The CPA Journal

INTERNATIONAL ACCOUNTING

March 2002

A Conversation with James J. Leisenring, IASB Member

By Donald E. Tidrick, PhD, CMA, CIA, CPA, associate professor of accountancy, Northern Illinois University

James J. Leisenring was recently appointed to the new International Accounting Standards Board, following 13 years as a member of FASB, where he served as vice chair. Leisenring is a former member of the Auditing Standards Board, which he chaired for three years. He also served as the first chair of the FASB’s Emerging Issues Task Force. He is a former partner of Bristol, Leisenring, Herkner & Co. in Battle Creek, Mich., and a former faculty member of Western Michigan University. Donald Tidrick interviewed Leisenring at last year’s annual meeting of the American Accounting Association, held in Atlanta.

The New IASB

The CPA Journal: The International Accounting Standards Committee (IASC), formed in 1973, has received a lot of attention in recent years. How would you characterize the increasing momentum of international accounting standards?

James J. Leisenring: The fundamental driving force has been the capital markets’ demand for quality information in view of the ever-increasing volume of transnational transactions. There is an obvious benefit to the marketplace if we can achieve a single set of quality standards across national borders. The IASC just happens to have been an organization that was constituted to be responsive to that purpose, and it has been recently reorganized to accomplish that objective.

CPAJ: Would you comment further about that reorganization of the IASC into the International Accounting Standards Board (IASB)? What’s changed?

Leisenring: The former IASC consisted of a relatively large group of standards setters supported by a rather small staff. The board members were only part-time. The new IASB consists of only 14 members, 12 of whom are full-time. In addition, there is an oversight board consisting of 19 trustees, the IASC Foundation. Historically, the IASC was criticized for its lack of independence and cumbersome standards-setting structure. Moving to a smaller, full-time board with a much larger staff should make the organization more efficient and more independent, which will be critical to gain credibility internationally.

As a result, the standards-setting process will probably become much more staff-driven than in the past. The public “due process” will be similar to that of the IASC: Meetings will be open to the public, task forces will be established for major projects, and there will be a comment process, perhaps including periodic public hearings. U.S. observers will note the similarity to FASB. The structure may look similar, too: the IASC Foundation is analogous to the Financial Accounting Foundation.

CPAJ: Has there been much friction among competing interests in changing the structure of international accounting standards setting? Was there a conscious effort to balance American and European perspectives?

Leisenring: As I understand it, the friction occurred more at the Strategy Working Party in finalizing a proposal for the reorganization. Some wanted a much larger board with a significant number of part-time members—the European view. Hopefully, everyone will support the existing structure and give the IASB a chance to work.

One early debate was over whether the IASB would be geographically representative. Some argued that the board would derive its legitimacy by “representation”; others argued for “competence” and accomplishment, which became the prevailing view.

As for the selection of American Paul Volcker as chair of the IASC Foundation trustees and Briton Sir David Tweedie as chair of the IASB, I think it is merely coincidental. David Tweedie is an excellent choice, and it is merely coincidental that the United Kingdom is seen as politically in between Europe and the United States. Volcker, a former Federal Reserve chair, is an eminent man in finance and an excellent choice in terms of raising funds and enhancing the stature of the organization.

CPAJ: How are these activities going to be financed, and how does the IASB’s budget compare to FASB’s?

Leisenring: The IASB’s budget will be comparable to FASB’s. Obviously, a 14-member board will cost more than a seven-member board, and travel costs for an international body will be more significant.

The IASB will rely relatively more heavily on contributions from other organizations in the early years, since it does not have the publications and other products for sale that FASB does. The public support and commitment to financing the IASB have been very gratifying. The Big Five have been very supportive. Major companies worldwide will be asked to contribute to the IASB’s activities, whereas most of the FASB’s corporate support naturally comes from the United States.

CPAJ: Would you comment about the composition of the IASB, the members’ responsibilities, and how members were selected?

Leisenring: The IASB is comprised of 14 standards setters [see Exhibit 1]. In addition to myself, the United States is represented by Tony Cope, Mary Barth, Bob Herz, and Tom Jones. Tony is a former FASB member. Mary is a faculty member of Stanford University. Bob is a partner in PricewaterhouseCoopers. Tom, originally from the United Kingdom, is a retired executive of CitiGroup and has been named IASB vice-chair. Mary and Bob hold part-time positions, so they have a somewhat different role than the full-time members.

Of the twelve full-time members, seven are designated as liaisons to the domestic standards-setting bodies for Australia and New Zealand, Canada, France, Germany, Japan, the United Kingdom, and the United States. I will serve as the FASB liaison. The preponderance of IASB members have had experience in standards setting, and many of these members come from what used to be called the G4+1 countries [Australia, Canada, New Zealand, the United Kingdom, and the United States]. That emphasis was inevitable, since that is where so much standards-setting experience resides. Whether that pattern will hold over the long term, I cannot say.

The Foundation’s trustees selected the board members. A selection committee interviewed many candidates, probably more than 60, from around the world.

