The road to IFRS: does the SEC's roadmap mean that U.S. companies may soon report under International Financial Reporting Standards?

Strategic Finance, Sept, 2007 by Parveen P. Gupta, Cheryl Linthicum, Thomas G. Noland

The PCAOB also faces the reality of inspecting non-U.S. firms that audit non-U.S. issuers that elect to have their securities trade in the U.S. markets. The Board is trying to closely coordinate its work with similar regulatory bodies in other countries and may at its own discretion rely on inspections and work of these audit oversight bodies. This reliance on other oversight bodies could lead to a difference in the audit quality of public companies. These differences may well lead to what PCAOB Chairman Mark Olson calls regulatory arbitrage, which could occur if the audit oversight approach of one regulatory body is substantially different from that of other audit oversight bodies.

Globally there are still differences in the areas of auditor independence and nonaudit services. There are issues of audit oversight boards not being independent of the industries they oversee, and, in some countries, audit committee members aren't independent of management. While these concerns are being addressed by the EU and other countries, it would seem that global convergence must be reached before similar levels of assurance could be given for both U.S. and foreign listed registrants.

OTHER ISSUES

One issue that hasn't been discussed in public forums is the role of Congress in allowing an international board to establish reporting and auditing standards for U.S. companies. In 1996, as part of the National Capital Market Efficiency Act, Congress directed the SEC to give vigorous support to the development of high-quality international accounting standards. But some members of Congress have an interest in accounting policy issues and have been known to express their views to both the SEC and the FASB over controversial accounting issues, which could lead someone to conclude that some members of Congress may not be interested in a diminished role in connection with accounting standards setting.

Another issue that must be addressed is the funding of international boards. SOX Section 109 provides that funds to cover the PCAOB's annual budget (less registration and annual fees paid by public accounting firms) are to be collected from issuers. Accounting support fees are based on the average monthly U.S. equity market capitalization of publicly traded companies, investment companies, and other equity issuers. The fees are paid by publicly traded companies with average monthly U.S. equity market capitalization of more than $25 million each and by investment companies with average monthly net asset value or U.S. equity market capitalization of more than $250 million each. International standards-setting boards would have to develop a funding stream that not only preserves their independence but meets the requirements of Congress and other international legislative bodies.

An additional factor in IFRS adoption is already being considered by the SEC. The Commission realizes that avoiding regulatory conflicts concerning the application of IFRS is crucial. In August 2006, it published a joint work plan with the Committee of European Securities Regulators (CESR) that requires the SEC staff and the CESR-Fin, the expert group within CESR focused on financial reporting, to share information about consistent application of IFRS. Protocols for sharing confidential information about companies that are listed with the EU and the SEC are to be established. The SEC will have to develop similar agreements with securities regulators in other jurisdictions to resolve IFRS issues for companies that have multiple exchange listings.