Is there anybody out there? Financial regulators and accounting standard–setters sometimes wonder.

At a panel discussion in July, Wayne Carnall of the Securities and Exchange Commission’s Division of Corporation Finance chided companies for their tepid response to the SEC’s call for comments on the proposed adoption of international financial reporting standards (IFRS) in the United States — even after the regulator gave interested parties two extra months to express their views. Half of the 240-odd comment letters the SEC subsequently received were from registrants, meaning that “only about 1% of the companies in the United States that would be impacted by this change” have spoken up, Carnall said. Only a third of the letters the SEC received came from nonfinancial companies.

Across the Atlantic, the silence of nonfinancial companies on issues of major significance is also a worry. “There is some reluctance by nonfinancial companies to comment on issues that are not perceived as being of immediate concern to them,” says Philippe Danjou, a board member at the London-based International Accounting Standards Board (IASB). After an April request for views by the IASB regarding proposals by the Financial Accounting Standards Board to alter fair-value measurement and impairment practices, the IASB collected 74 letters, none of which came from nonfinancial companies.

Of course, accounting for financial instruments — the crux of the fair-value and impairment controversy — may not interest industrial companies, because it does not have a material impact on their balance sheets. Nonfinancial companies do tend to speak up in larger numbers on proposed changes to the rules on revenue recognition, leasing, pensions, and the like, Danjou says. But Carnall of the SEC notes that the response from companies on “relatively small, narrow” accounting issues has dwarfed that related to the international convergence project, which is no less than “a proposal to change the reporting framework in the United States.”

Missed Opportunities?

By largely limiting their comments to official bodies to narrow, technical matters, are corporations missing an opportunity to participate more broadly in the future course of accounting? “If they have something to say, they should speak up,” urges Danjou. Politicians, banks, and assorted lobbying groups have certainly not been shy when making their opinions known about the future of fair value, the convergence of international standards, and much else besides. Should such fundamental issues be left for them to discuss among themselves?

Finance executives in France think not. Two of the country’s main associations for finance and accounting executives, the APDC and the DFCG, issued a joint communiqué in April encouraging members to participate more actively in the debate, lest financial-services firms shape standards to suit themselves. “Accounting standards are for all companies, the majority of which are nonfinancial,” the statement read. “It would not be appropriate to entrust them to vested interests that are mostly financial.”

Holler Back

As for the letters that have been sent in response to the SEC’s appeal for views on IFRS in the United States, what are the corporate authors after? Do they think that speaking up will make a difference?

A number of finance executives from nonfinancial companies — such as General Electric, Eli Lilly, Cisco Systems, and Best Buy — did write in support of the switch to IFRS, typically expressing some reservations and suggesting changes. Wallace Macmillan, former CFO of Central European Media Enterprises (CME), a Bermuda-based, Nasdaq-listed broadcaster with operations in seven European countries, noted that allowing a domestic registrant like CME to use IFRS makes sense from a “pure efficiency perspective.” “It takes costs and inefficiency out of the system and enhances the control environment,” Macmillan says. (Macmillan spoke with CFO shortly before an amicable departure from CME in the summer.)

None of CME’s local businesses reports under U.S. GAAP locally, requiring an arduous reconciliation process to feed the group-level accounts under American standards. Most of CME’s main competitors report under IFRS. Easier comparability between CME and its rivals would benefit investors, Macmillan says.

One point he wanted to get across in his letter to the SEC was that the regulator was too restrictive in defining the types of companies that would be allowed to use IFRS before 2014. Although he respects “the difficulties of moving such a huge market as the U.S. along this new route,” he is happy for his company to pave the way for others, proving IFRS’s viability by switching as soon as possible.

The letter didn’t elicit a direct response from the SEC, but Macmillan didn’t expect one. The impact of his arguments will be seen when the next stage of the regulator’s IFRS road map is announced, he says. “I’d like to think that they have at least been considered,” the CFO says. “They were intended to be constructive and supportive of the process.”

