Simplifying Global Accounting

As chair of the London-based International Accounting Standards Board, Sir David Tweedie is championing an effort to develop a single set of global financial reporting standards that will be both understandable and enforceable. More than 100 countries now require or permit the use of International Financial Reporting Standards developed by the IASB. Before taking on the convergence mission, Tweedie served as the first full-time chair of Britain’s Accounting Standards Board. He was knighted in 1994 for his service to the profession and his efforts to reform British accounting standards in the wake of financial scandals. Tweedie spoke recently with Journal of Accountancy Publishing Director Geoffrey Pickard about convergence issues and the future of accounting.

JofA: What do you think the IASB’s biggest challenges will be over the next three to five years?

Tweedie: Right now, just over a hundred countries require or allow companies to use the IASB’s International Financial Reporting Standards (IFRS). In five years that figure will probably have risen to 150 countries.

We have a major convergence program with the Financial Accounting Standards Board based on the idea that if the U.S. has a better answer, we should have it—and vice versa.

Our two boards made an agreement with the SEC that, rather than making sure that every single detail in our respective standards was aligned, we’d divide the standards into two sets: one for which we should just pull the principles into line because the standards were basically OK, and the other set where we both had outdated standards, which we would replace by writing new ones together.

So by 2011–12, U.S. and international accounting should be pretty much the same—with 150 countries using IFRS and several others using U.S. GAAP. That adds up to about 170 countries accounting in much the same way. So, by then, if you’re a company in one of the remaining 50-odd countries, you’re going to have a problem attracting finance. The idea of one single set of standards for use around the world is gathering momentum. And that’s why it’s important, I think, for the U.S. profession to look at what’s happening internationally, because it’s coming your way, just as the rest of us are watching the U.S. because we’re moving together.

JofA: Is comparability surfacing as an issue as countries adopt International Financial Reporting Standards with a national flavor?

Tweedie: It is. At the IASB we are increasingly concerned about doing what we call “protecting the brand.” You can see the importance of this in looking at Australia’s experience. When they switched to IFRS, the Australians called them Australian International Financial Reporting Standards. They are actually IFRS, but nobody thinks they are because they’ve got Australian in front of their title. So now the Australians are going to remove the national reference.

We’re encouraging people, if they use IFRS, to say so.

The other problem we have is a country that says that its standards are based on IFRS. Well, what does that mean? We are investigating this, and I think there is going to be some naming and shaming. My advice is, if you don’t use IFRS—the real thing, undiluted—don’t confuse the markets by using the brand name.

JofA: In July, Zhang Wei-Guo, chief accountant and director general of the Department of International Affairs of the China Securities Regulatory Commission (CSRC), becomes a member of the IASB board. What prompted that appointment?

Tweedie: China initially showed little interest in using international standards, but as the economy continued to grow, the Chinese needed outside investment. But that was a problem partly because, quite frankly, investors were scared of the accounting risk—they did not understand Chinese accounting. China wanted to join the global accounting community, but that meant having to build a profession.

The scale and speed of change is remarkable. If I give a lecture in China, all I can see in my audience are relative youngsters. This is a profession of the under-30s.

The Chinese have told us that for reasons related to their legal framework, they can’t just take our standards, but what they have done is take the principles out of these standards, put them into the law and then issued mandatory guidance for the rest.

We’ve said, ‘Well, you can only claim to be compliant if you get the same answers.’

And the Chinese are checking up on that. Hong Kong has adopted IFRS, and its business community is very keen that mainland China should also comply with IFRS. So there is a lot of discussion between the Ministry of Finance in Beijing and the Hong Kong standard setters to make sure that the whole of China is in line.

JofA: You’ve been quoted as saying that principles-based standards are something that you would be able to explain to your Aunt Tillie in just a few sentences. Do you think that current IASB standards meet this test?

Tweedie: No, I don’t, certainly not all of them. They’re more complicated than the standards we used to have in the U.K. U.K. standards weren’t perfect, but we didn’t have a lot of problems with them.

What worries me now is that I’m not sure the auditor can do an audit without referring back to a specialist. That doesn’t seem right to me. I don’t think accounting is rocket science. But we sometimes make it look like it is.

When you look at what we’ve done with financial instruments, you find that we’ve got all sorts of exceptions and exceptions to exceptions. Not just in the U.S.—we’ve got them in IFRS, too. The rules have become so arcane that they are being interpreted by specialists in specialist departments. In the end, you find that only a tiny group of people is capable of understanding one standard. Well, that’s just crazy.

Why is it like that? Part of the reason is that people don’t like volatility. They don’t like the answers that simpler accounting standards would give. Therefore, they try to get around them, and very soon an avoidance industry springs up and standard setters and regulators have been only too ready in the past to respond by adding further layers of complexity by devising anti-avoidance rules. And vested interests press to get the standards changed by inserting exceptions.

