Speech by SEC Chairman:
Proposing a Roadmap Toward IFRS
Chairman Christopher Cox
U.S. Securities and Exchange Commission
August 27, 2008
The fourth item on our agenda today is the proposal of a Roadmap for U.S. participation in the development of truly global and high quality accounting standards.
One of the proposals we just adopted earlier during this meeting requires that foreign companies make disclosures to U.S. investors in English. That is both a necessary and an important step, because despite the relatively widespread use of English and a few other more common languages, even in the 21st century the world is still a very multilingual place. Today, the top 10 languages in the world by number of speakers are Mandarin Chinese; English; Hindustani; Spanish; Arabic; Russian; Portuguese; German; French; and Japanese. And every one of these languages is spoken by over 100 million people. It may be a very long time indeed before the world's 6.5 billion people can all speak in the same tongue.
Fortunately, we won't have to wait nearly as long for the language of business and finance to converge. One of the more revolutionary developments in the world's capital markets is the remarkably quickening pace of acceptance of a true lingua franca for accounting.
The world's capital markets have long searched for a single set of high quality accounting standards that could be used anywhere on earth. An international language of disclosure and transparency would significantly improve investor confidence in global capital markets. Investors could more easily compare issuers' disclosures, regardless of what country or jurisdiction they came from. They could more easily weigh investment opportunities in their own countries against competing opportunities in other markets. And a single set of high-quality standards would be a great boon to emerging markets, because investors could have greater confidence in the transparency of financial reporting.
Today, all of Europe and nearly 100 countries around the world require or permit the use of IFRS, and many more are on the verge of doing so. And yet the increased use of IFRS around the world is a fairly recent phenomenon. The majority of companies that are currently reporting financial results based on IFRS have only been doing so for a few years. This relatively limited history is an important reason that the U.S. needs to continue to support the work of the International Accounting Standards Board, and the foundation that oversees it — the International Accounting Standards Committee Foundation. In order for IFRS to fulfill the promise it holds to be a uniter of the world's capital markets and a powerful tool for investors everywhere, there are a handful of principles that are critical to its success. The Roadmap we are proposing today is aimed in significant part at seeing to it that these principles are applied.
The first key success factor for IFRS is that the standards be crafted in the interest of investors. That has to be their overarching purpose.
The second is that the standard setting process be transparent. That is essential not only to maintain investor confidence, but to ensure the integrity and quality of the standards.
The third is that the standard setter must be independent. That means independent from special pleaders, from the political process, from favored industries or industry players, and from national or regional biases.
Fourth, the standard setter must be accountable. This means ensuring that IFRS actually meet the needs of investors and other stakeholders, and that they are updated in a timely way.
And fifth and finally, it is vitally important that all of the stakeholders themselves participate in the standard setting process in order to ensure the continued success of IFRS.
This focus on the investor's interest in global comparability also underlies the Roadmap's support for eXtensible Business Reporting Language in IFRS reports. In the same way that IFRS might someday soon make financial statements understandable to investors anywhere on earth, the 30 different spoken languages that will someday soon be embedded in XBRL data tags attached to public company financial statements could let any investor read an IFRS financial statement from any country in his or her own native language.
The IASC Foundation is explicitly dedicated to the development, in the public interest, of a single set of high-quality, understandable and enforceable accounting standards. This public interest mandate is documented in the IASC Foundation Constitution. Further, all Trustees must formally commit to acting in the public interest. In order to enhance their public interest focus and this institutional framework, the IASC Foundation has embraced a new monitoring group as part of its 2008 Constitution review. The purpose of this new group is to ensure the accountability of the global standard setter to national authorities charged with protecting the capital markets and the public interest. This arrangement is designed to preserve the independence of the IASB while enhancing the accountability of the IASC Foundation to national authorities. Both of these mutually reinforcing objectives will serve the interests of investors.
The United States' participation in the development of global accounting standards goes back many years. In 2002, Section 108(d) of the Sarbanes-Oxley Act of 2002 required the SEC to conduct a study and report to Congress on the adoption of a principles-based accounting system. And in July 2003, the Commission submitted the report to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives.
