The Bruce Column — Looking ahead to the defining decision of 2012

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29 Dec 2011

As 2011 draws to an end two significant speeches were made in Washington - both looking toward 2012. Robert Bruce, our resident, regular columnist assesses their importance.

In the early days of December two significant speeches were delivered in Washington. The first came from the Chief Accountant of the SEC, Jim Kroeker, the second from the Chairman of the IASB, Hans Hoogervorst. They come from different standpoints. But you could detect common ground and also, and perhaps more important, a serious desire to increase the landmass of that common ground.

Hoogervorst talked of his experience on the Financial Crisis Advisory Group. 'Through the traumatic experience of this crisis', he said, 'I became convinced more than ever that the best protection available to investors is transparency. Indeed, without transparency there cannot be enduring stability'. Then he went on to talk of his passion for the goals of the IASB. These he defined as: 'To develop and sustain, first and foremost for investors, a single set of globally accepted and high quality accounting standards. These standards must be set independently and then consistently applied and enforced'.

Then he pointed out to his American audience that: 'These goals may sound familiar'. Why? 'They are almost identical to those of the FASB'. He drew parallels. FASB's principles were deeply embedded in the IASB. The SEC had helped establish the framework which set up the IASB. Paul Volcker, a giant in US financial history, had become the first Chairman of the IASB's trustees. When it was agreed in 2002 that the work of IASB and FASB should move towards convergence a US Board member at the IASB became Chair of the FASB.

Then he looked back. When the FASB was set up in 1973 the world was a different place. As he said: 'Market participants on either side of a transaction were mainly located in the same jurisdiction. Investors and preparers could speak the same financial reporting language'.

But all that had changed: 'Since then', he said, 'and especially in the last 20 years, the world's capital markets have integrated and become more interdependent. US investors seek investment returns and diversify risk on an international basis. US companies seek to raise capital on markets around the world, while US capital markets seek to attract international listings'.

The result was inevitable. 'The emergence of interconnected financial markets explains the momentum gathering behind the move to global accounting standards. Investors need comparable, reliable financial reporting around the world. For global investor protection, we need a global accounting language'.

Jim Kroeker was optimistic but cautious with his words. He said that 'there is reason to be quite encouraged'. But the process of assessing the whole issue was taking longer. But that didn't mean that they were discouraged. 'I believe that the passage of a grain of sand in the hour glass of time is not nearly as critical as ensuring that we take this opportunity to establish a strong and lasting framework'.

And that framework had five points to it. It should 'demonstrate a high level of support for US commitment to continued development and use of global consistent high quality accounting standards'. It should 'provide both in fact and in substantive operation clear US authority over standards applicable in the US capital markets'. It should 'provide for and facilitate a strong US voice in the process of establishing global accounting standards'. It should 'be responsive to the economic and other impacts of change'. And finally it should 'consider whether to retain "US GAAP" as the basis for US financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under regulatory regimes, contractual documents, and US laws under which compliance with US GAAP is often specifically contemplated'.

All that sounds fine and feasible.

And Hoogervorst agreed. 'I recognise the challenges and significant pressures facing the SEC in making its decision', he said. 'The US is the largest and most liquid national capital market in the world. So, transitional concerns have to be carefully considered. The SEC must believe that this is the right decision for the US. From an investor protection and capital formation standpoint, I believe it is'.

And he gave an example of why this is so. 'US investors now seek and should seek investment returns on a global basis', he said. 'For example, in its submission to the SEC, CalPERS made the point that they currently invest in 47 markets around world. If the SEC is to protect CalPERS in this international environment it must be an active participant in the development and global enforcement of IFRS'. And how would that come about? 'For that to happen', said Hoogervorst, 'the SEC needs skin in the game'.

But let us leave the final word with Paul Beswick, Jim Kroeker's deputy, from a post to the SEC's website in connection with the same conference. 'We are in the process of drafting a final report that summarizes all of our efforts to complete the 2010 Work Plan', he said. 'The staff is drafting the report to provide our insights on what we have learned during the last almost two years of work. I would hope that the staff could get the final report out as soon as practicable in 2012'.

Hope springs eternal as we come up to the new year.

Robert Bruce
December 2011

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