Stop the presses: accountancy is news. It’s official. Rarely has the financial press paid much attention to accounting issues, but over recent months significant progress has been made towards that holy grail of financial reporting: a set of globally-accepted accounting standards. The decision of Iosco, the club of stock market regulators, to recommend that its members accept 30 core principles drawn up by the International Accounting Standards Committee (IASC) was heralded by superlatives such as ‘historic’ and ‘ground-breaking’ when announced at the Iosco conference in Sydney in May.
The agreement followed years of close cooperation between Iosco and the IASC on establishing core standards, a process that began back in 1995.
According to an Iosco spokesman, this deal does not mark the end of the debate over international accounting standards, rather one stage of a three-leg mission to harmonize global reporting standards. ‘We have already come to an agreement on international disclosure practices two years ago at our conference in Kenya. Iosco has just approved core global accounting standards, but we have no agreement on the audit leg yet,’ he says. Certainly the approval process seems to have been a lengthy affair. ‘The core principles were agreed on following an assessment by the Iosco technical committee. The resolution to support the IASC principles had also to be approved by our emerging markets committee,’ confirms the Iosco spokesman.
But Iosco and the IASC haven’t been the only ones announcing plans to consolidate national accounting standards; the European Commission (EC) has got in on the act too. A month after Iosco made its declaration, the EC unveiled a plan to make company accounts across Europe conform to its own set of international accounting standards, derived from the IASC’s core principles.
IROs at multinational companies may be wondering why it has taken so long for progress to be made on international accounting rules. The IASC was set up back in 1973, when flared pants were all the rage and the calculator was the pinnacle of high-tech innovation. The standards-setting bodies have been trying for years to work towards convergence, claims Allan Cook, technical director of the UK’s Accounting Standards Board (ASB). ‘Iosco first asked for improvements to IASC principles 15 years ago and it’s been raising its requirements ever since,’ he says. ‘It’s been like a carrot in front of the donkey.’
According to John Kellas, technical partner at KPMG, no single factor can be credited with pushing change along. ‘Markets are more global and it is becoming more important for major companies to list in different parts of the world,’ he says. But increasing political and economic harmonization in Europe may also be driving change. ‘We now have the euro, as well as the planned stock market mergers across Europe and beyond. So there’s now a lot of pressure for the authorities to develop a single set of accounting standards,’ he adds.
Cook also believes the changing face of international capital markets is a major force. He echoes IROs across the world when he says, ‘It is difficult if you have to report the same facts by different methods. And life would be a lot easier for the financial community if you only had one story to tell. The fact is that today, the place of reporting matters less and less.’
No surprises
We now have global trade, firms have global interests and, thanks to global shares and depositary receipts, more and more companies are listing outside of their home territory. But while the Iosco-IASC deal removes a major obstacle to the adoption of international standards, sticking points remain. A major concern is that Iosco’s declaration leaves scope for national regulators to effectively veto the parts of the IASC’s core principles they disagree with. This was no surprise to the IASC, claims technical director, James Saloman. ‘It was always understood that national regulators would have control over the implementation of international accounting standards,’ he says.’
The IASC constitution presupposes that national standards setters will still play a role. Seven of the twelve IASC board members liaise closely with national bodies,’ adds Cook of the ASB. For him, national accounting bodies are key to ensuring that international accounting standards remain acceptable to all, not just to one hegemonic country. ‘If there are no national standards bodies, what’s to stop international accounting standards just becoming a US export?’ he asks.
Perhaps another transatlantic quarrel is in the offing. For two regions that proclaim themselves political allies, Europe and America don’t seem to agree on much when it comes to international trade and finance. Accounting standards are no exception. Recent years have seen a power struggle between the Europeans and the US SEC over the precise shape of international accounting standards. While the SEC proclaims it wants rules of ‘equivalent quality’ to its own, critics have accused them of arrogantly trying to enforce their own principles on overseas markets. Cook believes that the US now realizes it needs the support of its overseas counterparts if international accounting standards are to succeed. ‘For a time there was a danger that SEC standards would become the de facto global rules. But now even the Americans acknowledge that the rest of the world would not be happy if their standards were imposed elsewhere,’ he says.
Caught in the crossfire is the IASC, which has been trying to find a middle ground acceptable to all sides. According to KPMG’s John Kellas, the US has a lot of influence over international accounting standards. ‘The goal of international harmonization will never be achieved unless the standards are acceptable without reconciliation in the US,’ he says. ‘It’s easy to see how the European Commission has grown concerned that the IASC will become obsessed with the SEC, giving the US disproportionate influence.’
But Kellas warns it is worth remembering that US accounting standards are themselves a very developed, strong set of rules, and that the SEC will not want to see these diluted by international standards.
Tight-lipped
While the EU has declared its hand, conclusions are still awaited from the SEC, which launched an exercise in February seeking comment on whether it should let foreign companies list in the US under international accounting rules. The consultation period ended in April, but there is no sign yet of any SEC declaration. ‘On the basis of the input, our staff will decide what to recommend on behalf of the commission,’ says a tight-lipped SEC spokesman. ‘There is no statutory time regulation, so I would advise people interested to watch our web site,’ he adds.
