The IASB’s objective is to work towards a single set of high-quality global financial reporting standards, produced in the private sector under principles of transparency, open meetings and full due process. We have no intention to ‘water down’ existing standards in any jurisdiction. Instead, we plan to build a set of financial reporting standards that are the ‘gold standard’.
I do not plan to comment on specific accounting and auditing issues surrounding Enron, although there are many. None of us knows enough about the specifics of the transactions, the information available to the auditors and the judgements involved to form a solid professional conclusion. As we learn more, we may find the US accounting standards should be improved. If so, we plan to learn from this case and to make sure that international accounting standards do not have similar problems.
I would offer two observations. First, history is full of examples of those who said ‘it couldn’t happen here’ and came to regret it. I do not plan to repeat that mistake.
Second, long experience as a chartered accountant and as an accounting standard setter tells me that business failures seldom have a single cause. They are usually much more complex than they first seem and the rush to a single easy answer is usually wrong.
Let me answer some questions that you may have about the future of standard setting and the role of the IASB and international financial reporting standards in assuring investor confidence.
So why have international accounting standards? First, there is a growing need for international accounting standards. A large number of sets of national standards, each different from the others to some (often significant) degree, imposes an unacceptable cost on the capital markets. Some of that cost is direct and is borne by companies that must meet multiple standards if they seek to raise capital in different markets. There is a more important cost – a systematic increase in the cost of capital. Markets demand a price for uncertainty, including uncertainty about the accounting standards that govern reported information.
The existence of multiple, and sometimes unknown, sets of accounting standards increases that uncertainty and drives up the cost of capital. We have seen situations in which a lack of confidence in reported financial information causes investors to leave markets and refuse to invest. Even if there was no systematic increase in the cost of capital, the uncertainty created by multiple sets of national financial reporting standards would be likely to lead to a misallocation of capital among market participants.
Second, no individual standard setter has a monopoly on the best solutions to accounting problems. Taken as a whole, US generally accepted accounting principles (GAAP) are the most comprehensive in the world. But that doesn’t mean that every individual US standard or the US approach to standards is the best. At the IASB, our goal is to identify the best in standards around the world and build a body of accounting standards that constitute the ‘highest common denominator’ of financial reporting. We call this goal convergence to the highest level.
Third, no national standard setter is in a position to set accounting standards that can gain global acceptance. There are several excellent national standard setters, including the US Financial Accounting Standards Board (FASB). Before accepting my current post, I was chairman of another, the United Kingdom Accounting Standards Board, for ten years.
However, each of the national standard setters operates in its own national setting. Leaders of the accounting world have realised that international standards must be set by a group with an international make-up and outlook. I should acknowledge the work of two Americans who recognised that point and were instrumental in bringing the IASB to its present position – Arthur Levitt, former chairman of the US Securities and Exchange Commission, and Edmund Jenkins, chairman of FASB.
Lastly, there are many areas of financial reporting in which a national standard setter finds it difficult to act alone. Constituents often complain that a ‘tough’ standard would put local companies at a competitive disadvantage relative to companies outside of their jurisdiction. Local political pressures and policies may work against individual national standard setters. An international standard setter can establish financial reporting standards that would hopefully apply to all companies in all jurisdictions, thus eliminating perceived disadvantages.
Having explained the need for an international standard setter, I should also explain that national standard setters are a critical part of our activities. We look to the national standard setters for research and counsel, for help in alerting us to particular local problems and in our due process. Most importantly, we look to the national standard setters as partners in several of our projects, enabling us to make use of their resources. Seven of our board members have direct responsibility for liaison with the national standard setters in Australasia, Canada, France, Germany, Japan, the UK and the US. We expect that our liaison board members will spend as much as half their time in direct contact with their assigned national standard setter, thus bringing the collective wisdom of each country’s financial community to our debates.