It’s a pale, frosty day in London. From inside the imposing, white building
at 30 Cannon Street, Robert Herz, who prefers to be called Bob, can just see the
dome of St Paul’s Cathedral if he leans back in his boardroom chair.
He’s a long way from home. It’s a 16-hour flight from Washington, and the
winter gusts do little to refresh the weary here.
Voices fill the small conference room – Australian, Indian, Japanese,
Scottish and other, less recognisable accents. Herz remains silent. Some say he
seems quiet – tired perhaps.
He leans forward to speak. A handful of public observers at the back of the
room, mostly accountants, pick up their pens. Poised.
Two cameras silently swivel, focus, beaming his broad face across the world,
and on to three flat-screen televisions in the room. “I think it is all or
nothing if we converge on this,” he says in a smooth, rounded American accent.
Convergence has become the major goal for the Financial Accounting Standards
Board (FASB), the body Herz chairs. By 2011, both the International Accounting
Standards Board (IASB) and FASB need to find common ground on each and every
accounting standard. The goal is to create a truly global financial language.
Sir David Tweedie, Herz’s opposite number at the London-based IASB, once
lectured on the convergence of accounting standards like some grand utopian
dream at university.
Now he sits shoulder-to-shoulder with Herz, both men now single-minded in
their goal. They have to be.
The inevitable cultural differences, disagreements and rivalries which come
with any global enterprise of this scale can easily derail efforts, and almost
The issue on today’s agenda is by far the most contentious – fair value. The
accounting rule was brought into sharp focus during the credit crunch as banks
struggled to value their financial assets in illiquid markets.
The rule requires assets to be valued at their market price and as
transactions in markets dried up, so too did fair value. Values were in free
fall. Herz watched on as the accounting rules he championed, forced banks to
value their assets at rock bottom prices.
In due course, the fair value principle itself came under political attack,
along with the standard setters who set it.
Fast forward twelve months and the issue is still causing concern. Sitting
around the table, the two boards have come to different views on the principle,
which seems to illustrate the challenges – both ideological and practical –
faced by both as they converge.
Herz’s approach is closer to what some might describe as accounting purity.
Fair value should be applied to all assets, including contentious banks’ loan
Tweedie, taking into account the views of regulators, allows bank loan books
to be valued at amortized cost.
The issue is one of a number of fundamental differences in approach by the
two boards, and illustrates the high wire act the IASB and FASB must walk if
they really want to achieve convergence.
Herz is not prepared to sacrifice sound accounting principles at the alter of
convergence. Tweedie can’t afford to abuse his international mandate to bring
Herz on board. The two must work together, as friends, to make convergence a
success, but there are some issues this friendship may not be able to overcome.
The world looked so rosy in August 2008 for proponents of convergence in the
US. Lehman Brothers had not collapsed, the world was struggling through an
emerging credit crunch, but banks had stood strong. It was in this climate that
Christopher Cox, the US Securities and Exchanges Commission (SEC) chairman,
announced a tentative convergence roadmap.
It was a significant step. The SEC is the lynch pin to international
convergence plans. The pair might agree on the standards, but without SEC
approval, the final book will be little more than a paperweight for US-only
Cox’s roadmap envisioned all US companies switching to International
Financial Reporting Standards (IFRS) by 2014. At that moment, US accounting
codes would be dropped and the migration to international standards would begin.
“The increasing world-wide acceptance and US investors’ increasing ownership
of foreign companies make it plain that, if we do nothing and simply let these
trends develop, comparability and transparency will decrease for US investors
and issuers,” he said at the time. It was a high-point in the convergence story.
In September, Lehman Brothers collapsed. In November, the Democrats won the
race to the White House.
Christopher Cox choose Barack Obama’s inauguration day to step down. No
announcement or statement preceded his departure, only an email to staff.
His replacement, Mary Schapiro, was welcomed. Floyd Norris, the New York Times’
chief financial correspondent, named her as “perhaps the most experienced
regulator in Washington”.
But her attitude to accounting convergence, at first, seemed a long way from
Cox’s. During her confirmation hearings, she controversially said she would “not
be prepared to delegate standard-setting or oversight responsibility to the
The comment has been debated ever since, with some close to the IASB
suggesting it was the words of someone not engaged with the issue. Privately,
she is reported to have said she did not expect these comments to paint her as a
She would later reaffirm her commitment “to the goal of a global set of
high-quality accounting standards”.
But the fact remains that, eighteen months on, Cox’s roadmap still has not
Complicating matters, she also had to decide on a new chief accountant. The
key post would be pivotal to convergence. A leaked shortlist appeared in the
media. Among the names was known convergence skeptic Charles Niemeier, who once
said “the biggest difference between GAAP and (international standards) is that
US GAAP is older and has been tried”.
