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Speech by SEC Staff:
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The remarks included herein are the views of the speaker, and do not necessarily represent the views of the U.S. Securities and Exchange Commission, the Commissioners, or other members of the Commission's staff. |
Good afternoon. I am pleased to be here to talk with you about work we are doing in the SEC's Office of the Chief Accountant in connection with international accounting and the global financial reporting infrastructure.
Before I begin, let me remind you that my remarks today represent my views and do not necessarily represent the views of the Commission, the Commissioners, or other members of the Commission staff.
For those of you who do not know me, I have been at the SEC for four and half years, working exclusively on international matters. Prior to joining the SEC staff, I had a long career in industry, where I worked in both operations and financial reporting capacities at a large public company. I also served for several years on the staff of a global association of financial executives. I joined the staff of the SEC in July 2000 because I care a great deal about the quality of financial reporting. I felt that my experiences as a preparer -- and user -- of financial statements would be useful at the SEC, and I was intrigued by the opportunity to address financial reporting matters from a global perspective. It has been challenging and exciting work!
The title of this conference is " Understanding the Financial Infrastructure for Globalization." I can't think of a more appropriate place to talk about what is happening in financial reporting on a global basis.
The SEC is participating in a number of initiatives with securities regulators around the world, to encourage high quality accounting and auditing standards, and to enhance consistent application and enforcement of standards. Many of the initiatives I'll describe today are carried out through the SEC's involvement in IOSCO, the International Organization of Securities Commissions.
I will be giving you some background about IOSCO and its work, and also information about some of the other organizations involved in international financial reporting. Please feel free to interrupt me at any time with a question, and I will also allow time to take questions at the end of my talk.
International financial reporting developments are not always on the radar screen of accountants who are involved with the multitude of U.S. day-to-day financial reporting and auditing matters. Some of these international efforts are longer term developments that are very gradually coming together on a global scale. But all the initiatives I'll describe today have a potential impact on the work of issuers, auditors, academic professionals, and anyone else with an interest in financial reporting.
There are three themes underlying my discussion today;
Let me begin by surveying the landscape of international financial reporting today.
At lunch today, we had the pleasure of hearing from Tom Jones about the work of the International Accounting Standards Board. The IASB has carried a huge workload since its restructuring into a full-time Board in 2001 - and is constantly beset with controversy. All standards setting work involves controversy, but it is clear that the IASB's international mission adds even more issues and perspectives and challenges to the mix. I'll say more about accounting standards later - but for now, let me just note the hard work that has been going on at the IASB, and express appreciation for the cooperative efforts of the IASB and the FASB to both improve and converge U.S. and international accounting standards.
In addition to the IASB, some of the other major international organizations involved in global financial reporting today include the following:
Also involved is the International Federation of Accountants (IFAC), sponsor of the International Auditing and Assurance Standards Board (IAASB) and the IFAC Ethics Committee that sets international ethics and independence standards.
In addition to these groups, there are many accounting professional organizations, and industry and user groups and public interest entities, that cross national and regional boundaries in addressing financial reporting matters.
Your conference handout for this session contains a listing of many of the international groups and their websites, along with other some other sources of information on international matters. I hope my remarks today will prompt you to visit some of these websites.
IOSCO, the International Organization of Securities Commissions, is a voluntary association of 181 government agencies, self-regulatory organizations and international financial institutions representing over 100 jurisdictions that are committed to promoting high standards of regulation in order to maintain just, efficient, and sound markets.
IOSCO was created in 1983. Its General Secretariat is now based in Madrid, Spain. The member bodies in IOSCO have resolved, through its permanent structures:
The SEC has had an active involvement with IOSCO since its inception. SEC staff throughout the Commission's various offices and divisions work on numerous IOSCO-related initiatives on a regular basis. For example, IOSCO has subgroups that work on the regulation of exchanges, broker-dealers and other securities market intermediaries, on oversight of investment funds, and on enforcement activities including cross border investigations of fraud and abuse.
Within OCA, most of our efforts take place in the IOSCO Technical Committee and its Standing Committee No. 1 on Multinational Accounting, Auditing and Disclosure (SC 1). The IOSCO Technical Committee and SC 1 are composed of members from 11 of the more developed securities markets around the world, along with some liaison members from emerging markets. IOSCO also has an Emerging Markets Committee with members from more than 70 countries and a number of regional committees.
