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50–361 2010

S. HRG. 110–951 

INTERNATIONAL ACCOUNTING STANDARDS: 

OPPORTUNITIES, CHALLENGES, AND GLOBAL 

CONVERGENCE ISSUES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES AND INSURANCE AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

OPPORTUNITIES, ISSUES, DIFFERENCES AND CHALLENGES AS THE U.S. 

AND INTERNATIONAL COUNTRIES MOVE TOWARDS CONVERGENCE OF 

IFRS WITH U.S. GAAP ALONG WITH THE IMPACT OF THESE PROPOSED EFFORTS ON STAKEHOLDERS, INCLUDING REGULATORS, INVESTORS, AUDITORS AND COMPANIES 

WEDNESDAY, OCTOBER 24, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

DEAN V. SHAHINIAN, Counsel 

MIKE NIELSEN, Republican Professional Staff Member 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES AND INSURANCE AND INVESTMENT

JACK REED, Rhode Island, Chairman 

WAYNE ALLARD, Colorado, Ranking Member 

ROBERT MENENDEZ, New Jersey 

TIM JOHNSON, South Dakota 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT P. CASEY, Pennsylvania 

DANIEL K. AKAKA, Hawaii 

JON TESTER, Montana 

MICHAEL B. ENZI, Wyoming 

JOHN E. SUNUNU, New Hampshire 

ROBERT F. BENNETT, Utah 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

DIDEM NISANCI, Staff Director 

TEWANA WILKERSON, Republican Staff Director 


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(III) 

C O N T E N T S 

WEDNESDAY, OCTOBER 24, 2007 

Page 

Opening statement of Chairman Reed ................................................................... 1 

Opening statements, comments, or prepared statements of: 

Senator Allard ................................................................................................... 3 

Senator Bennett ................................................................................................ 4 

Senator Schumer .............................................................................................. 5 

Prepared statement ................................................................................... 41 

WITNESSES 

Sir David Tweedie, Chairman, International Accounting Standards Board ...... 6 

Prepared statement .......................................................................................... 42 

Robert H. Herz, Chairman, Financial Accounting Standards Board .................. 9 

Prepared statement .......................................................................................... 60 

Conrad W. Hewitt, Chief Accountant, Securities and Exchange Commission ... 12 

Prepared statement .......................................................................................... 84 

Response to written questions of: 

Senator Reed .............................................................................................. 157 

John W. White, Director, Division of Corporation Finance, Securities and 

Exchange Commission ......................................................................................... 13 

Prepared statement .......................................................................................... 87 

Response to written questions of: 

Senator Reed .............................................................................................. 157 

Jack T. Ciesielski, President, R.G. Associates, Inc. .............................................. 28 

Prepared statement .......................................................................................... 91 

Charles E. Landes, Vice President, Professional Standards and Services, 

American Institute of Certified Public Accountants ......................................... 29 

Prepared statement .......................................................................................... 102 

Response to written questions of: 

Senator Reed .............................................................................................. 160 

Teri Lombardi Yohn, Associate Professor, Kelley School of Business, University of Indiana ...................................................................................................... 31 

Prepared statement .......................................................................................... 131 

Lynn E. Turner, Managing Director, Glass Lewis & Co. ..................................... 33 

Prepared statement .......................................................................................... 147 


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(1) 

INTERNATIONAL ACCOUNTING STANDARDS: 

OPPORTUNITIES, CHALLENGES, AND GLOBAL CONVERGENCE ISSUES 

WEDNESDAY, OCTOBER 24, 2007 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The subcommittee met at 2:01 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Jack Reed (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN JACK REED 

Chairman REED. Let me call the hearing to order, and I want to 

thank the witnesses, obviously. This afternoon, we are holding a 

hearing on International Accounting Standards: Opportunities, 

Challenges, and Global Convergence Issues. 

In recent months, the Securities and Exchange Commission has 

been prioritizing a number of regulatory reforms aimed at providing foreign private issuers greater access to the U.S. securities 

market. The Commission’s proposals on the elimination of reconciliation to U.S. GAAP for foreign private issuers who apply the International Accounting Standards Board’s version of International Financial Reporting Standards by 2009 is one such proposal. The 

Commission also issued a concept release which raises the possibility of U.S. companies having the option of filing their financial 

statements using either IFRS or U.S. GAAP and the establishment 

of an advisory committee to examine complexities in the U.S. financial reporting system. 