JofA: In the U.S., FASB and the AICPA are collaborating on private company GAAP. What are your thoughts on this initiative?

Tweedie: This is very similar to what we’re doing. I think this is something that we will certainly look at because when we move towards issuing our standard on this some time next year, we shall look at the U.S. and see how you have treated issues such as income tax. Perhaps the U.S. has got a better answer, in which case we shall be perfectly willing to change ours over time.

We know there’s not so much international trade involving smaller companies, but there is some, so it would be quite useful if, again, we had a similar standard.

JofA: There has been a concern in the U.S. about auditability of some fair value measurements. Are concerns about auditability as strong in other parts of the world? And how does the IASB ensure the auditability of information it requires in financial statements?

Tweedie: That’s a very interesting question, because I think the rest of the world would be surprised that you asked it. After all, you’ve got deep and liquid markets, so what about the rest of us? We have taken your fair value standard SFAS 157, put a cover around it and published it as a discussion paper, saying, ‘Look. This is what the U.S. does. Do you agree with it? Could you operationalize it? Is there more guidance you need?’ We’re in the process of getting the answers back now. We will then look at the responses and decide what to do.

JofA: Has the IASB determined whether the development of requirements for management commentary should be a priority and, if so, whether the IASB would develop a standard or non-mandatory guidance or both?

Tweedie: We have published a discussion paper, which was written by staff from the standard setters of Germany, New Zealand and the U.K., and from the Canadian profession. It got a pretty favorable reaction. The topic is not yet on our agenda. So we have asked the national standard setters to consider the responses and recommend what we would have to do to progress to an exposure draft.

The securities regulators worldwide get a bit nervous about standard setters prescribing what should go into management commentary. I suspect that if we were to issue guidance, we’d start off with a document that wasn’t mandatory.

Actually, I think this is the future of financial reporting. I often say about IAS 39 (the standard on the recognition and measurement of financial instruments) that, if you understand it, you haven’t read it properly—it’s incomprehensible. Many people are bemused by the standards, so we need to explain what the accounting effects mean. Furthermore, as standards remove smoothing devices and reflect the real economics, we need a vehicle to enable managements to communicate to the outside world by giving their interpretation of the results.

JofA: XBRL is and has been an exciting phenomenon in the U.S., and it’s spreading globally. As you know, SEC Chairman Christopher Cox has committed more than $50 million this year to help to advance that. The Netherlands has implemented XBRL for statutory reporting. Do you see similar public and private efforts in other countries?

Tweedie: This is going to spread. Chairman Cox actually has done us all a favor by pushing this issue in the U.S. But it was already starting elsewhere. At the IASC Foundation we have had an XBRL program running for some years now. One of the things we have to do is make sure that we don’t have two XBRL taxonomies for financial reporting running internationally. So this is another convergence issue and one that we are working on to make sure that people using our XBRL system use exactly the same terms as the U.S. has.

The central banks are looking at it worldwide. Other countries are going to look at it for filing purposes. This is taking off. And it’s going to make a huge difference as people can drill down into the information.

JofA: The joint conceptual framework will serve as a basis for U.S. GAAP and IFRS. Similarly, the Enhanced Business Reporting Consortium is developing a structured framework for non-GAAP information. Has the IASB addressed this issue and, if so, what’s your current thinking about a non-GAAP framework?

Tweedie: We haven’t done much in non-GAAP information mainly because we’ve been so busy trying to make sure we’ve got all our existing standards in good shape. However, this is obviously going to be an important topic for the future. Again, it’s tied up with the management commentary. What important drivers and other aspects of a company’s performance and financial position should we report? I can see this being the next major issue after the conceptual framework.

JofA: Talk about GAAP convergence. In 2002, the Norwalk Agreement between the IASB and FASB was to move toward a convergency—U.S. GAAP and IFRS. Are you satisfied with the progress of this convergence?

Tweedie: Well, we weren’t until recently. Take income taxes—we’ve already spent two or three years on it, and we still haven’t published an exposure draft. We thought that, if we continue like this, we’ll get our standards converging in something like 20 years’ time. And people will not wait that long.

So that’s where I think the SEC and the FASB helped us enormously by saying, ‘Look. Why don’t we accept that removing every difference will take too long? We still want to converge. It is a process. In some cases we need only to change a principle or two. Forget the detail. Where we realize that we’ve both got some pretty outdated standards, let’s jointly write the new ones.’ So this is the new program.

And for example, in April we (met) the FASB in London, both boards, full boards, (met) together for a couple of days. We do this twice a year. In October, we come to Norwalk (Conn.). There are good relationships between the boards. We swap papers—the FASB staff writing them for us; and we’re writing papers for the FASB. I think this is the way the future is going. Gradually, we’re going to pull this all together. There is no point having two different answers.

