Some obstacles to global financial reporting comparability and convergence at a high level of quality part 5

Some obstacles to global financial reporting comparability and convergence at a high level of quality part 5

3. Concluding comments

The following are a few closing comments.

The more rigorous the enforcement mechanism—that is, the more authority and the larger budget a country gives to its securities market regulator to fortify the effort to secure compliance with IFRS—the more lobbying pressure that will be brought on the IASB, because companies in such countries will know that they have no ‘escape valve’, no way of side-stepping the adverse consequences, as they see them, of a proposed IASB standard or interpretation. If the auditor is strict and the regulator is strict, political lobbying of the standard setter, the IASB, may become more intense. Therefore, if a powerful company or group of companies do not like a draft standard, they will have an incentive to engage in politicking of the standard-setting body.We have seen that in the USA for decades, because we have a strict securities market regulator, the SEC. As a country strengthens its regulator, which many people think is good, one of the consequences may be more selfinterested politicking of the IASB, which is thought by many to be bad. Hence, it becomes a Catch-22.

The contemporary debate over principles vs rules arose in the wake of Enron in February 2002, yet the same issue was raised in the late 1960s (see Zeff, 2003, p. 197). Who brought up the issue in February 2002? SEC Chairman Harvey L. Pitt said in a speech, ‘We seek to move toward a principles-based set of accounting standards’. He argued that the Enron debacle exposed a major flaw in the US rules-based system. Companies would say, ‘Is there a rule that says I cannot do this?’, as opposed to, ‘What is the overriding principle?’

This expression of alarm by the SEC Chairman is ironic, because the SEC’s accounting staff has been more responsible for the FASB’s detailed standards than perhaps any other single external source. When the FASB develops a standard, the SEC’s accounting staff typically is heard to say that there is a list of issues it wants the FASB to take up in specific paragraphs: this cannot be done, that cannot be done, and only this other can be done. And this leads to detailed and lengthy standards. To the SEC’s staff, fewer open questions about the interpretation of the FASB’s standards translate into fewer deficiency letters and fewer time-consuming meetings with companies to question their accounting choices. Additionally, audit firms also push for detail in the standards in order to bolster their defence in lawsuits.

A similar trend is occurring at the IASB. The IASB has become more of a force—recall that no companies had to adopt the IASC’s standards in 1990s. There was not all that much overt politicking of the IASC: no regulator imposed an obligation to follow the standards, and there was no law that instructed companies to follow them. Now that the EU’s IAS regulation has been issued, and there are strengthened national regulators that appear to be taking more insistent enforcement positions, there is more determined politicking on sensitive proposed standards: more pressure on the standard setter, more space in the standards allotted to exemptions, provisos, and exceptions to accommodate this pressure, and, because of the contentiousness of the arguments over the standards, more detailed norms, if only styled as implementation guidance. Despite the best efforts of the IASB not to proceed down this more rules-oriented path, such a trend is already evident.

That the IASB is in active convergence with the FASB to some degree runs the risk that detailed prescriptions in the latter’s standards will find their way into the former’s.

In sum, what I have been attempting to say in this lecture is that, in the areas of comparability and convergence, there seem to be obstacles to what might be termed ‘genuine’ comparability, and there are obstacles to convergence at a high level of quality. Some of the obstacles are deeply cultural, while others are more susceptible to modulation by the principal parties.

It requires enlightened leadership and commitment from the accountancy profession, including academics, audit firm partners, and company accountants, as well as from company finance directors and national regulators and other instrumentalities of Government, such as the European Commission, the SEC, and legislators, to overcome these obstacles and therefore promote genuine international convergence and comparability.

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