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Speech by SEC Staff:
"Implications of Convergence: A Regulator's Perspective"


Julie A. Erhardt

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

International Financial Reporting Standards (IFRS) — Implications of Convergence Conference
Frankfurt, Germany
April 6, 2006


Good afternoon, and welcome to all of you here at today's convergence conference. I am pleased to have the opportunity to participate in it as well as to listen to others' perspectives on, and experiences with, working with International Financial Reporting Standards (IFRS). It is also nice for me to be sharing the podium today with one of my former Arthur Andersen partners, John Tiner.

It is especially enjoyable for me to be here in Germany as, with a last name of "Erhardt," it is probably not surprising for you to learn that my father's father's family came to the United States from the Munich area. Further, my mother's mother's family came to the United States from southwestern Germany, specifically from a small town near Trier. I have indeed visited both places with my parents. Once in the U.S., those immigrants from Munich married immigrants from Scotland while those from near Trier married immigrants from Ireland, and, well, here I am as the result.

Now that I've told you a little bit of my personal history let me move to discuss the history we are all making with the convergence of national accounting standards. But before I do so, let me state that the remarks I make today are my own and do not necessarily represent the views of the Securities and Exchange Commission, Commissioners or of other members of the Commission's staff.

Today's Remarks

As with the other speakers today, I am here to talk about convergence. To me, convergence is about providing the capital markets with one set of high quality global accounting standards. And I see two aspects to convergence. First is "getting to convergence"; the journey if you will. And second is "living with convergence"; the destination if you will. I make the distinction because I do not think the two aspects — getting to convergence and living with convergence — are the same; much in the manner that "getting married" and "being married" are not the same either! In my remarks at last year's version of this conference I discussed getting to convergence. While getting to convergence is not yet complete for many sets of national GAAPs, I thought I would nonetheless turn today to the second aspect — the subject of living with convergence — because we have begun to live with convergence as issuers from many jurisdictions begin to make IFRS financial statements available to their investors. So I thought it was timely to offer some observations on it.

Living with Convergence

When I think about living with convergence, or more broadly with the resulting one set of global accounting standards, I wonder about one thing; namely, will everyone be able to get along? Or, said another way, how do we provide the leadership needed so that our strength that many people worldwide are involved in living with one set of global accounting standards does not become a weakness because, indeed, many people worldwide are involved in living with one set of global accounting standards. How do we address the perennial matter that any endeavor's particular strength can also potentially form a weakness?

Challenged to contemplate leadership in times of change with global accounting standards, my thoughts turn to others who have triumphed in historical journeys. One such inspirational story took place decades ago; long before the likes of one set of global accounting standards was ever a thought. Perhaps you are familiar with the story of Sir Ernest Shackleton, the famous British explorer of Antarctica. The year was 1914 when Shackleton set out to Antarctica on a ship named the Endurance. The goal of he and his party was to be the first to cross Antarctica on foot. As they sailed toward Antarctica, however, there were signs that the ice floes in the seas surrounding Antarctica might be coming in earlier that year. Shackleton plowed ahead anyway, making no changes to his course. He did not pause and take heed of that intelligence, which turned out to be critical to the success of his endeavor.

One could liken our endeavor to succeed in having one set of global accounting standards to Shackleton's planned journey. Both of these endeavors have characteristics in common: a noble cause; towering ambition and boundless optimism for its success; willingness to adopt a new vision; no false hopes; willingness to make tough decisions; optimism but pragmatism at the same time; inspiration by the confidence of others; selection of a good team; enthusiasm all around; people who are not trapped by the past and who are passionate, resourceful, risk taking; people who have ownership for their endeavor; and so forth. I think we can learn from Shackleton. Recall that I mentioned Shackleton continued to sail toward Antarctica, not altering his course after receiving intelligence about signs of potential trouble ahead: early ice floes. Shackleton's strength, his persistence, became a weakness as he persisted without updating his plan for the latest challenges and realities of his journey. As a result, Shackleton's ship got stuck among the ice floes before his party would reach Antarctica and then he and his crew began an ultimately successful attempt at survival. Admittedly, with convergence, we are not trying to cross the Antarctic on foot. Nevertheless, we are well into our journey, and it is important that we use our strengths, combined with our latest information and thinking to ensure that we accomplish and can live with our goal. Said another way, I think we want to heed intelligence about any early ice floes! I suggest we begin this consideration now by thinking and talking about challenges that lie ahead. Specifically, I would like to focus on some strengths and the related potential weaknesses that may confront us in a world in which we would be living with one set of global accounting standards. I am interested to hear your observations, and today, I will begin by offering four of my own.

