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The
Ride to Going Global
Slow Down for the Bumps
JULY 2008
- The move to International Financial Reporting Standards (IFRS)
is proceeding at full throttle. In November 2007, the SEC eliminated
the requirement for non-U.S. companies to reconcile their financial
statements with U.S. GAAP as long as they use IFRS as adopted
by the International Accounting Standards Board (IASB). U.S.-exchange-listed
companies are increasingly reporting in IFRS as well, and private
companies are closely monitoring the IASB’s
project on IFRS for small and medium-sized entities (SME). Many
observers expect that as more companies outside the U.S. use IFRS,
U.S. companies will feel added pressure to adopt IFRS to remain
competitive in an increasingly global capital marketplace. But
before we board this speeding train to global standards, perhaps
we should consider the bumps that lie ahead.
Funding
Challenges
 The
IASB receives approximately one- third of its funding as voluntary
contributions from the Big Four; another third from the United
States, Japan, and Germany; and the balance from other countries
and organizations. The lack of a stable and guaranteed source
of funding has caused some concern that the IASB’s independence
may be compromised. Some organizations, such as the Council of
Institutional Investors (CII), have insisted that the IASB’s
funding should not depend on contributions from constituents that
have a stake in the outcome of the process. In much the same way
that section 109 of the Sarbanes-Oxley Act requires public companies
to pay fees that support FASB, the CII has voiced their assertion
that the international community should seek to provide the means
for broad-based funding that is “not contingent upon any
particular action that would infringe on the independence of the
IASB.”
Experience
Gap
Most CPAs,
CFOs, controllers, and other financial professionals lack a working
knowledge of, and experience with, IFRS; consequently, the accounting
profession will have to come to terms with this experience gap.
Furthermore, the complexity of converting from U.S. GAAP to IFRS
is not just an accounting project; it also involves information
technology, legal, tax, risk management, and other departments.
This type of project requires implementing external rules within
an organization, managing information across several corporate
areas, and keeping a global perspective while addressing unit-specific
concerns. Multinational companies face the additional complication
of having to adjust to regional variations of IFRS where local
tax rules and laws prohibit certain aspects of IFRS reporting.
Enforcement
Effective
enforcement is essential to protecting investors and promoting
market confidence. To the extent that other local GAAP is allowed
and used, enforcement must cover this as well. The thorny question
is: What organization or group of organizations should carry out
such enforcement? Historically, securities regulators have been
national. So how do we enforce international standards?
One possibility would be for authorities around the world to cooperate
and coordinate in developing coherent and converging international
solutions. At least that was the school of thought until recently,
when globalization took an unexpected turn—Ernst &Young
partners across Europe, the Middle East, India, and Africa decided
to relinquish national control of their partnerships to form a
single management that would cover the entire region.
Country-level
legal and regulatory restrictions had previously limited the business
form of international professional service firms to networks of
national partnerships; however, a recent change in European rules
now allows cross-border ownership. This raises some questions,
not the least of which is: Which regulators have authority over
such an entity? Is this entity subject to all regulations, or
none? If securities regulation is enforced at the national level,
will this entity have any oversight?
Overcoming
Special Interests
With all
of the challenges outlined above, one of the most-pressing questions
is whether the IASB will be able to resist succumbing to special
interests. The European Union (EU) endorsement process raises
serious concerns about the level of EU influence on the development
of IFRS (e.g., the disputes over accounting for financial instruments).
While many in the accounting profession tout the virtues of “principles-based”
standards, I can’t help but wonder how long it will take
until pressure mounts for “additional guidance” and,
inevitably, a return to rules-based standards. Are we really rushing
to something better? Or is there a cliff up ahead?
As always,
I welcome your comments.
Mary-Jo
Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org
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