Financial Services
Going Global With Accounting


By Brian Wingfield

WASHINGTON, D.C. -

The worldwide market meltdown shows just how global our economy has become, for good and for bad. All the more reason, then, for the U.S. Securities and Exchange Commission to boost investor confidence by simplifying accounting practices for international firms, an issue the regulatory agency will address this week.

On Tuesday, the SEC hosts a long-planned forum to discuss its "road map" for the convergence of U.S. and international accounting standards. Regulators want to eliminate the costly requirement that foreign companies listing their shares on American markets reconcile their financial statements with U.S. accounting guidelines.

Instead, the SEC would like to move toward a single international accounting standard. Doing so would provide transparency to investors and could increase foreign investment in the U.S.

But the SEC also admits to another reason for convergence of U.S. and international standards: nearly 100 other countries, including those within the European Union, are either currently using international standards or are in the process of converging with them. And in the age of a global economy, capital is going to flow where it finds the fewest barriers to entry.

The goal of developing a single international accounting standard is not entirely new--in fact, it dates back to 1973, when the International Accounting Standards Committee (now the International Accounting Standards Board) developed a set of standards to be used worldwide.

However, the SEC's push for convergence of U.S. and foreign standards, as indicated by Tuesday's meeting, shows that the agency is at last getting serious about accounting reform. Regulators have said that they want to eliminate by 2009 the need for foreign firms to reconcile their accounting with U.S. policies.

The issue has gained importance in recent years in light of the Sarbanes-Oxley corporate governance legislation of 2002, which critics say places too many regulatory burdens on companies who wish to invest in the U.S. In addition, the recent report commissioned by New York Mayor Michael Bloomberg and Sen. Charles Schumer, D-N.Y., raised concerns that New York is losing ground as the world's financial capital.

"Clearly we saw with Sarbanes-Oxley, if you make it too onerous for people to come and access your markets, they can go elsewhere," says Gordon Bodnar, a professor of international finance at Johns Hopkins University's School of Advanced International Studies in Washington.

The U.S. uses Generally Accepted Accounting Principles (GAAP), which are deemed to have a relatively high standard. However, in addition to the E.U., some of the U.S.' largest trading partners, including Canada, Australia and China, are moving closer to adopting the International Financial Reporting Standards (IFRS). The SEC does not want to replace its own accounting blueprint, but it wants to find common ground between the two in order to make international capital flows more efficient.

"The international rules tend to be more simple and less stringent in disclosure requirements," says Bruce Pounder, president of Leveraged Logic, a company that provides education for accountants. This week's SEC forum is "domino one" in sorting out the differences between the two systems, he says.

The meeting Tuesday is not expected to resolve differences between the two sets of standards, but it is an important step in the agency's "road map" toward convergence, which began in 2005. Regulators will hear testimony from a host of executives, including representatives from Citigroup, Morgan Stanley, Moody's Investors Services, AXA and Royal Dutch Shell. Panelists are expected to address the impact of accounting standards reform on the raising of capital raising as well as on U.S. investors and lenders.

Few oppose the move toward an international accounting standard, though problems, of course, arise in sorting out the details. The task before the SEC, however, is to devise a system that will ensure for companies that the benefits of regulation outweigh the costs.

"As we head toward a 24-hour global securities market, the ability of investors to have common standards makes a ton of sense from 30,000 feet," says Todd Malan, president and chief executive officer of the Organization for International Investment, an industry organization that represents foreign firms operating in the U.S.

Even though differences over accounting principles have stymied the hope of a single standard in the past, Malan says there now seems to be a "spirit in the discussion" that there would be an obvious benefit to a convergence of rules.

"Global standards are the regulatory framework catching up with the market reality," he says.