Many Investors and Creditors Can Utilize Financial Statements Prepared Under IFRS

My first image is of a strength; namely of many investors and creditors using financial statements prepared under IFRS. My corresponding image is that of a potential weakness, namely of many investors and creditors using financial statements prepared under IFRS.

To the strength, this image is, to me, the raison d'etre of IFRS. The benefits of investors and creditors being able to analyze and compare investment opportunities the world over are often spoken about, so I won't repeat them again today.

Many investors and creditors utilizing financial statements prepared under IFRS could, however, potentially also form a weakness. Having one set of global accounting standards is a noble cause; but how will so many peoples' needs be conveyed? And vice versa, how will these investors all become educated about IFRS? Will they all be educated consistently? Will they just be educated about the "recipe"; that is, what the standards call for, or also about how best to eat the resulting "cake" if you will; that is, an issuer's resulting IFRS financial statements.

My observation on this potential weakness is that education will happen through a combination of formal and informal or pragmatic mechanisms. With so many more issuers now providing sets of IFRS financial statements, a treasure trove of information will be available. Thus, those with an academic bent will see this once-in-a-lifetime opportunity for analysis and sharing.

Many Countries Moving To or Toward IFRS

My second image is of a strength; that is, that many countries are moving or have moved to or toward IFRS. My corresponding image is of a potential weakness, namely, that many countries are moving or have moved to or toward IFRS.

To the strength, it is easier for the second country to move to IFRS than it was for the first, and so on and so on, because there are just more resources available to the country for whom others have gone before. For example, there is a more informed expectation of the result, transition methods that are tried and true or tried and discarded, confidence derived from the success of others, and so forth. In the commercial sector some refer to this phenomenon as "network effects" which, without getting into the economic analysis, is generally a good thing in promoting a platform.

Many countries moving to or toward IFRS could, however, potentially also form a weakness. This could occur if due to traditions, cultures, legal frameworks, national mandates, national responsibilities or other local business realities, desires or pressure points not every jurisdiction views IFRS as doing everything they think they are looking for in a set of accounting standards and therefore they "nip and tuck" the package of IFRS. If as a result financial statements prepared pursuant to the version of IFRS at work in a particular jurisdiction cannot be equally asserted to comply with IFRS itself, then the strength of more and more jurisdictions moving to or toward IFRS potentially doubles as a weakness if that move occurs in a myriad of different ways. The result is that investors have no clear and constant signal as to what "IFRS" means. While we could set aside the varying local nips and tucks as "the cost of it all," eventually small things can accumulate and almost without realizing it one day we run the risk of realizing that we aren't living with one set of global standards after all.

My observations are not meant to ignore the reality that different jurisdictions may travel different roads to the same destination of one set of global standards, as acknowledged in the 'roadmap' published in April of last year. The roadmap acknowledged this possibility and its acceptability provided that progress toward convergence is being made. Accordingly, the contemplation in the roadmap of the possibility of eliminating an IFRS to U.S. GAAP reconciliation requirement was written in the context of financial statements that comply with IFRS itself as opposed to in the context of "recognition" of financial statements prepared using jurisdictional versions of IFRS pursuant to which the financial statements cannot also be asserted to comply with IFRS itself.

Many People Applying or Auditing the Application of IFRS

My third image is of another strength; that is of many people the world over either applying IFRS or auditing its application. My corresponding image is of a potential weakness; namely of many people the world over either applying IFRS or auditing its application.

To the strength, many people means many helping hands for this work. Many helping hands means scrutiny by many people to freely and quickly identify any "bugs" or needed improvements in IFRS, ultimately leading to a better set of standards. With many people walking the beat there is the opportunity for self-policing, if you will, of any IFRS application trouble spots. With the internet and thus communication costs so low, people can be in separate organizations and spread all over and yet still work together. This group of people also provides — or maybe sells — ancillary books and other media that explain and bring to life the provisions of IFRS through examples. The availability of these materials makes it less daunting for others to move to or toward IFRS, which feeds back into my first point. The availability of these individuals also creates a talent pool for future employees of the International Accounting Standards Board.

