LSU International Accounting

November 25, 2009

Highlights of IFRS Research

Filed under: 1, General — ealfon1 @ 11:13 am

Highlights of IFRS Research

Journal of Accountancy, November 2009 

By CYNTHIA BOLT-LEE, CPA and L. MURPHY SMITH, CPA, DBA NOVEMBER 2009Conversion from U.S. GAAP to IFRS is a heavily discussed topic in the corporate world. Expected benefits of adoption include reporting consistency, enhanced global competition and improved financial reporting transparency. While many countries worldwide have already adopted IFRS, many other countries are closely examining its effects before adoption, not only from an economic perspective but also from a reporting quality position.




Researchers Elaine Henry, Stephen Lin and Ya-Wen Yang evaluated the difference between financial results under U.S. GAAP compared to IFRS. Their results show that convergence between U.S. GAAP and IFRS is occurring. Using 2004 to 2006 reconciliation disclosures, the authors found that the calculated difference between shareholders’ equity under U.S. GAAP and under IFRS declined from 2004 to 2006. In addition, the difference between U.S. GAAP and IFRS reported net income during this period also declined but remained significantly different. Pensions and goodwill appeared to be the dominant reconciliation items.


 Reconciliation amounts varied by industry and country, raising questions about consistency between region and industry. Additionally, more than 70% of the companies examined in 2004 through 2006 had a higher return on equity under IFRS compared to U.S. GAAP. The 2007 SEC elimination of the IFRS-to-U.S. GAAP reconciliation for non-U.S. companies with securities listed in the United States suggests a need for users of financial statements to be aware of the potential for differences resulting from the two sets of standards.


 “The European-U.S. ‘GAAP Gap’: IFRS to U.S. GAAP Form 20-F Reconciliations” was published in the June 2009 issue of Accounting Horizons.




Researchers Holger Daske, Luzi Hail, Christian Leuz and Rodrigo Verdi examined 3,100 firms in 26 countries mandated to adopt IFRS in “Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences.” The study examines the economic effects of IFRS, for both early and mandated adoption.


 The authors concluded that a company’s adoption of IFRS creates strong economic benefits in countries with rigid regulation over financial reporting. These benefits include an increase in the stock’s market value, an increase in market liquidity, and a lower cost of capital. Companies with major differences between GAAP and IFRS standards show the greatest benefit when supported by a strong regulatory environment.


 Additionally, the researchers found that in firms that adopt early, benefits are not only strong in the year of the change to IFRS, but also in the year that reporting is officially mandated. Results reinforce the view that strong enforcement of reporting standards not only enhances transparency for investors but also increases the market position of adopters.


 The paper also investigates possible contributing factors unrelated to IFRS adoption that may have caused these economic benefits to occur. Self-selection appears to be a primary reason; firms voluntarily changing to IFRS had factors unrelated to the accounting standard change that gave them an economic advantage.


 The article, appearing in the December 2008 issue of the Journal of Accounting Research, reinforces the economic benefits of voluntary early adoption of IFRS, combined with a strong regulatory environment emphasizing transparency and financial reporting quality.




French authors Thomas Jeanjean and Hervé Stolowy examined the effect of IFRS conversion on earnings quality—specifically on management manipulation of earnings to avoid recognition of losses. Their work examined more than 1,100 firms in three countries to determine whether the earnings management appeared to increase or decrease after implementation of IFRS.


 The authors measured financial reporting quality as a reduction in earnings management. Earnings management was assessed as the frequency of small profits compared to small losses—an established statistical research design used in similar past studies. Australia, France and the U.K. were selected for examination, as these three countries were unable to adopt IFRS before the mandatory transition date, thus eliminating any early adoption benefits.


 Based on the author’s research, earnings management remained consistent in Australia and the U.K. after IFRS adoption. However, in France, earnings management appeared to increase, suggesting that, overall, earnings quality was not improved by adopting IFRS.


 The research further discusses the subjectivity of IFRS accounting standards and the necessary use of management discretion for quality reporting. The authors suggest that the efforts of the standard-setting bodies should be focused on enhancing IFRS adoption reporting incentives and strict enforcement as opposed to “harmonizing accounting standards.” They state that “sharing rules is not sufficient in itself to create a common business language.”


 “Do Accounting Standards Matter? An Exploratory Analysis of Earnings Management Before and After IFRS Adoption” was published in the November/December 2008 issue of the Journal of Accounting and Public Policy.