IOSCO SC 1 monitors the work of the IASB and IAASB on international accounting and auditing standards setting, attending and observing Board and advisory group meetings and reviewing and commenting on proposed standards and interpretations. IOSCO also interfaces with other international groups such as the Basel Committee, World Bank, International Association of Insurance Supervisors. IOSCO also meets with organizations such as the European Commission, Financial Stability Forum, International Federation of Accountants, and many national and regional bodies that IOSCO members belong to or oversee.
Most challenges and policy issues in the international regulatory community in the areas of accounting, auditing, and disclosure, are not unique to individual jurisdictions but instead represent common concerns and problems impacting cross border capital formation. In recent years, the Enron, Worldcom, Parmalat and other corporate financial reporting and control failures around the world have triggered strong reactions in both the public and private sectors. Regulators around the world have been cooperating more than ever before to encourage high quality financial reporting.
In addition to the SEC staff's active involvement in IOSCO, the SEC has launched a collaborative dialogue with CESR to exchange information on regulatory policy initiatives. SEC Commissioners and staff have also met numerous times with representatives of the European Commission and with individual securities regulators of other national jurisdictions, and other international visitors, and will continue to engage in such dialogues. The SEC has a global perspective and is engaged in many activities that are related to the international aspects of capital markets regulation.
Let me describe some of the specific international initiatives underway that relate to accounting...
For those of us who have grown up accustomed to using US GAAP as a comprehensive set of guidance and requirements, the introduction of an international standard setter in addition to the US FASB may at one time have seemed to be superfluous or redundant. However, it is interesting to note that the IASB and its part time predecessor body have been in existence as long as the FASB. Since 1973, the IASC and the IASB have been seeking to provide a single set of high quality accounting standards that could be used throughout the world.
Awareness of the importance of international accounting standards has grown as the markets have become more global[ized]. The profile of international accounting standards, now called IFRS - International Financial Reporting Standards - increased significantly with the 2001 decision of the European Union and a number of other countries around the world to adopt IFRS or use IFRS-based standards beginning in 2005.
Interest in IFRS has also risen sharply in the U.S. in recent years. The SEC issued a Concept Release on International Accounting in February 2000 and received more than 90 comment letters from individuals and organizations in the U.S. and around the world. The Concept Release can be found on the SEC website, and provides a good overview of many of the issues involved in international financial reporting. In the years since the Release was issued, the SEC staff has considered the comments received and continues to monitor the development and application of IFRS. The staff also continues to consider the requirements in place for foreign registrants to reconcile IFRS financial statements to U.S. GAAP.
Convergence of IFRS and U.S. GAAP is a major development that has been gathering momentum. In October 2002 , the FASB and the IASB announced a Memorandum of Understanding to work for convergence in U.S. and international accounting standards. Under the Convergence MOU, both Boards committed to work together to reduce differences between U.S. GAAP and IFRS and to align their project agendas to seek common, high-quality answers to important accounting questions. Since 2002, there have been increased interactions between the two Boards and their interpretative bodies, the U.S. Emerging Issues Task Force, and the IASB International Financial Reporting Interpretations Committee.
The IASB and the FASB have been working closely together on such major subjects as business combinations, revenue recognition, restructuring and asset disposals, stock compensation/share based payments, reporting performance, and many other subjects. Significant joint work in future years could include subjects such as conceptual frameworks, insurance accounting, financial instruments pension and benefits accounting, and many other areas.
Accounting convergence is not a one-way street, but rather a situation in which the standards setters seek to find the best accounting for any given subject area. Work of the IASB will be affecting the work of the FASB, and vice versa. One need only check the web sites of these two standards-setting boards to see the impact that convergence work is already having on both sides of the Atlantic. Convergence is also taking into consideration the views and efforts of other accounting national standards setters around the globe, though ongoing liaison efforts of other national standards setters with the IASB, as well as other potential projects for convergence now being discussed.
Convergence is important to you because the interaction of the IASB and the FASB will impact the standards that are issued by both bodies, the accounting standards that you apply in your work.
