Global Business

Will Americans Foul Up Global Standards?

Many outside the U.S. would rather American companies and auditors stick to their own accounting standards, says a panel of experts.
Marie LeoneApril 30, 2008

The idea of forcing American companies to file results using international financial reporting standards makes preparers and auditors in other countries edgy. “The world is very nervous about a U.S. move to IFRS because they are afraid [the standards] will turn into 25,000 pages of rules,” asserted Richard Fuchs, a partner with PricewaterhouseCoopers, during a panel discussion Tuesday. Today, U.S. generally accepted accounting standards runs about 25,000 pages, while IFRS comprises about 2,000.

“They think the U.S. response [to accounting problems] will be more guidance and more specificity. They fear the future because of what happened to U.S. GAAP … there will be tremendous resistance to the U.S. coming in and screwing up [existing standards],” continued Fuchs, who was a panelist at a conference sponsored by Pace University’s Lubin School of Business.

The six panelists were charged with discussing the status of global integration of accounting standards, and commenting on the impending mandate to force U.S. companies to use IFRS. In February, Securities and Exchange Commission chairman Christopher Cox said that his staff was working on a plan and schedule to move U.S. companies to the international standards.

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But the panelists, all of whom boasted international accounting expertise, said the rest of the world viewed the more rules-based U.S. GAAP — as opposed to the more principles-based IFRS — with suspicion. Outside the U.S., “the expectation is that [American] standard setters will just plug loopholes” if there is an accounting problem, remarked Robert Colson, a partner with Grant Thornton. “It will take great discipline on the part of standard setters to fight the urge to get specific, but it will also take an arrangement with [U.S.] regulators” to defer to principles rather than rules.

“Regulators need to show restraint, and not make accounting interpretations on their own,” insisted Ernst & Young partner Danita Ostling. She said that as part of a global standard-setting and regulatory regime, the SEC would have to reach consensus with other oversight and enforcement bodies. In the U.S., the commission only answers to the president and Congress, with the Public Company Accounting Oversight Board and the Financial Accounting Standards Board operating under its watchful eye.

D.J. Gannon, a partner with Deloitte & Touche, says he sees “the beginning of a mindset change” at the SEC regarding cross-border consensus building. He cited a recommendation put forth by the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFR), led by Robert Pozen, which introduced the notion of a judgment-based framework for accounting standards. What’s more, in a lunch time keynote address, the SEC’s deputy chief accountant Julie Erhardt noted that although it might not be obvious to the general public, she spends half of her time in London working with the International Accounting Standards Board and the International Organization of Securities Commissions.

However, the push for IFRS in the U.S. will take more than a mindset change at the SEC and FASB. Preparers and auditors will be forced to abandon their tendency to dig into accounting literature until they find a rule that matches their fact pattern, and instead adopt a holistic approach to debits and credits, said the panel. But that won’t be easy. Under GAAP, Americans “use the accounting model to analyze transactions by saying, ‘let’s look up a standard,’ ” noted Grant Thornton’s Colson. That way of thinking “is embedded in our culture.”

To make the switch to IFRS, preparers and auditors practicing in America will have to start “thinking about the economics” of transactions, rather than just performing a “research exercise” to find the rule that supports their position, said Gannon.

The single biggest challenge U.S. preparers and auditors face regarding global standards is breaking away from “a system [that focuses on] one right answer,” opined PwC’s Fuchs. That focus “drives the rest of the world nuts,” he insisted.

Fuchs emphasized that “uniformity drives U.S. GAAP,” while transparency drives IFRS. He explained that GAAP starts with principles, then preparers and auditors ask for guidance, and FASB and the SEC respond with rules that essentially force the bulk of companies to apply the standards in a uniform manner. Meanwhile, IFRS encourages preparers and auditors to focus on “what was done in a transaction, despite what everyone else is doing,” said Fuchs.

“The end game [with IFRS] is getting accounting results that reflect reality,” noted Gannon. Part of that end game may mean that companies come up with different answers about a transaction, but that is acceptable in international accounting, as long as proper disclosures are made related to the facts, assumptions, and approaches taken by the company with regard to the transaction, added KPMG partner Paul Munter. With robust disclosures, companies can then allow users of financial statements to make the decision about what is reasonable with respect to a transaction, said Munter.

E&Y’s Ostling looked at the potential shift to IFRS from a different perspective. She called the move to IFRS a “once-in-a-lifetime opportunity to take a clean sheet of paper and change your approach to accounting.”

Munter agreed, explaining that companies have different philosophies when it comes to adopting IFRS. Some stay anchored in their local GAAP, and work hard to minimize the differences between the older standards and IFRS. Others start with a clean slate and apply best practices to become more transparent.

For example, under IFRS, a companies that intends to become more transparent in its financial reporting may analyze what is happening with a lease agreement in terms of motivating factors and the risks and rewards the parties are incurring, rather than just using U.S. GAAP’s bright line tests to record the transaction.

The SEC is getting a first look at how some companies handle the switch to IFRS. In November, the regulator eliminated the requirement that non-U.S. companies must reconcile their financial results with U.S. GAAP. So far, 37 companies have taken the option to report results using IFRS rather than GAAP.

The road to IFRS may be a bumpy ride, so panelists were vocal about what they thought should be a top priority for FASB and IASB: the conceptual framework.

The framework is a gargantuan joint effort by FASB and IASB to redefine major concepts, like full fair value and revenue. It is being developed simultaneously with the convergence project to merge U.S. GAAP and IFRS into a single set of global standards.

When completed, the framework’s principles will “put pressure on fundamental elements of the financial statement — assets, liabilities, revenue and expenses,” said Gannon. Indeed, without the framework, preparers and auditors “will be tempted to fall back on GAAP rules,” posited KPMG’s Munter.