Will global adoption of IFRS increase the amount of investments in foreign businesses? According to research published in the Journal of Accounting and Public Policy, the effect will be small, largely due to “home bias.”


 Prior research reveals that investors perceive a higher risk associated with foreign investments due to numerous factors, including differences in financial accounting standards, uncertainty about financial statement quality, and a lack of familiarity with anticipated future cash flows. Home bias is the idea that shareholders favor domestic over foreign investments, preferring the certainty and familiarity of financial information available from domestic firms. In addition, investors feel they have a greater understanding of domestic financial reporting, which enhances their decision making.


 Authors Messod Beneish and Teri Lombardi Yohn examined prior research related to home bias to predict the effect of IFRS adoption on investments in foreign equities by domestic investors. Their work, published in the November/December 2008 issue of the journal, suggests that the geographic proximity of domestic companies causes investors to perceive a “home court” advantage compared to foreign companies—one that will not be reduced even when IFRS adoption standardizes financial reporting.


 The paper is titled “Information Frictions and Investor Home Bias: A Perspective on the Effect of Global IFRS Adoption on the Extent of Equity Home Bias.” 




A recent independent research study prepared for FASB examines issues surrounding IFRS adoption in the United States. This working paper was provided to the SEC with the Financial Accounting Foundation’s comment letter in February 2009. The authors provide a thorough review of academic research on IFRS adoption, addressing issues and questions brought up by the SEC when it released its IFRS adoption road map and request for comments in 2008.


 Areas examined include cost/benefit trade-offs, the effect on capital markets and the economy, financial reporting effects, and political, regulatory and legal implications of IFRS adoption. The paper, “Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors,” also discusses the effects on the standard-setting process itself, including issues with the International Accounting Standards Board.


 Authors Luzi Hail, Christian Leuz and Peter Wysocki summarize the potential benefits of adoption as “greater market liquidity, a lower cost of capital and a better allocation of capital.” Financial reporting comparability will also likely be enhanced. Additionally, the research reveals that multinational companies will receive a cost savings as they will no longer have to report under several sets of standards.


 On the negative side, studies suggest that a major impact will be the cost of transition to IFRS. According to research, the benefits to U.S. investors may not exceed costs. Additionally, due to U.S. GAAP’s high standards, financial reporting improvements will be minor. Research also suggests that these costs and benefits will vary across firms and will be difficult to trace upon adoption.


 The working paper concludes with options the U.S. might want to consider. They include the following scenarios: (1) Retain U.S. GAAP, (2) adopt IFRS but require increased disclosure for U.S. firms, or (3) consider developing an International U.S. GAAP or I-GAAP.


 The full text of this report is available at 




When a country switches from its domestic GAAP to IFRS, many people and organizations are affected. Getting ready for the transition is a major task. Research by John Goodwin, Barry J. Cooper and Shireenjit Johl evaluated the preparedness of Australian listed firms for IFRS. Specifically, these researchers examined changes in explanations from Australian GAAP to IFRS between the half-year and annual reports in the first year of IFRS adoption.


 Switching from Australian GAAP to IFRS required Australian firms to provide new accounting information via the firms’ reporting function. Due to the operational significance of IFRS, firms were expected to consider compliance with IFRS as sufficiently important to be treated as a strategic management issue. If Australian firms and their auditors were prepared for the transition, then no changes to explanations in the annual reports would be anticipated.


 Examination of changes to explanations from Australian GAAP to IFRS between the two reporting dates of the first year of IFRS revealed that 33% of firms changed their explanations. The researchers conclude that most of these firms or their auditors were unprepared for IFRS at transition, consistent with observations made in the months preceding IFRS adoption and with most other related studies.


 Among changes to explanations, most concerned cash flows, earnings and equity, with most firms revising their initial IFRS earnings or equity by less than 5%, usually downward. The most often adjusted item was income tax. The explanation for this was complexity of the income tax standard and the fact that a tax reconciliation was only prepared at the annual report preparation time.


 “How Prepared was Australia for International Financial Reporting Standards? The Case of Listed Firms” appeared in the March 2008 issue of the Australian Accounting Review.




A study by Christoph Kaserer and Carmen Klinger calls into question the widespread belief that a true and fair view accounting approach provides higher quality financial statements data vis-à-vis a conservative accounting approach. Their research, covering the 10 years ending in 2005, shows that for those German companies that used IFRS or U.S. GAAP, their earnings were more associated with prior-year cash flows than with prior-year accruals. For those companies that followed German GAAP, there was no difference between earnings persistency of accruals and cash flows.


