[Senate Hearing 110-951]
[From the U.S. Government Publishing Office]
S. Hrg. 110-951
INTERNATIONAL ACCOUNTING STANDARDS:
OPPORTUNITIES, CHALLENGES, AND GLOBAL CONVERGENCE ISSUES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
SECURITIES AND INSURANCE AND INVESTMENT
OF THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
OPPORTUNITIES, ISSUES, DIFFERENCES AND CHALLENGES AS THE U.S. AND
INTERNATIONAL COUNTRIES MOVE TOWARDS CONVERGENCE OF IFRS WITH U.S. GAAP
ALONG WITH THE IMPACT OF THESE PROPOSED EFFORTS ON STAKEHOLDERS,
INCLUDING REGULATORS, INVESTORS, AUDITORS AND COMPANIES
__________
WEDNESDAY, OCTOBER 24, 2007
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania ELIZABETH DOLE, North Carolina
JON TESTER, Montana MEL MARTINEZ, Florida
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Dean V. Shahinian, Counsel
Mike Nielsen, Republican Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
Jim Crowell, Editor
------
Subcommittee on Securities and Insurance and Investment
JACK REED, Rhode Island, Chairman
WAYNE ALLARD, Colorado, Ranking Member
ROBERT MENENDEZ, New Jersey MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota JOHN E. SUNUNU, New Hampshire
CHARLES E. SCHUMER, New York ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana CHUCK HAGEL, Nebraska
ROBERT P. CASEY, Pennsylvania JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
JON TESTER, Montana
Didem Nisanci, Staff Director
Tewana Wilkerson, Republican Staff Director
C O N T E N T S
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WEDNESDAY, OCTOBER 24, 2007
Page
Opening statement of Chairman Reed............................... 1
Opening statements, comments, or prepared statements of:
Senator Allard............................................... 3
Senator Bennett.............................................. 4
Senator Schumer.............................................. 5
Prepared statement....................................... 41
WITNESSES
Sir David Tweedie, Chairman, International Accounting Standards
Board.......................................................... 6
Prepared statement........................................... 42
Robert H. Herz, Chairman, Financial Accounting Standards Board... 9
Prepared statement........................................... 60
Conrad W. Hewitt, Chief Accountant, Securities and Exchange
Commission..................................................... 12
Prepared statement........................................... 84
Response to written questions of:
Senator Reed............................................. 157
John W. White, Director, Division of Corporation Finance,
Securities and Exchange Commission............................. 13
Prepared statement........................................... 87
Response to written questions of:
Senator Reed............................................. 157
Jack T. Ciesielski, President, R.G. Associates, Inc.............. 28
Prepared statement........................................... 91
Charles E. Landes, Vice President, Professional Standards and
Services, American Institute of Certified Public Accountants... 29
Prepared statement........................................... 102
Response to written questions of:
Senator Reed............................................. 160
Teri Lombardi Yohn, Associate Professor, Kelley School of
Business, University of Indiana................................ 31
Prepared statement........................................... 131
Lynn E. Turner, Managing Director, Glass Lewis & Co.............. 33
Prepared statement........................................... 147
INTERNATIONAL ACCOUNTING STANDARDS: OPPORTUNITIES, CHALLENGES, AND
GLOBAL CONVERGENCE ISSUES
----------
WEDNESDAY, OCTOBER 24, 2007
U.S. Senate,
Subcommittee on Securities, Insurance, and
Investment,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The subcommittee met at 2:01 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Jack Reed (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF CHAIRMAN JACK REED
Chairman Reed. Let me call the hearing to order, and I want
to thank the witnesses, obviously. This afternoon, we are
holding a hearing on International Accounting Standards:
Opportunities, Challenges, and Global Convergence Issues.
In recent months, the Securities and Exchange Commission
has been prioritizing a number of regulatory reforms aimed at
providing foreign private issuers greater access to the U.S.
securities market. The Commission's proposals on the
elimination of reconciliation to U.S. GAAP for foreign private
issuers who apply the International Accounting Standards
Board's version of International Financial Reporting Standards
by 2009 is one such proposal. The Commission also issued a
concept release which raises the possibility of U.S. companies
having the option of filing their financial statements using
either IFRS or U.S. GAAP and the establishment of an advisory
committee to examine complexities in the U.S. financial
reporting system.
These proposals are part of an effort to establish a single
set of global accounting standards. There is no doubt a single
set of high-quality accounting standards would benefit the
United States as well as global markets. However, there are a
number of significant issues which should be seriously
considered. Most importantly, we need to ensure that this new
single set of globally accepted accounting standards continues
to protect and provide enhanced transparency to investors while
promoting market integrity. This effort should incorporate the
best of both standards to build the strongest protections for
investors. This hearing is an opportunity to discuss progress,
opportunities, and challenges in achieving convergence, but
also to understand the impact of the SEC's proposals on
investors, regulators, auditors, and businesses.
Increased globalization of markets and wide adoption of
IFRS have been significant drivers of convergence. In
recognition of this trend, in 2002 the FASB and the IASB agreed
on a framework to eliminate differences between the two
standards and to collaborate on future ones. This process has
set a good balance for moving ahead with new standards, mindful
of eventual convergence.
However, it is also important to note that these efforts
provide not only truly comparable transparency and accurate
financial results to investors, but they must also ensure
comparable enforcement, interpretation, and implementation by
regulators.
To that end, it is clear that some countries using IFRS are
tailoring these accounting standards to their needs, resulting
in jurisdictional versions of IFRS. In its review of more than
100 foreign private issuers' filings, the SEC has found that,
``The vast majority of companies asserted compliance with a
jurisdictional version.'' As Sir David Tweedie has suggested,
the butting of these jurisdictional versions and variances will
ultimately make true convergence difficult.
There are also significant questions raised in the area of
implementation and interpretation of IFRS. Again, the SEC's
study of the filings of firms reported on an IFRS basis in the
U.S. found problems with the implementation of IFRS, including
in the area of the presentation of cash-flow statements,
accounting for common control mergers, recapitalizations, and
similar transactions. According to an Ernst & Young report,
because IFRS standards generally include only broad principles,
preparers and auditors may in good faith interpret company-
specific facts differently, which may result in different
accounting treatments for the same or similar transactions
among companies.
The issue of timing should also be considered carefully.
Many prominent investors and users of financial statements,
including the CFA Institute and FASB's Investors Technical
Advisory Committee, ITAC, conclude that it is premature for the
SEC to eliminate the reconciliation requirement. Some have
asked, with the projected convergence of U.S. GAAP with IFRS by
2011 or 2012, why there is such a rush before the frameworks
are substantially harmonized.
Additionally, while this effort may ease the filing
requirements on foreign private issuers, IFRS is still in its
infancy and may, in fact, be dependent upon reconciliation with
U.S. GAAP. Moreover, some companies, like S&P, have indicated
that if reconciliation is eliminated, it will continue to ask
companies to provide reconciliation as part of a package of
non-public information credit rating agencies' requests. If
companies will indeed need to continue to prepare
reconciliation information for credit rating agencies, why
shouldn't the SEC require companies to provide that information
to public investors as well?
There are numerous other issues which I hope we can address
today, including: Will the elimination of reconciliation lead
to the abandonment of convergence? How prepared are we for the
greater use of IFRS standards in the U.S. markets when there
are virtually no accounting programs in our universities that
teach accounting students IFRS standards? And shouldn't we be
concerned about the lack of knowledge of IFRS standards by U.S.
accountants and CFOs? What does this mean for the future role
of the SEC and the FASB in providing oversight of U.S.
financial reporting? Another key question is: Will investors be
served by this change?
These are challenging times for financial regulators. If
done properly, convergence of international accounting
standards can have positive impact on U.S. and global markets.
However, the events of recent months remind us of the ever
increasing complexity of financial products and the
interconnectedness of our financial systems. We have learned
that complex financial products, while spreading risk, can also
hide that risk. Financial reporting and accounting standards
play a critical role in decoding some of that complexity to
investors and regulators, and we must push to further enhance
transparency to restore confidence in our markets. With our
uniquely large retail base of investors and millions of
individuals investing their futures in our capital markets, it
is critical that we get this right and make certain that there
are no unintended consequences.
Thank you for allowing me--this is an important topic, and
I wanted to be expansive, and I think I have accomplished that.
But now, Senator Allard, do you have an opening statement?
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. I do. You did not think I would turn down
an opportunity to speak, did you?
Chairman Reed. No.
[Laughter.]
Senator Allard. Thank you, Mr. Chairman. I would like to
thank you for holding this hearing to examine the convergence
of the global accounting standards. Although accounting
standards might not seem like the most exciting topic to some,
it is important to the economic vitality of the United States
and its trading partners around the world. Clear, accurate,
consistent, and reliable accounting standards are necessary for
investors to have the information necessary to make decisions.
The quality of decisions generally cannot be better than the
quality of the information on which they are based. Credible
information has been an important foundation for the success of
our capital markets, just as bad information is often at the
heart of market meltdowns.
As markets become increasingly global, we have begun to
examine accounting standards in an international context. The
credibility of information is critical, but even credible
information is more useful when it is comparable. Accordingly,
discussion turned to international convergence of accounting
standards. Convergence of accounting standards holds many
possibilities, including the prospect of better transparency
through greater comparability, reducing costs, improving market
confidence, and improving market competitiveness. All of the
opportunities are predicated upon credible standards from a
credible standard-setting body. Anything less will be a step
backwards for U.S. markets.
It is also important that U.S. regulators are mindful of
the practical details in moving toward a global standard. The
industry infrastructure must be in place to ensure that the new
standards can be applied accurately and rigorously. This is
particularly important with regards to the many small and
medium-sized accounting firms and businesses.
We have an excellent line-up of witnesses today, and I am
certain that they will be able to help us better understand the
potential benefits of global convergence, as well as
highlighting the issues that must be addressed first. Their
testimony will be very helpful in increasing the Subcommittee's
understanding of the issue.
Finally, I would like to take this opportunity to offer a
special welcome to one of my constituents, Lynn Turner. Mr.
Turner served as the Chief Accountant of the Securities and
Exchange Commission from July 1998 to August of 2001. He has
also been a professor of accounting in the College of Business
and the director of the Center for Quality Financial Reporting
at Colorado State University. Mr. Turner currently serves as
the Managing Director of Research at Glass Lewis.
Again, welcome, Lynn, and, again, thank you, Mr. Chairman.
Chairman Reed. Thank you, Senator Allard.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you very much, Mr. Chairman, for
holding this hearing. This is not a very sexy issue. I realized
that as I walked in, walked down the hall. My first reaction
was the hearing must have been canceled because there was no
pile of lobbyists in the hall. I come into the room, there are
enough people in the room to justify the kind of attention we
are giving it, but it does not get the sort of headlines that
we often see.
That does not mean it is not important. That just means
that it is a little complex and does not lend itself to the
kinds of quick headlines and 1-minute sound bite summaries that
we get on television than some of the other issues are.
I have been interested in this ever since I became aware of
the Merkel Initiative and got involved in that at the Brussels
forum earlier this year. I understand that Gunter Verheugen and
Al Hubbard are meeting weekly on this issue. Mr. Hubbard is
known to us in the United States as the President's Domestic
Adviser or all-around economic guru. And when I asked what
Gunter Verheugen, if I am pronouncing his name correctly--if
not, I apologize. When I asked what his counterpart role was,
they said he is basically the Al Hubbard for the EU.
This is an essential area, however dry and difficult it is
to get into, and we need to move forward on it if we are going
to have the maximum benefit that will come out of international
trade.
The shorthand version of the difference between the
American system and the European system is that the American
system is rule based and the European system is principle
based. I am congenitally more interested in a principle-based
system than I am a rule-based system because a principle-based
system is usually easier to adapt to the situation on the
ground than rules that have been adopted in one set of
circumstances that then have to be twisted and distorted to
deal with another. And I am encouraged by the comment of
Secretary Paulson, who said, if I can quote him correctly,
``Where practical, of moving''--consideration should be given
``where practical, of moving toward a principle-based system,''
noting that added complexity and more rules are not the answer
for a system that needs to provide accurate and timely
information to investors in a world where best-of-class
companies are continually readjusting their business models to
remain competitive.
The other issue, which we probably will not get into today
but that broods over us and that we should be aware of as we
are talking about this, is the lawsuit that is moving forward
in the Supreme Court, shorthand term is Stoneridge v.
Scientific Atlanta, and it is over the question of whether or
not we can open up a window to allow foreign firms--to allow
U.S. trial lawyers to get at foreign firms who are doing
business with American firms on a basis that I, a non-lawyer,
find absolutely incredible.
As the former Chancellor of the Exchequer in the United
Kingdom, Norman Lamont, wrote in the Wall Street Journal
earlier this month, he said, ``Currently in the U.S., a company
must actually make statements that are fraudulent to be the
target of a private securities lawsuit. This is a clear line
that discourages the kind of speculative or predatory
litigation that has become a feature of American law. Should
the plaintiffs in Stoneridge prevail, any non-U.S. business,
whether it be a law firm, accounting firm, buyer, banker, or
seller, that has U.S.-listed companies as customers, suppliers,
or clients, we risk being sucked into America's security
litigation vortex.''
I can think of nothing more chilling to international trade
than the concept of the class action suits being brought
against non-U.S. businesses simply because they have a customer
or a supplier who has made some kind of statement that the
lawyers decide could be challenged. Bill Durack is on his way
to jail, but the virus of excessive litigation is still very
much with us, and I think that concern is a parallel concern to
getting the accounting standards right. If we have the
accounting standards right, it will make it easier to do
business, and it will also act as some kind of a firewall
against the litigation storm that I hope never breaks over this
part of international trade.
So, again, Mr. Chairman, thank you for holding the hearing,
and I look forward to hearing what the witnesses have to say.
Chairman Reed. Thank you, Senator Bennett.
Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. I want to thank
you and Senator Allard and all of the witnesses for being here
on a very important subject, which is the convergence of the
international accounting standards, because we live in an era,
of course, that is defined by globalization of capital markets,
a trend that was documented in the report that Mayor Bloomberg
and I issued. And you cannot have a global market and 22
different accounting standards. It is inefficient, at best, and
fraught with peril, at worst.
Our report made a whole number of recommendations to help
the United States maintain its historic role as the leader in
global financial markets, and one of these was the accelerated
convergence of U.S. Generally Accepted Accounting Principles,
GAAP, with International Financial Reporting Standards, IFRS.
So in today's world, where a typical investment consists
often of a Russian investor purchasing shares in a Japanese
company listed on an American stock exchange, you just cannot
have different auditing standards for different countries.
