SEC Moves to Adopt International Accounting Standards

The recent securities pact between the United States Securities and Exchange Commission (SEC) and the Australian Securities and Investment Commission is seen as a step towards the SEC’s goal of globalizing investing. In another step towards achieving this goal, the SEC has now floated a plan that could require U.S. companies to switch to international accounting standards starting in 2014 and permit others to make the switch even sooner. The switch to international standards could be staggered starting with large U.S. companies in 2014, followed by mid-sized companies in 2015, and small companies in 2016.

A small group of large companies could begin using the standards as early as next year. To qualify, the company must be among the 20 largest companies in its industry and a large number of its competitors would have to already be using the international standards.

Companies switching to international accounting standards would make it easier for investors to compare companies operating in different regions. It also makes it easier for companies to raise capital in whatever market seems most attractive.

There could be many roadblocks which the SEC will have to overcome before the plan can be implemented. There are already concerns about how the transition will occur and how uniform the accounts will be. U.S. companies and auditors will have to learn new accounting rules.

The international accounting standards are set by the International Accounting Standards Board. Whether all countries accept the standards set by the Board is a different issue. Countries have asserted that they have the right to approve or modify the standards issued by the Board. The European Union has allowed banks to ignore parts of the standard. The SEC hopes to deal with this by accepting filings using international standards only if it complies fully with the Board issued standards.

Problem would crop up if the Board issues a rule that the SEC believes is wrong. If the U.S. Financial Accounting Standards Board considers such a rule, the SEC can overrule it.

The plan, if approved, could result in a wholesale change in the U.S. accounting rules. There are many issues on which the international rules are silent. In many cases, the international rules will require more professional judgments from auditors.

Accounting firms have welcomed the SEC’s plan. They look upon the plan as the best opportunity to achieve the goal of a single set of high quality standards around the world.

Until the Sarbanes Oxley Act was passed in 2002, the U.S. Financial Accounting Standards Board was financed by contributions from companies and accounting firms. The Sarbanes Oxley Act gave the Financial Accounting Standards Board the right to levy charges on public companies. This was necessary to assure its independence. Now where does the International Accounting Standards Board get its financing? The answer – the same sources where the U.S. Financial Accounting Standards Board got its financing before the Sarbanes Oxley Act. The switch could depend on the Board getting an independent and stable source of financing.

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