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Remarks at the AICPA Conference on Current SEC and PCAOB Developments

Julie A. Erhardt

Deputy Chief Accountant, Office of the Chief Accountant
U.S. Securities and Exchange Commission

Washington, D.C.

Dec. 3, 2012

As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.


Good morning. In preparing for today’s remarks I realized that it has been three years since I have addressed you at this conference. So, how have you been? I realize it would be a little time consuming to go around the room and answer that question right now, but in terms of gazing out from the podium you all look well. As for me, I am good also, and grateful for the opportunity to rejoin you here today.

And it is indeed I, and only me, joining you here today, as evidenced by the fact that the remarks I will make are my own, and thus they do not necessarily reflect the views of the Commission, the Commissioners or other members of the staff.

My work, as the International Deputy, involves a lot of interaction with people who live and work in other countries, in particular those who have responsibilities associated with the financial reporting by issuers to the public capital markets in their home countries. My role means that many times over the years I have engaged in conversations with others about the thinking behind their country’s decision to move to the use of international financial reporting standards, or IFRS, as the basis for their country’s national accounting standards. I have always been intrigued by their answers, and hopefully in about ten minutes you will be intrigued too.

Of course the ones really best suited to tell you these stories are these individuals themselves, but it would have been kind of expensive to fly them all in! So I will do my best. To be practical I have boiled down what I have learned into three dimensions, on which I will center my remarks, thus please recognize that I am not providing you with all the nuances to these policy questions here today.

Domestic Upgrade

Let me start with one of the more obvious reasons that a country might decide to incorporate IFRS into its national accounting standards. I will refer to this as the “domestic upgrade.” The domestic upgrade situation is essentially the “make vs. buy” decision for national accounting standards, where “buy” wins out.

“Buy” wins out when the policy makers in a country consider that, all in, it can improve its national accounting standards by “buying” international standards to serve as its national standards instead of “making” its own. The considerations that go into this analysis are those that would go into any “make vs. buy” decision. Those considerations include the tangible factors, such as:

  • The relative quality of the financial statement information expected to be produced with or without incorporating IFRS;
  • The relative control over the nimbleness, flexibility and effectiveness associated with producing and modifying the standards with or without incorporating IFRS; and
  • The relative cost to produce and maintain the accounting standards under each approach.

A country’s considerations also include intangible factors, such as:

  • Whether the international standard-setting environment is poised to provide a better standard setting environment than can realistically be established at home, in terms of, the structure used, resources available to invest, objectivity obtained, and so forth;
  • Whether the use of IFRS can help overcome any negative perceptions about the national accounting standards;
  • Whether the use of IFRS gives the country more of a “seat at the international table”, if you will, than it believes it would otherwise have; and
  • Whether the impartiality of IFRS relative to the views of any particular country make it the most suitable common platform for a group of countries that are seeking this linkage.

In summary, if the country anticipates a better standard setting outcome under “buy” than under “make” then it is motivated to pursue the upgrade by incorporating IFRS into its national accounting standards.

Now, while the potential opportunity to upgrade the national accounting standards probably sounds like the be all and end all of what a country’s analysis of IFRS would entail, from my experiences it is not. So let me now move to two other considerations that I am aware of. To appreciate these we will need to think more in terms of the economics of the capital markets.

Foreign Investment

The first of these two is what I will label “foreign investment.” The foreign investment situation revolves around to what degree the businesses in a country that raise money in the public capital markets are importers of capital. If even setting aside its cost, the needs by businesses for capital in a country exceed the resources of that country’s investors that are available to it, then this shortfall prompts the need for the domestic businesses to import capital; that is, to obtain foreign investment.

I don’t think this phenomenon is unique to capital, as the same thing could be said for, say, bananas. Let me show you by restating it in terms of bananas. So, if the consumption of bananas in a country exceeds the amount of bananas grown in that country, then this prompts the need for domestic food companies to import bananas; that is, to seek foreign bananas. But now, getting back to capital.

