June 5, 2000

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Concept Release: International Accounting Standards (File No. S7-04-00)

Mr. Katz:

The Global Financial Reporting Advocacy Committee (GFRAC) of the Association for Investment Management and Research (AIMR)1 is pleased to respond to the U.S. Securities and Exchange Commission's Concept Release on International Accounting Standards. The GFRAC is a standing committee of AIMR charged with representing the views of investors to and maintaining liaison with bodies that set financial accounting and reporting standards in a global context, particularly the International Accounting Standards Committee. The committee is also charged with responding to requests for comment from national standard setters and regulators on international financial reporting issues. The committee is developing a position paper on the quality of International Accounting Standards and their acceptability as a reporting regime for financial analysis and valuation of cross-border securities listings. The committee's work on this position paper forms the basis for their comments on the Commission's concept release.

The GFRAC is currently comprised of AIMR members from the United States, the United Kingdom, Canada, Malaysia, and Hong Kong. They have familiarity with various accounting standards and financial reporting regimes and are well versed in the issues addressed by the Commission's concept release.

Scope of Comment

The primary objective of GFRAC in fulfilling its charge by AIMR is to promote efficiency and transparency in global financial markets through development, maintenance and use of high quality financial reporting and disclosure standards. Such standards cannot stand alone. To be effective, financial reporting and disclosure standards must be part of a financial reporting and disclosure system or infrastructure that ensures these standards are properly and consistently applied. We believe that such a system must have the following five elements:

We believe that only a comprehensive and integrated financial reporting system that includes high quality accounting standards can produce financial statements that are comprehensive, neutral, timely, and most importantly, relevant and reliable.

A majority of the Committee believes that IAS standards meet the requirements set forth in element (1) above and this letter presents our reasons for that view. We wish to be extremely clear, however, that in forming our views on the suitability of IAS for use by foreign issuers in the U.S. capital markets, we assume that the quality of financial statement preparation, auditing, regulatory oversight and enforcement, and corporate governance will be of the same level and caliber as currently exists for U.S. registrants. We understand that this is a significant, and perhaps unrealistic, assumption. However, in order to be fair and impartial in our assessment of IAS, we must provide these standards with a level playing field vis a vis U.S. GAAP. Therefore, our conclusions are predicated on the following four assumptions being true:

We believe that accounting standards are only one piece of an integrated financial reporting system. These standards can only be effective when combined with consistent interpretation and enforcement by high quality, independent audits, and regulatory enforcement with consequences for lack of compliance. We firmly believe that clear and consistent interpretation of the standards cannot rest solely with the standard setter, whether it be the Financial Accounting Standards Board (FASB) or the International Accounting Standards Committee (IASC), but must also be the responsibility of the independent auditors when addressing practice questions. With respect to enforcement, no private-sector standard setter, including the FASB, enforces its own standards. Only regulators have that power. The Commission must commit to enforce compliance with IAS standards with the same diligence and attention with which it enforces U.S. GAAP.

We are emphasizing these assumptions because we are concerned that many who criticize IAS have confounded these various elements of a comprehensive financial reporting and disclosure system. Even the most "perfect" accounting standards, if they should exist, would be of little use to investors if they were expected to stand alone without the other elements of the reporting system in place and fully operational.

Dissenting View

One member of the GFRAC disagrees with this view. He strongly believes that the IAS (as of June 5, 2000) cannot be regarded as a set of "high quality" standards for the following reasons:

He believes that these deficiencies make it impossible to conclude that IAS can be consistently applied and are capable of rigorous interpretation. He is also alarmed by the absence of any comprehensive discussion of plans to achieve acceptable levels of compliance by preparers and enforcement by auditors and regulators. Because he believes that (1) it is not possible to conclude that IAS are of acceptable "high quality' and (2) there is not enough evidence that adequate compliance or enforcement exists today, he dissents from the views expressed in the remainder of this letter.

