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High & Low Finance
A Tower of Babel in Accounting?


'The S.E.C. is expected to propose a rule that would allow foreign companies using international accounting standards to stop reconciling their financial statements to U.S. rules.');
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By FLOYD NORRIS
Published: June 15, 2007
WASHINGTON
Globalization is coming to the securities markets. Investors will find it easier to buy stocks from around the world, but they may also find it harder to compare the financial statements of those companies while trading on markets that have widely varying levels of regulation.
The Securities and Exchange Commission will consider the first step on that road next week, when it is expected to propose a rule that would allow foreign companies using international accounting standards to stop reconciling their financial statements to American rules.
It will probably follow that step later this year with a proposal to give some foreign stock markets direct access to American investors.
The decision to halt reconciliation, which allows investors in foreign companies traded on American markets to see how they would have fared under American rules, would be effective for 2008 annual reports, to be issued in early 2009.
That is a year earlier than some had expected, meaning there will be less time for investors to see how the international rules are working, and less time for American and international rulemakers to bring their rules closer together.
Christopher Cox, the S.E.C. chairman, is pushing for prompt action, which could make globalization of markets his legacy by the time he steps down after a new president takes office in 2009.
If foreign companies can trade in American markets using international accounting rules, why not let American firms do the same? The commission is likely to take up that issue later this summer.
And Mr. Cox promised this week that the commission would act within months on questions involving the access of foreign stock markets, and perhaps foreign brokers, to American investors.
“We are moving to a system of home country regulation and global trading,” said Alan Beller, a partner in the New York law firm Cleary Gottlieb and a former director of corporation finance at the S.E.C. “The question is whether that produces a race to the top, or a race to the bottom.”
In a race to the top, countries could seek to assure that their rules are good enough to gain access to the American market, and less burdensome American rules would encourage companies to provide excellent disclosures. In a race to the bottom, companies could seek out the country with the lightest regulation and least investor protection.
To some at the S.E.C., the need for prompt action is clear, because it is already relatively easy — if not very cheap — for investors to buy securities in virtually any market around the world. There is concern that if the S.E.C. does not sanction the trading, it will happen anyway without any oversight at all.
A decision to accept international accounting standards, without forcing companies to reconcile their books to American rules, would provide a powerful boost for the International Accounting Standards Board, which is based in London.
That board’s ability to set standards has been compromised because the European Commission, in ordering companies to use the international rules, allowed them to ignore part of one rule, on derivatives accounting. But any company that took advantage of that loophole would still have to reconcile with American accounting rules if it wished to maintain a listing in the United States.
Even with common international rules, however, it is not yet clear just how comparable corporate statements are. The international rules do not yet cover some areas, like insurance, and sometimes offer more choices than do American rules. There is no government agency to assure that British companies interpret the rules in the same way that French or Chinese ones do.
A Moody’s study of financial statements from seven large European telecommunications companies found significant differences in the way they accounted for such things as leases, interest expense, depreciation, pension expense and taxes, although all followed international standards.
“These accounting differences make it harder to compute credit metrics on a comparable basis,” said Trevor Pijper, a Moody’s vice president. He added that Moody’s had sometimes been able to satisfy itself that differences were not very important by looking at the changes made when figures are reconciled with American rules.
Those reconciliations are what the S.E.C. is expected to eliminate.
If the S.E.C. does take that step, it might also force foreign companies to provide more timely information. They now have six months to file annual reports, while large American companies have just two months.
Mr. Cox and his fellow commissioners are wading into this area at a time of great uncertainty. Their changes could make it more, or less, attractive for foreign companies to list in the United States.
They could open the floodgates and allow foreign markets to sell almost any stock to almost anyone in this country, or they could restrict access to leading exchanges from countries with strong regulations, and allow only large stocks to be sold, and only institutional investors or sophisticated individuals to trade on such exchanges.
If they are too restrictive, the commissioners could be accused of undermining New York’s standing as the world’s financial capital. If they are too accommodative, they could be accused of slashing protection for American investors.
The urge to act quickly is understandable. But it is far more important that the commission get myriad details right when it does act.