PracticeAuditIs the SEC a ‘gorilla with a machine gun’?

Is the SEC a 'gorilla with a machine gun'?

Europe fears that the US standards-setter is hijacking the international standards debate.

Concern is growing in the IASB and among other stakeholders that the SEC – with its substantial resources and influence – may muscle its way into a position as the global interpreter for IFRS.

Described by one commentator as a ‘big gorilla with a double-barrelled machine gun’, the SEC has been mobilising a team of experts to ensure that when companies with US listings reconcile their IFRS accounts with US GAAP, the reconciliations meet its approval.

IASB board member Robert Garnett said the standards setter was ‘concerned’ that the SEC may use its clout to take on a dominant role in the interpretation of the accounting standards. ‘The SEC hasn’t given any indications that it will take this route, but we are concerned that it could happen,’ Garnett said.

Brian Shearer, national technical partner at Grant Thornton, said there was ‘a big prize to play for’ when it came to issuing interpretations, adding that the US was bound to have an impact.

‘The US is the largest capital market and its accounting practices cannot be ignored. The SEC is a powerful player and will have an influence,’ Shearer said.

Deloitte technical partner Ken Wild agreed: ‘The US has the biggest and deepest pockets, and if the SEC is not happy with a company’s reconciliation to US GAAP it will simply not file the accounts. If the SEC issues an interpretation companies will have to apply it.’

Wild says specific US interpretations are a possibility given the ‘conflict’ between the US’s rules- based approach, and the principles-based accounting of IFRS. ‘The SEC has made it known that it is employing extra staff for IFRS, so they can reconcile results from the point of view that they want,’ Wild said.

If the SEC adopts a heavy-handed approach to IFRS interpretations, the independence of the IASB and its interpretations committee IFRIC could be undermined – and the SEC’s interpretations may become the benchmark.

‘An increasing majority of companies will be presenting interims under IFRS and a lot of decisions are going to have to be made in a hurry,’ Shearer explained. ‘The SEC has the resources and staff to produce interpretations quickly.’

The power the SEC possesses also raises the political question of one organisation or region holding too much sway over the setting and interpretation of standards that the whole world will have to implement.

‘Accounting standards and interpretations are technical issues and we do not want politicians or regulators dictating what the technical details should be,’ Wild said.

‘Europe has gradually taken a more sensible approach in this regard and hopefully the SEC will do the same.’

A further concern is that the whole purpose behind adopting international financial reporting – to facilitate increased liquidity through a single market – would be undermined as different versions of IFRS could arise.

One potential scenario may see the creation of an ‘SEC IFRS’, based on absolute rules and adopted by all companies with listings in the US, and a principles-based IFRS used in the rest of the world.

Shearer was optimistic that this situation could be avoided. ‘In the reconciliations to US GAAP the SEC will hopefully use IFRIC interpretations that are available, and avoid creating differences between IFRS unless they clearly exist,’ he said.

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