.
An official call for the creation of an IASB monitoring body came from several regulatory sources earlier this month. In their joint statement, the SEC, the European Commission, the Financial Services Agency of Japan, and the International Organization of Securities Commissions (IOSCO) said an overseer would give the board and its trustees more accountability while also “enhancing public confidence in IFRS.”
To be sure, public confidence is shaky. The application of IFRS has been inconsistent thus far, as some countries have refused to adopt the IASB-blessed version of the standards in favor of the version mandated by the European Union. This have put into the question the fate of the FASB/IASB convergence project and IASB’s future as the official global standard-setter.
Once IASB issues a new standard, it’s up to individual countries whether to adopt it. In the European Union, which mandated that its countries use IFRS starting in 2005, each standard goes through additional rounds of scrutiny by the European Commission and the European Parliament. Within IASB’s umbrella, the standards also go through an implementation review by its International Financial Reporting Interpretations Committee, which rarely issues guidance.
The variant opinions on IFRS and other securities matters has raised the possibility of a consolidated, supranational securities regulator. However, observers tell CFO.com that notion could be a pipe dream.
The Committee of European Securities Regulators (CESR) was created six years ago to coordinate the enforcement efforts of the regulators and advise the European Commission on securities issues. One of CESR’s tasks is to promote a uniform interpretation of accounting rules, which it does through enforcement-coordination sessions to make sure the European regulators don’t start sharing disparate understandings of standards.
However, while CESR provides input to IASB, before and sometimes after standards are issued, as well as to the European Commission, it does not have any authority to mandate the use of IFRS, nor can it directly influence the independent standard-setter, notes Paul Koster, chairman of the CESR-Fin, which coordinates the enforcement and endorsement of Europe’s financial reporting standards.
In addition, 24-year-old IOSCO acts with similar intent but on a much larger scale than CESR by including the securities regulators of the United States, European countries and others.
SEC chairman Christopher Cox has credited IOSCO with helping to build a “seamless global market.” However, the group of regulators is unable to take on the role of an international regulator, he said. “Market regulation will remain a national affair for the foreseeable future — if for no other reason than that our legislative mandates require as much,” he said during a speech at an IOSCO conference earlier this month. IOSCO serves as a “think tank” for reaching “international consensus on regulatory ideas and philosophies,” he added.
According to former SEC commissioner and Cooley Godward Kronish partner Roel Campos, the European Commission would like a global European regulator to be formed, “but that’s not going to happen soon.” It’s unlikely the sovereign nations that make up the European Union, for instance, would ever agree to give up their historical authority over their securities markets, he told CFO.com.
In the meantime, “the European Commission doesn’t have a specific enforcement tool other than the bully pulpit,” he says. In other words, the EC instead uses its authority to share its views with regulators through a third-tier group, such as CESR.
Agreeing with Campos’ view is Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England & Wales. “I don’t see any sign that a single pan-European securities regulator is on anyone’s agenda or is very likely to become a reality,” he told CFO.com. He says he doesn’t expect the regulatory landscape to change significantly and expects that the collaboration of regulators through IOSCO and CESR will continue to “ensure that enforcement decisions on IFRS are broadly consistent across jurisdictions.”
As it stands now, European companies don’t always experience that lofty goal of consistency from regulators. They’ve been dealing with discrepant interpretations of their financial statements from the SEC and their own countries’ regulatory bodies. For that reason, international law firm Cleary Gottlieb Steen & Hamilton worried whether the SEC’s recent decision to lift its GAAP-reconciliation requirement for foreign filers that use IFRS was wise considering the standards’ lack of coordinated regulatory oversight.
If the SEC and European Commission disagree on a future standard passed by the IASB, “a European company would not be able to apply the standard or interpretation in its home-country financial statements, but would effectively be required to do so in its Exchange Act reports, despite the fact that the [European] Commission disagrees with it,” the law firm wrote in its comment letter for the SEC proposal, which passed unanimously earlier this month.
Still, European companies privy to SEC inquiries are often taken aback at the U.S. regulator’s heavy-handed questions, according to Andrew Bernstein, a partner in Cleary Gottlieb’s Paris office. In fact, they are often “offended” that they have two regulatory bodies reviewing their financials. For example, former AstraZeneca CFO Jonathan Symonds accused the SEC of acting as a “judge and jury” over international companies’ financial statements after he and other European CFOs received extensive queries from the SEC about their IFRS-prepared filings.
At the same time, some companies have found the SEC’s questions to be informative. “A lot of the companies I represent say, when they get their SEC comment letters, ‘Boy, I don’t want to deal with all these questions,'” Bernstein told CFO.com. “But they also say, ‘These are good questions that we should have asked ourselves internally.'”
According to Koster, the SEC and the rest of the world are still in a transitional phase of getting used to looking at IFRS-prepared financial statements. Most of the questions that have arisen have been technical rather than interpretative issues, he adds.
To be sure, the SEC is wielding some influence over the future of international standards by restricting the IFRS-based filings it does allow to those based on the IASB’s version of the rules and those that involve a home-country modification. By doing so, the commission is agreeing with IASB’s push to keep the standards clean and promoting the concept of a single set of globally accepted accounting standards. Critics of the reconciliation-elimination proposal had wanted the SEC to broaden its allowance to the version of IFRS approved by the European Union.
The creeping influence of the SEC on foreign companies’ financial affairs and its push for bringing the international standards into the United States has generated some fear over the commission’s motives. IASB chairman David Tweedie acknowledged to CFO.com recently that Europeans worry the SEC aims to become the world’s regulator, as evidenced for example by its search for an overseas office. However, according to SEC spokesman John Nester, the office would be used for travel purposes for staffers attending meetings rather than as a far-flung location for overseeing or enforcing SEC policies.
These concerns about the SEC are unwarranted, according to Campos, who recently resigned as SEC commissioner after spending his five-year tenure as a liaison between the U.S. regulator and its international counterparts. The SEC’s goals do not include recognition as a world regulator, he told CFO.com.
Moreover, Campos notes that while Europeans pushed for the elimination of the GAAP reconciliation requirement, they are recoiling at the SEC’s other IFRS-related proposal to give U.S. companies the option of using IFRS rather than U.S. GAAP. “For no particular reason, they worry that the U.S. is trying to capture IFRS and make it into something that is more like U.S. GAAP, something that is more in U.S. control,” he says. “That is not the case.”
In truth, the SEC is trying to respond to its registrants that have a global presence and may find using IFRS more practical to use than GAAP as they continue to do business abroad, Campos says. For that reason, he predicts the SEC will give U.S. companies the option of using IFRS before the convergence project is completed.