Globalization will only continue to accelerated, making the
need for this greater than ever before. And the fact that IFRS
is well on its way to becoming the global language which the
rest of the world uses means that we here in America have to
get with it and try to do our best to integrate the standards.
When it comes to the way companies balance their books,
Wall Street and the rest of the world should be on the same
page. And IFRS will be the language of worldwide business for
future generations. We have to start allowing it to be spoken
in the U.S., and eventually U.S. businesses must be allowed to
speak this language themselves. So I am glad to see FASB and
the IASB working together toward the convergence of their
accounting standards.
With that, Mr. Chairman, I will ask that the rest of my
statement be read into the record, and I look forward to
reading--I will not be able to stay, but reading the testimony
of the witness.
Chairman Reed. Without objection, all statements will be
made part of the record.
Now, let me introduce the panel. First, Sir David Tweedie,
Chairman of the International Accounting Standards Board. Thank
you, Sir David.
Mr. Conrad Hewitt, Chief Accountant, Securities and
Exchange Commission; Mr. John White, Director of the Office of
Corporate Finance, Securities and Exchange Commission; and Mr.
Robert Herz, who is the Chairman of the Financial Accounting
Standards Board.
I want to specifically recognize Sir David for his strong
leadership while serving as the Chairman of the International
Accounting Standards Board during a very critical period. Also,
thank you, Sir David, for the assistance you have given this
Committee on numerous occasions. We thank you very much.
I also understand that this is Mr. Hewitt's birthday, so we
are all going to resist the temptation to sing but wish you the
best, and thank you for sharing some of your special day with
us, Mr. Hewitt.
Sir David.
STATEMENT OF SIR DAVID TWEEDIE, CHAIRMAN, INTERNATIONAL
ACCOUNTING STANDARDS BOARD
Mr. Tweedie. Thank you, Mr. Chairman, Ranking Member
Allard, and Senators Bennett and Schumer.
As I said when I first appeared before the Banking
Committee, it is a great privilege to be back here in the
Colonies to continue my missionary work----
[Laughter.]
To discuss the relevance of international reporting
standards in the United States and in the international markets
in general. This week, we have just finished our second meeting
of the year with the FASB. It went very well, probably one of
our best ones, and we are looking very closely at the SEC's
deliberations on the Proposed Rule and Concept Released.
I am very glad that Conrad Hewitt, Bob Herz, and John White
are here with me because the FASB and the SEC were instrumental
in forming the IASB. Its structure, governance, and
independence are modeled on that of the FASB. And, in fact, if
anything has gone wrong, it is entirely due to Lynn Turner, who
was a major----
[Laughter.]
A major instrument.
When I first appeared before the Committee, we had hardly
been going for about a year, and there were very few countries
that actually used our standards. But the objective which was
set for us by the SEC and FASB was very clear. We had to come
up with one single set of high-quality global standards, so it
did not matter the transaction took place here in Washington or
in Winnipeg, Warsaw, or Wellington. We should get the same
answer. And, historically, that has not been the case.
The European Union started us off, 25 countries which
previously had 26 different ways of accounting, because they
used U.S. GAAP and international standards as well. And it told
us how difficult it was to meld international standards
together. Cultures are different. In Britain, everything is
permitted unless it is prohibited. In Germany, it is the other
way around; everything is prohibited unless it is permitted. In
the Netherlands, everything is prohibited even if it is
permitted. And in France, of course, everything is permitted
especially if it is prohibited.
[Laughter.]
But now we have 108 countries that are using our standards.
Australia, Hong Kong, New Zealand, and South Africa all joined
Europe very early on. Brazil, China, India, and Russia have
agreed to take our standards. And, similarly, Chile, Canada,
Israel and Korea have all recently decided to make the tie, as
has Japan, who did it just a month or so ago. So there is clear
momentum toward having one single set of standards.
It is understandable that the U.S. was not among that group
because you have a well-established and respected standard-
setting body, a high degree of transparency in your standards
that have been tested over a long period of time, and a high
degree of acceptance internationally.
However, the world is changing. The realities of
globalization, the integration of the capital markets, and the
emergence of IFRSs as a viable and high-quality set of
standards are changing the policy equation. Senator Schumer's
report has documented these issues.
The U.S. requirement for reconciliation, as the Committee
will be well aware, has caused resentment among non-U.S.
companies forced to go through the reconciliation exercise. The
hope of many of the registrants in using IFRS was that
eventually it would become the passport to all markets,
including that of the United States.
I obviously have a bias on what I would like the U.S. to do
in this situation, but it is really for the SEC and Congress to
decide that. But that is why we place such a high priority on
convergence with the United States.
The benefits to the U.S. companies are similar to those in
Europe. Many of their subsidiaries are already reporting in
IFRS terms. All this has to be converted back to U.S. GAAP. For
U.S. investors, they now will be more aware of the accounting
in other countries. Previously, when you were faced with a
myriad of different systems, it is very difficult. Now you
should be faced with one major system worldwide.
For auditors, a single set of accounting standards helps
training and helps people to understand, and for regulators,
they, too, are dealing with just one set of standards rather
than many.
One of the questions is that if we have competition in
accounting standards, will there be a race to the bottom. I
always think of John Glenn when I think of that. He always
said, as he hurtled around space in his capsule, the thought
that was ever prevalent in his mind was the fact that every
single component in that capsule had been supplied by the
lowest bidder. Well, we are not going to have a race to the
bottom. In fact, that is why we are working together, and Bob's
intention and mine with our boards is to have a ``best of
breed'' convergence program.
Irrespective of the SEC decision, our convergence work will
be undertaken. It is very important to us both. The early
progress we made after Norwalk has gone into the Memorandum of
Understanding, and we now have 11 major subjects that we are
dealing with which are critical to the general well-being of
financial markets: consolidations, post-retirement benefits,
leasing and financial instruments, among others. This is a
critical aspect of the financial infrastructure we have to fix.
Our joint efforts to produce joint standards on these
issues signal a double win and--improved accounting for both of
us in important areas and the elimination of differences
between U.S. GAAP and international standards.
It is understandable that those affected by the standard-
setting process will want to know how the future will look. We
intend, Bob and I, to make sure our joint standards are
different from our existing IFRS and U.S. standards. We want
these to be principle based.
Basically, are they written in plain English? Can they be
explained in a matter of a minute or so? Does it make intuitive
sense? And does management believe it actually helps them
manage their business?
These standards should eliminate anti-abuse provisions. A
tough principle is very difficult to get around; whereas, if
you have if A, B, and C happens, the answer is X. The financial
engineers come up with B, C, and D and claim a different
answer.
It will rely on judgment, and we will have to force people
back to the core principles. We have to make sure we do not
give too much guidance. Do we really need this guidance or can
we actually rely on judgment?
That is the vision we have for the future of the
convergence. It will not be easy. The Lord's Prayer has 57
words; the Ten Commandments, 297; the U.S. Declaration of
Independence--big mistake that was--300 words; and the European
Directive on the import of caramel products, 26,911 words.
[Laughter.]
I know several commentators have said if the reconciliation
is removed, a major incentive of convergence goes. That is not
the case. We have made an agreement with the SEC and the FASB
we will converge on this program. We intend to keep that
agreement. And if we did not, we would end up with two sets of
standards. That is not in our constitution, and it is not our
objective.
So I am optimistic, Mr. Chairman, about what is going to
happen. There are some challenges ahead. We must resist
countries' having national versions of IFRS, and we are working
on that with the regulators to make sure we know exactly what
they have done. We are trying to make sure that the
interpretation is done through our Interpretation Committee,
and the regulators are helping in that. And, finally, we want
to try and ensure the enforcement is good. So the regulators
are very important to us in this work.
We are at a crucial point in the development of IFRSs. The
United States has played a huge part in encouraging the
adoption of our standards throughout the world. The world's
fastest growing economies are converging with IFRS. But this is
no time to rest on our laurels. We recognize the effect of our
work on the economy of the world, and we are delighted that
U.S. policymakers are now considering options for the U.S.
markets.
We appreciate, sir, your continued interest in
international convergence, and we are committed to doing all we
can to complete the work program in the MOU.
We are at an interesting stage. When I was at school, I
played in goal for my school's soccer team, and in a cup
semifinal, we were winning 1-0 with a few moments to go. One of
the opposing forwards came through and hit the ball so hard, it
went past me before I could move. But, fortunately, it hit a
goalpost and rebounded to him, and he hit it again. And this
time, I threw myself to the left and turned the ball around the
post. And my teammates were ecstatic. What they did not realize
was I was trying to save his first shot.
[Laughter.]
We will not get a second chance. This is our best chance
ever, with Bob's help, to merge our two sets of standards and
come up with the world's best. And that is what we are trying
to do.
Thank you, sir.
Chairman Reed. Thank you, Sir David.
Mr. Herz.
STATEMENT OF ROBERT H. HERZ, CHAIRMAN,
FINANCIAL ACCOUNTING STANDARDS BOARD
Mr. Herz. Thank you, Chairman Reed, Ranking Member Allard,
and Members of the Subcommittee. I am Bob Herz, Chairman of the
FASB, and thank you for asking us to participate in this
hearing today. And thanks for throwing a little gathering to
celebrate Con Hewitt's birthday with all his friends, too.
I would also like to take this opportunity to thank both
the Banking Committee and this Subcommittee for your support
over the years of the FASB, of independent accounting standard
setting, and our international convergence activities.
Recent years have been marked by a clearly continuing,
rapid, and accelerating globalization of capital markets,
cross-border investing, and international capital-raising. We,
therefore, agree with both the IASB and the SEC that a widely
used single set of high-quality international accounting
standards for listed companies around the world would greatly
benefit the global capital markets and investors. The ultimate
goal, we believe is a common, high-quality global financial
reporting system across the capital markets of the world.
However, achieving the ideal system requires improvements
and convergence in various elements of the infrastructure
supporting the international capital markets, including a
single set of common, high-quality accounting standards. But
improvements in convergence are also needed in disclosure
requirements; regulatory, enforcement, and corporate governance
regimes; auditing standards and practices; and education of
capital market participants.
In regard to accounting standards, the FASB, with the IASB
and other major national standard setters, has been working for
many years to improve and converge accounting standards. The
pace of these convergence activities has increased
significantly since the formation of the IASB in 2001, and
there has been a clear movement in many parts of the world
toward IFRS. Many jurisdictions around the world have mandated
or permit the use of IFRS, and many others are planning to move
in this direction. However, in some of these jurisdictions, the
standards issued by the IASB have been modified, resulting in
so-called as-adopted versions of IFRS, and also differences in
implementation between countries have resulted in national
variants of IFRS.
In the U.S., we at the FASB and IASB committed in 2002 to
the goal of developing a set of high-quality, compatible
standards. Our 2002 Norwalk Agreement described the plans for
achieving that goal, including working together on major
projects and eliminating more narrow differences in other
areas. Our 2006 Memorandum of Understanding added specific
milestones to that effort.
Since 2002, we have made steady progress toward
convergence, but that effort is not yet complete, with work in
process in a number of key areas. In addition, differences
between U.S. GAAP and IFRS remain right now, which can result
in significant differences in the reported numbers under the
two sets of standards. Thus, it will likely take more years to
reach the goal of full convergence using our current approach.
Accordingly, and in light of the growing use of IFRS in
many other parts of the world, we believe that now may be the
appropriate time to consider ways to accelerate the convergence
effort and the movement in the U.S. toward IFRS. For to be
truly international, any set of standards would need to be
adopted and used in the world's largest capital market--the
United States.
Thus, we believe that planning for a transition of U.S.
public companies to an improved version of IFRS would be an
effective and logical way forward to achieving the goal of a
set of common, high-quality global standards.
However, a smooth transition will not occur by accident,
and to plan for and manage this change, we suggest that a
blueprint for coordinating and completing the transition should
be developed and agreed to by all major stakeholders in the
process. The blueprint should identify an orderly and cost-
effective approach to transitioning to an improved version of
IFRS and should set a target date or dates for U.S. registrants
to move the standards toward IFRS, allowing adequate time for
making the many necessary changes.
The plan should also address needed changes on the
international front, including those necessary to bolster the
IASB as a global standard setter and to reduce or eliminate the
as-adopted versions of IFRS that have emerged. And it should
identify and establish timetables to accomplish the many
changes to the U.S. financial reporting infrastructure that
will be necessary to support the move to IFRS. Such changes
will likely take a number of years to complete, during which
time the FASB and the IASB will continue our joint efforts to
develop common, high-quality standards in key areas where both
existing U.S. GAAP and IFRS are currently deficient.
In other areas that are not the subject of those joint
improvement projects, we envisage that U.S. public companies
would adopt the IFRS standards as is based on an established
timetable. We believe that this sort of well-planned approach
would provide an orderly and effective transition of U.S.
public companies into the global reporting system.
Let me now briefly turn to the two SEC releases relating to
the reconciliation requirement and to the possible use of IFRS
in the U.S. I commend the SEC for bringing forward these timely
and important issues.
The SEC Concept Release seeks comments on whether U.S.
issuers should be given a choice between U.S. GAAP and IFRS. We
are generally opposed to allowing companies to elect different
reporting regimes because of the added cost and complexity such
choices create for investors and the added cost and complexity
involved in developing a U.S. financial reporting and
educational infrastructure to support a two-GAAP system for
U.S. public companies.
Accordingly, instead of permitting U.S. companies an open-
ended choice between IFRS and U.S. GAAP for an extended period
of time, we believe it would be preferable to move all U.S.
public companies to an improved version of IFRS over a
transition period following the blueprint we are advocating be
developed.
Finally, on the more imminent question of whether the SEC
should remove the reconciliation requirement for foreign
private issuers that use IFRS, we are aware of a variety of
views on this issue. We believe that either way the decision in
the near future whether or not to eliminate the reconciliation
requirement will have important implications for the continued
development of a global reporting system. On the one hand, we
certainly acknowledge the concerns of those in the United
States who believe that dropping the reconciliation would be
premature and would result in a loss of information that some
investors and other users clearly find important and useful. On
the other hand, this change only relates to relatively small
number of SEC registrants in relation to the overall size of
our capital market. And maintaining the current reconciliation
requirement could be viewed by many parties outside this
country as a clear signal that the U.S. is not truly interested
in participating in an international reporting system.
