Speech by SEC Staff:
Remarks before the Public Hearing on the IASC Constitution Review

by

Donald T. Nicolaisen

Chief Accountant
U.S. Securities and Exchange Commission

Baruch College, N.Y.
June 3, 2004

Thank you. Chairman Volcker and other members of the Commission, I am pleased to have the opportunity to offer my perspective on the IASC Constitution Review. To begin, I need to remind you that the views I will share today are my own. They are not necessarily representative of the Commission or of my colleagues on the SEC staff.

We all know that accounting standards-setting is important work. Accounting standards provide the basic requirements for reporting transparent, high-quality financial information to investors in the capital markets.

And it is from that perspective that I am going to speak today, namely "what is good for the investor, and what implications does this have in the review of the IASB structure and process?" My comments will be organized around three main points:

• I believe it is critically important to have an independent accounting standards setter.
   
• Having capable, high-quality professionals in the standards setting process is key to the development, issuance and sustainability of high quality standards.
   
• The IASB has had a sound process and the changes being announced and proposed will no doubt make it even better. I will try to comment on some of the process and "mechanics of standard setting" questions that have been raised. I readily acknowledge that structure and process do matter.
   

The Importance of Having an Independent Accounting Standards Setter

For reasons of appearance and acceptability of standards issued, I believe it is critical to have an independent professional accounting standards setting board. The Board should have an assured source of funding, so that necessary but unpopular projects do not undermine its viability. If a standards setting Board is not independent, the quality of its output will inevitably be undermined or be called into question. To produce high quality standards, the Board needs to be free to conduct the projects that are needed to improve the accounting model and enhance investor information, to obtain the relevant views and conclude on final standards through its own deliberations, without external pressures for -- or against -- certain answers.

I believe that the prime considerations in an accounting standards project should be whether a standard will improve information for investors and the markets, and whether the standard is clear and capable of being applied consistently. As part of this, it is important that the standard not be overly-complex. It is the role of the standards setter to create a standard that can be understood and applied by the people who have to use it, and also to ensure that a standard is necessary and cost-beneficial to investors. Standards need to improve financial understanding and fit within a logical and understandable framework. The principles underlying each standard should be clear.

Once a duly-constituted professional Board has received information and views from a variety of interested parties and stakeholders, it should be permitted to use its best judgment in considering these inputs and arriving at a final accounting standard. It should be able to do this without political and funding pressures or other external interference. The public interest is best served when accounting standards are set to provide the highest quality of information, for the long-run benefit of investors and the capital markets.

Gaining worldwide acceptance for international accounting standards requires a commitment to preserve and protect the independence of the IASB standards setting process. This Constitution Review effort, and any resulting amendments to the IASC Constitution, should reinforce the independence of the standards setting process. In that regard, it will be important to ensure that the proposed enhancements to the Trustees' oversight activities regarding review and consideration of the IASB agenda and approval of consultative arrangements remain clearly within the role of oversight. Review and approval activities should be conducted so as to assist the Board in carrying out its mission and preserve the independence of the Board.

As to the issue of funding, in the U.S., the importance of adequate funding in assuring the independence of accounting standards setting led to certain specific provisions in the Sarbanes Oxley Act. As you know, the operations of the designated U.S. accounting standards setter, the Financial Accounting Standards Board, are now funded by an assessment on issuer companies who are SEC registrants. I believe it is important that the IASC Foundation carry out its announced work to consider alternative funding mechanisms for the IASB. Assurance of adequate funding for the IASB's standards setting activities is fundamental to the Board's independence.

The Quality of the People Involved is a Key Factor in Developing and Issuing High Quality Standards

To get the best international standards, you need to start with getting the best people engaged fulltime to do the work.

Accomplishing this requires a body of highly qualified Trustees from around the world who recruit the very best Board members from a diverse mix of professional backgrounds. The primary focus should be on the best candidates, not geography. However, I do believe it important that the Trustees seek to ensure that the resulting Board, as a whole, is a global body and is not dominated by any one discipline or region. There are highly qualified people throughout the world. It should be possible to get the best people through focusing on individual excellence and a need for a mix of perspectives, without the need for overly rigid quotas as to professional background or geographic origin.

There are other individual qualities vitally important in accounting standards setting - for example, an important characteristic for Board members is to be able to see the broad picture of financial reporting, and to make the complex understandable. There is a need for Board members to be open to understanding new ideas and different views, and respectful of different perspectives. We need simple solutions to complex issues, not complex accounting for routine transactions.

The Trustees should be responsible for ensuring that the appropriate range of experience exists, as they consider the backgrounds and capabilities of both present and potential Board members, and the work program of the IASB.

The possible approaches that have been laid out by the Constitution Review Committee provide for a balanced mix of skills and experiences, without having any one background predominate. The Committee appropriately recommends that the existing stated requirements regarding the professional backgrounds of both trustees and Board members be relaxed. I note that, while the Committee has not completely relaxed the geographic requirements for the Trustees, the proposals do allow for diverse representation and ensure that no particular region will have undue influence.