 Prior research shows that investors systematically overreact to accrual-based accounting information, which is referred to as the accrual anomaly. Kaserer and Klinger provide empirical evidence that the accrual anomaly, while present in Germany, is associated with companies that report their financial statements under IFRS or U.S. GAAP, and not associated with companies that reported under German GAAP. The researchers offer the explanation that true and fair view accounting, which relies on difficult-to-verify information, may not be suitable to improve accounting information quality in the context of a weak corporate governance system.


 The authors show that the economic impact of an accounting system choice, that is, the choice between a conservative and a true and fair view accounting system, will be determined by the corporate governance system under which this accounting framework is implemented. Since true and fair view accounting depends on difficult-to-verify information, the quality of this information depends on management incentives to report reliable information. If the management incentives are poor, for example, due to corporate control or external enforcement mechanisms being lax, a true and fair view accounting system might be poorly applied and, thus, yield less reliable information vis-à-vis a conservative accounting system.


 “The Accrual Anomaly Under Different Accounting Standards—Lessons Learned from the German Experiment” appeared in the September-October 2008 issue of the  Journal of Business Finance & Accounting.




Wai Fong Chua and Stephen L. Taylor examine the rationale behind the ever-increasing recognition of IFRS. To demonstrate the dramatic change that has occurred over the past 20 years, the article begins with a quote from R.K. Goeltz in a 1991 Accounting Horizons article: “Full harmonization of international accounting standards is probably neither practical nor truly valuable.” This common view from nearly 20 years ago has been turned upside down, with the widely held view today that IFRS will be adopted eventually by virtually every nation.


 The IFRS movement is often explained on economic grounds, but the authors question whether economic justifications for IFRS are supported empirically. They offer an alternative explanation that incorporates social and political factors.


 Economic rationales typically offered for convergence to IFRS include transparency, quality and comparability. The authors point out, with regard to transparency, that periodic financial statements are just one part of the information set used to evaluate the performance of publicly traded companies. Regarding improved quality, the authors note that empirical evidence indicates that the quality of the financial reporting process has more to do with the manner in which standards are enforced than differences in the standards themselves. On the third item, comparability, the authors are struck by the almost total lack of evidence to support the view that financial reports under different accounting regimes lack comparability.


 Chua and Taylor purport that there is lack of support for convergence to a single set of accounting standards, that is, IFRS, at least in the way that supporters of IFRS typically claim. The authors suggest that the driving force behind the IFRS movement is not the economic role of accounting, but rather the political nature of accounting standard setting. They note that the critical impetus at a national level for adopting IFRS has usually been from the government or its agencies.


 Standard setting at the national level has been filled with political controversy in recent years. A transfer of the standard-setting process to an entity external to national boundaries could eliminate what people in the regulatory and political arena regard as a “messy” process at the national level.


 Chua and Taylor provide evidence that political and social factors have been central to the development and diffusion of IFRS. They suggest that outsourcing the manufacture of accounting standards to a single private agency appears to be a rational, lower-cost option, which reduces economic and political costs for individual countries as long as they retain residual decision rights regarding IFRS adoption.


 “The Rise and Rise of IFRS: An Examination of IFRS Diffusion” appeared in the November-December 2008 issue of the  Journal of Accounting and Public Policy.




History is likely to note 2007 as a special time in the development of Chinese accounting and financial reporting standards. In that year, the nation’s new, essentially IFRS-convergent, accounting standards became required for certain companies. China’s path toward IFRS offers an interesting illustration of how globalization received backing from regimes previously regarded as least likely to be interested. Authors Yuan Ding and Xijia Su offer a descriptive analysis of the process leading up to IFRS in China.


 China inherited a closed regulatory culture from the former Soviet Union. China began its economic reform from a planned economy to a market-oriented economy in 1978. Subsequent to that year, accounting regulation and practices have significantly evolved from primarily serving macroeconomic planning to providing information for investors and lenders. The authors provide a brief history of accounting standards development in China. Two key events occurred in 1992: The Accounting Standard for Business Entities (similar to a conceptual framework) was issued, and the government announced a plan to issue new accounting standards. By 2001, 16 new accounting standards had been promulgated.


