Waiting to Converge: Global Accounting Standards

California CPA magazine: July 2007

International accounting standards convergence is quietly moving forward and practitioners should begin to prepare for the inevitable.

The accounting profession has several sets of international standards. Perhaps best known are the International Accounting Standards Board’s international financial reporting standards (IFRS), which have been embraced at some level by most major economies outside of the United States. Additionally, the International Federation of Accountants (IFAC) has boards that set international standards for auditing, ethics, education and public sector accounting.

IFAC is an association of professional accountancy bodies from nearly 120 countries. U.S. members include the AICPA, the National Association of State Boards of Accountancy and the Institute of Management Accountants. 

IFAC’s mission is to develop the global accountancy profession, which includes funding and overseeing the development of international standards for auditing, ethics, education of professional accountants and public sector financial reporting, as well as providing support for small and medium practices and professional accountants in business. The member bodies of IFAC contribute funds for standard-setting, as well as immense levels of volunteer technical talent that helps create the standard setting boards.

California CPA recently interviewed Robert Bunting, a partner at Moss Adams LLP in Seattle and deputy president of IFAC, for an insider’s glimpse into the international standard-setting process and his reflections on the impact for the profession.

Q: How did international standards come about? Who set those standards then and who is working on those standards now?

A: The international standard-setting process was an effort by the developed nations to create standards that could be used by developing and smaller nations not able to develop their own. As the business world became more global, investor groups, regulators, large companies and auditing firms began to realize the importance of common standards in all areas of the financial reporting chain. The formation of the European Union accelerated this realization as these major economies began to focus on the need for one set of standards and a common approach to regulating listed companies and auditors across Europe. European listed companies are now in their second year of implementing common financial reporting standards (IFRS), and the EU is in the process of settling on a common set of standards for auditing and ethics.

In the United States, the SEC has set a timetable for allowing foreign companies traded on U.S. exchanges to report using IFRS by 2009. The Norwalk Agreement, which exists between the FASB and the International Accounting Standards Board, sets out a framework to bring U.S. and international reporting standards closer together. Additionally, SEC Chairman Chris Cox has called for convergence of U.S. and international standards in public statements with increasing frequency in recent months.

The Auditing Standards Board in the United States, which sets auditing standards for private companies, has been using International Standards on Auditing (ISA) as the basis for its standards for several years. Even the PCAOB has allocated resources to monitoring the ISA process. Although they have not committed to any timetable, PCAOB Chair Mark Olson has stated publicly that “convergence is a goal” of the PCAOB.

Q: What is the timeline for this process?

A:  Because there are multiple sets of standards, the timetables are not necessarily the same for each set of standards. I believe, however, that all of the timelines are accelerating. As even the smallest companies become international there are growing forces for harmonizing standards so U.S. companies do not incur the costs of complying with multiple auditing and reporting standards. Many countries, such as Canada, India, Korea and Japan, which historically followed the U.S. lead on standards, have declared their intentions to converge with international standards in all areas. Since SEC Chair Cox has named 2009 as a critical year in convergence, I will venture the guess that the United States will be well on its way to converging financial reporting, auditing and ethics standards by 2009.

Q:  As IFAC deputy president, what does your job entail?

A: The officers of IFAC chair some key committees. I chair the Finance and Planning Committee, responsible for IFAC finances and strategy. I also serve on the Nominations Committee, which appoints members to the standard-setting boards and all IFAC committees. I’m also a member and an alternate chair of the International Regulatory Liaison Group (IRLG), which is a fancy name for the group that is responsible for meeting with government agencies and regulators to ensure the adoption of our standards in all countries.

The IRLG also meets with the Monitoring Group, which is composed of the global regulators of banking, listed companies, the insurance industry and the World Bank, among others. Their support and endorsement of our standard-setting process is a key factor in our standards being accepted around the world.

Q:  You mentioned in your recent CalCPA Council presentation that some U.S. standards match international standards, and some don’t. Will the United States eventually conform to international standards, or vice versa?

A: For many years U.S. standards in financial reporting, auditing and ethics either drove or heavily influenced standards in most other countries. This was due to the combination of the size of our economy and the talent we could bring to the standard-setting process. The problem with our process was that we did not accept input from the rest of the world regarding our standards; it was a take them or leave them kind of deal.

For this reason, and many others, the other major economies began to focus on international standards because they could have a seat at the standard-setting table and, unlike in the United States, the due process was designed to consider all sources of input and involvement. The United States still has considerable input and influence on international standards both because of our funding of the process and the substantial talent we contribute.

The United States is moving toward convergence in various ways with international standards and, while our commitment is not absolute, there is considerable evidence from all sides that it’s growing rapidly.

Q:  How will the various regulatory and standard-setting boards in the United States (FASB, SEC, PCAOB, GAAP) be affected by global accounting standards and what will happen to them as we move closer to convergence?

A:  This is total conjecture on my part, so it must be taken with a grain of salt. The answer may be a little different in each case. As with most countries, including Europe, that adopt international standards, the U.S. standard-setters will probably decide to stay in business. However, their role will most likely be first to exert influence on the international standards through direct participation and debate, and second to examine each standard for its impact and appropriateness for the U.S. market. Finally, they may develop standards for unique U.S.-only situations and provide guidance for the implementation of international standards in the United States.

