COMMENTS IN RESPONSE TO SEC CONCEPT RELEASE
INTERNATIONAL ACCOUNTING STANDARDS
FILE NO. S7-04-00
Donald A. Schwartz, J.D., CPA
Associate Professor of Accounting
National University, La Jolla, California
Are IASC standards sufficiently comprehensive?
If the SEC identifies what it considers to be fundamental accounting issues and/or guidance that are not addressed by current IASC standards but are addressed by U.S. GAAP, then it is suggested that the SEC list such topics and that registrants be required to apply host-country treatment (U.S. GAAP in this case) and disclose the recognition and measurement principles which have been applied. Such topics should include guidance for certain specialized industries. As these topics are addressed by new or modified IASC standards, they would be removed from the list of topics requiring such treatment.
Are IASC standards of sufficiently high quality?
Inadequacy of disclosure may be the most common criticism of IASC standards. Indeed, for some it is the only conceptual difference from U.S. GAAP that has significant impact on the reliability, transparency and usefulness of the financial statements. Commissioner Hunt in his March 23, 2000 address in Frankfort identified as a possible course of action "requiring U.S. GAAP and SEC supplemental disclosure requirements for footnote disclosures..." This approach would enable issuers to respond, however reluctantly, in a manner that would be straightforward and unambiguous.
Quality is, in part, a function of comparability. Comparability across time periods is a critical form of comparability, and could be ensured by requiring that financial statements contain at least three years of financial reporting under IASC standards. This would require first-time issuers of IASC-based financial statements to restate two prior years according to those standards, or in the alternative, to wait until the third year of IASC-based financial statements to apply for registration.
Comparability among different companies across national borders is one of the goals of international standards. However, as long a two companies' financial statements reflect measurement and recognition principles that are substantially different (even though equally defensible), they cannot be compared without reconciliation of one to the other. Indeed, it is questionable whether even reconciliation of earnings and equity is enough to enable comprehensive comparative analysis. If reconciliation is no longer to be required, there is a need for even greater disclosure. It could be required that the recognition and measurement principles reflected in the financial statements be disclosed for all balance sheet line items and their related income statement items.
Comparability of financial statements of the same company across national borders is also a worthy objective, and can be achieved only by presenting financial statements that adhere to the same set of accounting standards regardless of where in the world they are presented. That may well be an acceptable trade-off to reconciliation, which facilitates but does not ensure comparability among different companies.
The role of the auditor and audit standards
The preamble of the Concept Release emphasizes among other infrastructure components the importance of high quality auditing standards, along with effective quality controls and the mechanism to ensure that such controls are in place.
These audit quality components might best be assured by the establishment of an international counterpart to national certification, say, "Certified in International Accounting". [Or, if "CIA" is considered imprudent, then possibly "ICA" for International Certified Accountant.]
This certification could be administered by a body constituted in a manner similar to the AICPA, the members of which would be accounting professionals licensed or certified to practice in their home country. IFAC may be willing and able to adopt the appropriate structure for such certification, and also to promulgate and maintain a comprehensive body of international auditing standards.
Certification could require:
In the absence of an existing comprehensive set of high quality international auditing standards, AICPA standards could serve as a point of departure from which such could be formulated. Indeed, as an expedient until an effective auditing infrastructure is in place, SEC ruling could require membership in the SEC Practice Section of the AICPA.
Training and education
Training of issuers and auditors on international accounting standards (supplemented at the outset by U.S. GAAP) could be expedited for those who are familiar with U.S. GAAP: Training could then take the form of a comparative study, with emphasis on the differences between the two sets of standards. The FASB's "The IASC - U.S. Comparison Project" would make an ideal textbook for such a course, assuming the FASB would be agreeable.
Many accounting educators and practitioners, especially those that have been involved with or have at least followed the development of IASC standards, would likely be willing to participate in the development of curriculum, course materials, examination questions and the like, under the coordination of IFAC.
Courses could be delivered online, with student and instructor interaction through live chat and asynchronous threaded discussion.
Practitioners could be asked to contribute case studies based on real situations. The discussion and analysis of such cases would not only provide an effective learning experience, but would help to identify issues for which the level of IASC guidance is insufficient or lacking altogether.
A possible course of action for the Commission is to maintain its current practice of requiring reconciliation to U.S. GAAP, without identifying with reasonable specificity the conditions that would allow acceptance of unreconciled IASC standards. It is suggested that such an extreme might be an even greater disservice to U.S. investors than acceptance of IASC standards unconditionally "as is".
If on the other hand the SEC were to formulate and issue for public comment the specific rules and conditions under which it would accept IASC standards for cross-border filings, it would still take several years from the date of such publication for the necessary infrastructure (IFAC structure, auditing standards, rules of conduct, training and certification of issuers and auditors) to be put in place. During that time, the IASC could address areas of common concern with respect to interpretation, clarification and guidance. But unless and until such conditions are made clear, there will be little motivation, or funding, with which to build that infrastructure.