In Pursuit of Global Convergence in Financial Reporting

During her four-year term, Securities and Exchange Commission (SEC) Chair Mary Jo White expressed strong support for global accounting convergence. In January, she issued a 1,600-word statement calling for her successor under the Trump administration to continue to pursue efforts to more closely align U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS). Here’s an overview of the history of this project, along with White’s hopes for the future.

History lesson

For the last 30 years, the SEC has batted around the issue of international accounting standards. Most of the countries in the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting rulemakers to use global accounting standards.

But the SEC and Financial Accounting Standards Board have been hesitant to relinquish control over accounting rules and adopt a more principles-based regime under IFRS compared to existing U.S. GAAP. In 2012, SEC Chair Mary Schapiro authorized the publication of Release No. 33-9109, Commission Statement in Support of Convergence and Global Accounting Standards, which reviewed the SEC’s actions with regard to IFRS.

The publication highlighted numerous challenges the agency faced in adopting a rule that would expand the use of international reporting standards in the United States. A series of staff reports were released during the next two years that expanded on the statement and outlined some difficulties that would be encountered if U.S. companies were to use IFRS more extensively. Schapiro stepped down five months after the final report was issued and never made an IFRS rule a priority during her tenure. 

When White took over the SEC reins in 2013, she expressed far more interest in IFRS than Schapiro had. In fact, White appointed James Schnurr, a strong advocate of global accounting convergence, as her chief accountant. Schnurr said several times during his 18-month tenure that he was working on an IFRS rule proposal, but the effort went nowhere.

Recent statement

In White’s recently issued statement, she said, “I remain firmly convinced of the importance for U.S. investors of high-quality, globally accepted accounting standards, and I believe that the commission must continue to pursue such standards as one of its highest priorities.”

Her statement called U.S. support of IFRS “imperative for the protection of U.S. investors and companies and the strength of our markets.” Just before leaving her post at the SEC in January, White encouraged the SEC to continue her past efforts on global accounting convergence. These efforts include a proposal that would let U.S. companies submit IFRS financial data as supplements to their regulatory filings with financial statements prepared in U.S. GAAP. 

IFRS outlook

The practical effect of White’s statement is unclear, given that she largely gave up on the issue during her final year. As of this writing, the Trump administration’s views on IFRS have not been made public. Stay tuned for additional information in the coming months.

In other news… Dodd-Frank Act: Thumbs up or down?

In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, arguably the most comprehensive financial reform package since the Great Depression. The massive federal legislation included corporate governance measures for all public companies, compliance requirements for banks and financial institutions, and a host of other related changes, including enhanced consumer protections.

The Government Accountability Office (GAO), a congressional watchdog agency, recently issued a report that said the Dodd-Frank Act appeared to have shielded the financial markets from collapses of large banks or nonbank financial companies. The GAO said bank regulators, by requiring depository institutions to hold more equity capital and by strengthening their supervision of the swaps market, had made it less likely that a large institution would fail and trigger a marketwide panic. Moreover, the GAO concluded that large banks, while holding more assets on their balance sheet, had increased their equity capital by enough to withstand a financial shock.

The report also credited the rules requiring the posting of additional collateral for firms trading credit default swaps for the decrease in the amount of risk that trading firms are exposed to from the default of a major swaps market participant. (Such swaps are a hybrid of insurance and security.)

The future of Dodd-Frank Act reforms is uncertain under the Trump administration, however. During his campaign, President Trump pledged to repeal certain regulations made by the Obama administration. Many analysts expect an overall reduction in government regulations that burden businesses and compromise productivity, which could put Dodd-Frank protections on the chopping block in 2017 and beyond.

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