30 October 2008

Accounting: It’s time to put the brakes on convergence - FT

Uniting all countries under a single set of global accounting rules has long been the goal of the IASB. But the IASB has now shown it is not ready to be the premier accounting standard setter in the world, the article says.

Just two months ago, there was a growing certainty that the US was on the path to adopting international accounting rules and dropping US GAAP. A roadmap for how this would happen was promised.

 

Now, it looks less likely – and that’s good. The events of October contain many lessons, and one of them is that it’s time to put the brakes on the international accounting convergence movement.

 

Accounting got caught up in the crisis as a result of fair value rules, where assets are marked to their current market price. Banks around the world have been loath to take responsibility for their own abdication of reasonable lending standards. Instead, they found the perfect villain in fair value reporting – something upon which they could blame all the pain of the credit crisis, and expect little resistance. Accountants rarely marshal much public support. Positioning accounting as a source of pain for Everyman could only help the bankers’ cause.

 

Politicians listened – this “solution” costs nothing, after all – and some have echoed the bankers’ refrain.

 

Now the SEC is holding two roundtables to debate the effects and usefulness of fair value accounting. But the International Accounting Standards Board has gone one better and hastily changed its fair value rules, and this is where the push to converge accounting rules falls down.

 

Uniting all countries under a single set of global accounting rules has long been the goal of the IASB, which sets the rules for 100-plus countries. US GAAP is now the only other significant set of rules.

 

But the IASB has now shown it is not ready to be the premier accounting standard setter in the world.

 

The IASB amended its rules slightly to align them with US practice by allowing an exception to fair value reporting. It did so because of political pressure. The threat it faced was that if it had not, the European Union, which follows the IASB’s rules, would have acted itself. This would have likely resulted in worse accounting rules and would almost certainly have finished the IASB’s dream of the US switching to IFRS, since the US has made it clear it will not tolerate other countries carving out chunks of the rules where they choose.

 

But I believe the IASB has ended that dream of US convergence itself by bowing to political pressure. The amendment was done without due process: no comments or discussion were sought from investors. Incredibly, that suspension of due process bore the blessing of the trustees who oversee the IASB.

 

Seeking convergence on a tiny part of the rules in this regard may seem trivial, but it is a giant step backwards. It shows that when the going got tough, the IASB waived the interests of those – the users of accounts – whom it’s supposed to serve.

 

Instead of converging to what is best in US standards, the IASB is adopting some of the worst features. The IASB is defining convergence downward: it is adopting an exception built into the US standard, something for which the US system is often criticised – and it is an exception bound to lead to less transparent reporting to investors. This is not what convergence is supposed to bring about.

 

It was the Securities and Exchange Commission that promised the roadmap on convergence. Two months later, we still have not seen it.

 

If it does appear, US investors should still be wary.

 

Instead of a rush-job convergence during the worst financial crisis since the Depression, maybe what is needed is a few more years of friendly competition between standard-setters.

 

The US should renew its reconciliation requirement for the registrants using IFRS, so that convergence efforts can be effectively monitored. When those reconciliations show that accounting standards are producing truly similar results consistently, then the real roadmap to convergence should be styled – one that includes protection from political pressure and the effective worldwide enforcement of accounting standards.

 

By Jack Ciesielski, publisher of the Analyst’s Accounting Observer

 

© Financial Times