Conversely, we also believe that once the reconciliation
requirement is eliminated, there are some parties in other
countries who have viewed the convergence effort between the
IASB and the FASB as the price of getting the SEC to eliminate
the reconciliation, will see no further benefit in continued
convergence between IFRS and U.S. GAAP, and will call for a
cessation of further improvements to IFRS, particularly those
designed to achieve convergence with U.S. So in removing the
reconciliation requirements, we feel that it would be important
to make it clear that getting to a single set of high-quality
international standards remains the ultimate goal and that
further convergence and improvement of standards is necessary
to achieve that goal.
Last, we strongly agree with the SEC proposal that the
reconciliation requirement only be eliminated for those foreign
private issuers that fully apply IFRS as issued by the IASB and
not for those who use an as-adopted version of IFRS. To do
otherwise would, in our view, be inconsistent with the goal of
getting to a single set of global accounting standards.
In conclusion, we are firmly committed to continuing to
work with the IASB, the SEC, and others to achieve a single set
of high-quality international accounting standards that will
benefit investors and the capital markets domestically and
across the world.
Thank you.
Chairman Reed. Thank you very much, Mr. Herz.
Mr. Hewitt.
STATEMENT OF CONRAD W. HEWITT, CHIEF ACCOUNTANT, SECURITIES AND
EXCHANGE COMMISSION
Mr. Hewitt. Chairman Reed, Ranking Member Allard, Senator
Bennett, thank you for the opportunity to testify today, on my
birthday, on behalf of the Securities and Exchange Commission
concerning ongoing efforts to foster development and use of
high-quality, globally accepted accounting standards. As the
SEC's Chief Accountant, I advise the Commission on accounting
and auditing matters.
The Commission has a long history of supporting the goal of
high-quality, globally accepted accounting standards. The
reason for the Commission's support is that the global
accounting standards help investors to understand investment
opportunities more clearly and increase access to foreign
investment opportunities. Global accounting standards reduce
costs for issuers, who no longer have to incur the expense of
preparing financial statements using differing sets of
accounting standards. Also, lower costs facilitate cross-border
capital formation as well as benefit shareholders, who
ultimately bear the burden of the entire cost of the financial
reporting system.
The SEC has pursued the goal of high-quality, globally
accepted accounting standards through a variety of
international multilateral and bilateral venues. This includes
the International Organization of Securities Commissions, a
bilateral dialog with the Committee of European Securities
Regulators, and with fellow securities regulators from
countries that have moved to or are moving to IFRS reporting.
The SEC's staff has also participated, in some cases on behalf
of IOSCO, as an observer to the International Accounting
Standards Board's Advisory Council, its Interpretations
Committee, and certain of its working groups.
Over 100 countries now either require or permit the use of
IFRS for the preparation of financial statements by their
domestic listed companies. Under a regulation adopted in 2002,
the EU required its listed companies to report using endorsed
IFRS beginning in 2005. Japan's accounting standard setter,
with whom I met on Friday of last week, and the IASB have
agreed to work to accelerate convergence between Japanese
accounting standards and IFRS, with certain interim target
dates in 2008 and 2011. Other countries, such as China, Israel,
and India, have either begun to move toward the use of IFRS--
that is, China and Israel--or have announced plans to do so--
India's case. Closer to home, Canada has announced plans to
move to IFRS reporting around 2011, while we understand Mexico
is working to incorporate IFRS aligned content into Mexican
accounting standards. The incentives and reasons for these
national IFRS policy decisions, as well as the method and
timing of the transition to IFRS reporting for companies in a
particular country, are as varied as the profiles of the
countries involved.
This summer, the Commission began a process to determine
whether it is appropriate and timely to allow foreign and
domestic registrants the alternative to submit for SEC filing
purposes financial statements prepared in accordance with the
International Financial Reporting Standards as published by the
International Accounting Standards Board. I defer to my
colleague John White to discuss these proposals in detail.
Given the increasing globalization of capital markets, it
is imperative that the Commission be vigilant in keeping our
regulatory standards up-to-date for the protection of
investors, for the maintenance of efficient and orderly
markets, and for the promotion of capital formation. Our
ongoing work in the area of accounting and financial reporting
is an important part of the Commission's wide-ranging efforts
in this regard.
Thank you for the opportunity for me to appear before you
today, and we will be pleased to respond to any of your
questions.
Chairman Reed. Thank you, Mr. Hewitt.
I understand, Mr. White, you are not going to make a
statement but you are prepared for questions.
Mr. White. Actually, I had a statement.
Chairman Reed. Well, then, please.
Mr. White. I had a short statement to fill in the details
than Conrad had laid out.
Chairman Reed. Please fill in the details. Go ahead, sir.
STATEMENT OF JOHN W. WHITE, DIRECTOR, DIVISION OF CORPORATION
FINANCE, SECURITIES AND EXCHANGE COMMISSION
Mr. White. Thank you also for the opportunity to testify
before you today. I am the Director of the Division of
Corporation Finance, and we are the group at the SEC
responsible for overseeing disclosures of domestic and foreign
reporting companies in the United States. And what I wanted to
do was describe the two releases that the Commission put out
this summer regarding the potential use in the U.S. capital
markets of international reporting standards as published by
the IASB. And I particularly underline as published by the
IASB.
First, a proposal was issued in July to allow foreign
private issuers to use IFRS financial statements without a U.S.
GAAP reconciliation. Under the Commission's current
requirements, foreign private issuers have two alternatives
when preparing their financial statements. They can either
prepare them under U.S. GAAP or, alternatively, they can
prepare them under IFRS or under a national GAAP, and provide
in either of those cases reconciling information to U.S. GAAP.
That was the first release.
Second, in August, the Commission issued a concept release
to explore a more far-reaching project, and that is the
possibility of giving our own domestic issuers the alternative
of preparing their financial statements using IFRS. Today, of
course, domestic issuers may only use U.S. GAAP.
The comment period on the foreign private issuer proposal
ended in late September. The comment period on the U.S. issuer
concept release is actually still open and closes in mid-
November.
These releases address the core policy issue of what role,
if any, the use of IFRS should play in the U.S. public capital
markets. And with any policy issue, any policy decision like
this, a determination requires that we give due consideration
at the Commission to both the benefits and the costs.
In all of the Commission's work to date, a consistent
premise has been that investors are better served by having
available high-quality financial information across issuers,
regardless of their domicile. This obviously aids investors in
making informed decisions in allocating their capital among
competing alternatives. Investors also benefit if the costs of
compliance are reduced for issuers entering and staying in our
capital markets, as this opens up additional investment
opportunities.
Of course, adjusting to a new set of accounting standards
also presents issues to consider. With respect to the foreign
private issuer proposal, investors would be required to work
with IFRS financial statements directly without the benefit of
U.S. GAAP reconciliation. But the impact of this loss of
reconciliation depends both on the extent to which investors
are currently using that reconciliation and also the extent to
which U.S. GAAP and IFRS continue to differ.
The impact also depends on the number of issuers who are
actually using the alternative. And just to give you a few
numbers to work with as we proceed today, currently there are
approximately 110 foreign private issuers who prepare their
financial statements using IFRS as published by the IASB and,
therefore, would be eligible for the proposal that was put out
this summer. There are an additional 70 foreign private issuers
that prepare their financial statements using a jurisdictional
adaptation, a jurisdictional variation of IFRS. So it is that
110 and the additional 70.
The additional 70 would be eligible if they were able to
state that their financial statements were prepared in
accordance with IFRS as published by the IASB. But I suppose we
should also look a little bit ahead because, between now and
2011, there are a couple of other jurisdictions who we expect
will come online. We have 100 foreign private issuers from
Israel and 500 from Canada, and as Conrad alluded to, they are
coming online in the future.
So that is kind of the two proposals. I guess the only
other thing to comment on is we have received 120 comment
letters, which is actually quite a few, so far on the foreign
private issuer release, and the comment letters are still
coming in on the U.S. issuer concept release. We are actively
in the process of analyzing those comment letters. They raise a
lot of important issues. When we finish that review, Conrad and
I will be developing a recommendation for the Commission, but
we still have to finish--well, the letters all have to get in,
and we have to finish that review.
So that is really where we stand on the two releases, and I
and Conrad are ready to answer your questions.
Chairman Reed. Thank you very much.
Let me begin by echoing the sentiment that Senator Bennett
suggested initially. This is not drawing a huge crowd, a
throng, but this is one of the most important issues that could
be decided over the next several years because of the
centrality of accounting in every major business transaction.
Many times in transactions it is finally the accountant who
makes the determination of what can be done and what cannot be
done--not the lawyer, not even the business leader. And it is
critical what you are doing, and we want to make sure it is
done properly, and that is the purpose of this hearing today.
Let me follow up, Mr. White, with just the implication of
your final point. So the universe of issuers that could
potentially use IFRS without reconciliation, if it is dropped,
is about on the order of, say, 700 or 800 or so. Is that--or,
alternatively, do you see a big use of IFRS alone without
reconciliation?
Mr. White. Well, just in total numbers, there are about
1,100 foreign private issuers. I think our assumption would be
that most foreign private issuers that were eligible to report
without reconciliation would do so, although, in fact, we do
have some companies that report in IFRS in their own
jurisdictions and still report in U.S. GAAP in the United
States.
Also, that 500 number from Canada, a large number of the
Canadian companies report directly in U.S. GAAP and do not go
through the reconciliation process today. I do not know that I
would assume that they would switch.
Chairman Reed. One of the issues of having accounting
standards is comparability between issuers, and an obvious
question is if you have some that are reporting in IFRS, which
is not yet fully reconciled with GAAP, how much more difficult
is it for investors and analysts to make judgments between
companies that are reporting with different accounting schemes.
I presume there would be some cases of material differences the
way the accounting is treated.
Mr. White. I mean, there certainly are today differences
between IFRS and U.S. GAAP, but if we just kind of step back
for a second, obviously the goal here is a single set of high-
quality global standards.
What we are talking about in terms of eliminating the
reconciliation requirement is having a period of time when
there would be two sets of accounting standards for foreign
private issuers in the United States. They would both be high-
quality standards, but there would be two different sets. The
purpose, obviously, even though it applies to a pretty small
group of companies, would be to allow U.S. investors to get
familiar with IFRS directly to foster more understanding of it,
and certainly I think to allow the infrastructure to build.
There have been references, I think in your opening remarks,
about the colleges and the schools and all. But, I mean, we are
talking about initially less than 200 companies out of, you
know, a total, I think, of 11,000 public companies that report
in the United States would be doing this. So it is kind of an
opening step.
Chairman Reed. Let me ask a final question, and then I want
the panel to comment on sort of the more general issues that we
have been discussing. Would you consider any special
disclosures--not full reconciliation but special disclosures
for these companies that are now reporting exclusively in IFRS?
Mr. White. One of the questions that was asked in the
proposing release was whether if companies did not provide
reconciliation, whether we should have additional disclosures
about the differences, the principal differences. So that is
one of the questions we have asked and we will get comment on
and consider in the process.
Chairman Reed. Let me just go down. Mr. Hewitt, there are a
couple, I think, very obvious issues. One is the consequences
of dropping reconciliation, both good and bad, or the costs and
benefits, as Mr. White described them. And second would be the
timing issue. I mean, there is a good deal of opinion that is
saying this is a fine idea, once the convergence has been
completed between the international accounting standards and
GAAP standards, and that has not occurred yet.
So could you comment on your view of what the consequences,
both good and bad, are and also the issue of timing?
Mr. Hewitt. Yes, Senator, I would be very happy to. Lifting
the reconciliation, right now the foreign issuers, the
information that they file with us on reconcilement items are
approximately 7 months old. So it is not very timely
information. And the sophisticated investors understand the
differences between U.S. GAAP and IFRS when they analyze these
100-plus companies.
The timing difference, it will take some time for everybody
to understand what is happening on lifting the reconciliation,
but we believe that there is enough information and disclosure
in these financial statements that an investor will be able to
understand these differences. And we have differences within
our own U.S. GAAP that investors, sophisticated investors, can
understand those differences. The average retail investor
probably cannot. So the differences are not that large, and
eventually there will be convergence of these differences.
Chairman Reed. Mr. Herz, the same two questions basically:
your view of what the consequences are, both good and bad, for
the elimination of reconciliation; and, also, is it a good idea
but its time has not yet come?
Mr. Herz. I think that the benefits are potentially
bringing more people into our capital markets, more foreign
companies, and that may be viewed as a very good thing in terms
of the financial services industry. It may be thought of as a
good thing in bringing them into a system that is more investor
protection oriented, as well as that. So if it does actually
encourage more people to come to our markets, there would be
that benefit.
I think it would have a benefit also, as John said, of
people in this country beginning to learn a little bit more
about IFRS. It would be the beginning of that effort. And I
think the important thing is that if you go to other parts of
the world that are supporting the convergence movement and the
setting up of a global system, there are questions, have been
questions outside of our convergence efforts as to whether the
SEC is truly committed to having the U.S. go into a global
system, because there have been many kind of starts around
times, you know, back to the 1990's, a few other times, when it
was deemed that it was too early. And I am not saying that now
is definitely the right time, but people outside the U.S. have
been skeptical as to whether or not, you know, we really truly
want to become part of that system.
I think the costs of it are that there clearly are some
investors and other users of information that do use that
information. Even though it does arrive late, they do use it.
That seems to be mixed among investors. There are some
investors who are very comfortable already with IFRS, who
already analyze global companies that are used to it and the
like, and they do not need the reconciliation in their view.
But there are others that want to see things put on an apples-
to-apples basis. And as we have commented, there still are
differences, and some of those differences can be significant
to individual company results and the like.
I think that, as I said in my remarks, all three
organizations here are clearly committed to continuing the road
to get to a single set of high-quality standards across the
world that, you know, blend the best of the two sets of
standards, and sometimes we develop something new, often. But
there are people in other parts of the world that, you know,
for them the end of the road has been getting the
reconciliation removed. They have viewed that as kind of, you
know, the easier passport into our capital market, the most
cost-effective one, and are not that keen on the convergence
with the U.S. continuing, in part because they believe that the
U.S. system--I am not going to make a normative judgment as to
whether it is right or wrong with the litigation, everything
else, you know, that we are almost like an infecting agent into
a system that they would prefer versus our approach. I do not
happen to agree with that, but that is a view, and you do hear
it when you go over to certain parts of the world.
That is why I said in my comments that I think it is just
important that it be made clear that this is not the end of the
road. If the SEC does remove the reconciliation requirement,
this is a move toward the end of the road, but there is a lot
more work to be done to get to the ultimate goal.
Chairman Reed. Thank you, Mr. Herz.
Sir David, I do want to ask the same question, but my time
has expired, and I am going to call on Senator Allard. But we
will have a chance at the end of his comments and Senator
Bennett's comments.
Senator Allard. Thank you, Mr. Chairman.
