By Huw Jones - Analysis
LONDON (Reuters) - The credit crisis is hindering as well as helping the drive to create a globally accepted set of accounting rules, and it may take intervention by world leaders to keep the effort on track.
Chastened by the crisis, the U.S. Treasury and the G20 group of industrialized and emerging market countries called early this year for “substantial” progress toward convergence of accounting standards by the end of 2009.
Supporters of the reform said the crisis showed the need for more transparency and consistency. A single set of global rules would cut costs for multinational firms by removing the need to comply with different systems, and make it easier for investors to compare companies across the world.
But in the last several months, momentum for the reform has wavered as policymakers and politicians, especially in the United States and Europe, have responded to the crisis by stressing national autonomy or seeking to water down key parts of the rules.
A meeting of finance ministers from G20 nations in London early next month, and a summit of G20 heads of state in the U.S. city of Pittsburgh in late September, may therefore be key to getting convergence back on track.
“There is considerable pressure on standard setters on both sides of the Atlantic. There is no reason to presume the responses will get us closer to convergence,” said Ian Ball, chief executive of the International Federation of Accountants.
“If they are being subjected to different pressures, the odds are we may end up with standards that are different, and end up further from convergence rather than closer.”
Convergence was under way well before the credit crisis struck; there are now over 100 countries using International Financial Reporting Standards (IFRS), including 8,000 firms in the 27-nation European Union.
Japan, Korea, India and Canada are set to join around 2011. But for the standards to be truly global, the world’s biggest economy, the United States, must be on board.
America, however, has avoided giving a firm date for when it would adopt IFRS. U.S. policymakers have been distracted by a broad revamp of regulation of the financial industry, and some U.S. lawmakers balk at America giving up the right to set its own accounting rules.
Robert Herz, chairman of the Financial Accounting Standards Board (FASB), which sets U.S. accounting rules, has said adjusting FASB rules in the face of domestic pressures while continuing with convergence is like “riding two horses”.
There is now even talk in the accounting industry that convergence should be ditched in favor of a “bilingual” approach, in which IFRS and U.S. rules would co-exist indefinitely, industry officials say.
Switching from U.S. rules to IFRS brings a host of technical changes for companies that could result in higher or lower reported earnings.
David Tweedie, chairman of the International Accounting Standards Board (IASB), which draws up IFRS, tried to head off the bilingual approach when he bluntly criticized U.S. footdragging earlier this month.
“This is a very interesting moment for us, a once-in-a-lifetime moment. Where is the USA?” he told the American Accounting Association’s annual meeting.
Four of the IASB’s 15 board seats are held by U.S. representatives in order to facilitate its passage to IFRS. But this arrangement ends in 2011.
Tweedie said it would be impossible to extend the arrangement without a clear U.S. commitment to convergence. Further complicating the situation is the fact that a chunk of funding for the IASB comes from the United States.
Momentum for convergence has weakened partly because of controversy over mark-to-market rules, which require banks to value some assets at current prices rather than the prices at which the assets were purchased.
As the credit crisis slashed current prices this year, policymakers and politicians on both sides of the Atlantic blamed mark-to-market rules for some $1 trillion in writedowns at banks.
So when the writedowns unsettled financial markets, policymakers and politicians pressured the IASB and the FASB into relaxing mark-to-market rules, and some now seem reluctant to give up their influence over their national accounting industries in the interest of convergence.
“It’s a paradox. The crisis both creates the obvious need for a common set of standards and has pressures working against that. It’s up to the governments of the G20 to act individually on commitments they have made collectively,” said Ball.
Added Helen Brand, chief executive of the Association of Chartered Certified Accountants in London: “G20 leadership is essential for maintaining commitment to a global solution, and in seeking to avoid national or regional versions of IASB-issued IFRS.”
Convergence may become even trickier, however, because the FASB is expected in 2010 to formally propose a new approach to mark-to-market accounting. The new approach appears to reverse the earlier easing of the rule, putting the FASB at odds with the IASB’s approach.
“If FASB goes toward more marking-to-market and IASB to less marking-to-market, it may be difficult to resume business as normal,” said Jeremy Newman, chief executive of BDO International, a global network of accounting firms.
IASB sources say, however, that although the two boards often start from different points when revamping rules, they can later come into alignment when rules are finalized.
“Convergence will depend on when the political pressure passes and how much damage has been done in the interim because of political pressure,” Newman said.
Others say the advantages of convergence are likely to continue pushing the accounting industry toward it over the long term, regardless of disputes in the near term.
“I don’t think convergence will fail as the economic pressures for convergence are very strong. Politics can slow it down, but we will continue to head in that direction, with possible hiccups,” Ball said. (Editing by Andrew Torchia and Stephen Nisbet)