JofA: How is the rest of the world reacting to what you just said?

Tweedie: They’re jealous, frankly, because they see two gorillas out there and they’re in danger of getting squashed between them.

You know we have people saying, ‘Well, we’re as important, so we’d like to make it a triumvirate.’

And the answer is, ‘Sorry. Not many people are following your standards. A lot of people are following U.S. GAAP and a lot of people are following IFRS. But join in and help us both to write the “gold” standard for the world.’

This is one of the reasons I see the IASB’s members increasingly coming from many countries not previously represented on the IASB—there are big economies around the world that are not represented on the board, or not well represented. You can see them saying, ‘We want to come in, and we also want to have a big say in the future.’ And that’s understandable.

I suspect that the trustees who oversee the IASB are going to look at that. If countries put forward the right people of independent mind who are genuinely seeking to improve financial reporting, there’s a fair chance those people will be selected for the board. But I’m sure that there will always be a solid core of Americans on the board because you’ve got a huge economy, and that makes sense.

JofA: If your 2009 convergence target isn’t met, some argue that non-U.S. companies should not have to do the IFRS to U.S. GAAP reconciliation. Some in the United States would argue that this could put U.S. companies at a significant disadvantage. Do you agree?

Tweedie: No, I don’t think I do, because the standards are moving rapidly towards each other. The danger, I think, is that if the reconciliation requirement is not removed there will be political pressure elsewhere to say, ‘Well, let’s stick it to the Americans. We’ll make them reconcile elsewhere.’ That would be a complete waste of resources. I think the SEC is genuine in proposing the removal of reconciliation, provided that our standards are good enough, are being applied properly and the convergence program is continuing.

Chairman Cox put it very well in envisaging removal of reconciliation provided that the SEC can see continued cooperation and clear narrowing of differences—and we’ve got a base that the standards are pretty similar as it is now—and provided the accounts are audited properly—that’s going to be a key question. There will be no use for people to claim, ‘We use IFRS,’ when they don’t. I think the SEC could come down very heavily in such cases, and we’d be quite happy about that for companies when, quite frankly, they’re not telling the truth. All of this is going to put pressure on the regulators, too, to make sure that the auditors have done their job. So I think it’s a very helpful exercise, and that the United States has been very open and very international in this.

JofA: In the United States, the efforts of the Financial Accounting Foundation and the AICPA and others have been focused on keeping FASB independent of the political process. How are politics going to affect what you’re doing?

Tweedie: Oh, it affects it all right. People say that standard setters are not affected by politics. Of course, we are. Like politics, standard-setting is the art of the possible. You know, you can lead from 20 yards ahead. But if you’re two miles ahead, you lose the troops. And we’ve got to make sure that we bring people along with us and take the long view. So we get politics all right, as does the FASB. The FASB has done a pretty good job of standing up against it. But we get it, too.

I think one of our problems is when the European Union decided to adopt our standards—which it decided in 2000—it was a decision made with great courage and, as I expect many would admit, in almost total ignorance of what exactly the existing standards required.

I think that in principle it was an obvious and sensible decision because Europe could not have produced a set of standards in five years from scratch. They just couldn’t have done it. So it was the sensible thing to do. But when, for the first time, people in Europe started looking at the standards, they said, ‘Oh, my goodness, IAS 39 is a FAS 133 type of thing. We hate it.’

So did we have fights? Yes, we had massive fights. And eventually the European Union carved out part of our standard on financial instruments by making it optional.

We had a real standoff with them. We refused to change the standard. And that’s why they took this bit out. And that’s why the EU refers to our standards as IFRS ‘as adopted by Europe.’

JofA: You are a full professor. We have some challenges in the U.S. in attracting young people into the profession. Is this a problem you’re seeing in your country, or more importantly, in other parts of the world?

Tweedie: No, not really. I think it’s fun enough. The scandals that we have seen in recent years are often attributed to accounting although, in fact, I think the U.S. cases are corporate governance scandals involving fraud. If anything, however, the scandals have made accounting more exciting to people.

Where I take issue with universities is in their teaching of accounting standards. They do that to help their students with their professional training. I think the universities should be teaching them to think. I see all these kids learning all the rules about leasing and I think, some day soon, we’re going to get rid of all those rules.

If we move to principle-based standards, those students are going to have to come back and say, ‘Well, how do I do this?’

When I was a young accountant, we didn’t have any standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the guy who got you through the challenges of practice.

As we start pressing on judgment, we’re going to bring the professionalism back. I don’t think we’re professional enough in the profession at the moment because we ask our colleagues to learn a huge amount of rules. And a lot of them don’t make sense. The question ‘Where does the profession go from here?’ is one that we need to confront now, because I don’t think we can continue going in the direction we’ve been traveling for many years.