For this we have to read the runes. And that means looking back at the carefully worded, and equally carefully timed speeches which the SEC gives official status by placing them up on their website. For the detail of the work plan which the SEC is currently pursuing, and on which it will opine sometime in October, you go to a speech made by Paul Beswick, Deputy Chief Accountant in the SEC's Office of the Chief Accountant, in Pasadena in June. That gives you all the detail you need about what work the SEC staff have been doing, and continue to be doing.
For the thinking behind this work you go to a speech that the SEC's Chairman, Mary Schapiro, made in May in Boston. She was talking to the CFA Institute, the analysts, and interestingly enough she chose to deal with the myths. Her arguments were based on the idea that while the big issues of financial reform reverberate around the headlines, discussion about accounting standards "is often limited to specialized journals and a handful of websites for people who can tell a repo 105 from a 401(k)".
This column doesn't offer that sort of test to its readers. And it is my mission to provide good and lively discussion of any IFRS issues going. But I take Schapiro's point. Without drawing attention to the debate and without too much information available coverage is going to dwindle away. She agrees. "Perhaps because of this lack of coverage, and because of the complexity of a comprehensive accounting review and the resulting deliberate pace", she said, "a number of myths have sprung up, many suggesting that that our commitment to a single set of high quality accounting standards is not particularly strong".
To counter this she then went on to deal with the myths, one by one, and to "let you know that you can't always believe what you hear". These myths and what she said about them are important. It is in the detailed rebuttals of the myths that one can start to understand where the SEC is coming from.
Schapiro's first myth was that the SEC's commitment to global accounting standards was not as strong as it should be. Her rebuttal to this is a simple referral to a commitment to convergence given in a previous statement in February: "The Commission continues to believe that a single set of high-quality globally accepted accounting standards will benefit US investors and that this goal is consistent with our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. As a step toward this goal, we continue to encourage the convergence of US GAAP and IFRS and expect that the differences will become fewer and narrower, over time, as a result of the convergence project."
So the answer is convergence. And that is the answer to her second myth as well. Her second myth is: "The US may be committed, but it's dragging its feet regarding adoption of IFRS". She makes two points here. Convergence is far from complete and due process needs to be safeguarded. In particular she said, and remember this was back in May, that: "While the FASB and the IASB have been working diligently to reach common solutions to difficult financial reporting issues, US GAAP and IFRS are currently not converged in a number of key areas. These include the accounting for financial assets (the very types of securities at the center of the financial crisis), revenue recognition, consolidation principles, and leases".
Four months on some of these are being attended to but the point is that these are complex issues and solutions are hard to come by. And this runs directly into another Schapiro point. "Processes put in place by the FASB and the IASB to ensure the integrity of the final standards should be respected in both spirit and letter", she said. "Giving short shrift to process and testing, would increase the risk of poor decisions. We are committed to convergence. But we are committed, above all, to a convergence exercise that yields high-quality improvements to accounting standards".
This problem leads naturally to her third myth: "The United States is fixated on process". This, she said, is simply "inaccurate" Her point is that: "The United States understands the importance of process to a successful conclusion". And she defines that importance: "We will not accept shortcuts that undermine our larger goals or risk compromising the achievement of high quality global standards". So the process is there to ensure the quality.
But she recognises that there are other threats to quality. "A critical part of the standards-setting process is ensuring that the IASB and the FASB are shielded from undue political or commercial pressure, particularly now, as they work to finalize a number of their current joint projects", she said. And she then went on to point out that the Monitoring Board of the IASB, of which she is a member, is critical to achieving the best possible results.
At this point she had just one myth left that she still wanted to demolish: "America is protecting its parochial interests". Her answer to this myth was, again, forthright. "No", she said. "What we are protecting are the interests of the investors in our markets, and we always will that's what the Securities and Exchange Commission does", she said. "When investors from anywhere across the globe participate in our markets, they come under the SEC's umbrella of protection".
And she also made it clear that the umbrella of protection did not extend to protecting home markets alone. "But even with this protection, we can and must continue working together across borders", she said. "The global economy is too intertwined and too interdependent to tolerate parochial interests".
The lesson would seem to be that the goal of one global system of financial reporting standards is not simply dependent on the will of the standard-setters and regulators. It is also inevitable because of the cross-border nature of business anywhere across the globe.
Schapiro's conclusion to her speech was suitably precise. "Creating a system of high-quality, globally accepted accounting standards that benefits American investors and investors around the world is a detailed and challenging task", she said. "But it is a task we have been eager to embrace, and to which we remain fully committed".
So that is the context in which the forthcoming October progress report should be seen. It does weigh somewhat heavier than the comparatively spritely IASB might prefer. At the World Standard-Setters conference in London last week the IASB Chairman, Sir David Tweedie, made it clear in his opening words that: "Convergence is not adoption — it is just a means to adoption". But now we must all wait and see and, properly informed, weigh up the forthcoming update from the SEC.
Robert Bruce
September 2010
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