U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks Before Convergence: The Future of International Financial Reporting Worldwide Conference
U.S. Securities and Exchange Commission


Julie A. Erhardt

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

London, England
June 24, 2005

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 those of the Commission, the Commissioners or of the author's colleagues on the staff of the Commission.

Good morning, and welcome to all of you here at today's Convergence Conference. I am pleased to be in London in the company of so many key participants in the global financial reporting process. Let me begin by making the usual Securities and Exchange Commission (SEC) staff disclaimer that the remarks I make today are my own and do not necessarily represent the views of the Commission, the Commissioners or of other members of the Commission's staff.

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. In the U.S. capital markets, convergence is the enabler that will allow financial statements prepared under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) to co-exist. Don Nicolaisen, the SEC's Chief Accountant, described this in his recently published article-the so-called "roadmap article"-which is available on the SEC's website.1

In my remarks today I would like to make four points. First, I will talk about my belief in the case for one set of high quality global accounting standards; second, I will discuss my support for convergence as a tactic to achieve that goal; third, I will speak about my priorities for carrying out that convergence work; and fourth, I will describe how I think we can each contribute to achieving convergence. So, let me first talk about my belief in the case for one set of high quality global accounting standards.

The Case for One Set of High Quality Global Accounting Standards
There is an intuitive logic that supports the notion that capital markets benefit from using one set of high quality standards. Rest easy, however, I won't try to go over a proof of that economic theorem today. But suffice it to say that a thriving capital market requires a high degree of investor understanding and confidence. Converging with or embracing a common set of high quality accounting standards contributes immensely to this investor understanding and confidence.

Embracing a common set of accounting standards can also lower costs for issuers. In accessing capital beyond their home jurisdiction, companies incur additional costs of preparing financial statements using different sets of accounting standards. These include the costs for company personnel and auditors to learn, keep current with and comply with the requirements of multiple jurisdictions.

Because of all this, I believe that market forces will provide the incentive for a single set of high quality global accounting standards. If this is the case, then the question becomes how to actually provide to investors financial statements prepared under one set of standards. Thus, let me next discuss convergence as the tactic for achieving this goal.

Convergence as the Tactic to Achieve This Goal
What is emerging is that there are different routes individual jurisdictions might pursue toward convergence between their national accounting standards and those of IFRS and, implicitly, those of other nations. Broadly speaking, the choices for a particular national jurisdiction are either to adopt IFRS or to adapt national standards with IFRS; either road should take them toward one set of global standards. Convergence is the way forward by those who choose to adapt, and I think convergence serves its role well for several reasons.

First, convergence helps the efficiency of those capital markets in which IFRS co-exists with the national standards. While I believe national accounting standards and IFRS can co-exist in a particular capital market without those bodies of standards being identical twins, the fact is that the more converged they become, the easier it is for investors and others to work with financial statements prepared under either set of standards. Second, convergence reduces preparers and auditors' costs to juggle application of several sets of national standards within the same consolidated group. Third, convergence helps optimize the resources dedicated to standards writing because more resources are devoted to determining the one best accounting model for a particular topic instead of those resources being spread about pursuing separate national accounting models for the same topic.

An argument against convergence is the cost and inconvenience of implementing the change that it brings. To me, change-with all its cost and inconvenience-is the price of getting to a better place. I have a firm belief, thus, in the net positive value of convergence, both as an enabler to reduce the need for reconciliations between sets of accounting standards, and as the path toward achieving a single set of high quality global standards. So put me down as committed to convergence and all the changes involved. That is not to say that at the moment we couldn't use a free minute to digest all the recent changes. I do see value in a little peace and quiet, but I also believe it is important that we continue to work so that further convergence can be accomplished in a planned, timely and orderly fashion.

My Priorities for Convergence Work
Since I have just declared myself as committed to convergence, this begs the question of how I might approach that work. Looking specifically at convergence between IFRS and U.S. GAAP-which is the area with which I am most familiar-I think the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) achieve the greatest ratio of benefits to costs if they work to both improve the accounting standards and to converge them. Therefore, I think the IASB and FASB should use the resources and talent that a convergence approach to standard setting brings to tackle the toughest, most intractable and problematic standard setting issues.

