‘I Urge the Next Chair… ’: The SEC Chief’s Swan Song on IFRS


Call it a swan song of sorts for Mary Jo White. A final act—or at least a nuanced, carefully considered formal statement—on international accounting standards in her job as Chairman of the Securities and Exchange Commission.

Her public statement of Jan. 5 is also something of an exit memo, with instructions, s'il vous plait, to her successor as head of the powerful regulatory agency that dates back to the dark days of the Depression.   

The person in the ready room as the likely next top cop on the Wall Street beat is Sullivan & Cromwell partner Jay Clayton, a legal advocate for Wall Street firms and hedge funds, the nation learned Jan. 4—if Clayton gets the Senate’s blessing as the 32nd chair of the SEC.

White’s public statement, posted under the title “A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards,” runs more than three pages printed, single-space. In it, she makes the case for how important international financial reporting standards, or IFRS, are for “the protection of U.S. investors and companies and the strength of our markets.”

Investors in this country “make many investment decisions using financial statements of foreign companies that apply IFRS issued by the” International Accounting Standards Board, White says. U.S. investors have direct stakes in the securities of many foreign private issuers that apply IFRS in filings with the SEC.

As of September 2016, “these companies alone represented a worldwide market capitalization in excess of $7 trillion across more than 500 companies,” she says.

White: IFRS Should Be One of SEC’s ‘Highest Priorities.’

The lame-duck chair states her belief that “the commission must continue to pursue such standards as one of its highest priorities.”

“I urge the next chair, working together with a full commission, to speak again on this issue and agree on a path forward to most effectively advance this critical objective,” White says.

She suggested that the person who follows her in the SEC’s top job should work closely with the agency’s chief accountant and “continue to be an active member” of the monitoring board that oversees IASB’s parent foundation. In addition, White says, the Financial Accounting Standards Board “should make full use of its membership on the IASB’s Accounting Standards Advisory Forum and the IASB should be welcoming and responsive to those inputs.”

Not Much Chance.

As the SEC chairman used the bully pulpit for a final time to address international accounting standards, she seemed to tacitly acknowledge that IFRS have little chance—at least in the foreseeable future—of making decent headway in their struggle to become the accounting rules of the road for U.S. public companies.

“While it is now clear that U.S. GAAP and IFRS will continue to coexist in our public capital markets for the foreseeable future, it is just as clear that the efforts to enhance the respective standards and to reduce differences between them should continue,” White says.

Today’s prospects for the international standards in the United States stand in contrast to the situation circa 2008. At that time the U.S. and SEC seemed to be on the cusp of a marked shift to IFRS. That was when the commission was headed by Christopher Cox, a former IFRS booster who later took a sharply opposing view.

(In June 2014, Cox memorably proclaimed IFRS dead in the U.S. He did so by saying at a conference that he came “to bury IFRS, not to praise them.” He referred to the Monty Python troupe’s famous skit in which a man tries to return a “stone dead” parrot to the parrot-seller. The latter steadfastly disputes the bird’s demise, despite being presented with a cage graced by a parrot that plainly has shuffled off this mortal coil. “It’s resting,” said the avian tradesman. “Remarkable bird, the Norwegian blue.”)

In the gathering-IFRS-wave era, Mary Jo White’s husband, John W. White, served as the chief of the SEC’s Division of Corporation Finance. He became known as an advocate of international financial reporting standards.

John White “helped the SEC meet the challenges of the globalization of securities markets and the growing movement toward international accounting standards,” the commission stated in a 2008 news release marking White’s departure from the agency and plans to rejoin his old law firm, Cravath, Swaine & Moore LLP.

“In addition to spearheading the commission's groundbreaking adoption of new rules to accept IFRS from foreign issuers, Mr. White led the Division [of Corporation Finance] in developing the recommendation of a multi-year roadmap for use of IFRS by U.S. issuers,” the SEC said in the release. (John White wasn’t available for comment Jan. 9.)

The IFRS Mantra at the SEC. 

White suggests strongly that the next SEC chief should find a way to reach what the SEC and its staff have stated in mantra-like terms as a goal for some 18 years, but which has proven elusive: devising a set of comprehensive, high-quality globally-accepted accounting standards. Truly globally accepted.

IFRS and their creator, the IASB, have had great success in winning the standards’ acceptance in hundreds of countries around the world.

However, the biggest single capital market on the globe, the United States, with the SEC as gatekeeper, hasn’t accepted the international standards for use by domestic public companies (despite the commission, under Chairman Arthur Levitt Jr., playing a key role in the very formation of the IASB in 1999 through 2001).

It bears noting that in May 2014 Mary Jo White said that she planned to address the future of IFRS that year. In December 2014, Jim Schnurr, SEC chief accountant at the time, floated a relatively modest proposal: to allow U.S. domestic companies to supplement their U.S. GAAP-based reporting with disclosures that follow the international standards.

That proposal never really gained traction.

‘Convergence in Outcomes’: Linsmeier.

IASB reacted Jan. 6 to White’s lengthy statement with a simple declarative sentence. “We welcome the SEC’s continued support for our work,” a spokesman for the London board told Bloomberg BNA.

Tom Linsmeier, a former FASB member who teaches at the University of Wisconsin-Madison, focused on a theme he saw in White’s statement that aligns with the message that the leaders of the IASB and U.S. board have been transmitting for about a year or so. 

The signals point to how difficult it is to land on identical wording in two sets of accounting principles as they are carved out by two boards—especially in an arena where legal and regulatory systems differ and in which the IASB doesn’t have legal or regulatory authority. The board depends on the kindness of governments.  

“Most importantly, Chair White's statement recognizes that the goal should be convergence in financial reporting outcomes that may require differences in how standards are written to reflect differences in legal systems and laws, regulatory environment, market structures and corporate governance,” Linsmeier, who served two terms on FASB until he had to step down in June, told me Jan. 8.

“Identical wording of standards has too long been the goal of the boards’ convergence activities,” he said. “The focus should change to convergence in or comparability in reporting outcomes. Chair White's statement appropriately raises this distinction.”

Convergence Goals Have Evolved.

FASB Chairman Russell Golden similarly touched on the evolved goals in a prepared statement provided to Bloomberg BNA Jan. 6.   

“In working with the International Accounting Standards Board and other national standard-setters, we seek to improve GAAP and, when appropriate, to reduce differences in accounting standard outcomes,” Golden said.

”We all have much to learn from each other, and that knowledge-sharing is essential to the continuous improvement of accounting standards around the world,” Golden said. 

In Houston, Steve Zeff, a Rice University professor considered the dean of accounting historians, wrote in a Jan. 6 e-mail message that he didn’t see much that was new in the statement of the SEC chairman.

“It is perhaps noteworthy that she does not refer to Jim Schnurr's initiative to allow U.S. issuers to publish a second set of financial statements using IFRS,” wrote Zeff, the co-author of Aiming for Global Accounting Standards (Oxford University Press, 2015). He noted that the proposal seemed to attract little interest.

 

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