 The general trend was for slow but steady convergence of Chinese accounting standards with international standards. However, researchers have questioned the actual effect of changes in accounting standards on financial reports due to weak enforcement. To respond to concerns of other nations regarding whether China’s new accounting standards were actually convergent with IFRS, the Ministry of Finance established a task force whose main job was to persuade the IASB to sign a memorandum endorsing China’s move toward IFRS. This memorandum was signed in November 2005 by a representative of China and IASB Chairman Sir David Tweedie, supporting the view that China’s new accounting standards were substantively convergent with IFRS, with three exceptions. The exceptions regarded related-party transactions, reversal of impairment of depreciable assets, and government subsidies.


 To reap the benefits of adoption of new accounting standards, enforcement is likely to play a more critical role than the actual standard setting. Weak corporate governance is a problem that hinders Chinese authorities’ ability to prove to foreign counterparts that Chinese financial reports are consistent with international standards not just in form but also in substance.


 “Implementation of IFRS in a Regulated Market” appeared in the Journal of Accounting and Public Policy in the November-December 2008 issue.


 Cynthia Bolt-Lee ( is an associate professor of business at The Citadel School of Business Administration in Charleston, S.C. L. Murphy Smith ( is a professor in the Accounting Department at Texas A&M University.




  Editor’s note: This article is part of a series that samples accounting research and distills key findings for busy practitioners and preparers. These summaries explain the implications of a wide range of research and give CPAs the opportunity to apply the results in day-to-day activities. Readers interested in more detail should review the full text of each article to explore the hypothesis, research process, statistical analysis, supporting theories and conclusions.



November 24, 2009

Latest on IFRS 9

Filed under: 1 — Trey Burley @ 3:56 am

IASB Releases IFRS 9-Financial Instruments (Completes 1st Phase of Project: Classification & Measurement)

from FEI Financial Reporting Blog by Edith Orenstein
Earlier today, the IASB released IFRS 9, Financial Instruments. As noted in IASB’s press release, IASB is engaged in a three-phase project to replace its existing standard, IAS 39, Financial Instruments, Recognition and Measurement, with a new standard, IFRS 9, Financial Instruments. The three phases and related due process documents are listed below.

  1. Final standard, IFRS 9, Financial Instruments, issued today represents completion of the first phase of the project, focusing on Classification and Measurement of Financial Instruments. The press release notes: “The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users. Regarding liabilities, the press release notes: “the IASB decided not to finalise requirements for financial liabilities in IFRS 9 [and] expects to issue final requirements [regarding financial liabilities] during 2010.”
  2. Exposure Draft issued last week on the second phase of the project: Financial Instruments: Amortized Cost and Impairment. The comment deadline on the Exposure Draft is June 30, 2010.
  3. Upcoming proposals on Financial Instruments: Hedge Accounting continue to be developed.

Archived IASB Webcast on IFRS 9
A live webcast was convened by the IASB at two separate times earlier today (11am GMT and 2pm GMT) at which questions were taken from the audience. Opening each webcast, IASB Communications Advisor Sonja Horn noted that over 1,000 people were registered for each webcast. Horn introduced Gavin Francis, Director, Capital Markets, IASB and Sue Horn, Senior Technical Consultant, IASB who walked listeners through a slide deck summarizing IFRS 9 and responded to questions from the audience. The archived webcasts have already been posted on the IASB website; (the a.m. webcast begins at approx. 16 minutes into the tape, and the p.m. webcast begins at approx. 17 minutes into the tape). Each webcast lasts approximately 45 minutes (including the Q&A) and the slides summarizing IFRS 9 can be downloaded from the webcast link. Additional information about IFRS 9 can be found on the IASB’s Financial Instruments Project Page

FASB Financial Instruments Proposals Expected 1Q2010
As noted in the IASB-FASB joint statement issued on Nov. 5 reaffirming the boards’ commitment to convergence by June, 2011, the discussion of progress by IASB and FASB on their respective financial instruments projects notes: “FASB has been developing proposals to replace the equivalent requirements in US GAAP, which it plans to publish for public comment in the first quarter of 2010.” The joint statement details how the boards plan to address convergence issues, given that the IASB’s three phase approach vs. FASB’s unified approach to addressing the financial instruments project.

