Debate continues over adoption of IFRS rules

Don Stowers, Editor – OGFJ

Comments by several key Democrats in Congress have hinted they are concerned that the transition to international accounting standards might weaken regulatory control.

Federal officials, including the Securities and Exchange Commission, are preparing to propose a series of groundbreaking regulatory changes in order to address the increased globalization of the US economy, attract foreign investment, and enhance American competitiveness overseas. However, some experts are concerned that the changes would put US investors at the mercy of foreign regulators.

Over the past year, there has been increased dialogue about whether the current Generally Accepted Accounting Principles (US GAAP) should be replaced by International Financial Reporting Standards (IFRS). The SEC and its controversial chairman, Christopher Cox, have been at the forefront in pushing for adoption of IFRS rules.

First, the SEC moved to eliminate the GAAP reconciliation for foreign private issuers that use IFRS. Then it issued a request for comment on whether or not US-listed companies should be able to use IFRS instead of GAAP.

This past June, the giant accounting firm Ernst & Young held a seminar in Houston and a subsequent series of webcasts in which key members of the firm discussed the significance of a conversion to IFRS rules for US companies. Ken Marshall, Ernst & Young partner and IRFS markets leader for the Americas, noted, “It is clear that converting to IFRS will not merely be an accounting exercise; it will be an exercise in change management.”

In noting that IFRS will affect “many facets of the organization beyond financial reporting,” Marshall said that every aspect of the company affected by financial information has the potential for change. Marshall and his colleagues stressed that now is the time to prepare for these changes, which will include such things as revenue recognition and income taxes.

Protiviti Inc., a global business consulting and internal audit firm, recently released a survey in which they concluded that nearly half of US companies (48%) have made no preparations to date to adopt IFRS. However, 40% of the respondents said that if the SEC allows a choice between using US GAAP and IFRS, their organizations would choose to switch to IFRS. More than 60% of those surveyed said they anticipate at least a moderate cost impact in transitioning to IFRS.

Survey respondents included CFOs, who made up almost half of survey participants, along with CEOs, chief audit executives, vice presidents, controllers, and directors of finance and financial reporting.

Christopher Wright, managing director with Protiviti and one of the firm’s global leaders of IFRS services, said, “If approved by the SEC, the IFRS transition could have far-reaching ramifications for US companies, including policy development, technology migration, operational processes and procedures, staff education and training, and other change management efforts.” He added, “Companies that plan for the possible IFRS convergence or conversion will have a competitive advantage over those that wait.”

With an incoming Democratic administration in Washington and a more heavily Democratic Congress, it is unclear whether the government will continue to explore a conversion to IFRS rules. Comments by several key Democrats have hinted they are concerned that the transition to international accounting standards might weaken regulatory control.

Sen. Carl Levin (D-Mich.) has said the proposals would weaken government oversight of the financial markets, adding that the US cannot cede control of regulation to foreign bodies that are not accountable to US investors and taxpayers.

Levin’s point was reinforced by Jeff Willemain, a global managing partner at Deloitte, who commented at a roundtable discussion in Washington that the emerging system of multiple and duplicative inspections of audit firms by different countries will create inefficiencies that do not result in greater investor protection.

Sen. Jack Reed (D-RI), who heads the Senate banking subcommittee on securities and investment, which has jurisdiction over the SEC, is also a skeptic. He said that while it is clear that we’re rapidly becoming globalized and need a set of harmonized rules, the real question is – are the foreign rules any good?

So, while the SEC has been preparing a timetable that would permit US companies to shift to the new international accounting rules, the debate continues in Washington as to whether this would be a wise move.