The large scale adoptions of IFRS in 2005 in the EU and other jurisdictions around the world, coupled with the IASB's initiatives to work with other accounting standards setters for convergence in accounting standards, have generated great interest in IFRS among the world's securities regulators. The SEC and other members of IOSCO Standing Committee No. 1 devote a very significant amount of resources to monitoring the work of the IASB and its International Financial Reporting Committee (IFRIC), evaluating standards and interpretations and preparing comment letters. SC 1 members attend and observe meetings of the IASB's Standards Advisory Council, some IASB Board meetings, all IFRIC meetings and also participate in numerous project working groups of the IASB. Generally the representation in these meetings includes an SEC staff member and one other regulator from another country, and sometimes a member of the SEC staff is present at a meeting as an SEC representative, in addition to the involvement through IOSCO.
IOSCO is an international organization that operates through consensus - that means the 16 plus country regulators in SC 1 go through many discussions and debates over proposed accounting standards as comment letters are developed to express securities regulator views to the IASB.
Usually it is possible to reach considerable agreement on proposed standards through the IOSCO collaborative consensus process. Sometimes a mixture of views must be expressed in an external comment letter- but this is the exception, rather than the rule. If the SEC (or any other regulator) has strong views regarding an accounting standard that cannot be adequately reflected in an IOSCO consensus letter due to views of other IOSCO members, a separate comment letter may be written from that regulator. Again, this is the exception rather than the rule.
Regulators from many different jurisdictions are learning from each other and are working for IFRS to be widely accepted as a set of high quality global accounting standards.
High quality accounting standards alone cannot produce high quality financial reporting. There must be adequate knowledge of the standards on the part of those who use them, and a commitment to apply them properly.
As we enter 2005, there are not many people in the world that would consider themselves "expert" or even "experienced" with IFRS. Substantial training, open communication and information sharing about IFRS application will be needed to facilitate the growth and evolution of experience and knowledge. Communication about the interpretation and application of IFRS will need to take place both within and among issuer companies and audit firms -and regulatory agencies - as well as among educators and users and members of other stakeholder groups.
A sustainable international financial reporting system requires the underpinnings of education, application, interpretation, and regulation to support correct and consistent use of international standards. Securities regulators and others around the world who are involved in the use and enforcement of accounting standards, have a significant challenge ahead in promoting consistency. Accounting standards in general, and IFRS in particular, require issuers and auditors to use reasonable judgment in interpreting and applying the standards. Add to this the fact that sometimes a country's previous, long-used national accounting framework is now changing to a brand-new system - IFRS - and it is easy to imagine that there may be some implementation and transitional issues involved. For example, it is possible that some IFRS provisions may be understood differently through the perspectives of preparers, auditors, and regulators who have had previous national GAAP frameworks that differed considerably from each other and from IFRS. Also, the previous reporting customs and the legal and regulatory environments of first time users of IFRS users may provide different starting points for the introduction of a new accounting system.
IOSCO has embarked on a project to facilitate worldwide communication among securities regulators about decisions made on application of IFRS when reviewing the financial statements of issuer companies. It is envisioned that securities regulators will share information on decisions that they have made regarding appropriate application of IFRS, and that referral to the IASB and its interpretation committee will occur when unresolved differences are encountered. This project is in its very early stages, with a consultation paper expected to be circulated in early 2005.
In the European Union, the Committee of European Securities Regulators - CESR - has an operating subgroup CESR-FIN, that addresses both the development of international accounting standards and the regulatory review and enforcement of such standards. CESR-Fin is building a process and database that will seek to collect information about regulatory decisions on IFRS and share them among the European "enforcers" of accounting standards. (Enforcers in Europe may be securities regulators or other public and private sector bodies, depending upon the country involved.) Information about what is taking place may be found on CESR's website www.CESR-eu.org.
Regulators with responsibility for review and enforcement of the application of accounting standards will necessarily be making judgments as they evaluate issuers' filings; any processes created for information sharing cannot interfere with decisions that must be made in the normal course of regulatory work. But to the extent that effective communication takes place among regulators and between regulators and standards setting bodies, consistency in the application of IFRS can be enhanced. Ongoing communications will be occurring between IOSCO and CESR Fin to coordinate and facilitate each other's efforts to the extent possible.