These proposals are part of an effort to establish a single set of 

global accounting standards. There is no doubt a single set of highquality accounting standards would benefit the United States as 

well as global markets. However, there are a number of significant 

issues which should be seriously considered. Most importantly, we 

need to ensure that this new single set of globally accepted accounting standards continues to protect and provide enhanced 

transparency to investors while promoting market integrity. This 

effort should incorporate the best of both standards to build the 

strongest protections for investors. This hearing is an opportunity 

to discuss progress, opportunities, and challenges in achieving convergence, but also to understand the impact of the SEC’s proposals 

on investors, regulators, auditors, and businesses. 


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Increased globalization of markets and wide adoption of IFRS 

have been significant drivers of convergence. In recognition of this 

trend, in 2002 the FASB and the IASB agreed on a framework to 

eliminate differences between the two standards and to collaborate 

on future ones. This process has set a good balance for moving 

ahead with new standards, mindful of eventual convergence. 

However, it is also important to note that these efforts provide 

not only truly comparable transparency and accurate financial results to investors, but they must also ensure comparable enforcement, interpretation, and implementation by regulators. 

To that end, it is clear that some countries using IFRS are tailoring these accounting standards to their needs, resulting in jurisdictional versions of IFRS. In its review of more than 100 foreign 

private issuers’ filings, the SEC has found that, ‘‘The vast majority 

of companies asserted compliance with a jurisdictional version.’’ As 

Sir David Tweedie has suggested, the butting of these jurisdictional 

versions and variances will ultimately make true convergence difficult. 

There are also significant questions raised in the area of implementation and interpretation of IFRS. Again, the SEC’s study of 

the filings of firms reported on an IFRS basis in the U.S. found 

problems with the implementation of IFRS, including in the area 

of the presentation of cash-flow statements, accounting for common 

control mergers, recapitalizations, and similar transactions. According to an Ernst & Young report, because IFRS standards generally 

include only broad principles, preparers and auditors may in good 

faith interpret company-specific facts differently, which may result 

in different accounting treatments for the same or similar transactions among companies. 

The issue of timing should also be considered carefully. Many 

prominent investors and users of financial statements, including 

the CFA Institute and FASB’s Investors Technical Advisory Committee, ITAC, conclude that it is premature for the SEC to eliminate the reconciliation requirement. Some have asked, with the 

projected convergence of U.S. GAAP with IFRS by 2011 or 2012, 

why there is such a rush before the frameworks are substantially 

harmonized. 

Additionally, while this effort may ease the filing requirements 

on foreign private issuers, IFRS is still in its infancy and may, in 

fact, be dependent upon reconciliation with U.S. GAAP. Moreover, 

some companies, like S&P, have indicated that if reconciliation is 

eliminated, it will continue to ask companies to provide reconciliation as part of a package of non-public information credit rating 

agencies’ requests. If companies will indeed need to continue to 

prepare reconciliation information for credit rating agencies, why 

shouldn’t the SEC require companies to provide that information to 

public investors as well? 

There are numerous other issues which I hope we can address 

today, including: Will the elimination of reconciliation lead to the 

abandonment of convergence? How prepared are we for the greater 

use of IFRS standards in the U.S. markets when there are virtually no accounting programs in our universities that teach accounting students IFRS standards? And shouldn’t we be concerned 

about the lack of knowledge of IFRS standards by U.S. accountants 


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and CFOs? What does this mean for the future role of the SEC and 

the FASB in providing oversight of U.S. financial reporting? Another key question is: Will investors be served by this change? 

These are challenging times for financial regulators. If done 

properly, convergence of international accounting standards can 

have positive impact on U.S. and global markets. However, the 

events of recent months remind us of the ever increasing complexity of financial products and the interconnectedness of our financial systems. We have learned that complex financial products, 

while spreading risk, can also hide that risk. Financial reporting 

and accounting standards play a critical role in decoding some of 

that complexity to investors and regulators, and we must push to 

further enhance transparency to restore confidence in our markets. 

With our uniquely large retail base of investors and millions of individuals investing their futures in our capital markets, it is critical that we get this right and make certain that there are no unintended consequences. 

Thank you for allowing me—this is an important topic, and I 

wanted to be expansive, and I think I have accomplished that. But 

now, Senator Allard, do you have an opening statement? 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. I do. You did not think I would turn down an 

opportunity to speak, did you? 

Chairman REED. No. 

[Laughter.] 

Senator ALLARD. Thank you, Mr. Chairman. I would like to 

thank you for holding this hearing to examine the convergence of 

the global accounting standards. Although accounting standards 

might not seem like the most exciting topic to some, it is important 

to the economic vitality of the United States and its trading partners around the world. Clear, accurate, consistent, and reliable accounting standards are necessary for investors to have the information necessary to make decisions. The quality of decisions generally 

cannot be better than the quality of the information on which they 

are based. Credible information has been an important foundation 

for the success of our capital markets, just as bad information is 

often at the heart of market meltdowns. 

As markets become increasingly global, we have begun to examine accounting standards in an international context. The credibility of information is critical, but even credible information is 

more useful when it is comparable. Accordingly, discussion turned 

to international convergence of accounting standards. Convergence 

of accounting standards holds many possibilities, including the 

prospect of better transparency through greater comparability, reducing costs, improving market confidence, and improving market 

competitiveness. All of the opportunities are predicated upon credible standards from a credible standard-setting body. Anything less 

will be a step backwards for U.S. markets. 

It is also important that U.S. regulators are mindful of the practical details in moving toward a global standard. The industry infrastructure must be in place to ensure that the new standards can 

be applied accurately and rigorously. This is particularly important 


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with regards to the many small and medium-sized accounting firms 

and businesses. 

We have an excellent line-up of witnesses today, and I am certain that they will be able to help us better understand the potential benefits of global convergence, as well as highlighting the 

issues that must be addressed first. Their testimony will be very 

helpful in increasing the Subcommittee’s understanding of the 

issue. 

Finally, I would like to take this opportunity to offer a special 

welcome to one of my constituents, Lynn Turner. Mr. Turner 

served as the Chief Accountant of the Securities and Exchange 

Commission from July 1998 to August of 2001. He has also been 

a professor of accounting in the College of Business and the director of the Center for Quality Financial Reporting at Colorado State 

University. Mr. Turner currently serves as the Managing Director 

of Research at Glass Lewis. 

Again, welcome, Lynn, and, again, thank you, Mr. Chairman. 

Chairman REED. Thank you, Senator Allard. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Thank you very much, Mr. Chairman, for 

holding this hearing. This is not a very sexy issue. I realized that 

as I walked in, walked down the hall. My first reaction was the 

hearing must have been canceled because there was no pile of lobbyists in the hall. I come into the room, there are enough people 

in the room to justify the kind of attention we are giving it, but 

it does not get the sort of headlines that we often see. 

That does not mean it is not important. That just means that it 

is a little complex and does not lend itself to the kinds of quick 

headlines and 1-minute sound bite summaries that we get on television than some of the other issues are. 

I have been interested in this ever since I became aware of the 

Merkel Initiative and got involved in that at the Brussels forum 

earlier this year. I understand that Gunter Verheugen and Al Hubbard are meeting weekly on this issue. Mr. Hubbard is known to 

us in the United States as the President’s Domestic Adviser or allaround economic guru. And when I asked what Gunter Verheugen, 

if I am pronouncing his name correctly—if not, I apologize. When 

I asked what his counterpart role was, they said he is basically the 

Al Hubbard for the EU. 

This is an essential area, however dry and difficult it is to get 

into, and we need to move forward on it if we are going to have 

the maximum benefit that will come out of international trade. 

The shorthand version of the difference between the American 

system and the European system is that the American system is 

rule based and the European system is principle based. I am congenitally more interested in a principle-based system than I am a 

rule-based system because a principle-based system is usually easier to adapt to the situation on the ground than rules that have 

been adopted in one set of circumstances that then have to be 

twisted and distorted to deal with another. And I am encouraged 

by the comment of Secretary Paulson, who said, if I can quote him 

correctly, ‘‘Where practical, of moving’’—consideration should be 


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given ‘‘where practical, of moving toward a principle-based system,’’ 

noting that added complexity and more rules are not the answer 

for a system that needs to provide accurate and timely information 

to investors in a world where best-of-class companies are continually readjusting their business models to remain competitive. 

