US faces hurdles in move towards international convergence

While all eyes have been on Europe and its planned transition to International Accounting Standards in 2005, the US Financial Accounting Standards Board has been doggedly working towards its own convergence process. The move follows a commitment made between the FASB and IASB under the Norwalk Agreement in October 2002 to increase the comparability and quality of standards used in the US. Yet, like Europe, the US hasn't found convergence easy. In an exclusive interview with accounting & business at ACCA's US centenary seminar, Bob Herz, chairman of the FASB, said the biggest challenge is convincing the national business community that a global accounting language is worthwhile. He noted that although the SEC and large multi-nationals in the US are in favour of convergence, smaller businesses and domestic companies are less enthusiastic. 'People don't like change. They'd rather keep the status quo,' he said. 'Whether or not the FASB makes changes to accounting standards, and there will be some changes in order to successfully see through convergence, the question is: are people willing to stand some short-term pain for the long-term gain?'

Herz said that with cross-border investments and capital flows on the rise in the US, a common accounting language is essential. 'The world doesn't want US GAAP imposed upon it,' he added. 'That's why global accounting standard setters need to work together. If we go about this the right way, it will lead to better reporting for everyone, including the US.'

Outlining the progress made on a short-term convergence project, which resulted in the issuance of four exposure drafts last December, Herz acknowledged that because of the vast differences between US GAAP and IAS, it will take time to achieve convergence. But he stressed that getting it right is the key to success. 'Determining a global set of standards requires a lot of effort and a relentless determination,' he said. 'People expect careful consideration and a thorough debate, and they deserve that. For convergence to be sustainable, we all need to work towards the best standard we can find. FASB is committed to that effort.'

He noted that the US will be watching avidly to see what happens in Europe in 2005 when 7,000 listed companies start reporting their financial performance under IAS, and conceded that the ongoing argument between the IASB and the European banking and insurance industry over accounting for financial instruments, and the ensuing decision by the European Commission to shelve IAS 32 and 39, had heightened concerns in the US over whether convergence can succeed. 'There are a lot of people in the US who view the European Commission's action with suspicion. We have a system where accounting and reporting serves the needs of the investors and capital markets and not the needs of companies,' he said. He stressed that 'the success of the Europe 2005 project is critical. Not least because it's important to be able to say that convergence works and that it is for the common good.'

The question of whether international convergence can be achieved was earlier discussed during the ACCA US business seminar at which Bob Herz was the guest speaker. Over 120 members and guests attended the event, held in New York last month and chaired by outgoing ACCA US President John W Lane. During the seminar, Roger Adams, ACCA's executive director - technical, spoke of ACCA's support of convergence around a global set of accounting standards. 'We don't believe that everyone must converge around one or other of the choices on offer. Probably each needs to change, sometimes a lot, sometimes a little, sometimes willingly, sometimes grudgingly, until we get to that point where, to all intents and purposes, there are no significant differences,' he said.

Noting the recent accounting scandals that have shaken the European accounting profession, Adams said that Europe could no longer argue that it was immune to fraud. 'Immediately after Enron, the widely held European view was that the US 'rules based' culture acted as an incentive to commit fraud rather than as a deterrent against it. We heard a great deal in the UK about the superiority of 'principles based approaches'. But ultimately, fraud pays no heed to the existence of either rules or principles.' He added that with Parmalat serving as a wake-up call to the European financial and regulatory community, he hoped the European Commission would move quickly to improve audit oversight and corporate governance.