Investors would like to have global standards around the world but not necessarily IFRS, former US Securities and Exchange Commission (SEC) corporation finance chief accountant Wayne Carnall said.
Speaking at PwC’s annual international reporting Meet the Experts conference, Carnall, who is now a partner at PwC, explained the issue is not whether the US could adopt IFRS but whether the US would adopt them as the SEC do not question the quality of the standards.
Carnall gave two reasons behind the US’s reluctance to embrace IFRS. First, is the critical issue of sovereignty as he says Americans do not want to defer to another organisation for standard setting and would prefer to have their own standards that they can adapt if necessary.
"The other and perhaps bigger issue is currently there is no one leading the charge or the cost to adapt to IFRS in the US. The investing community doesn’t necessarily want it. They would like to have global standards around the world but they don’t necessarily want to go to IFRS," Carnall remarked.
He also said in his speech that the IFRS foundation’s call on US to take a leading role in working with other regulators on IFRS enforcement: "I would put that in the category of world peace. It’s a great concept but it will never be achieved," he joked.
Carnall stressed instead the importance for the International Accounting Standard Board (IASB) and the Financial Accounting Standards Boards (FSAB) to work together in developing standards in a more efficient manner.
The European Securities and Markets Authority chair Steven Maijoor expressed his disappointment with "the lack of ambition regarding IFRS on the other side of the Atlantic" and said although he understands the domestic constrains of the US SEC "patience has been a real virtue" during the last years.
Adding that as the IASB and FASB are unable to agree on important convergence projects – such as the impairment of financial assets and insurance contracts – the IASB agenda should be driven by developing high quality accounting standards rather than US convergence going forward.
According to Maijoor, worldwide adoption of IFRS is necessary but in order to achieve true global comparability "high quality standards need to go hand in hand with high quality enforcement," he said.
He maintained that mandatory adoption of IFRS by a jurisdiction results in reduced capital costs, increased disclosure and enhanced information comparability.
However, "consistent application of IFRS needs pan-European coordination, which is one of ESMA’s primary objectives" as otherwise "the benefits of strong enforcement could disappear within the EU," he remarked.
The state of financial reporting played a big part in the conference’s sessions with JP Morgan Cazenove head of pensions, valuation and accounting research Peter Elwin calling on accounts preparers to tell the truth in financial terms and not take the investors’ trust for granted.
"Trust is a very precious and relatively rare commodity. The key to earning investor’s trust is to be consistent in what you say year on year, quarter on quarter," he said.
According to Elwin, reliable financial reporting can have a positive impact on companies’ financial costs, as investors would charge less for giving money through equity or debt capital.
Elwin maintained that to apply the principles of good financial reporting, US companies do not need to wait for the IASB to rule.
"Voluntary disclosures are improving and a lot of companies are already giving net debt or cash flow in a helpful way beyond IFRS. It’s already happened and that creates pressure on you because you don’t really want to be left behind," he said.
Rebuilding the trust
Financial Reporting Review Panel chair Richard Fleck said society is losing confidence in businesses and insisted on the idea that integrity in financial reporting is a key factor to rebuild the trust in the financial system.
According to Fleck, these are times in which "the bankers have become the whipping boys of the media and the politicians. Utility companies are thought to make too much profit. Petrol companies don’t pass on reduction in oil prices. Transport companies put up prices to fund infrastructure investment."
Fleck said the list could go on and on and warned financial reporting is not an exception, and it actually has become another area where trust has been eroded.
"If society doesn’t have confidence in the integrity of financial statements, capital markets will not thrive and they make a vital contribution to the economy," he concluded.