The other issue, which we probably will not get into today but 

that broods over us and that we should be aware of as we are talking about this, is the lawsuit that is moving forward in the Supreme Court, shorthand term is Stoneridge v. Scientific Atlanta, and it is over the question of whether or not we can open up a window to allow foreign firms—to allow U.S. trial lawyers to get at foreign firms who are doing business with American firms on a basis 

that I, a non-lawyer, find absolutely incredible. 

As the former Chancellor of the Exchequer in the United Kingdom, Norman Lamont, wrote in the Wall Street Journal earlier this 

month, he said, ‘‘Currently in the U.S., a company must actually 

make statements that are fraudulent to be the target of a private 

securities lawsuit. This is a clear line that discourages the kind of 

speculative or predatory litigation that has become a feature of 

American law. Should the plaintiffs in Stoneridge prevail, any nonU.S. business, whether it be a law firm, accounting firm, buyer, 

banker, or seller, that has U.S.-listed companies as customers, suppliers, or clients, we risk being sucked into America’s security litigation vortex.’’ 

I can think of nothing more chilling to international trade than 

the concept of the class action suits being brought against non-U.S. 

businesses simply because they have a customer or a supplier who 

has made some kind of statement that the lawyers decide could be 

challenged. Bill Durack is on his way to jail, but the virus of excessive litigation is still very much with us, and I think that concern 

is a parallel concern to getting the accounting standards right. If 

we have the accounting standards right, it will make it easier to 

do business, and it will also act as some kind of a firewall against 

the litigation storm that I hope never breaks over this part of international trade. 

So, again, Mr. Chairman, thank you for holding the hearing, and 

I look forward to hearing what the witnesses have to say. 

Chairman REED. Thank you, Senator Bennett. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you and Senator Allard and all of the witnesses for being here on 

a very important subject, which is the convergence of the international accounting standards, because we live in an era, of course, 

that is defined by globalization of capital markets, a trend that was 

documented in the report that Mayor Bloomberg and I issued. And 

you cannot have a global market and 22 different accounting standards. It is inefficient, at best, and fraught with peril, at worst. 

Our report made a whole number of recommendations to help the 

United States maintain its historic role as the leader in global financial markets, and one of these was the accelerated convergence 

of U.S. Generally Accepted Accounting Principles, GAAP, with 

International Financial Reporting Standards, IFRS. 


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So in today’s world, where a typical investment consists often of 

a Russian investor purchasing shares in a Japanese company listed 

on an American stock exchange, you just cannot have different auditing standards for different countries. Globalization will only continue to accelerated, making the need for this greater than ever before. And the fact that IFRS is well on its way to becoming the 

global language which the rest of the world uses means that we 

here in America have to get with it and try to do our best to integrate the standards. 

When it comes to the way companies balance their books, Wall 

Street and the rest of the world should be on the same page. And 

IFRS will be the language of worldwide business for future generations. We have to start allowing it to be spoken in the U.S., and 

eventually U.S. businesses must be allowed to speak this language 

themselves. So I am glad to see FASB and the IASB working together toward the convergence of their accounting standards. 

With that, Mr. Chairman, I will ask that the rest of my statement be read into the record, and I look forward to reading—I will 

not be able to stay, but reading the testimony of the witness. 

Chairman REED. Without objection, all statements will be made 

part of the record. 

Now, let me introduce the panel. First, Sir David Tweedie, Chairman of the International Accounting Standards Board. Thank you, 

Sir David. 

Mr. Conrad Hewitt, Chief Accountant, Securities and Exchange 

Commission; Mr. John White, Director of the Office of Corporate 

Finance, Securities and Exchange Commission; and Mr. Robert 

Herz, who is the Chairman of the Financial Accounting Standards 

Board. 

I want to specifically recognize Sir David for his strong leadership while serving as the Chairman of the International Accounting 

Standards Board during a very critical period. Also, thank you, Sir 

David, for the assistance you have given this Committee on numerous occasions. We thank you very much. 