The SEC staff is preparing for the wider use of IFRS among foreign registrants. Today the SEC has less than 50 foreign registrants who use IFRS, and that we expect the number to grow to as many as 500 or more when results for the year 2005 are reported in 2006. For the past two years there has been a concerted effort in the Office of the Chief Accountant to involve all accounting professional staff in IFRS as well as U.S. GAAP matters.
Now I would like to mention some initiatives in the area of international auditing...
Through its participation on IOSCO Standing Committee No. 1, the SEC staff has been working with other regulators in addressing international auditing issues relating to the aftermath of financial failures and shocks to investor confidence in the markets. A significant portion of IOSCO's effort has been directed to the subjects of auditor independence and auditor oversight. IOSCO is in the process of carrying out a comprehensive Survey on Auditor Oversight in cooperation with other international organizations. This survey was sent to all IOSCO member jurisdictions in mid -2004 and is expected to be completed in early 2005. The survey addresses a very broad range of subjects, including legal frameworks, oversight bodies, auditing standards, audit quality assurance, investigation and disciplinary processes, audit committee oversight and other matters. A report will be issued when the study is completed.
As a member of IOSCO Standing Committee No. 1, the SEC staff actively participated in the development of the 2002 IOSCO Principles on Auditor Oversight and Auditor Independence. These can be found on the IOSCO website. More recently, Standing Committee 1 has sought to achieve reforms in the processes and structures for international auditing standards setting and auditing quality assurance.
In order to facilitate cross-border offerings and listings that are consistent with high levels of investor protection, IOSCO and other international organizations have been working with the International Federation of Accountants ("IFAC") and its standards setting boards, the IAASB (International Auditing and Assurance Standards Board) and the EC (Ethics Committee), to increase transparency in the standards setting process and to foster the development of a set of high quality international auditing, ethics and independence standards.
The International auditing standards setting that takes place in IFAC is about to come under a form of broad public oversight. During 2003 and 2004, the efforts of IOSCO regulators and certain other international groups such as the Basle Committee, the World Bank, the International Association of Insurance Supervisors and the European Commission coalesced into an informal "Monitoring Group" that pressed for improvements to be made in international audits . As part of these efforts, dialogues between the Monitoring Group and IFAC led to approval of plans for the creation of a Public Interest Oversight Board (PIOB) to oversee international audit standard setting and other IFAC public interest activities. In addition, other changes are being made to make international audit standards setting activities more transparent and more focused on the public interest. The new Public Interest Oversight Board is expected to get underway in early 2005. Further details about the PIOB and other "IFAC Reforms", and about international audit, ethics, and independence standards setting may be found on the IFAC website, www.ifac.org.
IOSCO Standing Committee No. 1 has also conducted an ongoing dialogue with the IFAC Forum of Firms and an IFAC International Regulatory Liaison Group to urge accounting firms that are engaged in multinational audits to develop and implement enhanced systems of quality control.
The area of international auditing standards has many parallels to the work that has been done on international accounting standards. Standing Committee No. 1 monitors the development and issuance of International Standards on Auditing (ISAs) and the IFAC international independence and ethics code and regularly provides comments on exposure drafts of proposed standards and other guidance. The SEC staff and other members of IOSCO SC 1 observe many meetings that are part of the standards setting process. Representatives of IFAC often attend SC 1 meetings to provide updates and answer regulators' questions. And as you may be aware, the U.S. PCAOB is now an observer at IAASB meetings. Communication is taking place between the U.S. and international auditing standards setters.
The subjects addressed by the IAASB during the last two years have included many key areas in international auditing. For example, standards have been issued on quality control and quality assurance requirements for both audit firms and for individual engagements. A standards on the auditor's responsibility to consider fraud in an audit of financial statements was issued last year. In December, a standard was issued on "clean opinion" auditor reports and work is well underway to address other types of auditor reports, as well as the documentation required for audits. The IAASB is reconsidering the requirements for Group Audits - the audit of a consolidated company and its components that often crosses national boundaries and involves the work of more than one audit firm. There are currently Exposure Drafts out for comment on auditing accounting estimates and materiality. And projects are underway to address many other significant topics. You can find more information about international audit standards setting projects on the IFAC website www.ifac.org. - in the IAASB section. If you go to the Ethics Committee section , you can obtain information about international ethics and independence standards setting projects. There are also sections that pertain to auditing education matters.