Non-GAAP Elements of Financial Reporting and Disclosure System

As noted above, the GFRAC believes that it may not be realistic to assume that the non-GAAP elements of the financial reporting and disclosure system surrounding IAS are of comparable quality to those surrounding U.S. GAAP. Elements (2) and (3) of the financial reporting and disclosure system described above, for example, relate to the responsibilities of issuers and auditors respectively. The GFRAC believes that these elements have two important characteristics in common: ethics and training. In addition, auditors must be independent from their clients. We believe that there is considerable work to be done in all three areas.

Training on IAS can be achieved in a variety of ways. We do not believe that it should take very long for preparers and auditors to be adequately trained. Some of us have seen evidence that the global accounting firms have already begun to address this issue. We believe that acceptance of IAS will of necessity expedite this process.

Ethics and independence are more problematic. The Independence Standards Board was initiated to address these issues with respect to those who audit U.S. financial statements. We believe that, given both cultural and legal differences that exist in an international context, it is reasonable for investors to be more concerned about compliance with both the spirit and letter of IAS.

Therefore, although we believe that independent auditors make significant contributions to effective enforcement, the true burden of enforcement of IAS will rest with the Commission and its staff. We understand that the most important issue for the Commission will be having adequate numbers of trained staff to undertake this responsibility. Once adequate staff is in place the Commission must review IAS financial statements with as much, if not more, care as they currently do U.S. GAAP financial statements. When non-compliance or fraud is detected, the Commission must use all of the remedial actions available including threats of litigation, punitive damages, and criminal proceedings.

Finally, shareholders and investors must accept responsibility and be afforded the opportunity to participate in corporate governance to insure that the companies in which they invest provide them with sufficient, reliable, and relevant information. And to penalize those companies who fail to do so with reduced share prices and increased cost of capital.

Comments on Convergence of Accounting Standards

The GFRAC strongly supports the IASC's mandate and its efforts to procure convergence of international accounting standards and practices to one high quality standard. As noted by the FAPC in Financial Reporting, globalization and increased correlation of international capital markets heightens the need for high quality, complete, accessible, and understandable financial statements that provide comparability across companies regardless of the country of domicile. Financial analysis and investment decision-making has for some time focused on analyzing and comparing companies in global industries, not merely domestic. Therefore, improved transparency and comparability of financial information will (1) provide the better companies with additional sources of capital at lower cost and (2) provide investors with additional investment opportunities and the ability to assess them appropriately.

By design, IAS are not as detailed or comprehensive as U.S. GAAP. Rather than providing detailed rules, IAS focus on the principles that when followed appropriately will provide the same quality and quantity of information in financial statements. Current IAS GAAP has benefited greatly from both the Improvements Project and the development of the other standards that comprised the IOSCO work program. The interpretations and the guidance that have been and continues to be provided by the IASC Standard Interpreting Committee (SIC) is critical to providing the consistency of interpretation that is provided in the U.S. by the Emerging Issues Task Force (EITF).

If IAS are considered as part of the Commission's financial reporting system, the GFRAC generally supports allowing foreign issuers to file their primary financial statements with the Commission using IAS. We believe the core standards provide as high quality and comprehensive a framework for financial reporting as U.S. GAAP and are suitable for use in the financial statements of foreign issuers in the United States. We believe that allowing foreign issuers to prepare their primary financial statements using IAS when they file these statements with the Commission will have three significant benefits:

Though the GFRAC recommends that the Commission allow foreign issuers to file financial statements based on IAS GAAP, this recommendation is not without trepidation. Our concerns stem primarily from the experience we have had analyzing financial statements currently prepared using IAS. First, a number of key standards have effective dates in 2000 and 2001 and there is no experience on whether the standards are being applied appropriately or consistently. Second, even for standards that are effective, we have seen inconsistent interpretation by the audit profession and a singular lack of enforcement. Some of these problems may be due to lack of knowledge and experience by both auditors and regulators. But continuance of such a situation is unacceptable to us.

