US support for IFRS hinges on reform of standard setter

Capitol Hill

There are still dissenting voices over in IFRS in Washington

If the SEC’s proposals for US plc to switch to IFRS are approved then the
largest 20 companies ­ determined by their size on an international scale within
their respective industries ­ will be given the green light in 2014, followed by
other companies two years later.

Sir David Tweedie, the
International Accounting
Standards Board
chairman, welcomed the SEC’s move as ‘another important vote
of confidence’ for IFRS.

Yet it is patently clear that the rest of the world – overtaking the US, in
terms of competitiveness by preferring principles-based standards – has forced
the hand of the SEC.

But within Washington there remain dissenters who are not entirely convinced
that IFRS could help resolve the declining popularity of the US capital markets.

One worry in particular concerns the privately-funded IASB. In setting out
its roadmap for a US switch to IFRS, the SEC indicated that one of the
milestones that would ensure a switch would be an accountable and independent
standard setter.

In the last year, the IASB has taken a hammering from politicians and told to
reform its processes after widespread criticism of its undemocratic and
unaccountable processes in relation to the wider constituents it seeks to serve.

In addition, the standard setter awkwardly finds itself in a position in
which it is privately funded with the mandate to write standards for publicly
listed companies.

The outstanding governance and funding issues at the IASB clearly do not sit
well with the SEC, which has also sent a clear message to the international
standard setter to find independent funding so as not to be reliant on listed
companies, whose donations make up the bulk of its funds.

Announcing the moves this week, a cautious Christopher Cox said: ‘Standard
setting practices must be transparent. Standard setters must be accountable.’

Other critics in the US have also raised the question about whether the SEC
was handing its oversight power to the IASB.

Rhode Island Democrat Senator Jack Reed argued that the SEC could put
investors at risk by allowing external, less-aggressive regulators to have the
power of overseeing the rules.

The SEC has, however, backed proposals for an international monitoring group
­ with representations from different regions including the US ­ to oversee the
work of the IASB. This could be one way of resolving this.

But in time there could still be a power tussle, given the political nature
of the SEC and its significance as a public office protecting the interests of
US investors.

The final decision to switch to IFRS would also depend on whether the US
manages to successfully merge its rules with IFRS, a joint project currently
co-ordinated by the IASB and the US
Accounting Standards Board

All these issues have to be resolved by 2011, when the commission decides
whether or not to adopt IFRS.

The IASB definitely has its work cut out.

Related reading

Fiona Westwood of Smith and Williamson.