Thursday, July 07, 2011

IASB Independence Concerns Voiced at SEC IFRS Roundtable; Chairman Schapiro Sees Danger of Differing Jurisdiction-Specific Interpretations

The SEC roundtable on IFRS revealed investor concerns around independent funding for the IASB and the Board’s due process as compared to FASB, and the development of inconsistency in global IFRS through differing national interpretations of global accounting standards, an important issue raised by SEC Chair Mary Schapiro, who attended the session. All that said, participants in the roundtable generally supported the implementation of global, high-quality accounting standards. Panelists believe that a single set of high quality global accounting standards will benefit investors.

There was a consensus that the IASB could be monitored until it achieves FASB-like due process in its standard setting. Some panelists believe that the IASB must adopt FASB due processes. Panelists were also concerned that the IASB does not have enough investor participation in its standard setting, along with governance and funding issues, but they allowed that the IASB is moving in the right direction.
SEC Chief Accountant James Kroeker noted that funding and independence of the IASB is a combined question. He viewed current IASB funding as similar to FASB funding before enactment of Sarbanes-Oxley.

Gregory Jonas, Managing Director, Morgan Stanley, said that the IASB is the logical entity to set global accounting and financial reporting standards. Indeed, the IASB has earned that right. Mr. Jonas acknowledged the risks of principles-based standards or principles-only standards. They do not work in all cases. One risk in that there will be unique US issues, such as tax law changes, and there would be a need to provide guidance.

Kevin Spataro, Senior Vice President, The AllState Corporation, noted that there are two levels of interaction with standard setters. The first level is the initial conversion to IFRS and the second is the eventual relationship with a new standard setter. He noted that FASB has experience in developing competent accounting and reporting standards through a formal, transparent, highly interactive and continuous process. The IASB must develop similar processes that people have confidence in.
To the question of whether FASB could have a continuing role in IASB standard setting, Mr. Spataro noted that this could only go so far since the IASB has its own dynamic. David Larsen, Managing Director, Duff & Phelps, offered that, in the post-Norwalk environment, the healthy tension between FASB and the IASB has created better standards. But he noted that some feel that the US has too much influence on IASB, and so FASB may not be able to exercise the same influence going forward as it has in the recent past.

Gerry White, President, Grace & White, Inc., expressed concern that some jurisdictions may not totally accept the US view that the purpose of financial reporting is to provide useful information to inform investor decision making. Some jurisdictions may place the concerns of management and other stakeholder above the needs of investors.

Tricia O’Malley, a former IASB Member, said that Mr. White put his finger on concerns over how some parts of the world view the process of financial reporting. The concept that financial reporting is conducted for the benefit of investors is not fully understood globally. In some jurisdictions, public policy rather than investor decision making has driven standard setting. The former IASB Member believes that the US and Japan coming on board could provide a counterweight to politically pressured standard setting. That would also help the funding issue, she believes. In any event, US participation in the process is essential to making sure investor focus remains at the center

SEC Chair Mary Schapiro asked about the danger in the expansion of differences in IFRS interpretations country-by-country as we go through time. Former IASB Member O’Malley acknowledged that local interpretations of IFRS may create differences globally while at the same time narrowing differences nationally. The IASB could help by focusing on answering application questions. In any event, jurisdiction-specific interpretations should be resisted, said the former IASB official.

David Larsen saw this as a real risk as jurisdictions issue differing interpretations of IFRS, adding that no global standard-setting body can correct that. Gregory Jonas is also concerned with differing interpretations of IFRS and also different enforcement around the world. There is a risk of wide differences in interpretations that could render consistency an illusion. But he still sees a benefit to investors in the adoption of global accounting and financial reporting standards. Just narrowing the differences in US GAAP and IFRS is very useful, he emphasized even if we do not achieve perfect comparability.

Mr. Jonas noted that, since, comparability is essential, we need a robust and active interpretative mechanism. The IASB has an interpretative infrastructure, he said, but it has been unproductive by design. A hedging device would be to keep in place an active US interpretative mechanism.

Mr. White noted that are three ways to obtain interpretations of accounting and financial reporting standards: enforcement actions, big accounting firms talking among themselves, and interpretations by the IASB or other standard setting body. He noted that most people favor option three, interpretations by an IASB body.