The SEC's IFRS Proposal: Be Careful What You Wish For

by: Belvedere

Last Wednesday, SEC Director of the Division of Corporation Finance John White delivered a speech at the Practicing Law Institute Conference in New York which covered “Foreign Issuers & the U.S. Securities Laws 2007: Strategies for the Changing Regulatory Environment.”

He touched on the SEC’s recent announcement of a forthcoming Concept Release that would give companies a choice of publishing their financials in either IFRS format or U.S. GAAP format, and the criticism that the proposal stirred:

… Already, however, some vocal critics have attacked the idea of allowing U.S. companies to choose to report either in IFRS as published by the IASB or in U.S. GAAP. I would note that I do not think these outcries are in any way a criticism of IFRS or of U.S. GAAP; they seem to be complaints specifically about the idea of companies having a choice. Former Chairman Arthur Levitt was quoted in last Saturday’s Wall Street Journal as saying, “The menu system, I believe, leads to earnings management, and that should be avoided."

In response, though, I would just reiterate that we are at a very early stage and any concept release will actively seek comment from the whole range of interested parties. We’re happy to listen to anything anyone has to say on this topic. We also have heard, at our Roundtable and otherwise, that if U.S. companies have a true choice between IFRS and U.S. GAAP, then market forces may well be the driver leading companies to select one accounting system over another. In other words, companies will not have the luxury of choosing one accounting system over another just because of the effect on some particular line item. Rather, analysts, investors, rating agencies, and the like will have a significant impact in driving companies to report under a particular system based on their peers and industry practices in order to promote comparability (and credibility) for the benefit of users of financial statements…

Be careful what you wish for, as the saying goes, because you just might get it. Giving companies a choice of standards - even though the full set would require compliance, not “menuing” - and expecting “market forces” to drive competition to one accounting system over another, might have unintended consequences. It could very well lead to companies supporting one standard-setter or another based on their view of how much they can push it around. That’s not something likely to lead to robust standards and reporting.

One very good point was contained in his speech:

I understand that U.S. colleges are generally not teaching IFRS in accounting programs, and IFRS is not tested on the national CPA exam.

It’ll be very interesting, indeed, if companies that are having trouble now finding technically competent personnel to recruit for their regular U.S. GAAP-based reporting wait until they try finding qualified staff if they decide to switch to IFRS.

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