(The news featured below is a selection from the news covered in the Federal Securities Law Reporter, which is distributed to subscribers of SEC Today.)

Nazareth Discusses Convergence of Accounting Standards

SEC Commissioner Annette Nazareth, in a speech before the Institute of International Bankers, said that one area in which coordination among U.S.-EU regulators has yielded great results is auditor regulation. The SEC, the PCAOB and their European counterparts have worked diligently to reduce regulatory overlap and divergence, she said. The harmonization of U.S. GAAP with international financial reporting standards will benefit investors and the capital markets, in her view. She said that investor confidence in financial reporting will likely be greater if the accounting standards have been subject to due process and have gained widespread acceptance. Investor confidence will also be greater if the differences between standards are understandable and few in number, according to Nazareth.

Having one or two widely used and accepted accounting standards with minimal differences is extremely important to the global markets, Nazareth said. She believes the opportunity to harmonize standards is within regulators' grasp. The convergence of IFRS and U.S. GAAP will reduce the differences between the standards while improving the quality of both sets of standards, she added. A true standard must be widely accepted in practice by issuers, investors, auditors and other market participants, she said.

IFRS is a comprehensive framework of quality accounting standards, but Nazareth said that because of its limited history of application and the uncertainty in its interpretation, the SEC wants time to assess its consistency and faithfulness to both application and interpretation. The SEC and its international counterparts will be closely reviewing the filings for consistency of application by both issuers and accounting professionals, she said. Nazareth pointed out that the so-called roadmap to the elimination of reconciliation focuses on whether foreign private issuers' financial statements that are prepared under IFRS, without reconciliation, will achieve the goal of further opening U.S. markets while remaining consistent with the objective of providing disclosure of comparable quality, transparency and usefulness.

What is essential for convergence, Nazareth said, and for the issue of reconciliation to be satisfactorily determined, is that each set of standards be complete, produce financial statements of high quality that enjoy wide acceptance and use, and are reasonably comparable to each other. Investors must be able to understand the differences between the two sets of standards, she said.

The SEC does not expect a full, or even a particular threshold of convergence in accounting standards before it will be willing to eliminate the reconciliation requirement, according to Nazareth. She said that while there is no bright line test for eliminating the reconciliation requirement, the SEC will likely expect a rigorous process for converging IFRS and U.S. GAAP. The best way to determine the effectiveness of the process is through the results it generates, she said, such as resolving the different approaches to recognition and the measure of fundamental inputs such as net income and equity.

The role of accounting firms, issuers and regulators should not be underestimated, Nazareth advised. She said the challenge of creating a high quality set of accounting standards is daunting, but perhaps even more daunting is the effective implementation of those standards across a large number of issuers in various jurisdictions and industries. The undertaking must be done with care and diligence. Nazareth said the SEC will continue its dialogue with its European counterparts to achieve this significant step for investors and worldwide capital markets.