I want to clarify. How many companies are currently subject
to requirements to reconcile their statements to U.S. GAAP?
Mr. White. There are about 1,100 foreign private issuers.
Senator Allard. Oh, 1,100.
Mr. White. Yes. Now, some number of those in a number of
countries already, they report in U.S. GAAP so that they have
the option of reporting in a foreign GAAP or the U.S. GAAP.
Senator Allard. Right.
Mr. White. I do not actually have that number--about 200
report directly in U.S. GAAP, so I guess it would be about 900
reconcile.
Senator Allard. Nine hundred that actually reconcile.
Mr. White. Today.
Senator Allard. Well, how many new U.S. listings could we
expect to see with the elimination of reconciliation? Do we
have any idea--particularly given the fact that the EU has
pushed back against the requirements to use international
standards as written by IASB.
Mr. White. I would not have thought that we were expecting
any significant increase in the number of U.S. listings. One of
the things we did last summer was adopt a de-registration
provision that actually allowed foreign private issuers to de-
register, and we have had, I think, about 70 foreign private
issuers actually have de-registered since that rule went into
effect in June, which got us down to the 1,100. I suppose the
number could go up somewhat, but I would not have thought it
would be----
Senator Allard. Have you or has anybody done an analysis on
the elimination of the reconciliation requirement, what would
happen, other than what you just stated? Have you gone any
further than that?
Mr. White. You mean an analysis of whether there would be
additional listings.
Senator Allard. Yes.
Mr. White. No, I do not believe we have. I mean, understand
that certainly one of the benefits of eliminating
reconciliation would be--could be either additional listings or
companies not de-listing. But our important drivers for this
are not just that issue. What we are really focusing on is
having the opportunity for U.S. investors to be able to look at
foreign companies using a single set of--the ultimate goal of
having a single set of accounting standards. And this is all
driven toward the ultimate goal of one international set of
standards.
Senator Allard. I understand that it is getting to this
ultimate goal. That sounds great. But when we get there, then
we could be giving foreign countries that understand this a
choice of one system or another, where American companies may
not have that choice. How would that impact behavior,
particularly among American--I mean, do we create an unfair
competition because one set of companies that are foreign can
use maybe a lesser standard than what is required of American
companies?
Mr. White. Well, if the foreign company were still using--I
do not know, I will call it Antarctica GAAP, they would have to
reconcile to U.S. GAAP. I mean, the only companies that we are
talking about----
Senator Allard. Yes, but we are not talking about
eliminating reconciliation----
Mr. White. I am sorry. We are talking about eliminating
reconciliation only with respect to companies that follow the
IFRS standards as promulgated by the IASB.
Senator Allard. I see.
Mr. White. Not foreign issuers that follow the GAAP of
Antarctica or whatever their country is.
Senator Allard. So that would be a very limited number of
companies that would be involved to start with, and those
countries that have a modification of the international
standards would not be included.
Mr. White. Correct. The initial numbers I was giving there,
today there are 110 companies that would be eligible. There are
another 70 that follow IFRS with a jurisdictional adaptation.
Now, when they follow a jurisdictional adaptation, they may
still be able to--they may still be following the IASB version
so that they would be able to have their--they would be able to
certify and have their auditors certify that what they actually
did was the IASB version, so that some of those 70 may be able
to come into the U.S. as well--excuse me, would be able to
eliminate reconciliation as well. Is that clear or----
Senator Allard. I think we are getting you down on the
record, and we may have more questions later on on that.
You know, I wonder about our educational requirements. In
this country, accountants take a great deal of continuing
education, and I do not know how other countries--what kind of
requirements they have on their accountants and their
continuing--and here in this country, a lot of that is
licensing that falls under the various States and what-not, and
then, again, do we currently have an educational infrastructure
in place for a rapid switch to the IFRS?
Mr. White. Since I am the only lawyer up here, maybe I
should--we should ask the accountants.
Senator Allard. Well, yes, and I think on that question
maybe everybody should try and answer that question and see. I
want to see how our continuing education matches in, or are our
accountants prepared to work with the new system, and those
accounts in other countries, would they be prepared to go with
our system, to know about our system.
Mr. Herz. A couple of thoughts on that.
First, a lot of other countries have gone through this
exercise, and a lot of materials have been developed in those
countries, just on IFRS, a lot of it by institutes, by the IASC
Foundation, by the major accounting firms. So I think that is
available, but it has not yet been embedded in our educational
system, and that is, again, one of the reasons that I think we
need this blueprint and some timetable that is, you know,
specific and also reasonable to get these kinds of things
accomplished.
I think there is another issue and it kind of goes to
Senator Bennett's comments about, you know, rules based versus
principles based. While I do not completely accept that
dichotomy, we do in this country like to have lots of guidance
and lots of detail. And we have it, whether it comes from us or
the SEC or the accounting firms or what else. And this will
require a little bit of a cultural and mind shift a little bit.
That is one of the reasons that Con Hewitt and I were very much
in favor of what has now become the SEC Advisory Committee on
improving our financial reporting system to look at some of
these issues in our own system as to what drives that perceived
need for all sorts of rulings, detail, and the like. And that
is also going to probably come up with some recommendations
that may hopefully have some impact on our ability to be able
to deal with a less detailed system of less specific guidance
and the like. But it will be a challenge.
Senator Allard. You know, when we went through this period
where we had a number of companies have accounting problems
that began to impact the markets, you know, the Congress felt
like they needed--in particular, this Committee I think felt
they needed to do something, at least this one member did, felt
we needed to do something to try and bring confidence back to
the market.
I am one who does not like to see a lot of rules and
regulations. I like to rely on the professional. But in this
particular case, the professional fell short. At least in a few
instances, it kind of reflected totally on the whole profession
as well as the attitudes on the market.
I would like to see us get more to the general concept,
but, you know, it seems like consumer confidence rests much
more on rules and regulations than perhaps we have, you know,
had to in the past prior to those instances.
How do we ensure that movement does not outpace the ability
of the accounting industry to keep up? How do we ensure that?
Do we make sure we put the schedule in with plenty of leeway in
it, or what have you got in mind on that?
Mr. Herz. I am just calling for a plan to be put together,
to get the right people together and put the plan together and
agreed to, and think about it, you know, in an orderly,
complete way. You know, I could probably think of 10 or 15
broad things that need to get thought about as we contemplate
this move, and there are probably other people from their point
of view in companies, in the accounting industry, who would say
we also need to think about this and that.
So I am always good at calling for plans. I am not so good
at developing them.
Senator Allard. My time is running out here. Would you list
for me, and response back to the Committee, you know, 10 or 15
things, broad things that you would consider? Unless you have
got----
Mr. Herz. Yes, there are a lot of them in my detailed
written testimony.
Senator Allard. OK. We have got it. Good.
Chairman Reed. Thank you very much.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Let's get practical now for just a minute. I am an investor
and I have interest in a company, and I get two sets of books--
one under GAAP and one under is it fair to say. What is the
first thing I am going to notice in terms of the differences
between the two?
Mr. Hewitt. I will start this. When you get your annual
report or they file them at the SEC, if it is in IFRS, it will
be reconcilement of all the differences, material differences,
although some companies put immaterial differences in their
reconcilement. Sometimes there may be only two items of
reconcilement items, sometimes there may be a dozen items. And
those reconcilement items are explained as they pertain to U.S.
accounting standards. And when you get done with those
reconcilement items, you are going to end up with a different
number for the net income or loss than you started with under
IFRS. However----
Senator Bennett. Is it going to be higher or lower?
Mr. Hewitt. Sometimes both. I have reviewed a number of
these, and sometimes they are both ways. And over a period of
time, if you take a snapshot today and look at it today,
because of the differences in how a company uses capitalized
items versus expensed items, over a period of time, 5 years,
there may not be any difference. If you just take 1 year, yes.
If you go over a number of years, those differences tend to
come out to zero, just as they do in U.S. GAAP when a company
has different alternative methods of depreciation or anything
else.
Senator Bennett. OK. So it will be the allocation of long-
term costs, appreciation and amortization. Let's talk about
cash-flow. One of the things that I want to look at is EBITDA.
Will EBITDA be different?
Mr. Hewitt. EBITDA would be different since that is
earnings before depreciation, interest, and taxes, and the
recording of those items under IFRS may be different than they
do under U.S. GAAP. So you may have a different EBITDA, yes.
Senator Bennett. OK. And it may be higher and it may be
lower?
Mr. Hewitt. May be lower. But over a period of time, I
personally think they equate out.
Senator Bennett. All right. U.S. taxes, we have seen
examples where the books kept for tax purposes are different
than the books kept for reporting purposes. And that was part
of the fight we had over the issue of expensing stock options
and how you value that. That continues to be a very fertile
field for accountants and lawyers to earn their fees.
How would the IFRS deal with U.S. taxes differently than
GAAP?
Mr. Herz. The two current standards are very close. The
basic principles are the same. The problem is we have had a few
exceptions in each standard, but they have been different
exceptions, and we now have a project which we are close to
issuing a document on that either eliminates the exceptions or
has the common one, so the standards will be the same.
Senator Bennett. OK. Stepping back from the particulars, if
Sir David has formed a company and puts out a prospectus and it
is in both forms, and I start looking at that prospectus,
assuming that his superior management will be there on both
forms, am I likely on the one form to say this is a good deal
and on another form to say, gee, I better not put my money in
it? Or will you come close enough in both of them that you will
arrive at basically the same decision?
Mr. Tweedie. Well, since this is my company, perhaps I
should answer this one. Basically, we know what the differences
are between U.S. GAAP and international standards, and that has
been the whole thrust of our program, and we took them from the
reconciliation. That is how we started off under the Norwalk
Agreement. We listed all the major issues, income taxes. There
were others such as the fair value option, joint ventures, and
so on. We worked right the way through, and what we did to
start with is we just eliminated the differences. That was
going to take a huge amount of time if we went through every
single detail, down to 2015.
And then what I thought was a real inspiration from the
SEC, when we called this together about 2005, 2006, we thought,
well, how can we do this faster? And we decided what we would
do, there were certain things that we could change very
quickly. Basically the standards were the same, but there was
some principle that was not quite the same. Well, why don't we
just take the better principle and we would do it? So that
locks another lot out, and we have done that more quickly.
We were then left with ten areas where sometimes there are
differences and sometimes there are not, but we know exactly
where they are. And we can highlight that, and we can explain
what the policy is. For example, in consolidation,
internationally we base it on control. If you control
something, you consolidate. The U.S. tends to be more do you
have majority equity shares. Well, we think it is broader than
that, and that is part of the issue that we are working with
FASB on.
Leasing, for example, the good news is that we have very
similar standards. The bad news is they do not work. They are
hopeless.
[Laughter.]
And nothing is on the balance sheet if it is leased. One of
my big ambitions is to fly an airplane. It is actually on an
airlines balance sheet. And the reason it is not is because the
standard really was written 20-odd years ago and does not
reflect the economics. You know, if you have a legal commitment
to pay, that is a liability. And when you think leases a year
ago amounted to $582 billion, and that is just for 1 year, and
most of that is off balance sheet. Now, Bob----
Senator Bennett. It sounds like Enron.
Mr. Tweedie. Well, it has been there for years, but, you
know, that is one actually we both get exactly the same answer,
which is nonsense. And what we are trying to do now is work a
joint standard, and we were discussing that just yesterday. We
will come out with a joint standard when we will move from not
showing any leases to showing almost all of them on balance
sheet.
So while we have ten major differences between us, some of
them really--not so much ten major differences. Ten major
projects. Some of them do not lead to differences, and the
other ones we know exactly what the differences are caused by,
and that can be disclosed. So there is, if you like, a flag for
the investor.
Senator Bennett. So the bottom line--this is what I am
driving toward. The bottom line is an analyst or an investor
who tries to do his own analysis can, in fact, understand
enough about the differences so that he or she will come to
basically the same decision regardless of which set of
accounting terms looking at--the educational process that you
have been talking about necessary to equip the analyst with the
skills to dig into a corporation under IFRS are not that
difficult to acquire, and the analyst will be able, with a
little bit of study to say, OK, it is a slightly different
pattern, but I can get the same information I want if I am
focused on EBITDA, I know what it will mean; if I am focused on
some other aspect or valuation of what the market cap really
ought to be, I can get those data out of this new set without
having to go back to school for 2 or 3 years in order to
understand it.
Is that a safe assumption?
Mr. Tweedie. You will not get exactly the same data in the
sense without doing the accounts twice, but what you will get
is you will get very similar answers, which are getting more
and more similar as time goes by. And the second thing you will
know is the fact there may be a difference in this area. Take,
for example, consolidations. One of the big issues that we have
had--and Enron was a classic--was special purpose entities, and
now with the credit crunch we have got conduits. How do we
handle those things? The U.S. handles it in a rather different
way from us. We look at do you control this.
In the aftermath of Enron, the U.S. brought out 46R, which
is a method of looking at what are the benefits you are getting
out of this thing. Well, we think that is worth exploring, too.
So we are trying to produce a joint standard which will
look at maybe the central theory should be control. But what
happens if you do not control? Can we make sure you get it?
So you will not yet get exactly the same answers, but that
does not mean to say that the IASB answer is better than
FASB's. It is in some situations and maybe not quite so good in
others. But the idea is we merge and get the best of both
worlds, and that is actively going on at the moment. So it is
going to get less and less, the differences.
Analysts in Europe must have had quite a job because, while
IFRS and U.S. standards are similar, when you looked at some of
the continental European standards, they were totally
different. So there was a complete mind-set's change from
looking at tax accounts or accounts based for creditors to
accounts based for the equity markets, which is the way we do
it and the way FASB does it.
So I think the differences are not as bad as people think
they are. The U.S., in fact, will be better equipped than most
countries to deal with this.
Senator Bennett. Thank you.
Chairman Reed. Thank you, Senator Bennett, and let's take a
brief second round.
Sir David, you pointed out the butting of jurisdictional
versions as a potential difficulty in reconciling and totally
converging. And even within the EU, most of the countries are
not--or all of those countries are not using the precise
standards promulgated by the International Accounting Standards
Board. Is that correct? There are some changes that they have
mandated?
Mr. Tweedie. Well, it is very small. It is about seven
paragraphs of one standard in 2,000 pages of standards.
I think what has happened, we are a rather unusual
organization in the sense we are modeled on the FASB, we are
independent, we can issue standards as we decide upon them.
That is not normally the way we deal internationally with
treaties and laws. People like yourself, sir, would meet with
opposite numbers in different countries, and you would come to
an iterative compromise, and that would be the international
rule.