I also understand that this is Mr. Hewitt’s birthday, so we are 

all going to resist the temptation to sing but wish you the best, and 

thank you for sharing some of your special day with us, Mr. Hewitt. 

Sir David. 

STATEMENT OF SIR DAVID TWEEDIE, CHAIRMAN, 

INTERNATIONAL ACCOUNTING STANDARDS BOARD 

Mr. TWEEDIE. Thank you, Mr. Chairman, Ranking Member Allard, and Senators Bennett and Schumer. 

As I said when I first appeared before the Banking Committee, 

it is a great privilege to be back here in the Colonies to continue 

my missionary work—— 

[Laughter.] 

To discuss the relevance of international reporting standards in 

the United States and in the international markets in general. This 

week, we have just finished our second meeting of the year with 

the FASB. It went very well, probably one of our best ones, and we 

are looking very closely at the SEC’s deliberations on the Proposed 

Rule and Concept Released. 


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I am very glad that Conrad Hewitt, Bob Herz, and John White 

are here with me because the FASB and the SEC were instrumental in forming the IASB. Its structure, governance, and independence are modeled on that of the FASB. And, in fact, if anything has gone wrong, it is entirely due to Lynn Turner, who was 

a major—— 

[Laughter.] 

A major instrument. 

When I first appeared before the Committee, we had hardly been 

going for about a year, and there were very few countries that actually used our standards. But the objective which was set for us 

by the SEC and FASB was very clear. We had to come up with one 

single set of high-quality global standards, so it did not matter the 

transaction took place here in Washington or in Winnipeg, Warsaw, or Wellington. We should get the same answer. And, historically, that has not been the case. 

The European Union started us off, 25 countries which previously had 26 different ways of accounting, because they used U.S. 

GAAP and international standards as well. And it told us how difficult it was to meld international standards together. Cultures are 

different. In Britain, everything is permitted unless it is prohibited. 

In Germany, it is the other way around; everything is prohibited 

unless it is permitted. In the Netherlands, everything is prohibited 

even if it is permitted. And in France, of course, everything is permitted especially if it is prohibited. 

[Laughter.] 

But now we have 108 countries that are using our standards. 

Australia, Hong Kong, New Zealand, and South Africa all joined 

Europe very early on. Brazil, China, India, and Russia have agreed 

to take our standards. And, similarly, Chile, Canada, Israel and 

Korea have all recently decided to make the tie, as has Japan, who 

did it just a month or so ago. So there is clear momentum toward 

having one single set of standards. 

It is understandable that the U.S. was not among that group because you have a well-established and respected standard-setting 

body, a high degree of transparency in your standards that have 

been tested over a long period of time, and a high degree of acceptance internationally. 

However, the world is changing. The realities of globalization, 

the integration of the capital markets, and the emergence of IFRSs 

as a viable and high-quality set of standards are changing the policy equation. Senator Schumer’s report has documented these 

issues. 

The U.S. requirement for reconciliation, as the Committee will be 

well aware, has caused resentment among non-U.S. companies 

forced to go through the reconciliation exercise. The hope of many 

of the registrants in using IFRS was that eventually it would become the passport to all markets, including that of the United 

States. 

I obviously have a bias on what I would like the U.S. to do in 

this situation, but it is really for the SEC and Congress to decide 

that. But that is why we place such a high priority on convergence 

with the United States. 


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The benefits to the U.S. companies are similar to those in Europe. Many of their subsidiaries are already reporting in IFRS 

terms. All this has to be converted back to U.S. GAAP. For U.S. 

investors, they now will be more aware of the accounting in other 

countries. Previously, when you were faced with a myriad of different systems, it is very difficult. Now you should be faced with 

one major system worldwide. 

For auditors, a single set of accounting standards helps training 

and helps people to understand, and for regulators, they, too, are 

dealing with just one set of standards rather than many. 

One of the questions is that if we have competition in accounting 

standards, will there be a race to the bottom. I always think of 

John Glenn when I think of that. He always said, as he hurtled 

around space in his capsule, the thought that was ever prevalent 

in his mind was the fact that every single component in that capsule had been supplied by the lowest bidder. Well, we are not going 

to have a race to the bottom. In fact, that is why we are working 

together, and Bob’s intention and mine with our boards is to have 

a ‘‘best of breed’’ convergence program. 

