U.S. considers costly switch to international accounting rules
In a regulatory sea change that could cost billions of dollars, thousands of U.S. companies — plus foreign corporations that do business here — will adopt global financial reporting rules within five years if regulators have their way.
The impact is likely to surpass that of the Sarbanes-Oxley Act of 2002, the tough anti-corporate fraud law of the Enron era that cost individual businesses millions of dollars in accounting fees. Whether U.S. companies like it or not, the new era of global accounting appears unstoppable, and businesses that ignore the International Financial Reporting Standards (IFRS) will fall behind.
"If companies don't prepare, if they don't start three years in advance," warns business professor Donna Street at the University of Dayton, "they're going to be in big trouble."
The long march to IFRS would be grueling and the preparations expensive to carry out. Companies would need two to three years to upgrade their communications and software systems and to train many thousands of financial professionals. Regulators, CPAs and investors would need to intensely study global accounting principles. Business schools would have to teach students the new accounting.
The U.S. Securities and Exchange Commission hopes to give companies plenty of time to adjust to IFRS. In November, the SEC issued a "road map" that could lead to regulations requiring U.S. businesses to file their financial statements using international rules by 2014, or by 2011 for companies that volunteer. The SEC is seeking public comment and has said it will decide in 2011 whether to keep that timetable.
SEC Chairman Christopher Cox has called the move "a revolutionary development" that will streamline global reporting standards and create "a true lingua franca" for accounting. Business leaders such as the U.S. Chamber of Commerce say it would help the USA compete in the world economy, leading to more cross-border commerce.
In an interview, Sir David Tweedie, chairman of the International Accounting Standards Board in London, says the growth of the global economy means "we must eventually end up with a common system of regulation, auditing and accounting."
The global financial and economic crisis, by many accounts the worst since the Great Depression, only illustrates the urgent need for universal accounting and oversight, Tweedie says.
But critics warn that global accounting could unleash a legal and regulatory nightmare, especially if the SEC moves too quickly to new standards. Add rampant corruption, poor financial practices and weak securities enforcement in many countries, and it gets worse.
"Switching to another set of accounting standards is a monumental task," says Charles Niemeier, a board member of the Public Company Accounting Oversight Board, or PCAOB, created by Sarbanes-Oxley to oversee U.S. corporate auditing. "It has the potential to be a Tower of Babel."
As the financial crisis commands Washington's attention, it's also unclear whether President-elect Barack Obama will back IFRS or shelve the issue this year. Several of his economic advisers and Cabinet choices have worked on global standards, while others favor U.S. accounting rules known as GAAP, or "Generally Accepted Accounting Principles," that have been used for decades.
The two major accounting standards organizations — the International Accounting Standards Board and the Financial Accounting Standards Board in Norwalk, Conn. — have been toiling for several years to move the USA toward global rules.
Already, the European Union and 113 nations — including Australia, China, India, Mexico and Canada — have adopted or soon plan to use international rules. The SEC already allows foreign firms that sell stock in the USA to file their financial statements here using IFRS.
"It's hard to find a trading partner of the U.S. that doesn't use IFRS," says Robert Bunting, president of the International Federation of Accountants and a partner at the Moss Adams accounting firm in Seattle.
Corporate America lags the rest of the world in global accounting. In a recent Deloitte & Touche survey of 200 CFOs and other financial professionals, only 9% said their firms used IFRS, although 42% might adopt global standards if allowed to do so earlier than 2014.
Some companies embrace switch
A handful of U.S. multinationals already use IFRS for their foreign subsidiaries. Dozens more are in the early stages, says David Kaplan, leader of international accounting consulting services at PricewaterhouseCoopers.
United Technologies, the $55 billion aerospace manufacturer in Hartford, Conn., isn't sitting still. More than 60% of the company's revenue comes from abroad, and many of its subsidiaries already use global standards.
Margaret Smyth, the company's comptroller, says that United Technologies already has a worldwide team working on international accounting rules for the entire corporation.
United Technologies is training its staff and, in a dry run, has redone its 2007 financial statements in the IFRS format, as if it were required.