The SEC might not have released its thoughts yet, but the EU has, ruffling a few feathers in the process. For Saloman of the IASC, the EC’s declaration is ‘a very significant step. Probably as significant as what happened with Iosco.’ But he won’t be drawn on whether the IASC perceives Europe’s plan to pick and choose certain core principles as a threat to global accounting rules.
Fears have been raised that the EC’s stance could alienate the SEC, resulting in two dominant sets of accounting rules. Allan Cook is one observer who believes that this ‘pick and choose’ approach adopted by the EC could undermine the IASC’s efforts. ‘European companies will be hobbling themselves if they take up a bastardized version of international accounting standards. Europe is very important to the IASC, but it would be very damaging to the IASC, EC and European companies if the EC tried to overrule international standards,’ he says.
Cook adds that in the past, there was much resistance from Europe toward the efforts of the IASC. ‘There has been reluctance to using standards that have been drawn up by a private sector body,’ he says. But for him, the key moment that convinced many across the international financial community that change was needed was when Daimler-Benz began reporting for US shareholders using Gaap. What had been a DM615 mn profit was turned into a DM1.84 bn loss overnight. Accounting standards strike at the heart of the core rules of the game by which listed companies exist. When Daimler-Benz revealed that its profit was a loss by US standards, a few eyebrows were raised.
In common with DaimlerChrysler, Swiss banking group UBS has globally listed shares. According to IRO Christian Grutter, UBS publishes its main accounts in line with international standards. Many stock exchanges already accept international accounting standards, including the London Stock Exchange, but national law often prevents companies from switching to international rules. Having an important American investor base means that UBS must reconcile its financials to US Gaap by producing a full 20F form. ‘It takes a lot of work, but thankfully the task only comes around once a year,’ sighs Grutter. His company began working with international standards many years ago, mainly because the jump from Swiss standards to international guidelines was much easier than making the leap to US Gaap. ‘I would welcome a convergence of international rules and US Gaap. What I want is for the SEC to accept both sets of standards now,’ he says. When Grutter and his team visit investors in the US, they have a presentation that highlights the main discrepancies between the two sets of accounts, a move he recommends to other companies.
Euro shock
UBS may have been able to make the transition from Swiss standards to international rules, but doubts have been raised over how prepared other European nations are. Still, John Kellas points out that a number of other continental companies have already gone over to international rules, and he believes UK companies are in a stronger position than their continental counterparts. ‘The difference between UK standards and international standards are less than with other European countries,’ he says. Allan Cook agrees: ‘The shock for UK firms will be less than for their French or German counterparts. But companies in Europe will be driven to adopt some form of global standards by the markets.’ Companies should keep a close eye out for the latest developments, he warns, as international rules are almost certain to become law for European firms. ‘They should start gearing themselves up,’ Cook says.
Meanwhile the US will not be forced to switch to international standards – the SEC seems likely to accept international standards only if it can set the rules. Even for UBS, what the SEC decides will be crucial. ‘We are effectively subject to US SEC regulations at present,’ says Christian Grutter. ‘All our disclosure standards need to be of a much higher level than anywhere else.’
Clearly, the job is nowhere near finished for the IASC, Iosco and the national accounting bodies. ‘This is a never ending project. The standards will need to be periodically re-evaluated and reviewed as circumstances change,’ Iosco’s man confirms. He gives little away when quizzed on future developments. ‘I am confident there will be a tremendous amount of work on this issue in the future,’ he continues.
Over at the IASC they’re singing from the same hymn sheet. ‘A lot of things will continue to happen, but for now the ball has been passed to the individual regulators,’ says James Saloman. ‘We intend to do a survey of regulators next year. Even though Iosco does not have jurisdiction over its members, we will want to see exactly what the individual regulators have done,’ he adds.
But a lot depends on the new IASC board elected recently. It will be better resourced, more powerful and better prepared to meet the technicalities of standard-setting, Kellas claims. But the new board will not be up and running until next year and reflects the current divisions in the accounting standards debate. The new chairman of IASC trustees at the is Paul Volcker, formerly of the US Federal Reserve. And the new IASC chairman? Sir David Tweedie, chairman of the UK’s Accounting Standards Board.
For the moment all eyes are on the SEC. Will the US approve the current standards or demand further amendments? For KPMG’s Kellas, the debate may boil down to two rival blocks – US Gaap versus IASC standards. ‘That would be better than the myriad of systems we now have, but still not a good outcome.’ Though the haggling over international standards looks set to continue, the international capital markets are unlikely to hang around for the world’s regulators to argue over global accounting standards that are necessary for efficient global equity markets. The accounting profession does not have a reputation for swift reform or radical solutions and though much progress has been made in recent months, the time for back-slapping is over. We now have international markets, international currency and even international forms of government. Globally-accepted international accounting standards should not be too far behind.