To me, those are topics such as financial instruments, performance reporting, revenue recognition and topics for which the existing accounting model has off-balance sheet elements; as is the case, for example, with pensions, leases and consolidation policy. Based on an in-depth SEC staff study released last week, 2 accounting models that have off-balance sheet elements are a frequent source of financial reporting transparency issues in the U.S. capital markets, and I suspect this is the case in other capital markets as well. To both converge and improve the standards in these topical areas it may mean the standard setters need to take a fresh look as opposed to shifting the existing IFRS or U.S. GAAP standard toward one existing model or the other. Projects in these areas may well be challenging and controversial-especially in terms of how best to transition from existing approaches to a new approach-but meanwhile the markets go on. I believe the IASB and the FASB have demonstrated that they can set high quality standards under difficult and changing conditions, so that stakeholders in financial reporting can look to them to do their jobs well.

I think the IASB and FASB's convergence efforts are effective if they make continuous progress on these toughest issues while also doing some other targeted work along the way. This means some shorter-term efforts that focus on key differences in particular accounting models and efforts to converge those. This work provides the rewards and other positive effects of making improvements along the way as the bigger and tougher subjects are handled. This does not mean, however, engaging in a paragraph by paragraph comparison of IFRS and U.S. GAAP for the purpose of deciding which paragraph is "better than" or "worse than" the other. Such an approach would, I think, take forever and may not result in significant improvement in the standards.

How Each of Us Can Contribute to Convergence
So, if convergence is a suitable tactic to achieve the goal of one set of global standards, then the next question is probably, "Are the standard setters the only ones who need to work on achieving it?" My answer is "no", because I think we all need to contribute. Convergence is not just the process of setting standards but rather also involves putting those standards into practice. Thus each of us-companies, audit firms and securities regulators-have a role to play.

I think companies can contribute by faithfully and consistently applying the converged standards in putting them into practice. And audit firms can contribute if they audit the companies' financial statements with the objective of looking for the same. The importance of how the standards are put into practice by companies and audit firms stems from the fact that investors read financial statements-not accounting standards-and thus the best converged standards do not provide transparency for investors if they are not implemented well.

Next, let me turn to the securities regulator, so I'll turn the spotlight on myself. Everyone knows that improving accounting standards is not a short term activity, so it is logical to ask, "How much convergence and improvement work is needed before IFRS and U.S. GAAP could be used in the U.S. capital markets without the need for reconciliation between the two?" My own answer is "more than what we have today, but not perfection, and not completion of all the standard setting topics on my list." Those topics raise issues that will require considerable effort to conquer, thus in the meantime good progress and a continued cooperative will to reduce differences over time are important. In the interim, the ability of IFRS to stand on its own two feet in practice and the transparency of any significant differences between IFRS and U.S. GAAP is important.

Beginning in 2006, the SEC expects to have a critical mass of registrants filing their home country financial statements prepared under IFRS and reconciled to U.S. GAAP. Hence, members of the SEC staff will begin reviewing the filings of registrants and listening to the experiences of issuers and investors, and of industry and professional groups, to get a good understanding of how the implementation of IFRS is proceeding. In particular, the SEC staff will be interested in how well investors are able to understand and use financial information prepared under IFRS. This work will help inform our views on the degree to which IFRS as a body of accounting standards and the application of those standards in practice can stand on their own, without the necessity for reconciliations of IFRS to U.S. GAAP. Ultimately, the staff will need to develop recommendations and proposals for the consideration of the Commissioners based upon what is learned.

In closing, I intend my remarks today to encourage everyone involved in global financial reporting to work to make convergence a reality. Progress toward a single set of high quality global accounting standards and progress toward creating an environment in which investors can rely on the application of such standards in practice are objectives that address common worldwide interests in the global capital markets. I believe these objectives will serve us well, and they are what I have in mind when I get up and go to work each day.

Thank you very much for your attention.



Modified: 07/01/2005