While it's too early to come up with precise figures, Smyth estimates that IFRS will cost the company at least several million dollars and two years to implement. In the meantime, United Technologies has a head start over slower-moving rivals.
"We see that IFRS is inevitable, and we want to get out in front of it," Smyth says. "It's a very large and complicated project."
At first glance, a move to IFRS seems straightforward. But it encompasses a company's entire operations, including auditing and oversight, cash management, corporate taxes, technology and software, according to D.J. Gannon, a Deloitte & Touche partner.
"This is not just a technical accounting exercise," Gannon says. "Companies should look at IFRS more holistically."
The changes won't come cheaply. The SEC says that adopting IFRS will cost $32 million for each of 110 U.S. companies that may be eligible to use IFRS long before 2014. Those companies compete in industries with foreign businesses that already use global rules.
While large companies can absorb the costs, small and midsize businesses will get hit hard by higher accounting bills.
Look at Brooks Automation, a technology firm in Chelmsford, Mass., that provides products and services to semiconductor-equipment makers. About 36% of its $526 million in fiscal 2008 revenue came from growing foreign markets that continue to outpace the U.S. market.
Chief Financial Officer Martin Headley says that global accounting rules would bring dramatic changes to Brooks Automation's reporting of revenue, assets and liabilities, the cost of employee stock plans and other areas.
Headley says that switching to IFRS would cost the company "multiple millions of dollars," while bringing scant benefits. "For a company our size, that's a very significant burden," he says.
Headley, who has managed global companies for 15 years, says that "the differences in accounting standards" have never thwarted his businesses.
Global accounting also is likely to be plagued by gaping differences in business customs, financial regulations, tax laws, politics and other factors.
Early studies of European companies, which moved to IFRS three years ago, have found widely varying quality in financial statements. A 2006 report by the United Kingdom's Financial Reporting Council regulatory body found "boilerplate" and "bland and uninformative" disclosure of financial information by businesses.
Research also shows that IFRS has boosted income, investment returns and other financial measures for Europe-based companies. A Citigroup report on 73 European firms found their net income rose 23% in 2005 and 2006.
Niemeier, a former SEC chief accountant and perhaps the strongest critic of IFRS among U.S. regulators, says the international standards are wide open to "multiple interpretations and a lack of uniform enforcement."
Rules open for interpretation
Likewise, Ray Ball, a business professor at the University of Chicago, says it's unrealistic to think that the more than 100 countries embracing global accounting will use those rules in the same way.
Take the recording of a company's troubled assets — one of many accounting moves open to wide discretion. During Japan's long 1990s recession, Japanese banks and other companies were required by Japanese law to write down the lost value of loans, stocks and real estate.
But Ball says that did not happen, as the Japanese government looked the other way. "An asset worth only $200 million would be kept on the balance sheet for $1 billion," he says, "and that hurt the recovery of Japan's economy for a long time."
Tweedie and other IFRS supporters say that the benefits of global accounting rules outweigh the obstacles. Embracing global standards will save money for companies in the long run and will help them raise capital abroad. Perhaps the biggest upside: IFRS is more streamlined and less complex, with 2,500 pages of standards compared with U.S. GAAP's 25,000 pages.
Auditors note that U.S. and global standards differ in key balance-sheet practices, from when to record a company's revenue to the use of so-called fair value accounting to record long-term assets and investments.
Executives at Lenovo, the China-based technology giant that bought IBM's personal computer business in 2005, are big believers in IFRS.
Dennis Culin, Lenovo's director of business transformation, says there was healthy debate and "fear of the unknown" among some U.S.-based employees who favored U.S. accounting. But in the end, adopting IFRS was a no-brainer for a corporation doing business in 160 countries.
Now, Culin says, Lenovo is weaning itself from IBM's old "legacy" U.S. accounting system. So far, Lenovo has converted its operations in Asia and Canada to IFRS, and it's working now on Europe, then Latin America. If the USA moves to global rules, Lenovo will adapt quickly.
"We didn't want to declare ourselves a U.S. company or a Chinese company — we wanted to be a world company," Culin says. "So this version of accounting fits us."
By Edward Iwata, USA TODAY