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PCAOB's Niemeier Slams IFRS at FAE Conference
By Colleen Lutolf
Posted on 9/11/08

NEW YORK -- While some regulators seem to have already boarded an express bus bound for International Financial Reporting Standards (IFRS), at least one of them -- Charles D. Niemeier, a Public Company Accounting Oversight Board member whose term expires in October -- is not getting on.

Niemeier, at FAE's Current Developments Under Sarbanes-Oxley, the SEC and the PCAOB Conference on Wednesday, said the accelerated pace towards IFRS is based on a series of "myths" developed by politicians.

"The impression I got and the reaction from the audience was: it's about time somebody said something about this," said conference Chair George I. Victor, who is also immediate past chair of the NYSSCPA's Accounting and Auditing Oversight Committee. "It's David and Goliath and David stood up to Goliath here. Just about everybody in the room agreed with most, if not all, of what he said."

Niemeier told the audience of about 120 CPAs and financial professionals that he supports converging U.S. accounting standards with a single international set of standards, but convergence is not what is happening anymore, calling the process a "capitulation" instead of convergence.

When the SEC voted last year to allow foreign private issuers to file their financial statements with the commission without reconciling them to U.S. GAAP, the U.S. began to allow two sets of accounting standards to exist in the U.S., said Niemeier.

A single set of international accounting standards could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide, said SEC Chairman Christopher Cox said at the commission's Aug. 27 meeting where commissioners unanimously approved to propose a "roadmap" to IFRS.

Cox said that the increasing worldwide acceptance of financial reporting using IFRS (more than 100 countries either allow or permit IFRS) and U.S. investors' increasing ownership of securities issued by foreign companies that report their financial information using IFRS led the SEC to move more quickly towards IFRS.

"These two facts … make it plain that if we do nothing and simply let these trends develop, with each passing year, comparability and transparency will decrease for U.S. investors," Cox said.

Niemeier said this was one of the IFRS myths.

"It seems decisions were made that it's too hard and would take too long to actually converge," he said.
IFRS could undermine the regulatory protections that U.S. GAAP affords, he said.

"IFRS has the potential to de-link us from our regulatory model," he said. "The only way to move to comparability is to move to U.S. GAAP."

GAAP actually gives the U.S. an advantage, he said.

"He was talking about the myth of the convergence process," said Anthony S. Chan, vice chair of the Society's SEC Practice Committee, which hosted the event. "He did a good job objectively stating why the project might not be feasible for the U.S. environment given the uniqueness of our environment. I think it was inline with the maturity of our policy development."

Most regulators describe U.S. Generally Accepted Accounting Principles (GAAP) as rules-based and IFRS as more principles-based when comparing the two sets of standards.
Niemeier disagrees.

"IFRS is not more principles-based, it's just younger," he said. "The biggest difference between GAAP and IFRS is that GAAP is older and has been tried."

The NYSSCPA raised a similar point in a comment letter sent to the SEC last year after the commission had issued a concept release on allowing U.S. companies to prepare financial statements in accordance with IFRS.

"IFRS lack detailed guidance which can result in varied and divergent accounting practices," according to the Society comment letter.

U.S. GAAP provides more guidance in how revenue is recognized, the Society's letter continued, which was "developed in response to historic abuses. The use of IFRS for the preparation of U.S. issuer financial statements could open the door for such abuses to occur again."

Julie A. Erhardt, deputy chief accountant in the SEC's Office of the Chief Accountant, later said during the same conference that to label either set of standards as rules-based or principles-based is "not the way to do it. It's a false labeling system."
You can find principles-based standards in U.S. GAAP and IFRS, she said.

GAAP has been accumulating rules for 30 years and IFRS and IASB has been around about six years, she said, "so there hasn't been enough time to physically" accumulate as many rules.

She said the physics of IFRS also "cuts the other way."

"If you look at some of these restatements, you'll see the companies just overlooked" a rule or standard in U.S. GAAP that they didn't know existed because of the unwieldy amount of standards, she said.

"There's so many pages, they can't find it," she said.

Erhardt said she also doesn't see there being a problem with auditors possibly having to use more professional judgment when using IFRS.

"I don't subscribe to that either," she said. "I'm hoping they're using their professional judgment everyday and that there's not a reserve tank that they'll use later."

What standards setters have to find is a "sweet spot" that balances all trade-offs, all the benefits, and all the costs associated with convergence, Erhardt said.

"If anyone has a silver bullet, put it in your comment letter," she said.

"The SEC has made no decisions," she said, but that it is "duty-bound to call the question for input by people in the U.S. whether U.S. companies should report" in U.S. GAAP or IFRS.

"It doesn't mean there is a particular answer," she said.

Once the SEC publishes its roadmap in the Federal Register, the public will have 60 days to comment.

What happens next?

"Then it's the [commissioner's] decision," she said. "Do we do something and what's the timing? The commission put the roadmap out. It's conceivable it goes back to the commissioners with a modified roadmap."

Colleen Lutolf, Editor, can be reached at clutolf@nysscpa.org.