Standards and Convegence

CPAJ: You have been described as an outspoken critic of international accounting standards.

Leisenring: [Laughing] I’m not sure that characterization is accurate or complimentary, although I suppose I have been outspoken. Fundamentally, I have been a longstanding supporter of international standards, including during my years at FASB. I have been critical of the existing set of international standards and argued that it is not sufficiently robust to be useful, for example, in the United States’ capital markets. And that is a view I still have. International standards are not yet adequately comprehensive and remain too ambiguous. They must be improved and it is time to begin that process.

CPAJ: The IASB recently announced its initial agenda, which consists of nine technical projects, including accounting for share-based payments. American businesses have bristled at revisiting stock option accounting. Since the IASB’s stated goal is convergence, why was this added to the agenda and what will be the result?

Leisenring: First of all, there is no convergence now, despite what one may have read to the contrary. We do not account for all stock options in the United States based on their “intrinsic” value, because we have so-called variable option plans. The rest of the world’s literature does not even necessarily account for cash SARs [stock appreciation rights] as compensation expense. The drive to put share-based payments on the IASB agenda was led by the Europeans, who do not believe the U.S. standards setters have properly thought through all of the issues.

Some are concerned that if the IASB adopts a superior standard, FASB and the United States may not embrace it. I can’t predict that. However, I think our goal should be to converge around the highest standards, not the lowest common denominator. As I have said consistently, I don’t think the U.S. stock-based compensation accounting standards are exemplary—I dissented to the disclosure-only approach of SFAS 123. This could become one of those areas where the international standard is superior to the U.S. standard. If the IASB does its job well, there could be many more.

CPAJ: There is a widespread view in the United States that our financial reporting standards are the best in the world and that the rest of the world should embrace them. In international circles, is the United States perceived to be an opponent or a proponent of global accounting standards?

Leisenring: Certainly, in view of activities the last few years, FASB would absolutely be seen as a proponent of improved international standards and a single set of standards to be used internationally and domestically. They have never equivocated on that point. The SEC has supported global standards, as well. From my brief contact with committees of Congress, including presenting testimony this summer, I see nothing but support for efforts to improve international standards.

But it is important that the process of convergence result in an improvement, not a reduction, in the quality of financial reporting. There are some areas of U.S. standards that could be improved, where international standards seem to be more rigorous and more easily applied. We in the United States must recognize that we do not have all of the answers. We can still make some improvements.

CPAJ: The SEC has stated repeatedly that international accounting standards must constitute a comprehensive, generally accepted basis of accounting; be of high quality; and be rigorously interpreted and applied. Are these criteria sufficiently precise to be meaningful to the IASB?

Leisenring: The IASB’s conceptual framework embodies the notion of high quality, so that term is meaningful and contributes to comparable financial reporting. I am less certain what “rigorously interpreted and applied” means, since that involves auditing, enforcement mechanisms, and regulatory environments, which obviously are not uniform around the world. I have paid more specific attention to the SEC’s comments about accounting standards—and, I might add, their comments have been constructive and helpful.

CPAJ: In the U.S., we have had a recurring debate about “big GAAP” versus “little GAAP” for companies of different sizes, although GAAP makes no such distinction. Has that been an issue internationally, in terms of national economic development?

Leisenring: That issue has arisen in two respects. As the question suggests, less-developed countries do tend to advocate a “little GAAP.” It is definitely an issue associated with emerging nations, but it is more than just that.

Domestic companies within some of the national jurisdictions argue that those companies which are not involved in cross-border financing should not have to follow all of the rigorous international accounting standards associated with multinational corporate activities. We have had debates about that issue recently with our advisory council. Do people want a distinction in the recognition and measurement principles, a distinction in the level of disclosure, or improved educational materials to help them better apply international accounting standards? I don’t know the answer, but I believe this is an important question.

The emerging nations, in particular, have been warned that being labeled “second-class citizens” in their financial reporting would restrict their access to the capital markets and significantly delay their economic progress. This is similar to the U.S. debate, where some would say they should not have to follow SFAS 133 on derivatives because of its complexity. But, if they have invested in complex financial instruments, why should the accounting standards be waived? One person complained to me about having to follow the FASB standards on securitization; but, in my view, everyone trading in asset-backed securities should have to adhere to the same rules. This debate tends to go in circles and it will take some rigorous analysis to clarify the issues.

CPAJ: How critical is the issue of enforcement and the infrastructure supporting international accounting standards? Who is likely to be the enforcer? The International Organization of Securities Commissions (IOSCO)? The SEC?

Leisenring: It is far more important than most people recognize. Standards are often criticized for not being robust, when, in reality, the standards are fine, but application or enforcement is inadequate. Unfortunately, there is no evidence that an effective enforcement mechanism is imminent. I have been told that IOSCO has no real power to serve in that role. The SEC ends up acting as an enforcer when foreign companies file in the United States. In fact, the SEC has actively critiqued companies’ application of foreign GAAP to begin their 20-F reconciliations—forcing companies to restate French GAAP, or German GAAP, before beginning their reconciliation to U.S. GAAP. That is a perfectly legitimate activity for the SEC, but they are one of the few organizations in the world to do so.

