Thursday, March 4, 2010

"Can’t-Shoot-Straight SEC" Gets it Right on IFRS

Article from Bloomberg by David Reilly

Can’t-Shoot-Straight SEC Gets This Call Right: David Reilly

Bloomberg-- Every now and then the much-maligned Securities and Exchange Commission gets it right. That was the case this week when it adroitly tapped the brakes on a drive to require U.S. publicly traded companies to adopt international accounting rules.

In doing so, SEC Chairman Mary Schapiro embraced the dream of a global financial language, yet kept the hug loose enough that the agency can ensure such a change isn’t a foregone conclusion or happens on someone else’s timetable.

That was vital because the stakes are so high -- a decision to switch the U.S. accounting system, or not, will affect every investor as well as companies throughout the U.S.

Yet a basic question about international standards remains unanswered. Would it be foolish to adhere to a supposedly uniform, global accounting system when countries don’t consistently enforce rules and have opposing views of the purpose of financial markets themselves?

If Greece is openly admitting to fudging numbers on a national level, you can bet it and others wouldn’t hesitate to twist corporate accounting rules. And let’s not pretend the Chinese communist party is ever going to put the interests of investors over those of the politburo.

That being the case, it’s not clear any common accounting language would really offer investors the kind of comparability they’d hope for.

Until the SEC can provide investors and Congress, which is sure to weigh in at some point, with an answer to how it will deal with that fundamental flaw, the agency would be crazy to rush to switch.

No Rush

That’s why the go-slower approach advocated by the SEC on Feb. 24 was justified. The commission said it would wait until at least the middle of next year to make a decision on whether the U.S. should switch to international rules.

The agency also clarified what it wants to know or see happen before making that decision. Among other steps, it said U.S. and international rules should be more closely aligned and international standards setters should be independent and investor-oriented.

While those conditions weren’t cast in stone, they give the SEC room to further postpone a decision. And, if a switchover took place, the SEC wouldn’t require it until at least 2015.

This contrasts with the more rushed approach to international rules undertaken when Christopher Cox chaired the commission from August 2005 to January 2009.

Making Comparisons Easier

Let’s step back, though. Publicly traded U.S. companies report results according to generally accepted accounting principles set by the Connecticut-based Financial Accounting Standards Board. They are enforced by the SEC. Around the world, many countries have their own accounting regimes.

In a global market, having numerous accounting systems becomes costly for both companies and investors, who can’t easily compare companies in different countries.

A decade ago, an effort was launched to create a set of international standards. This got a huge boost when the European Union required all its publicly traded companies from 2005 to use those rules, which are set by the London-based International Accounting Standards Board.

The hope was always that the U.S. would eventually join in, and the FASB and IASB have been working to converge their standards with that goal in mind.

As it considers a next step, though, the SEC has to weigh just how independent an international body can be and whether a switchover from U.S. rules is in the best interest of U.S. investors. Not all countries share the U.S. view that markets are meant to serve investors.

The SEC’s Dilemma

And political pressure on the IASB, particularly from the EU, has grown recently. Not that politics isn’t an issue in the U.S.: Congress last year browbeat the FASB into easing mark-to- market rules so banks wouldn’t have to recognize losses quickly.

Yet political pressure is an even greater concern at the IASB, given that it is setting rules for use in more than 100 countries. Among them are widely differing views on how accounting rules should be crafted, their fundamental purpose and how they should be enforced.

This leaves the SEC with a dilemma, if it chooses to go international.

It could accept a system that offers uniformity only through United Nations-style consensus. That would mean watered- down rules that sometimes force investor interests to take a back seat to political concerns.

Or the agency will have to insist that different countries and regions may tailor international rules to their own situations. This would result in a global accounting language that has regional and national dialects.

Melding Together

So rules may be comparable, yet not effective, or not that comparable yet more robust.

If dialects become the norm, why not let the FASB and IASB continue melding their rules over a longer period of time? At some point, the rules will be so similar that a costly system switch won’t be needed.

That route has hazards, since the rulemakers may diverge, rather than converge, on key standards. It may also lead other countries to say the U.S. shouldn’t have much say in international rules. The big fear is that staying on the sidelines too long may put U.S. markets at a competitive disadvantage.

Those are risks the SEC should take. With the economy in tatters, financial regulation in flux and investors still jittery, the SEC shouldn’t foist massive change onto markets unless we know what we’re really getting into.

Until then, it makes sense for the U.S. to go it slow and alone for at least a while more.

David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

No comments: