As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC staff.

Introduction

Good morning. True to form, and to the nature of my work at the SEC, I will speak to you today about international financial reporting matters. I am grateful for the opportunity to do so and, as in the past, what I say will consist of my own views that do not necessarily reflect the views of the Commission, the Commissioners, or other members of the SEC staff.

To start, let me observe that the need to distinguish a speech as one that covers “international” financial reporting matters is slowly melting away. As time has marched on, it is more and more my experience that everything domestic in the public capital markets seems to have a relevant international corollary, while everything international in the public capital markets seems to strike some chord at home. Nonetheless, I will take one more bite of the international apple today, and a rather large bite, in that I will take you on a bit of a world tour.

Our world tour will be a tour of the public capital markets in other countries, to convey what I have perceived about both some of the context in which they operate as well as some of the perspectives of the people who participate in them. And you may have a sense for where the tour is headed if you subscribe to the view that “while situations may differ, people are largely the same.” My narration of the tour is derived from the work over the years of the members of my group and me to lead and participate in many meetings with a myriad of individuals who serve as investors, analysts, senior management of issuers, members of audit committees, auditors, standard setters, and members of professional associations in their home countries.

I take you on this tour in the hope that at the end you will have one more insight from which you can consider that perennial international policy question, namely “What is the role of international standards of accounting, auditing, or disclosure in the national capital markets?” Of course, this is a tour based only on my old snapshots of these discussions about matters related to international financial reporting, as opposed to the results of a real research study about all the aspects of national capital market structures and individual wants. Therefore, what I will point out is inherently influenced by what made an impression on me at the time, and how I recall it now. Nonetheless, I am confident that it will be worth your time and attention for the next 10 minutes.

The Context for the Operations of the Non-U.S. Capital Markets

Let me turn first to the aspect that the capital markets are differently situated in various countries, and they also differ from the situation that we have here in the U.S.

My first observation about this aspect relates to the notion that a public capital market should operate justly, in the sense that it properly moderates the interests of those seeking capital (the companies) against the interests of those providing capital (the investors). From this central notion, however, aspects of how the national capital markets are situated in society from one country to the next, and therefore how they operate, do diverge. To help illustrate this, I’ll convey five “snapshots”; that is, points about this that I have heard made over the years. They are:

• The features of one country’s national capital market are that the issuers are controlled by significant shareholders or government bodies. These are not so keen on transparency.
• Investors in certain capital markets may be investing more in the track record of the controlling shareholder than in the company.
• To give securities regulators in one capital market a bigger role in auditor oversight a government could, through royal decree, put some arrangements in place.
• In at least one national capital market there is not a requirement for independent members of the company’s Boards of Directors.
• In a capital market the issuer financial statement requirements call for a “true and fair” presentation, so the sets of accounting standards that meet this principle are accepted.

My second observation about this aspect relates to the notion that public capital markets operate such that investors can act prudently in the sense that investors have an environment in which they are able to assess risk and opportunity in deciding whether to invest, and, if so, in which companies to invest. But again, from this central notion of facilitating how investors take action, national settings do differ. To help illustrate this, let me convey the following four points that I have heard made over the years:

• Some capital markets operate in a savings-led economy, in which individuals’ savings is what is invested, while other capital markets operate in an investment-led economy, in which it is the state that is making the investments.
• If a capital market is located in a country with a high rate of individual savings, then there are more issues around how capital markets provide the structure for people to convert those savings into investments than is the case in low savings rate countries.
• Culture matters. In emerging markets countries the savers there typically do not have a culture of investing in the equity markets.
• The characteristic of at least one national public capital market is that it is largely a debt market; its function is basically to provide companies with an alternative to borrowing from banks.

Now I don’t think these nine snapshots are enough to set out the full picture of the various, and varying, context and role of the national capital markets in other countries. Nonetheless, I think they do begin to paint a picture that the various national capital markets are situated in varying ways, and in ways that differ from how the U.S. capital markets are situated. Thus, overall, it would be good to remember that “you are not in Kansas anymore” when thinking broadly about the non-U.S. capital markets.

The Perspectives of the People Involved in the Operation of the Non-U.S. Capital Markets

Let me turn now to the second dimension; that is, the perspectives of the people involved in the capital markets in other countries.

My first observation about this aspect relates to the notion that investors should be given the opportunity to make informed investment decisions, of course after applying the appropriate amount of fortitude on their part. By fortitude, I mean that investors will be able to confront the uncertainty of where to invest with the wisdom gained from their analysis of the information provided to them by issuers. To help illustrate this, I’ll convey another seven points that I have heard made over the years. These relate both to the analysis investors do of the financial statements, and to the role of auditors in providing assurance to them.

• Ultimately, investing is an exercise in a person’s conviction to analyze the information and reports.
• If an analyst does not like the accounting policies, then they can adjust them out.
• Some investors are generally looking to company conference calls and to what is published on the company websites for immediately actionable information.
• To be skeptical in considering something, you have to know enough to be skeptical.
• Auditors provide attestation, as opposed to information. What auditors bring are their skepticism and a challenge to management’s thinking.
• It is tough for an investor to assess whether there has been a quality financial statement audit.
• A “clean” auditor’s report is largely a symbol. An auditor’s report is more informational if it contains a point of emphasis, or some sort of exception.

My second observation, also about investors, relates to the notion of tempering the information that issuers provide to them relative to boundaries of relevance, cost, usefulness and so forth. To help illustrate the subject of how information for investors is bounded, and then packaged and prepared, I’ll convey another four points that I have heard made over the years.

• Investors expect the company to pay out a good piece of its profits in dividends, but companies generally don’t have cash in line with their profits because much of the reported profits are non-cash. Profits are therefore not a reliable measure of what is available for dividend payments. Experts can make helpful adjustments for the non-cash components of profits, but the public generally cannot.
• A company can’t use changes in the fair market values of its assets and liabilities for paying dividends. Changes in the value of the company are part of “performance” not part of “profit.” These are complementary dimensions.
• The key issues with non-GAAP measures are transparency and consistency.
• As to the human factor, good news travels up the organization really fast; bad news not so much.

Now I don’t think these eleven “snapshots” about investors are enough to paint a full picture of the perspectives of the people who are part of the public capital markets in other countries. Nonetheless, I think they give you some impression about how others view things, and perhaps the conclusion that, in contrast to what I reported about the capital market structural issues, these thoughts could have been drawn from a group of us meeting in Kansas.

Closing

Let me end your world tour by suggesting that if there is one thing you can take away from this scenery it is that while each of the national capital markets may be situated differently, those who work in those national capital markets seem to think a lot like us, at least at these high levels anyway. Now let me also ask you to circle back to why we went on this tour to begin with, which was so that you would have one more insight with which to consider that perennial policy question of what role should international accounting, auditing, or disclosure standards play in national capital markets. Thinking back to these snapshots, one could conclude that the varying ways in which the national capital markets are situated points against the direction of international standards playing any significant role in them, but at the same time the common perspectives of the people who participate in those markets points in favor of international standards having therefore a purpose.

We of course won’t resolve the international standards dilemma here today, but reverting again to my experiences in meeting with others I can draw upon one more idea from which I will convey a final thought about this. The observation of the individual was that “whether you decide to adopt international standards depends upon the size of the need or the problem, and the range of alternatives available to you.” While that may sound very prophetic, and I think it is, I actually give the honor of most prophetic observation I have heard to a comment which isn’t derived from international financial reporting. Someone once stated: “If you are out hiking and see a storm coming, you don’t hike into it!”

Thank you very much for your attention.