We do not do that. We just listen to the arguments and say
that is what we think the answer is. And we do give--after we
have issued the standards, we then give--2 years later there is
still lots of antagonism toward it. We will look at it again,
but do not necessarily agree to change it.
Now, one of the things then is that jurisdictions are
suddenly saying, well, wait a minute, these people are actually
passing laws and we are having to take them and what right have
we to say this.
So I think what is starting to happen is an issue of is the
present structure suitable without giving, say, the U.S. a say
in the composition of our trustees or Europe. At the moment you
have not. The trustees, like FASB trustees, are self-elected.
They replace themselves, their successors, and it is
geographic. But, nonetheless, as far as jurisdictions are
concerned, there is no actual direct influence. And one of the
big questions then is: Should there be some governance body
that actually helps to appoint the trustees and representatives
from different countries and so on, so that people have more
say--but not to control the standards, because otherwise we
will get, if I may say so, political influence into the
standards, and that would be an appalling thing, as I am sure
you would agree, sir. This is the----
Chairman Reed. That is why we have FASB.
Mr. Tweedie. This is the issue I think that has still to be
discussed.
Chairman Reed. So there is a simultaneous effort to really
make this work, is to get all countries to adopt the version
promulgated by the International Accounting Standards Board,
and that has to go on, too, because as Mr. White and everyone
has pointed out, the jurisdictional varieties will not qualify
for special treatment under the proposal.
Mr. White. Yes, that is correct. Just to clarify, if you
remember, I mentioned 110 and 70. The category of companies
that are in the category of the 70, they are not in most
cases--in fact, I think in all cases, they are not required
under the jurisdictional adaptation to follow that
jurisdictional adaptation. There tend to be more different
options that they can follow. But they can follow the IASB
version. And so if they--they can still report--they can still
eliminate reconciliation and come here if they certify that
they are following the IASB version.
Chairman Reed. Right. Just a final point, and Sir David
brought up in terms of in the aftermath of Enron, there was
special attention to what is described as variable interest
entities now. And I understand--and going back to the whole
issue of reconciliation--that that is one of the items that is
included in a reconciliation by a filer who is using
international antitrust standards. Is that correct? Mr. Herz?
Mr. Herz. There are a few areas of difference. We have a
standard interpretation of 46R that has principles and then has
below it a bunch of guidance, as we do, that is an approach
that basically says if nobody seems to control that entity,
because one of these vehicles that has been set up, you have to
do an analysis of all the arrangements and decide based on that
whether there is a party that gets a majority of the risk and/
or reward. And then if you cannot do that qualitatively, it
lays out a quantitative approach to doing that. The
international standard is based more on control, although they
do have some risk and reward type backstops in it, but it is a
lot less specific.
On the other hand, we have significant differences in the
accounting for securitization transactions; whereas, I would
argue theirs are actually tougher than ours in order to get
something off the balance sheet than ours. So I think the
things could go either way depending upon the particular
transaction and structure. But it is something we are--it is on
our hit list of things----
Chairman Reed. Well, I think it should be, and just two
final points. First, Senator Bennett talked about looking at,
you know, apples and oranges and saying, well, I know it is an
apple, I know it is an orange, and I feel good about making my
investment. The problem is looking at an apple and discovering
later on you have got bananas that you did not think of.
Mr. Herz. You know, I said on balance I support the SEC
dropping the reconciliation, but there are pros and there are
cons to it, and one of the cons for some investors--and I think
you may hear this in the next panel from some of the people--is
they do use that information, and it will force them to either
do more work or they may not be able to quite put apples to
apples without a lot more work.
Chairman Reed. Well, I think the goal is one that we all
can embrace, which is convergence of standards, transparency,
all of the--but I think this panel has very adroitly and
elegantly indicated that there are some significant steps along
the way that have to be taken before we are quite there. Again,
we will participate, we hope, in that process in a positive
way.
Senator Allard.
Senator Allard. Thank you. I just have three brief areas I
want to bring up. I want to finish my discussion a little bit
about regulation and everything. There are a lot of medium-
sized firms in the State that I represent, and I think, you
know, if they are interested in growing their business, the
next step is into a larger firm. And they are concerned about
how this is ever going to get to be a large firm. Will these
provisions that we are talking about here make it more
difficult for those medium-sized firms to transition into a
larger accounting firm, wherever that bright line is? Anybody
want to comment on that?
Mr. Tweedie. I wonder if perhaps I could just mention
something briefly. When people switch to IFRSs, they tend to
use IFRS for listed companies. And then comes the question of--
--
Senator Allard. Those are large companies?
Mr. Tweedie. Large companies. For Europe, for example,
there are 8,000 listed companies which use IFRS--that is
compulsory--of which, I may say, only about 30 use the carveout
that is existent. The rest all use pure IFRS.
What we have done for the smaller companies is we have
taken the standards and then sort of said, well, if we were a
small company, how could we apply this? And we are putting
out--we have got a draft out at the moment on what we call IFRS
for small and medium enterprises, and it is probably about 15
percent of the size of the full standards. We have really
slashed them down.
On the other hand, if you do grow, you are basically
obeying the same sort of principles but in a simplified form,
so there is not a massive cliff that you go off when you reach
the listing, or whatever. And that is up to the jurisdiction
how far they push it. Some will push IFRS down into the medium
size, others will not. But there is an alternative coming up,
which is derived from the main standards, and that is what is
going to be used in many countries of the world.
Senator Allard. Thank you, Sir David.
The other subject I wanted to participate in here, the
Congress has charged several agencies with specific rights and
responsibilities--the SEC, the PCAOB, and FASB--and we also
designate the fees to support the setting of accounting
standards.
Now, do you have any concerns that convergence will involve
deferring some of those responsibilities or fees to foreign
organizations? And do you believe that you will need
congressional authorization to make any of these changes? This
is to the whole panel.
Mr. Hewitt. That is a very interesting question because the
support fees of FASB are paid by the registrants and then also
the----
Senator Allard. But set by the Congress--no, no, I am
sorry. Yes, we designate the fees.
Mr. Hewitt. That is true. And I believe that there will be
no decreases in fees because of lifting the reconcilement, that
type--I do not see any material effect at all upon both
standard setters, PCAOB and FASB, in terms of fees.
Senator Allard. Yes?
Mr. Herz. I think that is right. I think long term, you
know, one of the things that David mentioned is that their
trustees are trying to put in place a mandatory funding scheme
for them across the world, which would, I think, you know, give
them more security financially and be able to bolster their
staff and the like. And, you know, ultimately if we are going
to be part of this system, I think we would want to also bear
our fair share of that, whether that would be by taking some of
our fees, saying, you know, that is directed to you working
with the IASB, which we do already, or it is a separate fee
and, of course, ultimately what our organization would look
like, you know, down the road might change as well.
So whether that would--I do not know whether that would
take, you know, you all having to do something with Section 109
basically of the Sarbanes-Oxley Act or something that the SEC
could do regulatorily, I am rapidly getting out of my depth as
a non-lawyer.
[Laughter.]
Mr. Tweedie. Just on that point, perhaps I could mention
that the program of funding for the IASB, when we started, we
were very fortunate to have Paul Volcker as the Chairman of our
trustees, and saying no to Paul is very difficult. And he
certainly asked many companies to contribute on an individual
basis for the first 5 years, but that was unsustainable. And
what we are doing now is the trustees are working out a funding
program which is based on the GDP, and the countries are being
asked to provide their share. Now, they are doing it in
different ways. The U.K. and the Netherlands I think are doing
it very similarly to you in the United States by sort of a
listing fee. In Australia, they are collecting money for the
national standard setter and diverting some to us. Japan simply
is approaching individual companies, but as an organization and
then passing money up to it. So it has been done in various
ways, but the idea is to make thousands of companies involved
in this rather than as it was before, 200 or 300.
Senator Allard. Yes, I think there was some concern or
conflict of interest when you go to those people you are trying
to regulate to support you financially.
Mr. White.
Mr. White. Just to answer your question directly, we do not
believe there would be any required legislative changes to do
the things we are discussing. And, also, the SEC will continue
to be the organization that is responsible for all of the
financial reporting by foreign and domestic issuers in the U.S.
Senator Allard. Thank you.
Mr. Chairman, that concludes my questions.
Chairman Reed. Thank you, Senator Allard.
Gentlemen, thank you very much, and there might be
additional questions which we would direct to you in writing,
and we would ask for your responses in a timely manner. Thank
you very much.
I will call forward the second panel.
Our first witness is Mr. Jack Ciesielski, who is the owner
of R&G Associates, Inc., an investment research and portfolio
management firm located in Baltimore. He is the publisher of
the Analyst Accounting Observer, which is an accounting
advisory service for security analysts. He is currently a
member of the FASB's Emerging Issue's Task Force, and a member
of FASB's Investor Technical Advisory Committee.
From 1997 to 2000, he served as a member of the Financial
Accounting Standards Advisory Council, which is the advisory
body that consults with the FASB on practice issues and advises
FASB on setting its agenda.
Ms. Teri Yohn is an Associate Professor at the Kelley
School of Business at Indiana University. Prior to joining
Indiana University in the fall of 2007, she served on the
faculty of Georgetown University for 15 years. Ms. Yohn also
serves as the Academic Fellow in the Office of the Chief
Accountant at the Securities and Exchange Commission in 2005
and 2006 and on the faculty of the University of Massachusetts
at Amherst in 2006 and 2007.
Mr. Charles Landes is Vice President, Professional
Standards and Services for the American Institute of Certified
Public Accountants. In this capacity, he oversees the technical
activities of the Auditing Standards Board, Accounting and
Review Services Committee, Accounting Standards Executive
Committee, and the PCPS Technical Issues Committee.
Mr. Landes is a former member of the Auditing Standards
Board and is a former chairman of the Peer Review Committee of
the Private Companies Practice Section.
Mr. Lynn Turner serves as a Senior Advisor to Kroll Zolfo
Copper, a firm specializing in corporate advisory and
restructuring and forensic and litigation. He was appointed by
the Department of Treasury to the Advisory Committee on the
Auditing Profession. Mr. Turner served as the Chief Accountant
of the SEC from July 1998 to August 2001. As Chief Accountant,
Mr. Turner was the principal advisor to the SEC Chairman and
Commission on auditing and financial reporting and disclosure
by public companies in the U.S. capital markets as well as the
related corporate government matters.
Thank you all for your willingness to join us today and for
your testimony. Your testimony will be made part of the record,
your written testimony. So feel free, in fact I would encourage
you, to summarize your comments and see if we can approach the
5-minute mark.
Mr. Ciesielski, please.
STATEMENT OF JACK CIESIELSKI, PRESIDENT,
R&G ASSOCIATES
Mr. Ciesielski. Thank you, Chairman Reed, Ranking Member
Allard, members of the subcommittee----
Chairman Reed. I think you have to turn the microphone on.
Mr. Ciesielski. That is better.
Chairman Reed, Ranking Member Allard, and members of the
subcommittee, I am pleased to be offering testimony today on
the subject of international accounting standards.
From the start, I would like to commend the SEC for trying
to move the world's two leading accounting standard setters
closer together. The two have made a remarkable amount of
progress in the last 5 years, since they announced their
intention to work together on converging their standards and
coordinating their efforts on future projects.
It is the SEC that is an agent provocateur, however, by
issuing its proposal to eliminate the IFRS to GAAP
reconciliation and its proposal to allow U.S. companies to
choose between U.S. GAAP and IFRS. While convergence has
progressed well in the last 5 years, these proposals have such
broad implications that they force all players to rethink what
is possible or not possible in the current environment and in
the near future.
That said, I view the SEC's proposals as the right
questions at the wrong time. Much high quality information
about the state of accounting standard convergence is available
from SEC filings. The SEC has proposed to eliminate the
reconciliations which provide quantifiable evidence about the
GAAP and the results produced by the two reporting systems.
Much can be learned about the state of convergence from the
differences shown in those reconciliations for U.S. registrants
and targets could then be set for eliminating the differences
in the relevant standards.
There is no indication in either of the SEC's proposals
that there has been an examination of the existing evidence.
Instead, the SEC is relying heavily on the fact that there is a
process in place for convergence to occur in the future without
objectively assessing how far the convergence of the two
systems have progressed.
I would not smoke three cigarettes a day because there is a
process in place for discovering a cure for lung cancer. It
seems a little bit--maybe that is an exaggeration, but it is
relying heavily on an outcome that has not been determined yet
to make sure that everything is OK today.
I support the convergence efforts of the two standard
setters and I believe that the investors and capital markets
would benefit enormously from a single set of high quality
standards. At this time, however, I do not believe there is
sufficient convergence between the two sets to warrant either
the elimination of the IFRS to GAAP reconciliation or to allow
U.S. registrants the choice of which accounting standards to
use.
I urge the Commission to isolate the past differences
arising from non-converged standards having long effects on the
future reporting and to develop the proper disclosure for such
differences. I also urge the Commission to examine the other
differences produced by the application of the two sets of
accounting standards, identify the accounting literature
responsible for those differences, and work with the IASB and
the FASB to set realistic deadlines for working out those
differences through the convergence process.
That concludes my prepared remarks.
Chairman Reed. Thank you very much.
Mr. Landes, please.
STATEMENT OF CHARLES LANDES, VICE PRESIDENT, AMERICAN INSTITUTE
OF CERTIFIED PUBLIC ACCOUNTANTS
Mr. Landes. Thank you, Chairman Reed, Ranking Member
Allard. My name is Chuck Landes and, on behalf of the 340,000
members of the AICPA, the National Association for Certified
Public Accounts, it is my pleasure to testify today, and thank
you for holding his hearing.
I want to state as directly as possible that the AICPA
supports the goal of a single set of high quality,
comprehensive accounting standards, to be used by public
companies in the preparation of transparent and comparable
financial reports throughout the world.
The debate or question should no longer be whether we move
to convergence of high quality accounting standards, but how
soon we can accomplish convergence. The FASB and the IASB have
made tremendous strides in harmonizing accounting standards and
the SEC has demonstrated U.S. leadership in expediting this
process. But let's recognize that convergence is not, nor will
it be, without challenges and issues. So there is still hard
work to be done.
Will there be bumps in the road as we take this journey?
Absolutely. But it is a journey that must be taken.
Accounting is often referred to as the language of business
and there is a need for a common global business language, a
common set of accounting standards. In today's global economy,
that one common accounting language will benefit all
participants in the capital markets. It will first benefit
investors because it will facilitate the comparison of
financial results of reporting entities domiciled in different
countries. It will also benefit U.S. public companies because
it will allow them to present their financial statements in the
same language as their international competitors. And it will
benefit audit firms who audit public companies because it will
allow them to train their staff around one core set of
accounting standards.