It is clearly desirable that some of the Trustees represent emerging markets, as these areas can particularly benefit from the move to international accounting standards. It would be my hope that the Trustees will see that such markets are appropriately represented.

The IASB has had a sound process and the changes being announced and proposed by the Board and/or Constitution Review Committee will make it even better.

Having a sound standards setting process promotes effective communications and a good flow of information both to and from the Board. This is important to the development of high quality standards. Such changes as recent improvements in information provided to observers of Board meetings, and the planned website posting of Exposure Draft comment letters as they arrive will strengthen communications about the Board's work and are very desirable.

Accounting standards setting is always a controversial activity. Improvement in financial information often involves significant change, and constituents frequently have differing views on the needs for, and benefits of, given changes. The best accounting standards decisions come from careful, objective, thoughtful, independent professional consideration of all the relevant views and information affecting a given issue, but this does not mean that Board must keep working until all parties are satisfied with the answer. Sometimes it is not possible to accommodate everyone's views.

My staff and I have noted with interest the Board's March 24 Paper on Strengthening the IASB's Deliberative Processes and the Constitution Review Committee's Outline of Possible Approaches. These proposals appear to be well thought out and I commend the Board and its staff and the Constitution Review Committee for identifying changes that will expand constituent input and access, while preserving the Board's independence.

My overall reaction is that the IASB has had a sound process, and that the changes described will further improve the "mechanics" of international standards setting. I want to comment on a few of the issues involved.

Small and Medium Sized Entities - Smaller enterprises are important and I believe they do deserve specific consideration. They often bear a disproportionate share of the cost of new standards. There may not be easy answers, but to the extent that standards avoid unnecessary complexity, the cost of compliance is reduced.

Size of IASB Board - At 14 members, the size of the IASB Board is quite large. While the global reach of the IASB is enormous, the larger a Board is, the more difficult it is to make decisions. Getting agreement takes longer. Over time it would be good to consider whether the size of the Board could be made smaller, while at the same time ensuring that all relevant input is obtained and considered.

Voting Requirements - I believe that simple majority voting is appropriate. Going beyond that can greatly slow down the process without necessarily achieving appreciable improvements in product.

National standards setter liaison relationships - IASB liaison relationships with other national standards setters are useful and it is helpful that the Constitution Review Committee's possible approach would provide flexibility to expand beyond the present relationships if needed. International standards benefit from global input.

This concludes my comments that relate directly to the Constitution review, but I would also like to provide two follow-on comments that are indirectly related.

Reconciliation of IFRS to US GAAP by SEC Foreign Registrants and IASB-FASB Convergence

Part of achieving high quality financial information is to have information that enables investors to make valid comparisons among reporting companies. This raises the issue of the SEC reconciliation requirements for foreign registrants, and the convergence work that is being done to reduce differences between IFRS and U.S. GAAP.

Whenever I speak on the subject of the IASB and international accounting standards, I am asked "when will the SEC accept foreign issuer financial statements prepared under IAS without requiring reconciliation to U.S. GAAP?" I cannot respond for the Commission, but I can tell you what I personally think is ahead. The answer helps to explain our interest in having a strong independent IASB standards setting body and process.

My personal view is that if things continue as they have been going - if the IASB operates as a strong independent standard-setter, if the commitment to quality application of IFRS remains, and if good progress in made in accounting convergence and the development of an effective global financial reporting infrastructure - then "in this decade", the SEC will be able to eliminate the reconciliation. I assure you that I am eager to embrace IFRS because I believe our investors in the US will benefit.

I would like to commend the IASB for its efforts to work with the FASB in addressing differences in IFRS and U.S. GAAP. Issuers in Europe and around the world have urged progress on convergence, and the work being done will greatly reduce the need for reconciliation. Convergence is a two-way street, and I continue to encourage both Boards to work closely together.

As the SEC staff has been participating with other securities regulators in observing the work of the IASB and evaluating IFRS proposals, we have also been encouraging improvements to the global financial reporting infrastructure to address other issues that could stand in the way of consistent and transparent financial reporting. Consistent application of IFRS will be challenging with the large increase in the number of IFRS users that is coming in 2005. The experience of implementation of IFRS in the EU and in a number of countries elsewhere the world will tell everyone a great deal about whether the standards are being applied and enforced consistently.

I want to close today by noting that the financial statements and footnotes that are developed through applying accounting standards are absolutely critical but they form only part of the corporate reporting information that is important to investors in public companies. As we focus on the process for developing and improving accounting standards, we also need to keep in sight the bigger picture in investor information - management's discussion and analysis, non-financial statement disclosure, and other information that helps investors understand the performance and prospects of a company. MD&A in particular is essential to understanding a company's financial performance and the detailed information that is provided through accounting.

Thank you for this opportunity to provide comments. Scott Taub and I would be happy to take any questions that members of the Committee may have…

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