Regulator Rips Into Global Accounting Plan

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The rush to adopt international accounting standards is a politically motivated, myth-ridden effort that will weaken U.S. capital markets, says PCAOB member Charles Niemeier.
Marie Leone - CFO.com | US
September 10, 2008

Recent efforts to move the United States toward adoption of international accounting standards is a politically motivated effort that will hurt the standing of the United States in the world's capital markets, a prominent accounting regulator said today.

A precipitous move away from U.S. Generally Accepted Accounting Principles will undermine the U.S. regulatory system, and thereby "put in jeopardy the thing that gives the U.S. a competitive advantage," said Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board. "All research shows that the U.S. is unique in its regulation. No [country] is as effective . . . . We have the lowest cost of capital in the world. Do we really want to give that up?"

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Niemeier, who has been a vocal critic of the accelerated movement toward adoption of IFRS, laid out a scathing critique on Wednesday at a conference in New York City sponsored by the New York State Society of CPAs. Niemeier also declined an audience request to define the PCAOB's official view. "People speaking out individually is the closest you're going to get," he said.

Niemeier challenged the idea that stringent American regulations have hurt the country's ability to compete in global capital markets — an argument made to Treasury Secretary Henry Paulson in 2006 by the Committee on Capital Markets Regulation and again in 2007 by a McKinsey Report commissioned by New York City mayor Michael Bloomberg and Senator Charles Schumer (D-N.Y.).

Niemeier argued the opposite, contending that U.S. regulation gives the country a competitive advantage because it boosts investor confidence and results in a lower cost of capital. Efforts to move to weaker international accounting standards, he said, would undermine those regulations.

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There has long been a plan in place for U.S. accounting standard-setters and their international counterparts to gradually eliminate differences between the two different sets of standards through a process called convergence, which Niemeier said he supports. But under President Bush, he said, Washington placed a political focus on "what they called convergence."

"There is no effort underway to converge standards" into a single set of high quality rules anymore, asserted Niemeier. Instead, he said, the Securities and Exchange Commission decision to allow foreign companies to file financial reports using International Financial Reporting Standards without reconciling them to U.S. GAAP had already introduced two sets of standards into the United States. "We've given up on GAAP," said Niemeier. Recent efforts, including the SEC's decision last month to create a roadmap for U.S. conversion to IFRS represented "a move away from convergence toward capitulation."

Responding to Niemeier's remarks, SEC spokesman John Nester said, "The Commission's proposal comes directly in response to the fact that more U.S. investors are investing in more foreign companies in more international markets than ever before, which suggests the need for an international language of disclosure and transparency to protect investors and facilitate their comparisons of corporate financials."

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Yet in his speech, Niemeier said claims that IFRS would lead to improved comparability and better investor protection were among a series of widely touted "myths" about IFRS. Likewise, he said, it is no longer the case that the United States is making any effort to converge its existing accounting with IFRS. "Up until the last couple of years, we were on that path . . . but now it seems that decisions were made that it was too hard and would take too long to actually converge," he said.

Niemeier also said it is a myth that IFRS is based more on principles than the rules-heavy U.S GAAP. "IFRS is not more principles-based, it's just younger," said Niemeier, repeating a charge that he has made in the past. GAAP, he said, also started with principles. However, he said, that changed after U.S. v. Simon, a 1969 court decision that found that presenting financial information in conformity with generally accepted accounting principles may not be a sufficient defense against charges of violating the antifraud provisions of U.S. securities laws. That case, he said, was a "shock to the system," and spurred a large number of the rules that exist in GAAP today, which were demanded by companies and auditors seeking a level of predictability and consistency.

"The idea of moving to IFRS is very interesting," observed Niemeier, "because it is moving back to more discretion" for accounting decisions as existed before the Simon ruling.

Indeed, he argued, that increased discretion debunks another myth about IFRS — the contention that it will lead to greater global comparability among financial statements. Niemeier said he finds that contention "most amazing," noting that greater discretion and more comparability are incompatible. "Those don't go together. It's like having your cake and eating it too."

Moreover, "we don't even have to speculate [about comparability]," said Niemeier, "all we have to do is look at Europe." He cited a French study of IFRS use in the European Union that concluded that each country was practicing "nostalgic accounting," that is, individual flavors of IFRS that resembled their original country's GAAP.

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"The only way to achieve comparability is to move to U.S. GAAP," said Niemeier.

Another common myth is that U.S. GAAP itself has become obsolete, according to the rule maker. On the contrary, he said, "The biggest difference between GAAP and IFRS is that GAAP is older and has been tried."

While U.S. GAAP has many rules, he admitted, there are good reasons for many of them. As an example, he cited FAS 5, the accounting standard on contingent liabilities, which is currently a subject of hot debate because of a FASB proposal to increase company disclosure of liabilities, primarily those stemming from lawsuits. Niemeier said FAS 5 was the result of a carefully worked out treaty between the AICPA and the American Bar Association in the 1970s. Its analogous international standard — IAS 37 — works well, he said, but only "outside the U.S. [where there is less litigation]."

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Niemeier said the idea that IFRS will solve problems with the current U.S. financial reporting system is also a myth, and that those problems exist primarily because the United States has stopped dealing with them. "We are not addressing the problems by moving to IFRS." To deal with accounting problems, he said, "we need to face them head on. Moving to IFRS is an exit strategy, but it's not taking us where we need to go." Moving to IFRS, he said, is an "easier path than facing the limitations of our own system."

In a similar vein, Niemeier challenged the assertion that IFRS will be good for investors. "It's a great selling point if you are marketing something to say that IFRS is good for investors," said Niemeier, but that in fact, it might undermine the regulatory protections that U.S. investors currently enjoy. "IFRS has the potential to de-link us from our regulatory model," he said, noting that if someone wanted to get rid of the regulations put in place by the Sarbanes-Oxley Act of 2002, the best way to do so would be to move the United States to a system of standards that were more difficult to enforce.

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Niemeier cited an International Accounting Standards Board committee that he said had found that a move to IFRS would make SEC regulation less stringent. It was not clear from his remarks which report he was referring to, but the idea that adoption of IFRS would loosen regulation has been strongly disputed by IASB chairman Sir David Tweedie. In an interview in the current issue of CFO magazine, Tweedie called similar charges "absolute nonsense."

Still, Niemeier insisted, there is an "inherent danger" in the desire to make the United States regulatory system more like that of other countries, arguing that the United States is unusual because 50 percent of the population is invested in stock market. With a large group of Baby Boomers about to retire and depend on those investments, he said, the United States has a moral obligation to maintain a system with less risk. By contrast, he said, Germany has just 10 percent of its population invested in stock market--a level that the United States hasn't seen since 1933.

"We are an extremely unique place and should deal with accounting standards accordingly," Niemeier said. The United States, he said should "return to a policy of convergence to achieve something noble, not convergence for uniformity's sake. We should strive for comparability, not just say it."