Irrespective of the SEC decision, our convergence work will be 

undertaken. It is very important to us both. The early progress we 

made after Norwalk has gone into the Memorandum of Understanding, and we now have 11 major subjects that we are dealing 

with which are critical to the general well-being of financial markets: consolidations, post-retirement benefits, leasing and financial 

instruments, among others. This is a critical aspect of the financial 

infrastructure we have to fix. 

Our joint efforts to produce joint standards on these issues signal 

a double win and—improved accounting for both of us in important 

areas and the elimination of differences between U.S. GAAP and 

international standards. 

It is understandable that those affected by the standard-setting 

process will want to know how the future will look. We intend, Bob 

and I, to make sure our joint standards are different from our existing IFRS and U.S. standards. We want these to be principle 

based. 

Basically, are they written in plain English? Can they be explained in a matter of a minute or so? Does it make intuitive 

sense? And does management believe it actually helps them manage their business? 

These standards should eliminate anti-abuse provisions. A tough 

principle is very difficult to get around; whereas, if you have if A, 

B, and C happens, the answer is X. The financial engineers come 

up with B, C, and D and claim a different answer. 

It will rely on judgment, and we will have to force people back 

to the core principles. We have to make sure we do not give too 

much guidance. Do we really need this guidance or can we actually 

rely on judgment? 

That is the vision we have for the future of the convergence. It 

will not be easy. The Lord’s Prayer has 57 words; the Ten Commandments, 297; the U.S. Declaration of Independence—big mistake that was—300 words; and the European Directive on the import of caramel products, 26,911 words. 

[Laughter.] 


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I know several commentators have said if the reconciliation is removed, a major incentive of convergence goes. That is not the case. 

We have made an agreement with the SEC and the FASB we will 

converge on this program. We intend to keep that agreement. And 

if we did not, we would end up with two sets of standards. That 

is not in our constitution, and it is not our objective. 

So I am optimistic, Mr. Chairman, about what is going to happen. There are some challenges ahead. We must resist countries’ 

having national versions of IFRS, and we are working on that with 

the regulators to make sure we know exactly what they have done. 

We are trying to make sure that the interpretation is done through 

our Interpretation Committee, and the regulators are helping in 

that. And, finally, we want to try and ensure the enforcement is 

good. So the regulators are very important to us in this work. 

We are at a crucial point in the development of IFRSs. The 

United States has played a huge part in encouraging the adoption 

of our standards throughout the world. The world’s fastest growing 

economies are converging with IFRS. But this is no time to rest on 

our laurels. We recognize the effect of our work on the economy of 

the world, and we are delighted that U.S. policymakers are now 

considering options for the U.S. markets. 

We appreciate, sir, your continued interest in international convergence, and we are committed to doing all we can to complete the 

work program in the MOU. 

We are at an interesting stage. When I was at school, I played 

in goal for my school’s soccer team, and in a cup semifinal, we were 

winning 1–0 with a few moments to go. One of the opposing forwards came through and hit the ball so hard, it went past me before I could move. But, fortunately, it hit a goalpost and rebounded 

to him, and he hit it again. And this time, I threw myself to the 

left and turned the ball around the post. And my teammates were 

ecstatic. What they did not realize was I was trying to save his 

first shot. 

[Laughter.] 

We will not get a second chance. This is our best chance ever, 

with Bob’s help, to merge our two sets of standards and come up 

with the world’s best. And that is what we are trying to do. 

Thank you, sir. 

Chairman REED. Thank you, Sir David. 

Mr. Herz. 

STATEMENT OF ROBERT H. HERZ, CHAIRMAN, 

FINANCIAL ACCOUNTING STANDARDS BOARD 

Mr. HERZ. Thank you, Chairman Reed, Ranking Member Allard, 

and Members of the Subcommittee. I am Bob Herz, Chairman of 

the FASB, and thank you for asking us to participate in this hearing today. And thanks for throwing a little gathering to celebrate 

Con Hewitt’s birthday with all his friends, too. 