If he was appointed, it would be a sucker punch to convergence efforts. But,
after a drawn-out recruitment process, it was finally announced that Cox’s
number two would fill the role – convergence proponent Jim Kroeker.
Kroeker’s appointment brought a welcome sigh of relief to supporters of
convergence, but attracted jeers from critics.
“Not only were Kroeker’s and Niemeier’s positions as different as black and
white… Niemeier’s inspiration clearly sprang from a foundation of cited
broad-based analyses produced by published rigorous, peer-reviewed, independent
research. The source of Kroeker’s remarks apparently came from nothing more than
his own wishful thinking,” prominent blogger Tom Selling said in September last
Perhaps the most significant event of the post-Cox era came in September when
the G20 group of nations, with the backing of the US administration, also
committed to global standards.
But, if the landscape in the US was brightening, in Europe, the IASB’s own
constituency was giving it trouble.
Banking up trouble
News that Adair Turner would speak at one of accounting’s most renowned
institutes struck some in the profession as a little odd.
The Financial Services Authority, which Lord Turner heads, had remained
largely quiet on accountancy standards and his decision to address the ICAEW
seemed to many a cue that he was about to enter the fray. He didn’t disappoint.
It was standing room only, at the ICAEW’s main hall in Moorgate Place inside
London’s square mile, as Turner rose to speak on 21 January this year. Printed
large above him was the day’s topic: “Are banks different?” He argued that
accounting for banks should reflect the role and structural position they occupy
in underpinning the economy.
He said the IASB, under Tweedie’s leadership, had been “sympathetic to the
idea that it must be involved in close dialogue with the prudential regulators,”
while “FASB has been more wedded to the ‘accounts are for investors only’
His comments were squarely directed at new IASB plans to change the way banks
account for bad loans – a key issue in the crisis. He later said he felt there
was a risk the IASB might complicate its existing standards as it converges with
His was the most prominent of the voices so far expressing skepticism about
the convergence process.
In July 2008, the Fédération des Experts Comptables Européens (FEE) said
there were “diminishing returns”, from further convergence. Two months later
Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, said the process
needed to be kept under “close review”.
More recently, Stephen Haddrill, chief executive at the Financial Reporting
Council, said the process should not be about “translating American standards
into an international shape”.
Significantly the Basel Committee on Banking Supervision last month also
urged the IASB to stay the course and not reshape its standards to suit
Tweedie, speaking from an IASB meeting in Brazil, told Reuters journalists
that convergence cannot take place at “all costs”.
“Ultimately, we have to speak for the international community. If we disagree
with FASB, we have to do what we think is right,” Tweedie said. “I don’t think
the United States wants to be isolated.”
Tweedie knows his success with international standards – now accepted by 131
nations across the world – each day places more pressure on the US to accept the
Japan has now set a 2016 change date, at which point companies will no longer
use US accounting rules.
However, within the IASB, it seems understood that the convergence ship has
traveled too far to simply be turned around, however prominent the criticism.
Nations like India, Canada, Brazil and Japan have signed up to international
standards, in part because they understood that the US would eventually get on
board. The US is the last major piece of the jigsaw still to fall into place. If
the US walks away, could the international regime take such a major blow?
Already there is increasing talk of a bridging code, a way to translate US
accounting standards into an international shape, if there is no agreement on
key issues. It increasingly sounds to many like a plan B – not quite
convergence, a compromise.
In the meantime, Herz is continuing to travel to and from London to sit,
listen and debate.
Like Tweedie, a looming deadline, a personal commitment and a global
accounting vision drives him on. He must long for the day when the 16-hour
flights finally cease, but when that day comes he may wonder what it was all
What the big hitters say
“I am greatly encouraged by the commitment of the IASB and the FASB to
provide greater transparency to the standard setting process and their
convergence efforts… I believe that these efforts will result in improved
financial information provided to investors.”
“I hope we can come up with something that both achieves convergence and
improves the current state… We’re obviously keenly aware of the difficulties of
achieving both goals together.”
Lord Adair Turner
“The IASB, under David Tweedie’s leadership, has been sympathetic to the idea
that it must be involved in close dialogue with the prudential regulators. FASB
has been more wedded to the ‘accounts are for investors only’ philosophy, and to
the philosophy that banks, in their accounting, should be treated no differently
from anybody else.”
Sir David Tweedie
“The US believes we should have more at fair value. We have not found that…
It’s not all lost if we can’t agree.”
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