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| The
Ride to Going Global  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). As always, I welcome your comments.
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