From the IASB’s perspective, this is a serious problem, because a lack of enforcement may cause standards to be unfairly denigrated. Obviously, to achieve high-quality financial reporting, we must have high-quality accounting standards, but we must also have high-quality auditing, high-quality enforcement, and high-quality analysis. Those ingredients are not necessarily all coming together at the same time, although I should add that IFAC is working to enhance international auditing standards.

Author’s Note: IFAC, through its transnational auditor committee, is also actively promoting the “forum of firms,” an organization of international firms that audit cross-border financial statements. Member firms agree to meet certain requirements, such as having appropriate quality-control standards and periodic independent quality reviews. The goal is to raise the bar for firms actively engaged in international audit practice. The 30 or so largest firms involved with cross-border transactions have been very supportive of this effort, as have smaller firms doing transnational work, in Europe, for example. In addition, IFAC has recently announced the formation of an independent Public Oversight Board to oversee IFAC’s activities. It is important to note that IFAC is completely separate from the IASB; the IASB focuses exclusively on international accounting standards.

Planning for the Future

CPAJ: What are the respective roles of the IASB’s Standards Advisory Council and Standards Interpretation Committee?

Leisenring: While there are certainly subtle differences, the Standards Advisory Council functions very much like FASB’s Financial Accounting Standards Advisory Council (FASAC). The Standards Advisory Council is a larger group, in part because it is designed to achieve geographic participation from countries that might not otherwise feel represented on the IASB. I was very impressed by the initial Standards Advisory Council meeting, particularly the quality of the people and their comments.

The Standards Interpretation Committee (SIC) is likely to change. We will propose that the SIC’s mandate be expanded to permit it to address “emerging” issues (like the EITF), rather than restricting it to interpreting existing international accounting standards. Although this will increase the SIC’s authority, the IASB will still have to clear its conclusions, which will then have the same status as the standards.

CPAJ: Does the IASB inherit a conceptual framework that will be useful in guiding its standards-setting activities?

Leisenring: The IASC’s conceptual framework is fairly robust and similar to FASB’s. We have several conceptual framework projects on our research agenda, including one that will compare, in a very detailed way, the elements, definitions, and recognition criteria of different countries’ conceptual frameworks (such as the former G4 countries) to look for impediments to convergence. We are trying to determine whether any changes in the IASC conceptual framework are warranted to facilitate convergence. Although I do not think so, I cannot be positive of that. So, this should be an interesting exercise.

CPAJ: What ongoing role do you see for a domestic accounting standards-setting body, such as FASB?

Leisenring: One could argue that FASB’s own 1998 report, “International Accounting Standard Setting: A Vision for the Future,” suggests the board accepts that it may not be needed in the long term, at least not as presently constituted. But such a scenario is not imminent. If we are simply looking for a single set of accounting standards, there is no apparent reason to have multiple standards-setting bodies.

The main goal of some is to eliminate the need for reconciliation to U.S. GAAP. We have heard people say, “The IASB should not have a standard more rigorous than the FASB’s.” If that were the case, we could simply shut down the IASB. I don’t accept that, and neither does the IASB or FASB. We ought to work to improve the standards, both domestically and internationally. If we can accomplish that and the reconciling items go away, then the reconciliation won’t matter very much.

CPAJ: Is there anything else you’d like to tell readers about the IASB and the international accounting standards-setting process?

Leisenring: I would encourage people to remember that they will have the opportunity to participate in the due process activities of the IASB, and they should do that. The IASB will significantly affect the FASB’s agenda, including the prioritization of topics. In some cases, FASB might take on a project based on its potential for convergence which might not otherwise have been a high priority. That will probably frustrate those who might favor different priorities.

People will need to balance the desire to improve U.S. accounting standards with the desire for convergence. Because the U.S. has, by far, the most robust set of accounting standards—bigger and more comprehensive—these standards will need to change. Some of those standards are 20 or 25 years old, and it is unlikely that a current standards-setting body would develop them today. For example, the IASB has issued two discussion documents on industry-specific topics: insurance contracts and extractive industries (such as mining, oil, and gas). Would FASB choose insurance accounting for its own agenda? I doubt it, but they might do so for convergence purposes. FASB members are aware of this issue and they welcome it, because they support convergence, but it will make their jobs more challenging.

Some FASB and IASB constituents are incredibly well organized to resist change. There may be pockets of resistance to be addressed, particularly among smaller public companies. Nonetheless, most companies are supportive and understand that convergence can save them a lot of headaches and money.

CPAJ: Thank you, Mr. Leisenring, for sharing your views. It will be interesting to see how these issues unfold.

Leisenring: Five years from now these issues should be even more interesting and we should do this again.

See Exhibit 2 and Exhibit 3 for this interview.