The AICPA supports the SEC's proposed rule regarding the
elimination of the reconciliation to U.S. GAAP by foreign
private issuers and the SEC's concept release that would give
U.S. issuers an option to prepare financial statements in
accordance with IFRS. We believe these are both important steps
in the process toward the acceptance of a single set of high
quality globally accepted accounting standards.
That is not to say all differences between GAAP and IFRS
have been resolved. But despite these differences, both U.S.
GAAP and IFRS promote transparency and are designed to protect
investor interest. With respect to the SEC, the AICPA fully
supports their role of protecting U.S. investors. We encourage
the SEC to continue to provide input during the IASB standard
setting process and to solicit user feedback to understand
whether these standards meet investor needs.
The AICPA also encourages the SEC to work with other
regulators around the world to agree on an appropriate
framework for the acceptance of IFRS and to work with those
regulators to encourage robust enforcement of IFRS. The
challenge will be balancing the needs of investors and the
needs of the security regulators with one set of global
accounting standards.
In the end, any activity to remove organizational barriers
and avoid geographical differences ultimately will aid in
achieving one set of international accounting standards. While
this hearing is to deal with the acceptance of IFRS financial
statements in the SEC's filing of foreign private issuers and
granting of an IFRS option to U.S. public companies filing with
the SEC, the AICPA believes that the SEC should view
international convergence holistically. That is if IFRS are to
serve as a basis for U.S. issuers' financial reporting, there
will also need to be changes in auditing, regulatory, and legal
environments.
With respect to auditing, the SEC, along with the PCAOB,
should explore convergence of PCAOB auditing standards with
international standards on auditing.
With respect to regulatory, because IFRS currently are less
detailed than U.S. GAAP, a decision by the SEC to permit an
IFRS option should carry with it an expectation by regulators
and investors that the use of reasoned, professional judgment
may yield different outcomes in similar circumstances more
often under IFRS than U.S. GAAP.
Additionally, working from less detailed standards and less
interpretive guidance may result in more second guessing by
regulators and users and thereby result in unwarranted
increased legal liability for preparers and auditors of
financial statements. As a result, the SEC should work with
Congress and other governmental agencies to explore this
potential increased risk and work to mitigate this risk when
preparers and auditors have applied reasoned professional
judgment.
At the international level, continued progress toward high
quality international accounting standards requires an improved
funding mechanism for IASB that will allow them to remain
independent and objective.
And finally, we acknowledge that we need to fulfill a
number of responsibilities to make convergence to a single set
of global accounting standards for public companies a success.
Rest assured that we, the AICPA, will meet our
responsibilities.
On behalf of the AICPA, we would like to thank you for the
opportunity to appear here today and we would be happy to
answer any questions that you may have.
Chairman Reed. Thank you very much. Ms. Yohn.
STATEMENT OF TERI YOHN, KELLEY SCHOOL OF BUSINESS, UNIVERSITY
OF INDIANA
Ms. Yohn. Mr. Chairman, Ranking Member Allard, good
afternoon.
I appreciate the opportunity to appear before you today to
provide testimony on issues related to the international
convergence of accounting standards and the potential
elimination of the IFRS-U.S. GAAP reconciliation requirement
for foreign private issuers. The views that I represent today
are primarily based on my interpretation of academic research
on these issues.
Most, but not all of the academic literature supports the
notion that convergence of accounting standards is a laudable
goal to which U.S. standard setters and regulators should
strive. In general terms, the purpose of Regulation S-X is to
provide U.S. investors with inter-temporally consistent
information that is comparable across registrants. To the
extent that internationally converged accounting standards
increase the comparability of financial information,
convergence is in the best interest of U.S. investors and other
stakeholders.
Convergence of standards is occurring through the joint
standard setting activities of the IASB and FASB. And academic
research suggests that IFRS possesses the characteristics of a
high quality set of standards. Research has documented that
IFRS and U.S. GAAP are equally value relevant for non-U.S.
companies in non-U.S. markets. However, the quality of IFRS in
foreign markets is not the most important factor in determining
whether or not the reconciliation requirement should be
eliminated in the U.S. Rather, the informational needs of U.S.
investors should drive this decision.
Logically, any proposal to eliminate the reconciliation
requirement must be based on the premise that U.S. GAAP and
IFRS are informationally equivalent or that investors can
reconstruct comparable U.S. GAAP summary accounting measures
from IFRS financial information. Neither of these two criteria
appears to hold at this point in time. Academic studies have
documented that material reconciling items currently exist
between IFRS and U.S. GAAP and that the reconciliation is value
relevant and used by U.S. investors, suggesting that U.S. GAAP
is more value relevant than IFRS in U.S. markets.
In addition, without the reconciliation, it would be
difficult, if not impossible, to reconstruct U.S. GAAP income
and equity from IFRS-based financial statements and footnotes.
Furthermore, it does not appear that U.S. stakeholders have the
necessary expertise in IFRS to understand the differences
between the two sets of standards. Universities are still
attempting to fully integrate IFRS into their curricula, and
even the largest accounting firms have revealed concerns about
the lack of IFRS expertise within their domestic professional
staff.
The existence of significant reconciling items and the
value relevance and use of the reconciliation by U.S.
investors, as well as the inability to reconstruct the
reconciliation from public information and the lack of
expertise in IFRS by U.S. stakeholders suggests that the
elimination of the reconciliation requirement is premature. It
would perhaps be prudent to revisit the issue on a regular
basis and to reconsider eliminating the required reconciliation
where the differences are immaterial and when U.S. investors
appear to view IFRS and U.S. GAAP as providing equivalent
information.
Deferring the elimination of the reconciliation requirement
will also allow regulators to address some of the major
challenges of convergence. Academic research has documented
that institutional differences lead to differential
implementation of even uniform accounting standards across
countries. In addition, while the U.S. has the reputation for
providing the strictest enforcement of securities markets,
evidence on SEC enforcement has concluded that the SEC rarely
acts to enforce the law against cross-listed firms and that
there are legal and institutional obstacles to private
litigation against foreign forms in the U.S.
Differential implementation of standards across countries
and differential enforcement of domestic and cross-listed firms
diminishes the comparability of financial statements, even with
converged standards. Whether or not the reconciliation
requirement mitigates these issues remains an open question
that should be addressed.
An argument for eliminating the required reconciliation is
that it would reduce the cost of foreign firms of listing on
U.S. markets. Research has concluded that U.S. cross-listing
provides benefits to foreign firms in the form of greater
access to capital and improved information environment, greater
investment protection, and evaluation premium. Despite these
benefits, some are concerned that the U.S. securities markets
have lost their competitiveness in recent years due to onerous
requirements. However, existing evidence on the New York versus
London stock exchanges does not support this argument and
suggests that the newly cross-listed firms on foreign exchanges
tend to be small and unlikely candidates for cross-listing in
the U.S. The research also suggests that the net benefit of
listing on a U.S. exchange has not eroded in recent years.
In summary, most of the academic research suggests that the
convergence of accounting standards is beneficial to U.S.
investors and is therefore a laudable goal. The research also
suggests, however, that the elimination of the IFRS-U.S. GAAP
reconciliation requirement is premature because it will reduce
the comparability of financial statements across registrants
and will leave U.S. investors with a diminished set of relevant
information for decisionmaking.
Thank you.
Chairman Reed. Thank you, very much. Mr. Turner, please.
STATEMENT OF LYNN TURNER, MANAGING DIRECTOR,
GLASS, LEWIS & CO.
Mr. Turner. Let me just start by thanking Senator Allard
for those kind and generous remarks at the beginning. I know
that in the future you will be leaving the Senate. As a citizen
of Colorado, I know you have done tremendous public service for
us and have made tremendous personal sacrifice, including your
wife, in being back here. So thank you very much for all you
have done for us as a State.
My only regret in being here, actually, today is that
tonight on the plane ride home I am going to miss the Colorado
Rockies first World Series win.
Chairman Reed. I will refrain.
[Laughter.]
Mr. Turner. Anyway, high quality financial reporting has
been the lifeblood our capital markets, as noted by former SEC
Chairman Levitt. I could not agree with those remarks more. It
is this information that provides investors with the ability to
make informed judgments as to where they should allocate their
capital, thus resulting in allocations where there is higher
returns with lower risk. And that attracts a tremendous supply
of capital to any capital market. When the quality of this
information, however, is lowered, markets do pay a price as we
have seen throughout this decade, both here and abroad.
Based on my experience, I believe maintaining that high
quality financial reporting is important to the competitiveness
of the U.S. markets. As a former CFO and business executive, I
know it is important that you strive not just to match what the
other markets or competition is doing, but to beat their
product.
U.S. markets will not maintain their current prominence if
they simply become the equal of other markets, employing the
same strategies and approach to business. Certainly, the
fallout from the subprime fiasco and structured investment
vehicles, the SIVs, around the globe is a classic example of
this as we saw in August when foreign investors pulled
billions, tens of billions of dollars out of the U.S. capital
markets over that situation.
I would also like to clarify what true convergence is, in
terms of financial reporting. It is a single set of high
quality financial reporting and disclosure standards that
result in companies reporting the true economics of the
transactions they enter into. I seriously doubt if what is
known as the SIV IFRS-lite standards are going to come up and
meet that goal.
They are standards that result in consistent reporting
methods from period to period and comparable reporting by
companies who enter into comparable transactions. A couple of
the Senators today have already highlighted the importance of
investors being able to compare from one company to the other.
Without that, you do not have an efficient market.
They are a complete set of standards covering all the
significant industries, including in industries like the
extractive mining, oil, and gas, which is important to my
State, financial services including insurance.
They are transactions being reported in the financial
statements and not left off the balance sheet and out of the
income statement, as investors have seen time and time again in
recent years the special purpose entities, the SIVs, and off
balance sheet financing of securitizations and other assets.
And this is an area where, quite frankly, today I think it
would be difficult for the public to buy that we have high
quality standards either in the U.S. or international
standards. I have a number of e-mails from foreign investors
complaining about even their standards in this area.
I also note that in 2002 Senator Allard exhibited great
leadership when he wrote a letter to the FASB on off balance
sheet vehicles, encouraging them to fix this problem and bring
it back on balance sheet. So he certainly had the foresight.
Unfortunately, 5 years later we still have not gotten there.
Convergence is effective audits that ensure claim
compliance has been achieved. And it is authorities with the
expertise and experience to globally enforce these accounting
standards and audits wherever they are used in reporting to
investors. As we just heard from Ms. Yohn, that unfortunately
is a situation that does not exist globally today as many of
these conditions do not. In fact, no regulators and governments
have fully committed themselves to this effort, to fund it and
to provide it with adequate resource. And no time table has
been set among all the countries internationally to fully
achieve the changes needed to ensure complete and timely
convergence.
Instead, the efforts are, at best, being done in a
piecemeal, haphazard fashion. And as such, we are moving these
safeguards and protections such as the reconciliation before we
get there does run the risk of creating significantly more
scandals and problems for investors.
In striving to achieve convergence, I think it is important
that there are a few key points worth noting. These are all
laid out in the written testimony and I would ask, Senator,
that the entire written testimony and appendix be included in
the record.
But in striving to achieve convergence, which I do think is
important, having been one of the people that led the effort to
create the IASB as we know it today in the first place,
convergence on high quality standards will be best achieved
through the private sector standard setting process, not one
influenced by outside specialist interest, overbearing
regulators, and a lack of direct involvement. We are on the
right path today, letting Mr. Herz, Mr. Tweedie and their
organizations take care of the reconciliation by eliminating
the differences in a reasonable fashion and thereby letting
them eliminate the reconciliation. It should not be the SEC
doing it.
There needs to be assurance that the necessary supporting
infrastructure set forth the SEC concept release in 2000 is, in
fact, put in place. And it was interesting that in their
proposing release, the SEC almost totally ignores that
infrastructure and whether or not it exists.
There are concerns regarding the independence of IASB and
lack of meaningful representation of investors as members of
its board. There is no meaningful representation from the
investor community on the voting board members or on the
trustees whatsoever. It is an issue that in March of this year
Chairman Levitt pointed out as a serious shortcoming.
Comparability and consistency in reporting by companies has
been a hallmark of high quality financial reporting by
investors and the FASB's conceptual framework for several
decades. Negatively impacting that will have consequences for
investing public around the globe.
And finally, in the U.S. there is a lack of resources,
skills, and training to make an orderly transition to IFRS
anytime soon. And I do fear that to require a change in the
near term would disadvantage many small auditing firms and
result in significant costs for smaller companies at a time
when those of us on the Treasury Committee are looking for ways
to make the smaller auditing firms more competitive.
With that, I will conclude my remarks and take any
questions.
Chairman Reed. Thank you very much. Thank you all for your
excellent testimony. Let me start, Mr. Turner, with a question.
Under Section 108 of the amendments to Sarbanes-Oxley,
there was the setting out standards for--recognizing accounting
standards. There is a question, at least, and I think the
previous panel suggested that they have concluded that they
have the authority. But there is a question, at least, whether
they would have the authority without a statutory change to
recognize these standards without reconciliation.
Do you have a view on that?
Mr. Turner. Yes. Actually, having been involved with the
drafting of that, I personally think that they would need to
come back to Congress and get Congress's approval to do that. I
do not recall, in any of the conversations at the time, that
there was a notion that FERC funds, for example, would be
diverted from the FASB to the IASB. So I clearly do not think
it was the intent of Congress to open it up like that. So I
would say the SEC does need to come back to Congress.
Chairman Reed. Thank you.
I want to go back to Mr. Ciesielski and Mr. Landes and
Professor Yohn also, in that the discussion in the previous
panel, trying to sort of determine what the difference is
between international standards company reporting and company
reporting under U.S. GAAP. There was a suggestion that they are
similar but not identical.
But then there is a view that there could really be
material missing information. So Mr. Ciesielski, could you sort
of give us a comment and maybe an example to flesh out this
discussion?
Mr. Ciesielski. I would be glad to.
Chairman Reed. Can you turn your microphone on, please?
Mr. Ciesielski. I am sorry.
Chairman Reed. That is quite all right.
Mr. Ciesielski. I go back to the last panel, I believe Mr.
Herz thought there were 11 areas that needed to be reconciled
between the current body of literature of the FASB and Mr.
Tweedie believed there were 10. Close, they are similar. They
are not exactly the same.
There are projects in the literature that they are working
on that will be prospectively smoothed out. And I am confident
that the convergence process will work on that.
