Global Rules for Auditors? Don’t Hold Your Breath

Global Rules for Auditors? Don’t Hold Your Breath

JUNE 12, 2014


Chris Cox, who as chairman of the Securities and Exchange Commission tried to bring international accounting rules to the United States, has now done an about-face.

“The first thing we should give up is the counterproductive fiction that the United States is going to replace Generally Accepted Accounting Principles with International Financial Reporting Standards,” he said in a speech at a conference in Pasadena, Calif., last week.

“The prospect of full-scale I.F.R.S. in our lifetimes has ceased to be. It is bereft of life. It rests in peace.”

He recalled that as chairman he had begun a process intended to eventually require United States companies to switch to international accounting rules. “But that was several years ago, and a great deal has changed since then. Today, I come to bury I.F.R.S., not to praise them.”

As it happens, that speech came at a time when the current S.E.C. chairwoman, Mary Jo White, has raised hopes among I.F.R.S. supporters that she might be more open to wider use of international rules than was her predecessor, Mary L. Schapiro.

I.F.R.S. is not dead in the United States, although there is little or no chance of a complete conversion to international rules, something Mr. Cox envisioned when he led the commission. It seems possible that some United States companies will be allowed to convert to international rules if they wish to do so.

Whether or not his crystal ball was clouded, Mr. Cox could have made better disclosures in his speech to the S.E.C. and Financial Reporting Institute Conference.

He devoted much of the speech to an attack on proposed rules to change the accounting for leases. He went into considerable detail about what was wrong with the proposal, which would force many companies to show leased items, like cars and computers, as assets, along with an offsetting liability of the amount owed on the lease. The widespread view among accountants has long been that many leases are little more than disguised financing arrangements and that the assets and liabilities should be reported, just as they would be if the company had bought the item and borrowed money to pay for it. Mr. Cox does not like the proposal.

He’s entitled to his view, of course. But he might have mentioned that he had previously been paid to voice that opinion. In a comment letter sent to the standard-setting boards considering whether to change the rules, Mr. Cox, now a partner in the law firm Bingham McCutchen, made many of the same arguments he made in the speech. That letter said he had been asked to consider the issues by “our client, Majestic Realty Company.”

When I suggested to Mr. Cox that he should have mentioned the fact he had a client involved in the dispute, he seemed surprised. “No one paid me to make that speech,” he said. “Those are my views.”

In the speech, he attributed much of the problem with the proposed rule to the International Accounting Standards Board, which sets international rules, rather than to the Financial Accounting Standards Board, which sets United States rules and has been closely cooperating with the international board, although it now appears likely that the final rules issued by the two boards will differ in some respects.

The proposed rule, he said, had a “heavy perfume of I.F.R.S.” He complained that the international board “isn’t listening to American stakeholders” and said the United States board is “becoming more like the I.A.S.B.”

All of that reminded me of the way French executives used to complain about the I.A.S.B. when it was adopting a rule on accounting for derivatives. They said the board was overly influenced by Americans. In 2003, I heard Claude Bébéar, the chairman of the French insurer AXA, describe Sir David Tweedie, the chairman of the international standards board at the time, as “a super-superayatollah” who was not responsive to European opinion.

The French later persuaded the European Union to allow French banks to ignore part of the accounting rule that was eventually adopted by the board.

In 2007, when the S.E.C. decided to allow foreign companies to file financial statements using international rules without providing additional information on how the statements would have looked under United States rules, Mr. Cox, who was the chairman, emphasized that only companies that followed the full international rules would be eligible. S.E.C. officials made clear they were offended by the European Union action.

A year later, the S.E.C. issued a “road map” for eventual full acceptance of international rules in the United States. Mr. Cox said, “A global set of high-quality accounting standards would be an international language of disclosure, transparency and comparability.” He called it “a goal worth pursuing.”

John W. White, whom Mr. Cox had chosen to be the director of the commission’s division of corporation finance, told a group of financial executives that “I truly believe that the endpoint will be U.S. issuers using I.F.R.S. and that it is time to move in this direction.”

The financial crisis put that on the back burner, and Ms. Schapiro, Mr. Cox’s successor at the S.E.C., showed little interest in the idea. After long delays, the S.E.C. issued a staff report in 2012 that showed a distinct lack of enthusiasm for moving to the international rules. It said adopting those rules was “not supported by the vast majority of participants in the U.S. capital markets.”

In a speech last month, Ms. White, the current S.E.C. chairwoman, said that international regulators wanted to know what the United States was going to do, and that while she had no answers to give at that time, “I hope to be able to say more in the relatively near future.” She added that she agreed with a statement by Ms. Schapiro that “the role the United States plays in the development of international standards must be an important consideration.”

Ms. White, by the way, is married to John W. White, the former head of corporation finance at the commission. The S.E.C. this week said she was traveling and not available to comment. Mr. White, now a New York-based partner in the law firm of Cravath, Swaine & Moore, declined to discuss the issue.

At the moment, there is substantial United States representation in the setting of international standards, and some Europeans have said that should end if the United States remains aloof. Harvey Goldschmid, a law professor at Columbia University and a former member of the S.E.C., is a trustee of the group that oversees the international board, and the S.E.C. takes part in the governing board. He has voiced fears that if the Americans are forced out, the quality of international standards could deteriorate and the ability to enforce them consistently could diminish.

In January, the parent of the F.A.S.B., the Financial Accounting Foundation, announced that it would contribute $3 million to the parent of the I.A.S.B. Persons close to the foundation said the S.E.C. had strongly encouraged the contribution.

Advocates of international standards took heart from that contribution, which may have been aimed at preserving United States influence until the S.E.C. acts. While there seems to be no chance that the S.E.C. will require the use of international rules — there is far too much opposition to that, particularly from smaller companies — it is possible that the S.E.C. could decide to allow United States multinational companies that wished to do so use the international rules. An argument for that move would be that United States companies could use the same rules as their main foreign competitors, making comparisons easier for investors.

In Japan, companies can now choose among three sets of rules — Japanese GAAP, United States GAAP and I.F.R.S. In an interview, Hans Hoogervorst, the I.A.S.B. chairman, said he expected his board’s rules would gain market share as time goes on.

Far from reaching the goal of “a global set of high-quality accounting standards,” the world may be heading to a marketing contest where companies can choose the rules they like.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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