For months now the trans-Atlantic regulators have kept up a complex choreography, hoping to converge the global standards for accounting, reporting and auditing corporate financial information.
It’s like watching a carnival performance of dancing bears – notable not that they’re so slow and clumsy, but that they dance at all.
The publicity machinery has been cranking:
First was the US Securities and Exchange Commission, announcing in November – here -- that it would start to accept the financial statements of non-US companies, as prepared in accordance with International Financial Reporting Standards – widely used around the world except in the US – only now without the reconciliation to US standards that has been so costly, disruptive and questionably useful.
Next followed EU internal markets commissioner Charlie McGreevy – here -- with a symmetrical plan for American companies to list in Europe using accounting principles generally acceptable in their home country – good old familiar US GAAP.
Third was the December 5 announcement by the US Public Company Accounting Oversight Board – here -- that starting in 2009, its inspections of non-US audit firms would move toward fuller reliance on the inspection and enforcement regimes of that agency’s counterparts in other countries.
And lately, inputs from the US Chamber of Commerce – here – to the SEC’s Advisory Committee – here -- have been extolling the necessity of integrated global standards and principles.
A theme played for years, the case for convergence has stayed consistent -- that the use of common standards promotes strong globalized capital markets, supports investor comprehension and confidence, and fuels economic growth.
But the background has changed since the time the Americans were calling the tune: When convergence was first seriously sounded, corporate listings were migrating to the New York Stock Exchange, the Euro-to-be was predicted to be a regional form of play money, and the extensible hegemony of accounting principles as issued in the US was taken for granted. Little wonder the Europeans were mostly unenthusiastic wallflowers at the party.
And then? Still shadowed by the darkening gloom of the Enron era, the American-led scandals around executive options and subprime mortgages have showed the limits on its capacity for regulatory detection and deterrence. London became the center of the IPO market, and the Euro is hovering around $1.55.
Europe ascendant has had its mis-steps, of course. The French-led opposition to unqualified EU endorsement of the standards for derivatives accounting showed the survival of its parochial difficulties.
And although the subprime contagion started in and primarily affects American markets and institutions, it extends from the regional German banks to the funding of villages in northern Norway, while the Bank of England stubbed a toe against the collapsed mortgage lender Northern Rock and UBS showed the storied competence of Swiss bankers to be as holed as its cheese.
Back in the USA, while the London bankers merrily stole the lunch of their New York counterparts, the SEC’s readiness to accept IFRS-based financial statements – half a decade after Sarbanes-Oxley -- now rings as an effort to protect against market-share erosion. And fair-value accounting has become the target of choice for blame-shifting to evade the dysfunctions of the bankers’ black-box valuation models.
At the same time, the PCAOB’s readiness to “increase its level of reliance on non-US oversight systems” needs to be translated out of agency obfuscation into real English. If so, a candid statement from Chairman Mark Olson would read like this:
"Since 2002 we haven’t made a dent in achieving the legislatively-imposed mandate to inspect and oversee the 800 non-US audit firms forced by the law to register with us. We will never solve the foreign law prohibitions or find the competent resources to do this ourselves. We have no realistic choice but to devolve our responsibility over to the authorities of 86 other countries, although they mostly have neither real track records of success nor the resources to get there. Whether any progress is actually made or even measurable will not be known for many more years to come."
Meanwhile, taking a look at the PCAOB’s record at home, Sarbanes-Oxley has neither restored virtue to financial reporting nor unsprung the auditors from the limits on their performance:
• The subprime-triggered chaos across the capital markets originated with and is traceable to the confessed failure of the players to understand, value, control, account for or report on entire balance sheets full of complex financial instruments. What leadership role does an audit regulator deserve, having sat that one out?
• The academics’ confident proclamations of a year ago, that the level of US securities class action litigation was enjoying a structural reduction, now yields to the reality: case filings are back up to Enron-era levels, with the very large and rapidly-expanding group of subprime-based cases still comprising only a fraction.
So let’s wait a bit to evaluate the extent and effect of whatever convergence may actually be achieved within our lifetime.
Or, to invoke the ursine advice of the 17th century French fabulist La Fontaine, “don’t sell the bearskin until you’ve killed the bear.”
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