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SIA Tells House Panel of Concerns on International Accounting Convergence

Recent guidance from the Committee on European Securities Regulators on the equivalence of U.S. GAAP and International Financial Reporting Standards may result in U.S. firms being forced to keep two sets of books to ensure that they have identified all possible significant discrepancies between the two sets of accounting standards. This was the message delivered to a House financial services subcommittee by Marc Lackritz, president of the Securities Industry Association.

Recently, CESR advised the European Commission on the extent to which Canadian, Japanese and U.S. GAAP should be considered equivalent to International Financial Reporting Standards. While CESR said that U.S. GAAP was generally equivalent to IFRS, it simultaneously published a list of additional remedies that a U.S. issuer using U.S. GAAP would have to make. The press release that accompanied the advice described the remedies as relating to significant differences in accounting standards that could be handled through disclosure and not reconciliation.

CESR's recommendation on GAAP-IFRS equivalence is subject to disclosure in a number of discrete areas. For example, companies with subsidiaries such as special purpose entities which are not consolidated for GAAP purposes, but are required to be consolidated under IFRS, must report a pro-forma balance sheet and profit and loss account on their local GAAP basis, but include the unconsolidated subsidiaries. In addition, equivalence is conditioned on Japan and the U.S. adopting equivalent accounting policies for the expensing of stock options by January 1, 2007.

While CESR could not have intended to require a full reconciliation between U.S. GAAP and IFRS, the SIA reasoned that, as a practical matter, given the number and extent of the proposed remedies, a U.S. firm would have no choice but to keep two sets of books to ensure that it has identified all possible significant discrepancies between the two sets of accounting standards. This result, seems to be the very antithesis of accounting convergence in the SIA's view. The SIA noted that a number of major accounting firms have already informed clients that the level of review and attestation that would be required by auditors in such a scenario would be the equivalent of a full audit. Given the cost of such an undertaking, the SIA expects that some U.S. companies would find it more cost-effective to delist and deny themselves access to EU capital markets, rather than comply with the proposed remedies.

The SIA praised the recently announced EU-U.S. roadmap on accounting standards convergence. The SIA expressed its hope that, against the backdrop of the roadmap outlining a process for convergence by 2007, it will be possible for the EU to shortly make, well before 2007, a full equivalence determination with respect to U.S. GAAP for purposes of the Transparency and Prospectus Directives. The roadmap outlines a process of convergence. The SIA noted that it is critically important for market continuity that liquidity in the European markets not be needlessly curtailed and that companies not be needlessly penalized while that process is under way.