Learn More
Learn more about current FASB, IASB and SEC developments at FEI’s 28th Annual Current Financial Reporting Issues (CFRI) conference taking place on Mon. Nov. 16-Tues. Nov. 17 at the New York Marriott Marquis in NYC. We strongly encourage you to register in advance, but on-site registration is also available. Featured speakers include FASB Chairman Robert Herz, IASB Board Member Patrick Finnegan, SEC Commissioner Kathleen Casey, SEC Chief Accountant Jim Kroeker, SEC Div. of Corp Fin Chief Accountant Wayne Carnall, and other experts.

Separately, FEI’s Hall of Fame (sold out) will take place Monday evening, Nov. 16 in NYC, honoring this year’s inductees to the Hall of Fame: Dennis Dammerman and Don Nicolaisen.

Also next week: FEI’s IFRS Boot Camp, Wed. Nov. 18 in NYC, sponsored by Deloitte. Sign up for this one-day workshop, designed to provide financial executives with practical information, cost-effective approaches, and an overview of time-saving tools for addressing IFRS assessments and conversions in their organizations

If you’re betting on a transition to IFRS, consider signing up for the 2-day IFRS Conference Dec. 2-3 in Las Vegas, offered by Executive Enterprises Institute, presented in conjunction with FEI.

Latest Update

Filed under: 1 — Trey Burley @ 3:45 am

Thursday, November 19, 2009

FASB-Related Amendments (Perlmutter/Lucas; Garrett) Pass House Committee

As reported by Dow Jones Newswire’s Sarah Lynch earlier today, U.S. House Panel Approves A Toned-Down Accounting Proposal. The article refers to the Perlmutter/Lucas amendment relating generally to the role that the proposed systemic risk council would play vis-a-vis accounting standard-setting. Separately, an amendment offered by Rep. Scott Garrett, which would require FASB to conduct a study relating to its new standards for securitization accounting, reportedly also passed the House Financial Services Committee today, as detailed further below.

‘Toned-Down’ Perlmutter/Lucas Amendment
DJ Newswire’s Lynch notes in the article linked above:

The House Financial Services Committee agreed by voice vote to a much toned-down proposal Thursday that would allow a systemic risk council of regulators to offer advice about accounting rules that could pose problems to the broader marketplace.

‘Toned-down’ is an understatement. The amendment was virtually gutted from its original version (as detailed further below), moving from a complete overhaul of FASB oversight via the creation of a Federal Accounting Oversight Board that would take over oversight of FASB from the SEC, to what appears to be a one paragraph amendment (Amendment No. 58) that would add the following item to the list of duties of the Financial Services Oversight Council (the Council), established in the draft systemic risk bill (more formally, the Financial Stability Improvement Act):

To review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard or procedure.

Here’s a recap of the history of the Perlmutter/Lucas amendment:

  • The original version of the amendment, co-sponsored by Rep. Ed Permutter (R-CO) and Rep. Frank Lucas (R-OK), as announced by Perlmutter on March 6 (a week before the House Financial Services Committee’s March 12 hearing on mark-to-market accounting) would have created a Federal Accounting Oversight Board, transferring the SEC’s oversight authority (vis-a-vis FASB) from the SEC to the FAOB. See Perlmutter’s March 6 press release, and Lucas’s March 11 press release.
  • In the weeks preceding Election Day, Perlmutter was expected to formally introduce the amendment to financial reform legislation being drafted by the House committee. See our Nov. 3 post, FASB Oversight Subject of Congressional Interest.
  • During early November, as the House committee’s markup of the systemic risk bill approached, numerous individuals and organizations filed letters with the Chair and Ranking Member of the House Financial Services Committee, Rep. Barney Frank (D-MA) and Rep. Spencer Bachus (R-AL), respectively, to voice support or opposition to the Perlmutter/Lucas amendment, or any amendment more generally, that would impact the independence of accounting standard-setting.
  • Among those filing letters opposing change to independent standard-setting were SEC Chairman Mary L. Schapiro, FEI’s Committee on Corporate Reporting, FEI’s Committee on Private Companies – Standards, the AICPA, and a joint letter filed by the Center for Audit Quality, CFA Institute, and Council of Institutional Investors. (Links to these letters are in our Nov. 11 and Nov. 6 posts.)
  • Among those supporting the Perlmutter/Lucas amendment, as reported in this Nov. 16 Huffington Post article, included the American Bankers Association, Commercial Mortgage Securities Association, Council of Federal Home Loan Banks, Financial Services Roundtable, National Multi Housing Council, National Apartment Association, National Association of Home Builders, and Real Estate Roundtable.
  • By mid-November, as reported in the Huffington Post, the working draft of the Perlmutter/Lucas amendment had dialed back a bit, no longer calling for removal of the SEC’s oversight authority over FASB, but still maintaining certain powers for the Financial Services Oversight Council, including the power to: “suspen[d], modif[y] or eliminat[e] such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate.”
  • The one paragraph version of the Perlmutter/Lucas amendment approved for inclusion in the systemic risk bill by the House Financial Services Committee today, as noted above, makes no change to the SEC’s formal oversight authority over the FASB, and provides no ‘powers’ to the Financial Services Oversight Council with respect to FASB.