Adequate and consistent enforcement is critical to the acceptance and survival of the IAS. Since there is no global regulatory body charged with enforcing the IASs, this task will be the responsibility of separate national regulators and independent auditors. Both will need ample training on the IASs themselves and on cultural issues that may interfere with the correct application of the standards. If the Commission should accept IAS, it will be its responsibility to ensure its staff has sufficient knowledge and expertise to perform the enforcement role effectively.

Standard-by-Standard Evaluation of IAS

The GFRAC is in the process of completing a standard-by-standard evaluation of IAS. In performing this evaluation, we did not believe that simple comparison to the U.S. GAAP requirements would be sufficient to determine whether the standard was of high quality. Rather, we felt that it is also necessary to compare the standards to an ideal set of criteria. In doing so we are employing the criteria outlined in Criteria Employed by the AIMR Financial Accounting Policy Committee [FAPC] in Evaluating Financial Accounting Standards.2 In this paper, the FAPC provided eight criteria that they considered most critical to the promulgation of high quality accounting standards. The GFRAC believes that the FAPC's criteria provide an important framework for analysis and we are relying on these criteria in performing our evaluation of International Accounting Standards (IAS). These criteria are:

Although our evaluation of all the IAS standards is not complete3, a consensus has emerged on a sufficient number of standards for us to respond to the Concept Release.

The remainder of our comments address the specific questions the Commission raised in its concept release. Answers to most of the questions are implicit in the substance of our comments reflected below.

Specific Comments

Concluding Remarks

The majority of the GFRAC believe that IAS are of sufficient quality to be accepted by the Commission for use by foreign registrants without reconciliation given that the other elements of the financial reporting and disclosure system are in place and are comparable to those in the current system applicable to domestic registrants. We believe there are three benefits to accepting the core standards that should be reiterated here. First, acceptance will encourage more companies to adopt IAS. Second, acceptance will foster further improvement of the standards. Finally, acceptance will test the market implications of using IAS.

The dissenting member of the Committee is willing to support these conclusions only if the reconciliation requirement is retained. However, the majority of the committee disagrees with retention of the reconciliation requirement. They believe that if the reconciliation is retained any test of the market implications of IAS will be confounded by the availability of US GAAP information.

The Global Financial Reporting Advocacy Committee appreciates the opportunity to express its views on the Concept Release, International Accounting Standards. If the Commission or its staff have questions or seek amplification of our views, we would be pleased to answer any questions or provide any additional information you might request.


/s/ Trevor W. Nysetvold
Trevor W. Nysetvold, CFA
Global Financial Reporting Advocacy Committee AIMR

/s/ Patricia Doran Walters
Patricia Doran Walters, CFA
Vice President, Advocacy

Members of the AIMR Global Financial Reporting Advocacy Committee:

Low Kwong Chong Malaysia
Robin J. G. Fox, CFA Hong Kong
Trevor W. Nysetvold, CFA, Chair Canada/United States
Nazir S. V. Rahemtulla, CA Canada
Kenrick R. M. Ramlochan, CFA United Kingdom
Gary S. Schieneman United States
Ashwinpaul C. (Tony) Sondhi United States
Patricia A. McConnell, CA, Observer United States
Patricia Doran Walters, CFA, Staff Liaison

Cc: International Accounting Standards Committee


1 The Association for Investment Management and Research (AIMR) is a global, not-for-profit organization of over 42,000 investment professionals in 95 countries. Through its headquarters in Charlottesville, VA, and more than 94 Member Societies and Chapters throughout the world, AIMR provides global leadership in investment education, professional standards, and advocacy programs.

2 This paper was prepared by Peter Knutson, PhD, CPA, and Gabrielle U. Napolitano, CFA, former Chair and Chair, respectively, of the FAPC to be presented at the 1997 Financial Reporting Issues Conference of the American Accounting Association and the Financial Accounting Standards Board.

3 A copy of the complete analysis will be provided to the Commission when it becomes available.