The report noted, among many findings, that global accounting standardization would produce a myriad of benefits, including:
- Greater comparability for investors across firms and industries globally
- More efficient allocation of scarce capital among investment alternatives
- Lower costs of capital, since global accounting standards would eliminate the duplicative cost of preparing two sets of financial statements and make it easier for companies to access capital in more markets
This study concluded that the adoption of objectives-oriented, principles-based accounting standards in the United States would be consistent with the vision of reform that was the basis for the Sarbanes-Oxley Act.
Much has been accomplished since that report was completed in 2003. Above all, we have seen the emergence of IFRS as a high quality, increasingly globally accepted set of financial standards. Over 100 countries and all of Europe currently require or permit IFRS reporting, with approximately 85 of those countries requiring IFRS reporting for all domestic, listed companies. The market capitalization of exchanges within those 85 countries requiring IFRS represented approximately 35 percent of global market capitalization as of the end of July. That number exceeds the 28 percent share of global market capitalization held by United States exchanges. And the share of global market capitalization represented by IFRS markets will grow still larger with the inclusion of the additional countries that have decided to adopt IFRS by 2011.
U.S. investors keep buying securities issued by foreign companies that report their financial information using IFRS. Today, two-thirds of U.S. investors own securities of foreign companies. Given the fact that IFRS financial information is reported in home country filings well before they're filed with the Commission, U.S. investors and market participants have been analyzing and evaluating foreign companies listed here on the basis of only IFRS financial information for over two years.
These two facts — the increasing worldwide acceptance of financial reporting using IFRS and U.S. investors' increasing ownership of securities issued by foreign companies that report their financial information using IFRS — make it plain that if we do nothing and simply let these trends develop, with each passing year comparability and transparency decreases for U.S. investors and U.S. issuers. To help fulfill its statutory missions of protecting investors and facilitating capital formation, the Commission is duty bound to determine what role IFRS should play in U.S. capital markets — including whether it should be available for use by U.S. public companies.
Any proposed consideration of the potential required use of IFRS must start with the belief that IFRS, increasingly recognized throughout the world as a set of high quality globally accepted accounting standards, has the potential to best provide the common language on which companies can report and investors can compare financial information. From that belief, the real work begins.
Since March 2007, the Commission and the staff have held three roundtables on IFRS. We began with a "Roadmap" roundtable in March 2007 and earlier this month held our most recent roundtable — this one regarding the performance of IFRS and US GAAP during the subprime crisis. Almost one year ago, the Commission issued a concept release on allowing U.S. issuers to prepare financial statements using IFRS.
Against this backdrop — and with the learning from those roundtables firmly in mind — the staff is today recommending that the Commission adopt a proposing release that describes a proposed Roadmap that could lead to the mandatory use of IFRS by U.S. issuers beginning in 2014 if the Commission believes it to be in the public interest and consistent with the protection of investors.
The proposed Roadmap is cautious and careful. It is a proposed multi-year plan that sets forth both the basis for considering the use of IFRS by U.S. issuers, and several milestones which if achieved could lead to the use of IFRS by U.S. issuers.
A common language of mutual understanding is vitally important to commercial integration among the world's cultures and nations. Global markets cannot achieve their full potential without that common language. A global set of high quality accounting standards would be an international language of disclosure, transparency, and comparability. It is a goal worth pursuing and that is why we are here today.
I would like to thank John White, our Director of the Division of Corporation Finance, and Conrad Hewitt, our Chief Accountant, as well as their staffs, for their excellent work in preparing this proposal. In particular, I want to thank Wayne Carnall, Paul Dudek, Craig Olinger, and Michael Coco in our Division of Corporation Finance, and Liza McAndrew-Moberg, Paul Beswick, Julie Erhardt, and Jeff Minton in our Chief Accountant's Office for their work. Also, I want to thank Jim Overdahl and his outstanding staff in the Office of Economic Analysis for their inspired work in developing key parts of the Roadmap. And I would be remiss if I did not note the tremendous amount of work our Office of the Chief Accountant and the Division of Corporation Finance performed in preparing not only this release, but also completing the roundtables and the concept release. Finally, I would like to thank our Office of General Counsel for its expert assistance to John, Con, and their staffs. Finally, I thank our other Commissioners and their counsels for their work. I will now turn it over to John White and his staff to provide us with the details of the proposed Roadmap.