Risk & Compliance

Donaldson, Levitt Diverge on Convergence

A panel discussion among four former SEC chairman calls forth strong views on U.S. and international accounting standards, different Sarbox guideli...
Helen ShawFebruary 22, 2006

Two former chairmen of the Securities and Exchange Commission, William Donaldson and Arthur Levitt, offered differing opinions Wednesday on the benefits and likelihood of international convergence of accounting standards.

During a panel discussion that also included former SEC chairmen Harvey Pitt and Richard Breeden as well as Levitt, Donaldson expressed confidence that the Financial Accounting Standards Board is on course to adopt International Financial Reporting Standards. “The long-term goal of a common standard is a good thing throughout the world, particularly for U.S. investors,” he said. “The bringing together of two systems is proper and reflects globalization.”

For his part, Levitt, now a senior advisor at The Carlyle Group, doesn’t believe it’s important to have one accounting system. He also noted that over the years, the rhetoric in the convergence debate has changed. “Before, it was U.S. GAAP — period. We do not realize accounting standards have changed,” Levitt observed. “Today, certain accounting standards appear to be better than U.S. GAAP,” a view which is part of a natural evolutionary process, he said.

After the meeting, Levitt told CFO.com: “You can’t [converge], but we can look for better standards. [International convergence] is politically and culturally impossible.”

Wednesday’s panel discussion was held at the Council on Foreign Relations in New York and sponsored by McKinsey & Co.; Benn Steil, a senior fellow at the Council on Foreign Relations, served as the moderator.

The Sarbanes-Oxley Act also stirred up considerable debate. Levitt said he opposes plans that would indefinitely impose different Sarbanes-Oxley standards on companies, depending on their size. “These are public companies that passed a threshold,” he asserted, adding that investors in a small company that fails should enjoy the same protections as large-company investors.

Donaldson noted that while Sarbox’s benefits are substantial, initial compliance with the law was flawed. “We told Corporate America, you do not have to count paper clips,” he noted, adding that he expects compliance costs to decline and companies to start applying the law more intelligently.

Breeden amused the audience when he took note of the corporate whining about the costs of implementing Sarbanes-Oxley, particularly the section concerning internal control over financial reporting. “The problem is not the law, but the application of it,” he said. “The cost of Section 404 is one ten-millionth of executive compensation, but I do not hear people saying, get rid of executive compensation.”

Also on the topic of executive pay, Steil, the moderator, noted that the SEC may exempt foreign companies from its recent proposal on executive compensation and related-party disclosure. He asked Pitt, “Isn’t the SEC saying to U.S. investors, don’t look to us for standards, go to Europe or Hong Kong?”

The United States doesn’t have a monopoly on stringent standards, answered Pitt, and there are different approaches that are more creative than ours. “The global marketplace will differentiate those companies that comply with higher standards,” he added. “We are witnessing the global regulatory system is increasing and elevating standards.”

Despite the lively discussion, the four former SEC chairmen — who steered the agency through a combined 16 years — evinced relatively few strong differences of opinion. Indeed, Levitt chose one word to describe what each of them grappled with during their respective tenures: balance. “We have wrestled with how far you go [in] balancing investor and corporate interests, which do not always coincide,” he said.