Many people applying or auditing the application of IFRS could, however, potentially also form a weakness. To be applied well and applied consistently IFRS needs to be understood by all these people in the same manner. One set of standards does not guarantee uniform application of those standards. Are the education opportunities there for all these people? Are education curriculums changing, and keeping up? Are these opportunities predominantly in English, which is not the native language for everyone? Or are they in multiple languages, and what do we lose in translation? Are all these people motivated by altruism to make known to people outside their jurisdiction IFRS application issues or potential interpretive issues they come across? Or are they instead motivated by or affected by other self-interest factors to simply handle them locally? Are the results of self-policing of local application and auditing efforts made known to others?

My observations are not to ignore the reality that everybody cannot talk to everybody. However, a culture in which application or interpretive issues are, at their core, usually universal but for which problem areas discovered locally are not made known to others has the potential for a weakness.

Many Regulators Enforcing the Application of IFRS

My fourth image is of a strength; namely many securities regulators the world over enforce the application of IFRS. My corresponding image is of a potential weakness; namely, that many securities regulators the world over enforce the application of IFRS.

To the strength, the extent to which converged standards are "taken seriously" by investors and issuers depends to some extent on how regulators handle IFRS. Fortunately, actions by various regulators and by IOSCO have shown support for the successful implementation of IFRS.

Many securities regulators the world over enforcing the application of IFRS could, however, potentially form a weakness. In enforcing IFRS, securities regulators each have a responsibility to fulfill their respective jurisdictional mandate. While those mandates are often based upon similar objectives, those mandates are probably not identical from jurisdiction to jurisdiction. At the same time, securities regulators with whom I have interacted acknowledge the importance of sharing of information on IFRS matters. This may occur via modern mechanisms such as an IOSCO database or via good old-fashioned dialogue. All these efforts are aimed at securities regulators doing their best to carry out their own responsibilities while at the same time multiple securities regulators enforcing the application of IFRS still minimizes the degree of variance between interpretations of IFRS.

My observations are that securities regulators are proactive about how to handle the broad use of IFRS and yet continue to carry out their role within the local capital markets. In the US, we have evidenced our plans via the previously mentioned 'roadmap.' To that end, it is eliminating the need for the IFRS to US GAAP reconciliation on which our commitment is focused, rather than — as I sometimes hear others seemingly refer to it — a commitment to eliminate that reconciliation regardless of the outcome of the SEC's consideration of the factors identified in the roadmap.


In closing, let me observe that all of us — investors, standard setters, issuers, auditors and regulators — have embarked upon this convergence endeavor together. We have begun with our destination marked. Convergence is the common ground where the journey takes us. Like Shackleton, we face challenges. Unlike Shackleton, we plan to live at our destination; that is, to make it habitable and build a community once we arrive. Hence, it is important for us to think carefully about the "next steps" in our journey together. There will continue to be a lot of difficult work and a lot of tough decisions to make it work. We need to be conscious of intelligence that is not being acknowledged, small matters accumulating, and so forth. Not one of us individually controls the destiny of this expedition, but collectively we do. Are we ready for that? Your being here today evidences to me that you are willing to get ready for that. According to lore, Sir Ernest Shackleton famously recruited the people for his Antarctic expedition with the following words:

"Men wanted for hazardous journey.
Small wages. Bitter cold.
Long months of complete darkness.
Constant danger. Safe return doubtful.
Honour and recognition in case of success."

While these words are not wholly applicable to the global accounting standards expedition, I am glad to have the opportunity to work with the type of people who — had Shackleton been recruiting for this expedition — would have responded to his call. Together, you and I have an historic opportunity to provide leadership in this time of change. We can help support one set of global accounting standards by being supportive of efforts to live with convergence. I know we at the SEC continue to be committed to our 'roadmap' and thus continue to carry out our roadmap work. As each of you also continues with your important work, I call you to arms with respect to what you can do around all the aspects of living with convergence.

Thank you very much for your attention.


Modified: 04/28/2006