Q:  How will U.S. companies and CPAs be impacted by the international standards?

A:  This question is almost too big to answer. No one party gets its way in a shared process. The United States has huge influence in the international standard-setting process. Our voice is heard because of our economic clout, our participation in the process and the incredible respect U.S. accountants receive for our technical knowledge and talent.

One of the big issues we face is the debate on rules versus principles-based standards. Due, in part, to our litigious society, U.S. accountants tend to want very specific guidance on the implementation of standards. Most of the rest of the world believes in principles, which are applied using the knowledge, judgment and good faith efforts of the accountant or auditor. One of the big issues for the United States is whether we will have mechanisms to create rules for the application of international standards or move to a principles-based approach.

Another issue is the possible need to bifurcate standards between those that apply to listed companies and those that apply to private companies as we have begun to do here in the United States This is a global issue. In many countries, small, private companies dominate the economies. Most of these countries have grave concerns about “one size fits all” international standards.

Q:  More specifically, how does this impact California CPAs? Why should the sole practitioner in Modesto or Bakersfield care about international standards?

A:  I can think of two reasons. First, an accountant in Canada who serves a small Canadian company with a sourcing subsidiary in China will soon need to learn and be concerned about only one set of financial reporting, auditing and ethical standards since both countries have committed to implement common standards over the next few years. That accountant’s tools will be the same in both countries. The accountant in Bakersfield needs two set of tools, U.S. and Chinese (which is migrating toward international standards). Unless he has many clients with the same profile, it may not be worth his time to learn both skill sets. That could be one fewer client he can effectively serve. His U.S. client also may be incurring extra costs in complying with two systems or reconciling two systems relative to his Canadian counterpart.

The second reason relates to influence. The battle of U.S. versus international standards is, in my opinion, over. The next challenge is how much influence the U.S. accounting profession has on the international standard-setting process. I have learned very quickly that if you want to have influence, you have to have allies. For example, a recent exposure draft on independence from the International Ethics Standards Board for Accountants could have created real problems for U.S. accountants and their private company clients. The AICPA wrote an excellent response to this exposure draft, but what really got the Ethics Board’s attention were similar responses from Australia, New Zealand, the Nordic countries, India and many others. The AICPA played a key role in helping to make it clear that the problem was not a U.S. issue; it was a small-business issue for everyone in the world.

In an international standard-setting world, the local CPA in Bakersfield may have as much in common with a local practice in Oslo, Norway, as he does with his colleagues down the street.

Q:  Who are the major players/proponents of international standards?

A:  Most global corporations would benefit from not having to reconcile various reporting models to U.S. GAAP or the reverse. This is not a small cost of doing business for multinational companies. Large-scale investors, such as mutual funds, pension plans and other institutions, see the benefits of greater comparability between companies with a common set of reporting standards. In the audit world, many firms that serve transnational companies see benefits in training, efficiency and quality resulting from a single set of auditing and ethics standards. Finally, most national regulators are faced with regulating not only activities originating in their own countries, but also cross-border activities. Common standards serve all of these interests and there are proponents of convergence in all of these sectors.

Q:  With such varied cultures, societies and markets around the world, how is convergence possible? What are the biggest obstacles?

A:  It’s true that many countries that claim to be converging to international standards may never get to 100 percent compliance. Even major developed countries reserve the right to selectively carve out or modify standards that they consider not to be in their national interests. Culture and national interests do sometimes pose obstacles for full compliance.

Q:  Has thought been given to how accounting/finance educators should be adjusting their teaching to address the rise of international standards and the new regulations? What processes should we put in place now to facilitate our compliance with the coming standards?

A:  Educators who teach American standards will increasingly teach international standards. Perhaps the biggest challenge for educators will be if the American version of these international standards moves in the direction of principles rather than our current rules bias. I like to suggest that American standards come complete with an “operator’s manual” that consists of detailed rules and guidance on how they must be applied.

Principles-based standards require the accountant to think through the substance of what is being done and apply knowledge, judgment and ethical values to the application of the principle the standard represents. This requires high levels of critical thinking and application, compared with our current approach to “researching the answer.” The generations of accountants and accounting teachers who were raised in a rules environment may find this a difficult adjustment to make.

Q:  What impact, if any, does this have on the FASB/AICPA private company reporting project?

A:  The International Accounting Standards Board has set up a task force to study differential application of its standards for non-listed companies. That task force has made recommendations to exempt or moderate the applicability of certain IFRS to small and mid-sized businesses. I understand that Judy O’Dell and her Private Company Financial Reporting Committee is on top of the IFRS project and that they will use some of this thinking in their own deliberations regarding the U.S. market. The bottom line is that I think this dual effort could speed the private company work being done in the United States.

Q:  What is the worldwide goal of convergence? What is the impact of international standards on businesses and business and industry CPAs?

A:  Professional accountants in every corner of the world specialize in improving the quality of financial information for decision makers. This applies to accountants in industry who prepare and analyze financial information for management and shareholders. It applies to auditors and financial statement preparers in public accounting who either lend credibility to financial information or help prepare it. It applies to the many CPAs who see themselves as business advisers and lend their financial and analytical expertise to business owners, investors and management.

In an increasingly global world, if we want to keep up with our clients and employers, national boundaries should not artificially define our skills as accountants either.