But in the meantime, there are differences in the
literature that has not been addressed--excuse me, that is
being addressed, that produces current differences in the area
of taxes, pensions, and also what I refer to as legacy
differences.
If you go back to prior to 2002, there were differences in
the GAAP literature and the IASC literature that have an effect
at the time a transaction is consummated. My favorite example
is business combination accounting. There are some companies,
and we cite some in our report which is part of the record,
where there were business combinations that took place that did
not qualify for what was called pooling of interest accounting
in the United States at the time. There was a comparable
procedure called uniting of interests in the IASC literature,
which was adopted by the IASB. Because it did not meet the
criteria in the United States for pooling of interests, it had
to be reported in the reconciliation as a purchase, which is
what we use in the United States all the time now.
Those differences can have lingering effects on income that
last into the decades. And if the reconciliation is removed,
those differences will never be known to investors. There are
examples, again, of that in the report that is filed as part of
the testimony. Those differences, often, I recall, were
favorable in terms of producing income figures that were higher
under IFRS than under U.S. GAAP. There is no way that analysts
could go back and recreate that information.
I like to say that analysts and investors are reviewing the
company from 30,000 feet when they are reading the financial
statements. Those kinds of transactions occur at ground level.
They do not have visibility into those transactions to try and
estimate for themselves how they affect current report. And
even if they did have access to much of that information, it
would still be an estimate. I think a lot of that information
would be lost for good and it would create an unlevel playing
field.
And also, I would point out that I believe it was Con
Hewitt pointed out that the information is old and stale by the
time it reaches analysts. I think that is a great argument for
saying it should be reported more frequently to iron out those
differences as U.S. companies report.
One final remark, I believe there is a perception that
analysts and investors do not use the reconciliation. I would
disagree. I think they use it in much the same way they use
other information that is contextual, like the business
description part of every 10K filing. If you are picking up a
foreign company for the first time that is filing an IFRS and
you do not know much about them, but you do understand U.S.
reporting, this provides a context and a reason to understand
why they are different in terms of U.S. reporting versus IFRS
reporting. This does lay it out.
I would also mention that a lot of U.S. analysts are just
passably familiar with U.S. GAAP. When they look at this
reconciliation they are getting, I would say, prima facie
evidence of what they do not know. And they do have a way of
putting it into context in U.S. terms and they can follow up
and build their knowledge if they want to.
Chairman Reed. Thank you.
Mr. Landes, your comments on the same issues of is this
just similar information or is there missing information
perhaps?
Mr. Landes. Well, Senator Reed, we certainly acknowledge
that eliminating the reconciliation would result in a loss of
information. We, however, look at this a little differently. We
believe that the elimination shows that the U.S. is willing to
put some skin in the game, to use a golf term or perhaps even a
poker term. Sir David mentioned that there are some foreign
filers who look at the reconciliation and are offended by that.
And so we think that this is a way for the U.S. to step up and
say yes, we are serious about convergence.
I have some personal experience, not on the accounting side
but actually on the auditing side, where the AICPA's Auditing
Standards Board has been working very hard now for three or
four, almost 5 years on converging U.S. auditing standards for
non-issuers with international auditing standards. And what we
found was that the day that we publicly remarked that we are
working toward convergence, we were embraced in a different way
by the international community.
Prior to that, when we would try to make arguments, they
would look and say that is all well and good. But you all do
not use international auditing standards, so why should we
care? And we see the elimination of the reconciliation as a
first step in the process of telling the world we do care about
international convergence. And we actually believe that the
elimination may speed up the convergence. And we know that that
is a view not shared by others but nevertheless, from our own
personal experience, what we have found on the auditing side.
Chairman Reed. Thank you. Professor Yohn, please.
Ms. Yohn. I think the academic literature is focused on
what is the impact and the use of the reconciliation for U.S.
investors. And like I said earlier, it seems that there are
material differences, even looking as recently as 2004-2005.
There are material differences. The average, I think,
reconciling difference was about--the mean was 13 percent of
stockholder's equity. And that the investors use this. That if
you control for the IFRS earnings, the difference between IFRS
earnings and U.S. GAAP explains changes in stock prices. So it
suggests that the investors do use the information and it makes
material differences.
Chairman Reed. Thank you. Senator Allard.
Senator Allard. In your testimony, Mr. Landes, you made the
statement that AICPA supports the goal of the single set of
high quality comprehensive accounting standards to be used by
public companies. Does the association or the institute feel
that the United States has the best set of accounting
standards?
Mr. Landes. We would all love to believe that what we have
in the United States is the best, whether it be accounting
standards, whether it be auditing standards, regulatory
processes. What we have found is that we may not always have
the best answers. I have, if I may----
Senator Allard. Can you give me some examples where the
international accounting standards might be superior to what we
have in the United States?
Mr. Landes. Well, I believe that one of the items that Sir
David talked about was prior to the FASB's issues of FIN 46,
where they had some consolidation standards that may actually
have been better than the U.S. standards at the time. So I do
not----
Senator Allard. That is where you talked about the
majority, as opposed to controlling interest?
Mr. Landes. That is correct. That is correct, Senator
Allard. I do not have any specifics that I could give you
today. I am not prepared to offer specifics where I think one
is necessarily better than the other. That is a debate that we
personally do not believe is one that we should be having. We
believe--and I believe Senator Reed mentioned, and perhaps you
alluded to it, as well--that we should not be looking at
whether one set is better than the other. But what we ought to
be doing is looking at them both and saying how can we draw the
best answer out of both of those standards to create one set of
high quality standards.
Senator Allard. And that is what I am driving at, is for
that clarification. Because when I looked at that statement, oh
my gosh, it sounds to me like he would not be in favor of
convergence. But you are in favor of convergence, working with
other foreign countries to come up with a common standard?
Mr. Landes. Absolutely, Senator.
Senator Allard. In some cases, we might have to give a
little bit to accept a foreign standard.
Mr. Landes. That is correct. That is part of the
convergence process.
Senator Allard. Now there are some--well, let me drop that
right there. Mr. Turner, let me get back to you and it is kind
of along the same lines I was talking to him.
You are obviously very familiar with the Enron, Global
Crossing, other firms, those problems there that we had that
Congress ended up enacting Sarbanes-Oxley. And we did that to
raise our corporate governance standards. What we found out,
what this committee has begun to hear over the last couple of
years, is that this higher--although we expected the higher
standards to help our markets, when we raised those standards,
many companies seem to have fled our stock markets, going to
Tokyo. That is the report back to the committee--the Tokyo,
London markets, and Toronto, I believe, is where the other
markets are.
When we try and level out and reach a convergence like Mr.
Landes talked about, some of the European countries have carved
out exceptions. How can we be assured that we will not have a
similar adverse impact on our businesses here in this country?
Mr. Turner. Actually, at this point in time, I do not think
you can be assured of that because the process is young and we
do not know how it is going to work out. As I mentioned
earlier, I do get concerned about competitiveness between one
and the other. Some people would say oh, let's just look like
the Europeans. Well, if your product all looks alike, I can
guarantee you as a former businessman you are not going to be
the one selling most of the product.
And right now, quite frankly, we are selling the most. Our
capital markets still, to this day, have the best risk premium
on them for investors. Those companies that have gone to the
London market, for the most part, would not meet the listing
requirements of the New York Stock Exchange or NASDAQ,
regardless of what is SOX. So SOX has nothing to do with it.
As Goldman Sachs, probably a premier firm if not the
premier firm, has truly shown and demonstrated, it is not
anything to do with the regulatory regime that has caused
people to think about going elsewhere. It is either typically
most people do like to list in their home country. And you know
that is not a novel idea here. Most companies here like to list
here, as well.
It is because of the GDP growth in some of the emerging
Asian markets like India and China are growing at three to five
times our GDP. Their businesses are growing. That provides much
greater opportunity for growth in the businesses and that is
where the investment returns are going to be higher.
In fact, I serve on a mutual fund and we are reallocating
to some of the foreign markets more money because those are the
ones where they are going to generate the most return.
So it is not the regulatory scheme that is getting us down.
It is not the litigation that is getting us down. So I think
those are misnomers. What the focus really has to be on is how
do we make our markets different such that they are going to
give investors the higher returns?
And unfortunately, one of the things that foreign
investors, the largest pension funds in Europe and around the
globe, Australia, have written to the Commission and said is
that if they continued to be denied the same shareholder rights
that they have in their home countries like the U.K. and those,
if they continue to be denied those rights, they are going to
withdraw their money from the U.S. capital markets. And that
should concern us. It should concern us that we are not looking
for those opportunities to get better.
Senator Allard. Thank you, Mr. Chairman.
Chairman Reed. Thank you. I have one other area I would
like to touch on with Ms. Yohn and Mr. Landes. And that is this
would cause a sea change, I think, in the accounting profession
in terms of the practice, the routine, the rules, whatever. And
I have just had the experience, my godson went through and
passed all the tests for his CPA spending hours, excruciating
hours, late late at night, learning GAAP. And is that all for
naught? Maybe that is the best question.
But it would seem to me that this would be a huge cultural
change in the accounting profession. And are we prepared for
that? And not just in the profession itself but in academic,
those who prepare the accounts.
So Ms. Yohn, on this final point, unless Senator Allard has
different questions, if you could comment and then Mr. Landes,
on this whole issue of education and cultural change, how long
will it take, and whatever?
Ms. Yohn. I do not think that the educational system is
ready now for a move to IFRS. I know that universities have
been trying to incorporate IFRS into the classes, into the
accounting programs, and they are doing so. But they are trying
to figure out the best way to do so and they are doing it
slowly.
And so I do not think right now we are ready. And I know
that some representatives of the auditing firms have come to
the universities and said can you help us because we are
concerned about the lack of expertise in IFRS within our
offices in the U.S. So they see it as a big issue, as well.
So I agree, it would be a big sea change that I do not
think we are ready for.
Chairman Reed. Mr. Landes.
Mr. Landes. Senator Reed, when you become a CPA one of the
things that you learn very quickly is that you have committed
yourself to a lifetime of learning. And even under our existing
GAAP structure, things change.
When I think back to the time when I passed the CPA exam,
there were five standards, five accounting standards. Now there
are 159. There were only 30 auditing standards and now there
are 140-some, excuse me 114.
And so what we are talking about here is part of a
continuing process of education. I would agree that we are not
ready today. But that does not mean that we should not start.
The AICPA has a course. We have several courses on IFRS.
They are not the best sellers today but I suspect that they
will gain traction over the next months and years as more CPAs
become engaged in IFRS and the whole international convergence
process.
But we recognize our responsibility to educate our members,
to do what we need to do to bring them along, to help them walk
that journey that will be the new accounting environment of the
future. And that includes working with those folks in academic,
working with textbook authors, our own CPA exam to make sure
that it begins to change. And certainly, and I know both of you
have expressed some concern, and rightfully so, with members
from smaller companies or smaller CPA firms, who again may feel
very overburdened with just the number of new standards that
are out there today just in our own system.
And so one argument for moving to one core set is that you
do not have to learn two, that you can begin simplifying and
learning one. Will it take time? Absolutely. Are we
absolutely--are we ready to turn the light switch on tomorrow?
No, we are not. But I do not think anybody is saying we should
turn the light switch on tomorrow.
Senator Allard. I do not have any more questions. I just
would thank the panel for their testimony. I appreciate your
comments.
Chairman Reed. I would concur. Thank you all very much for
making time out of your very busy schedules to join us today.
There may be additional written questions by my colleagues
or members of the staff. If you could respond before Wednesday,
October 31st for my colleagues. We will get the questions to
you as quickly as we can.
Thank you very much. The hearing is adjourned.
[Whereupon, at 4:17 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
Good afternoon, Chairman Reed and Ranking Member Allard. Thank you
for holding today's hearing on the convergence of international
accounting standards. We live in an era that has been defined by the
increasing globalization of capital markets--a trend that was well
documented in a report issued earlier this year by New York City Mayor
Bloomberg and myself.
Our report made a number of recommendations to help the U.S.
maintain its historical role as the global leader in financial markets,
but one of the most important of these was the accelerated convergence
of U.S. Generally Accepted Accounting Principles--GAAP--with
International Financial Reporting Standards--IFRS.
In today's world, where a typical investment often consists of a
Russian investor purchasing shares in a Japanese company listed on an
American stock exchange, it simply makes no sense to have different
auditing standards for different countries. As the trend of
globalization continues to accelerate, it is critical that we establish
one common language for reporting financial results to investors.
The fact is that IFRS is well on the way to becoming the global
language which the rest of the world uses. More than 100 countries
throughout the world, including all of the major financial centers
outside of the U.S., already use IFRS. Furthermore, as all of you today
acknowledge, IFRS standards are robust and high quality accounting
principles that serve investor interests well. Therefore, the U.S.
requirement that non-U.S. companies must reconcile their financial
results to GAAP is a very costly, and in my view, unnecessary one, and
is a deterrent for many foreign companies that might otherwise choose
to list in the United States.
The requirement that foreign companies reconcile their accounting
results to GAAP is, in my opinion, a key factor in the decline of the
preeminence of U.S. capital markets, which have seen their market share
decline from 57% of global IPO proceeds in 1999 to just 18% last year.
Last year, only 3 of the top 25 IPOS chose to list in the U.S. We must
reverse this trend, and recognizing IFRS is absolutely critical to
doing this. When it comes to the way companies balance their books,
Wall Street and the rest of the world should be on the same page.
IFRS will be the language of worldwide business for future
generations and we must start allowing it to be spoken in the U.S. And
eventually, U.S. businesses must be allowed to speak this language
themselves, which is why I am glad to see FASB and IASB working
together towards the convergence of their accounting standards. We must
ensure that American entrepreneurs and investors can communicate freely
and openly on the international stage.
But we must also be judicious in how we proceed with the
convergence of accounting standards. This should not be a race to the
bottom, nor should the historical role of FASB be ignored. I am pleased
to hear that FASB and the IASB are working together to try to come up
with a ``best of breed'' approach to converging GAAP and IFRS. It is
imperative that the United States, which has been the nexus of the
world's financial markets, continue to act as a leader in establishing
the future of capital markets.
I think it is also quite critical that in considering how future
accounting standards will be set, we make sure that individual national
political considerations do not poison the well. In this country, we
have fortunately had a historical tradition of having an independent
accounting board--FASB--which politicians have been loath to try to
influence for short-term political gain. It is absolutely necessary for
any accounting system that hopes to serve the best interests of
investors to be similarly independent from the political considerations
of individual nations. And so I would ask FASB, IASB, and the SEC to
consider measures to strengthen the independence of IASB from the
political considerations of member nations as this debate goes forward.
