The Securities and Exchange Commission voted unanimously to seek public comment for 60 days on a "road map" to move from U.S. to international accounting. SEC Chairman Christopher Cox predicted U.S. regulators likely would vote again "late this year" on whether to endorse the plan.
The plan calls for early, voluntary use of international accounting standards by large U.S. multinational firms in 2010, followed by an SEC vote in 2011 on whether to require all U.S. companies to make the switch. The decision would rest on whether key changes occur by then, including international accounting standard-setters obtaining independent funding.
Under the timetable outlined by the SEC, the switch to international accounting could be staggered, starting with large U.S. companies in 2014, followed by mid-sized companies in 2015 and small companies in 2016.
"The proposed roadmap is cautious and careful," Mr. Cox said at a public meeting to consider the matter. SEC Commissioner Elisse Walter called the plan a momentous one that shows the U.S. is serious about considering a movement toward international accounting standards.
However, Ms. Walter said the U.S. should vote in 2011 to approve the switch "if and only if" certain conditions are met by then. The plan sets seven "milestones" to be met, including obtaining an independent, stable source of funding for the London-based International Accounting Standards Board.
The "road map" also calls for continued collaboration between the IASB and the Connecticut-based U.S. Financial Accounting Standards Board to narrow differences between U.S. and international accounting rules; and changes to the ways in which U.S. accountants are educated and trained.
The transition may well be messier for small firms than for large firms; large firms have more complicated finances, but they also have the means to hire top-notch accountants with loads of international experience on their staff. An even bigger issue is what happens when the SEC disagrees with the IASB. Currently, it has the power to overrule the nominally private FASB that sets accounting standards for the US. It will not have so much pull with the international board.
Overall, however, this makes sense. The difference between international and American accounting standards has cost US exchanges business in recent years, as companies decline to keep two sets of books. And it has made it somewhat harder to compare the performance of American firms with their foreign counterparts, which makes global capital markets marginally less efficient than they should be.
When the first accounting scandal hits, however, stand by for the wingnuts on both left and right wailing about the tyranny of global finance.
I worry about excess complexity.
In the same way that federalism imposed some minimum level of discipline on the state governments, so too did competing accounting standards keep bureaucrats in check.
Most folks who make accountind standards benefit from complexity. They often fail to balance the various accounting principles:
Accuracy vs. timeliness
Comparability vs. representational faithfulness
maximium disclosure vs. minimum cost
Conservatism vs. transparency
Many standard-setters make a fortune in the private sector before & after a stint of rulemaking.
I would be OK with globally "harmonized" standards if we adopted a UK-style "Comply or Explain" framework. Companies would disclose departures from IFRS. They'd need to at least comment on how they got comfortable with the area in question and what other data would be helpful in its place.
They can skip low-value bits. They would face the wrath of the capital markets if they were seen as being too secretive. There would be no harm at all if they skipped superfluous rules that analysts don't care about.
Anyone want to explain this move with a rational choice model of bureaucracy? (That is, why would a rational bureaucracy voluntarily give up power? Or if the SEC doesn't have freedom of action, why would domestic constituencies suddenly decide that they changed their minds and don't want barriers to trade after all?)
Here's a theory for you: as Megan noted, foreign companies have declined to list their stock on American exchanges due to the cost of translating from International Accouting to GAAP. If, after the rule changes, more foreign companies start trading their stock in markets under the SEC's jurisdiction, that gives them more stuff to regulate, which means more jobs, more prestige, bigger budgets, etc.
Jeff,
I'm not sure if that works. International standards wouldn't necessarily increase their jurisdiction: if all regulators are the same, then why does any company need to list in the US? And if all regulators are the same, what scope does the SEC have to rock and roll? So the jurisdictional effects are ambiguous at best and the scope w/in the jurisdiction would be contracted.
On the other hand, if "harmonization" looked like the recent US-Australia mutual recognition stuff, you might argue that what the SEC was thinking was: if we promise mutual recognition as long as you do what we say, we can leverage control of the huge but limited US market into control of a much larger jurisdiction. But if you're going to give away the store preemptively, I don't see how this works.
Does this mean we all have to learn metric again?
I always love hearing American officials brag about how foreign standards are irrelevant in the US and they have no interest in coordinating them. It's the ultimate naked assertion of bureaucrats' right to waste other people's time and money on busywork -- kind of beautiful, in its own way.
Bingo. Regulation used to give large corporations an advantage. Keep those small businesses small, at least until they're bought out by a bigger company.
It is always good news for consumers - in the medium term - when an industry standards war ends. This one has been the longest drawn out contest that I can remember.
The people who have opted (or been forced into) the losing standard face the short term costs of adjustment. These may be less than you think, judging by the relative ease with which most of Europe has adapted to the international standards.
What worries me is the long term. No system of accounting can be perfect; but where is the drive to come from for ocntinued radical improvement when there is no prospect of competition?