The 2003-2004 IFAC reforms are still in the process of being fully implemented. Over the course of the coming year, it will become more evident as to how much progress will be achieved in IFAC's standards setting and other public interest work activities, and by the international audit firms on matters of interest to regulators. Much work remains to be done to improve international auditing standards and to implement effective audit quality control measures on an international scale. This work will be carried out under the oversight of the new international Public Interest Oversight Body as it commences operations.
National regulators and oversight bodies are also in the process of introducing reforms on auditing matters. You are probably aware of the many developments in auditing oversight that have been taking place here in the U.S. under the auspices of the PCAOB and SEC. Arrangements for oversight of the accounting profession are also being evaluated and modified in other individual countries and jurisdictions. For example, countries such as Canada, France, the UK, and Japan have efforts underway to create new oversight bodies and introduce or improve minimum standards for audit quality assurance, and to strengthen auditor independence. The European Union is revising its Eighth Directive on Auditing. The Committee of European Securities Regulators has recently established a subgroup to focus on auditing standards, auditing quality assurance, and auditor oversight.
Up to this point I have been focusing on accounting and auditing. I also want to note that some of the other outputs of IOSCO in recent years have addressed the subject of disclosure in public company reporting - for example, general principles for ongoing material development reporting and disclosure by cross-border issuers, and an alert on reporting of non-GAAP and pro forma results measures. IOSCO has also issued a wide range of position papers, studies, standards and best practices documents on other capital markets topics such as credit rating agencies, security analyst conflicts of interest, financial fraud and other subjects, as well as comprehensive principles for securities regulation. All these are listed in the library of public documents on the IOSCO web site www.iosco.org.
Why is all this important?
So why is all this important? Are the activities and issues I have just discussed principally technicians' debates for people who work on the details of standards setting or who are directly involved in regulatory oversight? Or are these matters which should be of concern to everyone affected by financial reporting?
The answer is that high quality standards and effective application and enforcement of the standards are important to everyone who participates in the global capital markets. The standards and supporting infrastructure guide the production of financial information that supports investor decision making and investor confidence, and thereby supports a liquid market.
I would like to borrow a little from remarks that SEC Chairman William Donaldson made last week at the London School of Economics. After speaking about some of the financial scandals that had occurred at some prominent, once well-respected companies, Chairman Donaldson noted:
As it becomes extremely time-consuming for investors to distinguish the good from the bad, they will tend to invest in other markets or perhaps not invest at all. This is of particular concern in the U.S., at a time when more than half of all our households have some equity ownership, and investment decisions on the deployment of retirement funds are increasingly being delegated to individual beneficiaries. It must also be of concern for investors, businesses, and regulators throughout the world.
Different countries have responded differently to the problems in the world's securities markets, but what's significant is that there has been a global recognition of the need for reforms. This is critical, because simply fixing problems in only one market can result in their reappearance in other markets. Through multilateral cooperation we can not just learn from each other, but also raise standards throughout our markets, and ensure that investors everywhere have the protections they need and deserve."
The issues that are being discussed and debated now will affect how global financial reporting and auditing is done in the future. The standards and measures and processes being defined and developed will involve changes to existing practices and will create costs of implementation. It stands to reason that all involved should seek to get the best value for the efforts expended - the best accounting and auditing standards, the best information for investors and managers and all users, and the best supporting infrastructure to promote consistent application and give investors confidence in the results.
With all that is at stake, it would be wise for educators, financial managers and executives, auditors, financial statement users, regulators and all other affected parties to inform themselves on the international developments that are occurring - and to contribute to high quality outcomes.
Many people and organizations have important roles to play in the development of international accounting and auditing standards, and in the enhancement of the global financial reporting infrastructure for the benefit of investors. The SEC staff is actively engaged in efforts with standards setters, issuers, regulators and professional and industry groups around the world toward this end.
I personally am looking with optimism to a day when investors around the world can look at the financial statements and disclosures of listed public companies everywhere, reports that have been prepared -- and audited -- using improved, more comparable standards than today, regardless of where the company is based and in what markets the company's securities are listed.
Thank you. And now I would be happy to take any questions that you have.
http://www.sec.gov/news/speech/spch020405skg.htm
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