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Speech by SEC Staff:
Remarks before the 2008 AICPA National 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.
December 8, 2008

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.


Good morning. It is a pleasure to be here today. As you may know, my responsibilities run to international matters. While handling international matters involves the obvious-overseas travel—it also involves that basic element of our human condition, which is building relationships. In this case it is building effective working relationships with those from places with their own traditions, cultures and general approaches to things. Since at its core the Commission's International Financial Reporting Standards (IFRS) proposal asks you to comment upon the prospect of your work becoming more internationally engaged, I thought you might appreciate a few observations from my experiences.

Let me begin by saying that in thinking about the subject of fostering relationships with others internationally, I am always reminded of a story involving my extended family. The setting is a cemetery in Grand Rapids, Michigan; Grand Rapids is where I am from. My extended family on my mom's side is all gathered to lie to rest a family member who had passed away. As we were standing in the grass next to the burial site, various family members begin taking note of exactly where within the cemetery the family member is to be buried relative to where they themselves will someday be buried. Some observe that they would be buried right next to the spot, prompting others to point out that they would be one spot over, and so forth. By the time everyone had commented it became clear that my entire extended family was pretty much going to be lying there, head to toe, into eternity. At this point my Aunt Margaret joins in and says, "Do you think we'll all be able to get along?"

I am reminded of this story because I think this is also the essence of the question with respect to engaging internationally on financial reporting matters; "Do you think we'll all be able to get along?" The current global market turmoil has shown us just how connected we are, making this question all the more important and timely. Before I try to offer observations around this question, though, let me say that the remarks I make in responding to it are my own, and thus do not necessarily reflect the views of the Commission, the Commissioners or other members of the Commission's staff.

Observations from My Experiences

I have three observations to offer, based upon my experiences.

My first observation is global; that on the one hand when it comes to the capital markets, I see the world becoming a smaller place. For example, the recent meeting of the heads of state to discuss the market turmoil involved not the G7 but the G20 countries. And we now know that the future cash flows from a mortgage loan originated in the heartland of America can be purchased, bit by bit, in the capital markets overseas. And we have heard about the recent investor frustrations in not being able to quickly understand and compare the accounting used in the U.S. with that used internationally for those assets most affected by the market turmoil.

My second observation is also global; that on the other hand when it comes to the capital markets, I see that while the world aspires to come together in the best place, in the meantime the world is still a diverse place. For example, every country has a different approach to securing the welfare of its citizens, with correspondingly differing policies, practices, structures and norms. Since the functioning of the capital markets affects the welfare of one segment of society — investors — which in turn has domino effects for the welfare of others, the policies of the capital markets are subject to various pressures. Not immune from those pressures and decisions are financial reporting policies and financial reporting standards because establishing them does not have the benefit of scientific discovery where a "true north" can be discovered and by virtue of that fact not questioned. Financial reporting standards are, rather, norms that are established at a point in time by optimizing those characteristics of relevance, faithful representation, comparability, verifiability, timeliness and understandability within the binding constraints of materiality and the cost to prepare. This is always a matter of judgment; and different people see the optimal points differently. Not to worry, though, as I witness the work of my fellow securities regulators in countries all over the world truly giving of themselves in all their efforts to progress. Progress just takes time.

My third observation is local; that is, given these observations about the international capital markets — in particular related to financial reporting — how should we fit in going forward? Over time the U.S. has taken various approaches to engaging, or "fitting in" internationally. For example, in 1863 when the Swiss invited the U.S. to join the initial meeting of a working group to devise a humanitarian convention and a world aid organization, we declined. In 1864, as the working group was progressing, we joined the meeting but did not sign on to its results. Eventually, however, we did engage its work; consisting of conventions that we now know as the Geneva Conventions and a world aid organization that we now know as the International Red Cross.

Now, wars and natural disasters are not the same as the capital markets, but when the current phase of the International Accounting Standards Board/U.S. Financial Accounting Standards Board (IASB/FASB) work plan finishes in 2011, we have a natural opportunity to think about our approach with respect to international financial reporting - at one end of the spectrum to roll up our sleeves and get more involved and at the other end of the spectrum the IASB/FASB type work plan status quo. Other possibilities are no doubt in-between. And while the Commission is not asking you to think about this, some might see an analogous point during 2009 when a revised set of international auditing standards is scheduled for release.

There will be varying views about the optimal approach to engage with international financial reporting, and even if one approach for all is the optimal way. This is because, after all, how we might go forward is itself not scientific discovery either. One thing, though, to be sure, is that Rome wasn't built in a day, and perfectly aligning the financial reporting across the world's capital markets won't happen that fast either. Many of the countries which have taken action to align their financial reporting policies with the global norm have approached this by amending their local requirements so that the content of their generally accepted accounting principles, or GAAP, aligns with the contents of IFRS. As a result, investors are told via footnote disclosure about the basis of accounting on which the financial statements are prepared — X Country IFRS — as a baseline, accompanied by the additional representation of compliance with "IFRS as issued by the IASB" by some issuers. I don't highlight this example as indicative; rather, to make the point that I think all of our thoughts about approaches should reason from the very important matter of the basis of presentation on which issuers will present their financial statements to investors.


If you are now looking ahead as to how we will engage internationally on financial reporting matters and see a straight path, you can probably be sure it is not the actual path. But I don't think that should deter us. After all, I suspect no one would ever get married if they weren't willing to walk into some unknowns. So please consider everything you do know and give the Commission your best thoughts.

And one last point, in case in formulating those thoughts you are wondering, "Well what does your Aunt Margaret think?" Let me say that, regrettably, I don't have her perspective to share with you as she too has now passed away. So yes, she too has joined the other family members in Grand Rapids; alongside two of her seven children, Kristin and John Paul. But what of her question, as to whether — in this case with respect to international financial reporting matters — we'll all be able to get along? My answer is "I am working on it Aunt Margaret, I am working on it." Actually — in the spirit of making the world a better place for investors — we are all working on it Aunt Margaret, we are all working on it.

Thank you very much for your attention.


Modified: 12/12/2008