Coming to Terms With International Accounting Accounting Standards

Internal Auditor, Feb, 2001 by Robert K. Larson, Linda Lee Larson

For years, the prospect of international accounting standards has hovered uncertainly on the horizon. Now, the concept has become a reality -- and, especially in multinational organizations, the impact may stir financial operations.

YOU'VE JUST BEEN ASsigned to conduct a financial audit at one of your firm's foreign subsidiaries. Your planning is proceeding on course when suddenly you realize that the subsidiary's accounting records are prepared in accordance with international accounting standards (IASs). Your work comes to a screeching halt as you scurry to catch up.

In light of the growing acceptance of IASs, scenarios similar to this one are likely to become common. The U.S. Securities and Exchange Commission (SEC), for example, is giving serious consideration to allowing more extensive use of standards promulgated by the International Accounting Standards Committee (IASC). The SEC has unanimously approved and issued for public comment a "concept release" on international accounting standards. In asking for comments from those who have used IASC standards, the SEC has been particularly interested in the experiences of preparers using the standards in presenting financial statements, auditors working where IASC standards were used, and investors using financial statements prepared according to the IASC standards.

These standards are not an abstract notion that can be ignored. All finance professionals, including internal auditors, need to be aware of recent events regarding the IASC standards and their global acceptance.

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

The goal of the IASC is to harmonize--though some would say standardize--accounting internationally through the development, publication, and advocation of its standards. Founded in 1973 and based in London, the IASC is a private organization with a voluntary membership that consists of 152 professional accountancy bodies representing more than 100 countries. IASC members agree to support and encourage the use of IASC standards in their own countries. U.S. members of the IASC include the Institute of Management Accountants, the American Institute of Certified Public Accountants, and the National Association of State Boards of Accountancy. The Institute of Internal Auditors is an affiliate member of the IASC.

The IASC has issued approximately 40 IASs that address all "core" accounting topics. Although official IASC standards are developed in English, the IASC has worked to make them widely accessible. Official translations are now available in German, French, Russian, Polish, Romanian, Spanish, and Chinese.

INCREASED SUPPORT FOR THE IASC

During the past year, actions taken by the SEC, the European Commission of the European Union (EU), and the International Organization of Securities Commissions (IOSCO) contributed significantly to the acceptance and prestige of the IASC. SEC involvement has been a key factor. Even before issuing its concept release, the SEC had decided to accept, without reconciliation, cash flow statements filed with them--by corporations outside the United States--that were prepared in accordance with IASC standards (IAS 7). The SEC also allows foreign firms to file using parts of IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 22, Business Combinations, and IAS 29, Financial Reporting in Hyperinflationary Economies.

IOSCO announced that it would be recommending that its members allow multinational firms to use IASC standards--supplemented, where necessary, by reconciliation, disclosure, and interpretation--to address outstanding substantive issues at a country or regional level. Based in Montreal, IOSCO is an influential international organization composed of more than 100 securities commissions and similar government agencies. Although this decision by IOSCO does not force the SEC to allow use of IASC standards in the United States, it provides further support for the acceptance of the standards.

The EU announced that it had adopted a new strategy for future financial reporting in Europe and declared that adoption of IASC standards represented the way to move forward. The EU is expected to propose formally to the European Parliament that all EU companies listed on a regulated stock market prepare consolidated financial statements in accordance with IASC standards by the year 2005. This proposal includes all listed banks and insurance companies.

RESTRUCTURING THE IASC

A new IASC constitution is expected to move the organization even closer to its goals. The new structure and due process are somewhat similar to the structure of the U.S. Financial Accounting Standards Board. A board of trustees with 19 members has been established. The trustees appoint the IASC board members, exercise oversight, and raise the money needed to operate the IASC.

The IASC board is to be geographically diverse. Twelve of the 14 members of the board will be full-time. To achieve a "balance of perspectives and experience," IASC has mandated that at least five members shall have been auditors, at least three shall have a background in the preparation of financial statements, at least three shall have a background as users of financial statements, and at least one shall have an academic background. In addition, seven of the IASC board members are expected to have direct liaison responsibility with one or more national standard setters." A simple majority of voting members is required to approve new IASC accounting standards.