Push for New Accounting Standards Gains Speed

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Tuesday, July 8, 2008

The Bush administration and the Securities and Exchange Commission are pressing forward with a plan that would allow American companies to opt out of using U.S. accounting standards in favor of international ones as a way to ease global business dealings and help corporations raise capital around the world.

But critics in Congress and elsewhere warn that the initiative threatens to let industry unravel investor protections enacted since the Enron scandal.

SEC Chairman Christopher Cox said in a speech last month that the commission would soon consider issuing a timeline under which U.S. companies might be permitted to file their financial reports under international accounting rules. Now that the Senate has approved a full complement of five commissioners, such a vote could come in a few weeks, SEC spokesmen said yesterday.

But Cox has also noted that such a major shift in accounting rules is not imminent. "I don't see this happening for many, many years," he said earlier this year.

Accounting experts agree that it is all but inevitable that U.S. companies will increasingly use global accounting standards, aided in large measure by the efforts of Bush officials and appointees in recent years.

"While the timing is uncertain, the handwriting appears to be on the wall that change is coming," said Arleen R. Thomas, a senior vice president of the American Institute of Certified Public Accountants.

Advocates of a single, international system of standards -- known as the International Financial Reporting Standards, or IFRS -- say that multinational corporations would operate more efficiently with one rather than two systems. They also say that global business transactions, including attracting investors, would be simpler under a unified system.

Cox and some of his agency's senior aides, backed by Treasury Secretary Henry M. Paulson Jr. and the White House, have been talking up the idea of permitting U.S. public corporations to use the standards developed by the International Accounting Standards Board rather than U.S. standards, which were established largely by the Financial Accounting Standards Board.

"It would be a disservice to U.S. issuers and investors, and the American market as a whole, if the SEC were not looking at IFRS for U.S. companies," John W. White, director of the SEC's division of corporate finance, said in a speech last month. "Clearly, the use of IFRS has become a global movement."

The Treasury Department under Paulson has repeatedly urged that the United States step up efforts to allow companies to report under the international accounting system.

The White House also approves of a march toward the international standard. "They're going about it the right way," White House spokesman Tony Fratto said of the SEC. "We certainly have a positive view."

He added, however, that the effort to shift to an international standard must be balanced against the government's mandate to protect investors. In particular, he said, the efforts spearheaded by Cox would not undercut reforms that followed the fall of Enron, especially the 2002 Sarbanes-Oxley Act, which beefed up accounting standards.

But critics assert that the Bush administration's interest in moving toward the international system is a way of defanging some of the post-Enron changes.

These opponents say the international rules are not as strict as the U.S. system and that investors would be denied the look they now get into the workings of publicly traded companies.

James D. Cox, a corporate finance expert at Duke Law School, said the proposal was one of several examples of "deregulatory belt-tightening" that have been pushed in recent years under the guise of globalization.

The international rules, for instance, make it easier for financial institutions to avoid detailing their market assets compared with the U.S. standards. In addition, technology companies often are able to report higher earnings overseas than in the United States because of the differences in treatment of intangible assets known as goodwill.

Overall, James Cox said, companies that file under the international system have 6 to 7 percent higher earnings than they do when they report under U.S. standards. This can allow the firms to appear healthier than they really are, critics warn.

Some lawmakers are also leery of the proposal. "I have reservations," said Sen. Jack Reed (D-R.I.). "Many experts have indicated there are significant differences between the two standards and that many of these standards don't work in favor of individual investors."

Reed said he also fears that the SEC's proposal is driven mostly by the impending end of the Bush administration rather than a desire to find an investor-friendly policy. "This is a race to get it done, not to get it done right," he said. "This is one way to weaken the provisions enacted after Enron under the rubric of competitiveness and globalization."

Sen. Carl M. Levin (D-Mich.) said ceding control to overseas regulators would be a mistake.

"U.S. securities markets are already under enough stress -- we need to shore up investor confidence, not undermine it by weakening accounting standards and surrendering our oversight," he added.