I would like to thank all of the witnesses appearing today. This is
a project that many of you have been working tirelessly upon for quite
a long time, and I look forward to hearing your thoughts on the
convergence issue. I am also quite eager to hear from the SEC in
particular, to learn more about the status of this convergence proposal
in the United States.
I thank you Mr. Chairman and I also thank the witnesses for all
their hard work on this obviously complicated and important subject.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM CONRAD W. HEWITT AND JOHN W. WHITE
Q.1. Specifically, Section 108(a) of the Sarbanes Oxley Act
directed the SEC to establish a program for recognizing
accounting principles as ``generally accepted,'' by among other
things considering the qualifications of the accounting
standards-setter. The Act set forth several required
qualifications, including that the standards-setter have
independent funding in the same manner that the PCAOB and FASB
have and that the standards-setter ``considers, in adopting
accounting principles, . . . the extent to which international
convergence on high quality accounting standards is necessary
or appropriate in the public interest and for the protection of
investors.''
In his testimony before the Subcommittee, Mr. Herz echoed
some of the concerns underlying Section 108, when he testified
that the blue print for international convergence ``should also
address strengthening the IASB as an independent, global
standard setter by establishing mechanisms to ensure the
sufficiency and stability of its funding and staffing.''
Has the Commission or its staff considered how to
apply Section 108 in the context of the IASB? That is, what is
your process for evaluating whether the IASB satisfies the
criteria set forth by Congress?
Second, Congress determined in passing Section
108 that the accounting principles used for compliance with our
federal securities laws should be established by an independent
standards-setter with an independent source of funding. In your
statement today you testified that the IASB does not have such
a funding source at this time. Wouldn't the elimination of the
reconciliation effectively mean, though, that the SEC is in
essence recognizing the IASB as an independent standards-setter
for purposes of filings by foreign private issuers? If so, is
such recognition justified when the IASB does not have an
independent funding source?
A.1. We believe that Section 108 of the Sarbanes-Oxley Act is
not applicable to the Commission's decision to allow foreign
private issuers to file their financial statements under IFRS
as promulgated by the IASB, without reconciliation to the U.S.
GAAP.
Since the passage of the Securities Act in 1933 and the
Securities Exchange Act in 1934, Congress has given the
Commission broad statutory authority to set the requirements
for financial information in filings by issuers. That authority
includes the power to determine the methods to be followed in
the preparation of financial statements, as well as the
contents of the financial statements themselves. (See 1933 Act
Section 19(a); 1934 Act Section 13(b).)
Sections 108 and 109 of the Sarbanes-Oxley Act complement
this long-standing statutory scheme. Section 108(c) explicitly
recognizes the Commission's existing authority in this area,
and provides that ``[n]othing in this Act . . . impair[s] or
limit[s] the authority of the Commission to establish
accounting principles or standards for purposes of enforcement
of the securities laws.'' Further, Congress included a general
savings clause at Section 3(c)(2) of the Sarbanes-Oxley Act,
that expressly preserves the Commission's authority to set
accounting standards in terms nearly identical to Section
108(c).
What Sections 108 and 109 do accomplish is to provide an
appropriate funding (and governance) mechanism for any
accounting standard setter that the Commission chooses to
recognize for the purposes of establishing ``generally
accepted'' accounting principles. By its terms, Section 108 is
permissive and does not require the Commission to recognize any
particular standard-setting body: ``[i]n carrying out its
authority under [1933 Act Section 19(a)] and under [1934 Act
Section 13(b)] the Commission may recognize, as `generally
accepted' for purposes of the securities laws, any accounting
principles established by a standard setting body'' meeting
certain conditions (emphasis added).
In allowing foreign private issuers to file financial
statements prepared in accordance with IFRS without
reconciliation to U.S. GAAP, the Commission has not thereby
recognized the IASB as a standard-setting body. This is so,
because the Commission has not recognized IFRS as ``generally
accepted'' accounting principles. Nor need it recognize IFRS in
this way. The Securities Act and the Securities Exchange Act do
not require the use in Commission filings only of financial
statements meeting the requirements of U.S. generally accepted
accounting principles (U.S. GAAP).
Historically, in cases in which the Commission has
permitted financial statement of foreign private issuers to be
filed based on foreign accounting systems, it has also required
a reconciliation to U.S. GAAP. Reconciliation to U.S. GAAP does
not, however, turn financial statements prepared on the basis
of another set of accounting principles into U.S. GAAP
financial statements. It rather provides quantitative
disclosures (in footnote form) of some--but by no means all--of
the differences between the foreign private issuer's financial
results under its primary set of accounting principles and the
results had its financial statements been prepared on the basis
of U.S. GAAP. Nothing in the Sarbanes-Oxley Act itself (or the
Act's legislative history) suggests that Congress believed the
Commission should cease allowing foreign private issuers to
file financial statements prepared on the basis of a set of
accounting principles other than U.S. GAAP. Had Congress meant
that in 2002, filings made since then using not only IFRS but
also other non-U.S. accounting standards would not have
satisfied these requirements. The Commission does not believe
Congress intended this result.
Q.2. Some prominent academic research suggests that the
additional uncertainty that will likely result from the
increased use of IFRS by companies listed on the US exchanges
will result in greater US stock market volatility. Have you
performed or reviewed any relevant research on how the
elimination of the reconciliation requirement and the greater
use of IFRS in the US markets might impact market volatility?
A.2. The Commission's staff reviewed the academic research
cited in the comment letter of the American Accounting
Association (AAA) and that cited in Professor Yohn's testimony
before the Subcommittee. We believe this research shows the way
in which financial reporting affects capital markets, including
volatility, is a function of the attestation, legal and
regulatory environment, as well as the accounting standards
used. In considering the adoption of amendments, the Commission
carefully considered many factors, including the input received
from the commenters, including that of the AAA, as part of the
notice and comment process.
Q.3. How many current employees at the SEC would you
characterize as experts in IFRS? How many IFRS experts does the
SEC plan to hire in the next three years to assist in the
enforcement of IFRS standards by foreign companies listing in
the U.S. markets?
A.3. In 2006, the SEC conducted comprehensive IFRS training for
all Commission staff responsible for reviewing, consulting on,
and enforcing corporate disclosure filings. We will regularly
augment this training through our continuing education program.
Organizationally, the Commission staff is not divided as to
accountants that are responsible for IFRS and those that are
responsible for U.S. GAAP. Rather, in both the Office of Chief
Accountant and the Division of Corporation Finance, accountants
are responsible for their knowledge of IFRS just as they are
for U.S. GAAP. More specifically, in the Office of the Chief
Accountant the staff members who consult on financial reporting
policy and application matters are generally organized by
subject matter (e.g., pensions, leases and so forth), hence
they focus on those subject matters with respect to both IFRS
and U.S. GAAP. In the Division of Corporation Finance the staff
members who review the registrant filings are generally
organized by industry sector (e.g., manufacturing, financial
services and so forth), hence they focus on the application of
both IFRS and U.S. GAAP within that industry. Further, there
are other staff members within both the Office of the Chief
Accountant and the Division of Corporation Finance who have
experience with and are engaged in IFRS matters in connection
with their more general responsibilities. We plan to perform
future hiring to fill these roles as part of the normal course
of carrying out our work.
The SEC staff has several years' experience with IFRS as
some foreign private issuers have filed their home country
financial statements under IFRS for many years. Further, in
2006, the staff reviewed the annual reports of more than 100
foreign private issuers containing financial statements
prepared for the first time on the basis of IFRS. These reviews
covered a wide range of industries. The staff has continued to
review the filings of foreign private issuers that use IFRS and
reviews the primary financial statements, regardless of the set
of accounting standards used or the inclusion of a U.S. GAAP
reconciliation, in foreign private issuer filings with the
Commission. The more widespread use of IFRS has reduced the
number of home country accounting standards used in SEC filings
which has reduced the number of sets of accounting standards
with which the SEC staff must be familiar.
Q.4. Would elimination of the reconciliation requirement affect
the cross-listing premium that non-U.S. companies listed on
U.S. exchanges currently enjoy? What steps could help to
maintain the cross-listing premium and thus retain the
competitiveness of U.S. markets? Would reliance on non-U.S.
companies' home country interpretation and enforcement of IFRS
affect the cross-listing premium that non-U.S. companies listed
on U.S. exchanges currently enjoy?
A.4. Any cross-listing premium may be attributed to a number of
factors, including U.S. disclosure and corporate governance
requirements, and enforcement mechanisms that contribute to the
robustness of the U.S. capital markets. We do not believe that
eliminating the reconciliation requirement diminishes the
attractiveness of the U.S. market--one manifestation of which
would be any cross-listing premium.
In addition, our policy work related to removing the
reconciliation requirement considered factors consistent with
the Commission's statutory mission of facilitating capital
formation, maintaining fair and orderly capital markets, and
protecting investors. To those ends, accepting financial
statements from foreign private issuers prepared in accordance
with IFRS was one of the actions that could provide an
opportunity to reduce the number of home country accounting
standards used in SEC filings while, at the same time,
fostering the use of a set of globally accepted accounting
standards and realizing the attendant benefits this would
bring.
Finally, it is important to recognize that the SEC is not
bound by decisions of regulators in other countries because
their national mandates cannot supersede our statutory
responsibility to enforce the U.S. securities laws.
Consultation with other regulators does, however, contribute to
our ability to effectively enforce the application of IFRS. The
SEC has consultation protocols in place with other regulators
to exchange information and to learn from their thinking and
experience on IFRS matters.
------ --
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM CHARLES E. LANDES
Q.1. Would elimination of the reconciliation requirement affect
the cross-listing premium that non-U.S. companies listed on
U.S. exchanges currently enjoy? What steps could help to
maintain the cross-listing premium and thus retain the
competitiveness of U.S. markets? Would reliance on non-U.S.
companies' home country interpretation and enforcement of IFRS
affect the cross- listing premium that non-U.S. companies
listed on U.S. exchanges currently enjoy?
A.1. We have no views or opinions as to how, if at all, the
elimination would affect the cross-listing premium.
Q.2. Do you believe that the current quality of the
implementation, auditing, and enforcement of IFRS standards by
companies using those standards in the US markets is equivalent
to the current quality of the implementation, auditing, and
enforcement of U.S. GAAP in the U.S. markets? Why or why not?
A.2. We believe that IFRS is of a high quality, as demonstrated
by the fact that many major capital marketplaces throughout the
world either follow or have committed to follow IFRS. As for
the implementation, audit and enforcement of IRFS standards, we
believe that the quality is equivalent for those foreign firms
auditing foreign private issuers filing with the SEC since
those foreign firms auditing foreign private issuers are
required to be registered with the PCAOB and subject to its
inspection process.
Q.3. The SEC's proposal in its concept release allows U.S.
companies to choose between IFRS and U.S. GAAP. What will the
impact be of creating a two tiered system for investors and
businesses?
A.3. We support the goal of a single set of high quality,
comprehensive accounting standards to be used by public
companies because (1) we believe one common accounting language
would benefit investors, as well as issuers and the capital
markets, and (2) it would facilitate the comparison of
reporting entities domiciled in different countries.
Our support for an IFRS option for U.S. issuers is
postulated on a manageable number of U.S. issuers choosing the
option in the foreseeable future. Should a large number of
companies desire to choose the option immediately, system-wide
readiness may become an issue. Accordingly, we recommended that
the SEC solicit information on the number of issuers that are
likely to choose an IFRS option immediately to help the SEC
form its views on timing of giving such an option. We believe
that during an optional period U.S. businesses would choose to
adopt IFRS if they believe doing so would reduce their cost of
capital, considering both the internal costs of preparing
financial statements and the reaction of the financial markets
to IFRS.
Allowing such market forces to play a significant role in
the decision-making process allows for implementation
difficulties and costs to be borne initially by those companies
that expect to benefit. Initial participation by a motivated
voluntary filing population will permit the issues that arise
and are resolved to benefit those that follow on later. Market
forces already have provided the impetus for many constituents
to develop familiarity and expertise with IFRS. Some U.S.
companies have subsidiaries in locations where IFRS is
required. And auditors have increasingly been asked to provide
more services around IFRS reporting.
To be clear, our views, as expressed herein, relate to the
use of IFRS by U.S. issuers (public companies) only. The AICPA
believes that a separate, dedicated effort would be required to
consider the appropriateness of the IFRS option for U.S.
private companies and not-for-profit organizations, which also
currently apply U.S. GAAP as promulgated by the FASB.
Q.4. Many accounting experts believe that the reconciliation
requirement has resulted in the introduction of important
quality control processes at the ``Big Four'' accounting firms
in which foreign private issuer financial statements are
typically subject to review by firm experts in U.S. GAAP and
IFRS, respectively, before those statements are issued to the
public. Some experts are concerned that those processes will be
abandoned if the reconciliation requirement is eliminated.
Given that many companies have only recently begun to apply
IFRS, should we be concerned that the elimination of the
reconciliation requirement may weaken the quality control
processes at the ``Big Four'' accounting firms?
A.4. No. The policy and procedures referred to (commonly known
as Appendix K procedures) were developed so that SEC filings of
foreign private issuers including reports of non-U.S. firms
would have procedures performed by a person knowledgeable about
U.S. GAAP, U.S. GAAS, and SEC independence matters. The filing
reviewer would discuss with the engagement team the evaluation
of significant differences between the requirements in the U.S.
with respect to GAAP, GAAS, SEC reporting requirements, and
auditor independence and the requirements applied in the home
country. Please note that Appendix K predates current
requirements that foreign firms auditing foreign private
issuers be registered with the PCAOB and subject to its
inspection process and other developments.
At the time this guidance was developed, non-U.S. auditors
were allowed to report that the audit was conducted using non-
U.S. auditing standards that were substantially similar to U.S.
generally accepted auditing standards (U.S. GAAS). As the
audits did not need to be conducted in accordance with U.S.
GAAS, the guidance was developed so a person knowledgeable
about U.S. GAAS would discuss with the engagement team the
evaluation of whether the auditing procedures performed were
substantially similar to U.S. GAAS.
Subsequent to the development of the Appendix K procedures,
the Commission adopted International Disclosure Standards--
Securities Act Release No. 7745. This guidance required that
the audit be performed using U.S. GAAS--now the standards of
the PCAOB--and that the report include a specific statement to
that effect.
Likewise, there have been changes with respect to the
procedures for gathering and reporting information on scope of
services since the adoption of the Appendix K procedures. For
example, as a result of amendments made in 2003 to the
independence rules contained in Securities Act Release No.
8183, work performed by the auditor is required to be
preapproved by the audit committee.