Looked at in the aggregate, and setting aside the needs and resources of the state since IFRS is not written for it, countries blessed with natural resources need capital to finance the use of those resources and all countries need capital to finance their innovation. And how much capital a country has available is partly a function of the size of its population and the social structures that incentivize and provide the opportunity for the accumulation of savings. But the domestic supply does not always equal the domestic demand. Using simple numbers to illustrate, a country’s businesses might collectively need 10 of capital, while its savers have accumulated 7, resulting in a shortfall of 3. This shortfall increases to 4 if for diversification purposes its savers want to invest 1 internationally. The shortfall is then made up by foreign investment, but how much do the foreign investors charge for it? The pricing of the capital provided via foreign investment is where the accounting standards enter the picture.

More specifically, if in the aggregate the public companies in a country are big attracters of foreign capital — due either to a shortfall of capital domestically or the desire by overseas investors for diversification — then what factors into the IFRS policy considerations is whether all other things being equal the cost of this foreign capital will be reduced if the issuers report using national accounting standards which are based on IFRS, versus continue to report using the existing national accounting standards which are not. This reduced cost of capital could be the case if IFRS-based reporting is more familiar to foreign providers of capital than is reporting under the existing national accounting standards.

Foreign Access

The third and final observation I would like to pass along relates to what I will call “foreign access.”

The foreign access factor revolves around the natural frictions that can exist within the processes for the cross-border importing of capital, or foreign investment, by a country’s businesses and within the processes for the cross-border exporting of capital by those who have the savings to invest.

The checks and balances within these processes that cause the frictions are there for a reason; after all, you and I encounter cross-border friction each time we travel internationally and are faced with waiting in a long line of people to go thru immigration, but this wouldn’t cause us to suggest that the passport system be done away with. However, as with the advent of our passport electronic entry-type systems as a mechanism for handling the friction of a potentially long line at immigration, countries have come up with ways to address the frictions inherent in the cross-border movement of capital as well.

One model for addressing some of the international capital movement frictions between some countries involves the notion that the more the public capital market policy profiles can be appropriately similar between two countries, the fewer the friction points. One aspect of a country’s public capital market policy profile is the nature of its national accounting standards. So if it is appropriate to incorporate IFRS into a country’s national accounting standards, and the other country has done it as well, then there is one more feature on which the policy profiles of their respective public capital markets are more similar.

Interaction Between Domestic Upgrade, Foreign Investment and Foreign Access

Up to now I have spoken separately about the notions of domestic upgrade and foreign investment and foreign access. But they all can affect a country’s IFRS policy considerations. So let me finish my remarks by adding a couple of my own observations about their interaction.

A country will encounter a more difficult policy scenario if it gets mixed — versus uniform — signals from the evaluation of each of these three dimensions. Mixed signals occur if, for example, its domestic upgrade analysis suggests one answer about whether to transition to the incorporation of IFRS into its national accounting standards but its foreign investment and/or its foreign access analyses suggest otherwise.

If the mixed signals were that the domestic upgrade analysis suggests transitioning, but there are not really any foreign investment or foreign access benefits to doing so, then transitioning would probably not bring harm to the foreign aspects. I think the trickier situation is if the domestic upgrade analysis suggests not making the transition and either or both of the foreign analyses suggest there are benefits to doing so. I think the appropriate determination in this situation is much more difficult to discern. In a real situation, however, these difficulties will be informed by the nuances and other considerations that are lost in today’s simplified look at just these three factors.


So with that let me close now by suggesting that if there is one thing you can take away from my remarks it is that a country’s decision about whether to incorporate IFRS into its national accounting standards is not just about the standards themselves.

Countries have also focused on the role that those accounting standards serve in their public capital markets, and then in turn how those capital markets serve their function in society, and ultimately under which approach their society would be better off. Hopefully you can take what I have learned from those in other countries and ponder it, as well as no doubt pondering both the source of the bananas you eat and how to streamline your travel immigration process!

Thank you very much for your attention.

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Modified: Dec. 4, 2012