By contrast, letter-writer David Adante is as opposed to accounting convergence as Macmillan is in favor of it. In a colorfully worded, 11-page letter to the SEC, the CFO of The Davey Tree Expert Co., a $596 million Ohio-based gardening-services firm, calls for the IFRS conversion process to be “indefinitely suspended.” Adante says IFRS proponents are “infatuated” with its principles-based approach, which he warns will lead to dangerous vagueness when it comes to interpreting standards, with “choose-as-you-wish implications” for preparers and higher “Auditor Say-So” costs. The switch to IFRS would cost Davey Tree $2.6 million over the first three years, Adante estimates. These costs, he writes, “will be far in excess of any calculated benefits, real or imagined.”

Similarly, Gretchen Haggerty, CFO of U.S. Steel, writes that switching to IFRS would cost the company “tens of millions of dollars and require significant internal resources” — money and resources U.S. Steel cannot afford, she says, given the global economic and financial crisis.

Haggerty specifically objects to IFRS’s ban on last-in, first-out (LIFO) inventory valuation, which would result in U.S. Steel and other companies paying “significant cash tax payments.” “For this reason, U.S. Steel will not support a transition to lFRS until there is a definitive solution to handling LIFO which does not have a negative financial impact,” she writes.

The Write Stuff

Clearly, CFOs at nonfinancial firms harbor strong opinions when it comes to convergence. Why, then, do so few express them publicly? Even if comments like Adante’s and Macmillan’s are diametrically opposed, it makes for better rulemaking if regulators and standard-setters at least hear them.

When Macmillan joined CME, it was his first experience with U.S. GAAP. It was also his first experience with another sort of comment letter, the kind that the SEC sends to companies to question certain aspects of their accounting. Although these letters are “sometimes a pain in the neck,” the CFO reckons that it is a “healthy” process. “It takes you a step further in terms of expecting that everything you do will have to be justified,” he says. If letters provide a useful way for the SEC to keep companies honest, shouldn’t those same firms jump at the chance to return the favor?

Jason Karaian is senior editor for financial services at the Economist Intelligence Unit.

A Divergence on Convergence

While most CFOs have said little publicly about U.S. adoption of international financial reporting standards, some have spoken up. Below are excerpts from comment letters to the SEC.

“The question only remains as to when IFRS will be adopted, not if it will be adopted…. the Commission should consider broadening the population of companies that may elect to adopt IFRS for their consolidated U.S. public filings prior to the proposed 2014 requirement, perhaps even eliminating the size requirement from the Roadmap…. there are clear benefits to both the
[c]ompany and to investors in allowing us to adopt IFRS as soon as practically possible.”
— Eduardo Cordeiro, CFO, Cabot Corp.

“…it is imperative for the U.S. to play a leadership role in a rapidly globalizing world and we feel that if the U.S. remains outside the IFRS framework, then we will somewhat compromise our ability to participate in, and influence, important matters related to the overall operation of global capital markets.”
— Martyn Webster, VP of Finance, XenoPort Inc.

“…the large majority of U.S. public companies, like Darden, serve primarily domestic customer bases and are adequately capitalized without tapping overseas capital markets. Rather than mandating IFRS for all companies, we believe it would be more appropriate to allow large multinational organizations to adopt IFRS on a voluntary basis.”
— C. Bradford Richmond, CFO, Darden Restaurants

“In our opinion, there has been no groundswell of public opinion promoting a conversion to IFRS. In fact, we have never heard an investor in our company, any stock analyst covering Hertz, or any lender with which we do business suggest to us that they would prefer we report our results in IFRS.”
— Elyse Douglas, CFO, The Hertz Corp.

(Comment letters on the so-called road map for IFRS are available on the SEC’s Website, http://www.sec.gov/comments/s7-27-08/s72708.shtml.)