The future of the Perlmutter/Lucas amendment depends in part on what the Senate decides (and as we noted last week, Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, has said he sees no need to include in his bill anything relating to FASB independence; whether the final version of Perlmutter/Lucas will be adopted as part of the Senate version of the bill or not remains to be seen.)

My two cents
My two cents (I remind you of the disclaimer posted in the right margin of this blog): The long and short of it is, if indeed the sum-total of the Perlmutter/Lucas amendment as passed by the House committee today is the one paragraph amendment (Amendment No. 58) linked above (and if I’m wrong about that, I hope a commenter on this blog will point that out), then the final version of the Perlmutter/Lucas amendment as passed today appears to me to be pretty much motherhood and apple pie, since FASB and the IASB actively seek input from all of their constituents, financial regulators and otherwise, and the amendment calls for the systemic risk council to provide input to FASB and the SEC on accounting rules.

As noted in a Nov. 18 letter by the Financial Services Roundtable , the FSR supported the ‘revised’ (i.e. one paragraph) Perlmutter/Lucas amendment, because it: “leaves the current structure at the SEC in place, but provides a much-needed review if accounting principles threaten the safety and soundness of the economy.”

By putting this duty for financial regulators to review and comment on FASB standards into law, it may make some people nervous, (perhaps having the provision written into law ‘raises the bar’ so to speak) but I believe the scaled down version of the amendment (i.e. the one paragraph version passed today) may be looked upon as a significant improvement by some, vs. the earlier, more draconian versions of the amendment which would have directly impacted FASB oversight by removing it from the SEC and placing it with a new board.

November 19, 2009

Information about the proposed Financial Services Oversight Council

Filed under: General — Trey Burley @ 4:11 pm
American Accounting Association

Subject: A note from Terri Polley, President of Financial Accounting Foundation

Dear Former FAF Trustee/FASB Member:

Recently, Congressman Ed Perlmutter submitted an amendment to a bill that would create a new systemic risk regulator, the Financial Services Oversight Council (Council).  The passage of this amendment, which has the strong support of the banking industry, would transfer oversight of accounting standards from the Securities and Exchange Commission, with its focus on investor protection and transparency, to an expanded group of regulators charged with preserving the soundness of the banking system.  Under the language of the amendment, bank regulators would have authority over accounting standards for all U.S. companies.

Such a shift threatens to change the objectives of financial reporting, potentially politicize the process of setting accounting standards, and ultimately harm the capital formation process in this country.

The mission of bank regulators is to ensure the safety and soundness of financial institutions and the banking system.  In setting capital requirements, regulators must take many factors into consideration, including the needs of the economy and the particular circumstances of financial institutions.  However, accounting standard setters have a single mandate:  to ensure that investors and the capital markets at large are equipped with the information they need to evaluate U.S. companies.

Grouping these two functions under the auspices of a single systemic regulator threatens to weaken both missions.  For that reason, accounting standard setting should remain under the jurisdiction of the SEC, which is responsible for fair, objective, and transparent reporting to those who invest in our public companies.

We urge you to consider sending a letter to your Congressman urging him/her to reject the inclusion of accounting standards in the new systemic risk regulator.  We encourage you to use the attached sample letter as a starting point, and make your own edits so as to individualize and personalize the letter.  We believe it would be most effective if your letter was written not in your capacity as a former FAF Trustee/FASB member but on your own personal or professional letterhead.  In addition, time is of the essence, as we expect that the proposed amendment may be introduced as early as next Tuesday.  To locate contact information for your Congressman, use the “Write Your Representative” feature in the link below:

Please contact me if you have any questions.  We really appreciate your help.  A copy of the draft amendment is attached.  If you know of other potential allies who may be willing to send a letter, please let me know.


Theresa S. Polley
President, Financial Accounting Foundation


© 2008 American Accounting Association All rights reserved.

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