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Professor Submits First Comments on IFRS Use by U.S. Issuers

George Washington University professor Lawrence Cunningham submitted the first comments on the SEC's concept release on whether to allow U.S. issuers to use International Financial Reporting Standards in the preparation of their financial statements filed with the SEC (¶87,944). Professor Cunningham referred to the potential option of permitting U.S. companies to use IFRS as a "leap of faith," given that it would increase the lack of uniformity in financial reporting domestically and may depend on audit firms to enforce global consistency. The comment period remains open until November 13, 2007.

Prof. Cunningham said the use of IFRS by U.S. issuers may create a "false sense" of global comparability in which the uniformity of written standards actually disguises the diversity in practice. Comparability requires both uniform standards and their uniform application, he wrote, which may be unlikely given the differences in political, economic and cultural environments and the lack of a global enforcement authority.

The professor predicted that the Financial Accounting Standards Board's authority would be diluted in favor of the International Accounting Standards Board if U.S. companies use IFRS, and its diminished role would require a change in its funding. As for U.S. investors' confidence level in IASB as the standard setter, he noted that the IASB and its parent foundation are only five years old and are not subject to any oversight. He suggested that it may be possible for the SEC to recognize the IASB as an accounting standard setter, but the IASB does not meet all of the criteria outlined in the Sarbanes-Oxley Act. The securities laws give the SEC the authority to establish accounting standards on its own, but the Sarbanes-Oxley Act narrowly addresses the SEC's power to delegate that authority to others, Prof. Cunningham noted.

The voluntary contributions that fund the IASB mirror Congress' previous concern with FASB, whose funding was amended by the Sarbanes-Oxley Act. The professor said it is also hard to envision that the IASB would commit to protecting investors under U.S. law, and it would be harder for the IASB to do than FASB. Prof. Cunningham believes it is possible to prepare new versions of existing books featuring IFRS instead of U.S. GAAP, or to include both in a single book. The main costs are time and opportunity, he explained.

Prof. Cunningham said that global consistency is vital. A move to worldwide IFRS would expose the vacuum in enforcement, he said. Without an official global enforcement authority, the reliance on auditors is the next best option. To rely on auditors to fulfill this function, however, would require that they audit all of the important companies in the world that report under IFRS.

Prof. Cunningham also believes that national interests may override the goal of global uniformity. Governments are unlikely to cede sovereign prerogatives in the name of global accounting uniformity, he explained. Their exceptions would destroy uniformity. He pointed to the numerous European Union member countries that already ignore union directives.

If a U.S. company chooses to prepare its financial statements in accordance with IFRS, Prof. Cunningham said it should disclose all of the material considerations that led to that decision. Any financial contributions to the IASB should be considered material and should be disclosed.

The professor concluded that the concept release was a reasonable initiative, but to pursue the concept would amount to "a leap of faith, rich with paradox and irony." The paradox is that it would create a double set of standards in the United States, he said, while the irony is that the concept is very complex at a time when the SEC has publicly announced a war on complexity in financial reporting.