I would also like to take this opportunity to thank both the 

Banking Committee and this Subcommittee for your support over 

the years of the FASB, of independent accounting standard setting, 

and our international convergence activities. 

Recent years have been marked by a clearly continuing, rapid, 

and accelerating globalization of capital markets, cross-border inVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A361.XXX A361

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vesting, and international capital-raising. We, therefore, agree with 

both the IASB and the SEC that a widely used single set of highquality international accounting standards for listed companies 

around the world would greatly benefit the global capital markets 

and investors. The ultimate goal, we believe is a common, highquality global financial reporting system across the capital markets 

of the world. 

However, achieving the ideal system requires improvements and 

convergence in various elements of the infrastructure supporting 

the international capital markets, including a single set of common, 

high-quality accounting standards. But improvements in convergence are also needed in disclosure requirements; regulatory, enforcement, and corporate governance regimes; auditing standards 

and practices; and education of capital market participants. 

In regard to accounting standards, the FASB, with the IASB and 

other major national standard setters, has been working for many 

years to improve and converge accounting standards. The pace of 

these convergence activities has increased significantly since the 

formation of the IASB in 2001, and there has been a clear movement in many parts of the world toward IFRS. Many jurisdictions 

around the world have mandated or permit the use of IFRS, and 

many others are planning to move in this direction. However, in 

some of these jurisdictions, the standards issued by the IASB have 

been modified, resulting in so-called as-adopted versions of IFRS, 

and also differences in implementation between countries have resulted in national variants of IFRS. 

In the U.S., we at the FASB and IASB committed in 2002 to the 

goal of developing a set of high-quality, compatible standards. Our 

2002 Norwalk Agreement described the plans for achieving that 

goal, including working together on major projects and eliminating 

more narrow differences in other areas. Our 2006 Memorandum of 

Understanding added specific milestones to that effort. 

Since 2002, we have made steady progress toward convergence, 

but that effort is not yet complete, with work in process in a number of key areas. In addition, differences between U.S. GAAP and 

IFRS remain right now, which can result in significant differences 

in the reported numbers under the two sets of standards. Thus, it 

will likely take more years to reach the goal of full convergence 

using our current approach. 

Accordingly, and in light of the growing use of IFRS in many 

other parts of the world, we believe that now may be the appropriate time to consider ways to accelerate the convergence effort 

and the movement in the U.S. toward IFRS. For to be truly international, any set of standards would need to be adopted and used 

in the world’s largest capital market—the United States. 

Thus, we believe that planning for a transition of U.S. public 

companies to an improved version of IFRS would be an effective 

and logical way forward to achieving the goal of a set of common, 

high-quality global standards. 

However, a smooth transition will not occur by accident, and to 

plan for and manage this change, we suggest that a blueprint for 

coordinating and completing the transition should be developed and 

agreed to by all major stakeholders in the process. The blueprint 

should identify an orderly and cost-effective approach to 


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transitioning to an improved version of IFRS and should set a target date or dates for U.S. registrants to move the standards toward 

IFRS, allowing adequate time for making the many necessary 

changes. 

The plan should also address needed changes on the international front, including those necessary to bolster the IASB as a 

global standard setter and to reduce or eliminate the as-adopted 

versions of IFRS that have emerged. And it should identify and establish timetables to accomplish the many changes to the U.S. financial reporting infrastructure that will be necessary to support 

the move to IFRS. Such changes will likely take a number of years 

to complete, during which time the FASB and the IASB will continue our joint efforts to develop common, high-quality standards 

in key areas where both existing U.S. GAAP and IFRS are currently deficient. 

In other areas that are not the subject of those joint improvement projects, we envisage that U.S. public companies would adopt 

the IFRS standards as is based on an established timetable. We believe that this sort of well-planned approach would provide an orderly and effective transition of U.S. public companies into the 

global reporting system. 

Let me now briefly turn to the two SEC releases relating to the 

reconciliation requirement and to the possible use of IFRS in the 

U.S. I commend the SEC for bringing forward these timely and important issues. 

The SEC Concept Release seeks comments on whether U.S. 

issuers should be given a choice between U.S. GAAP and IFRS. We 

are generally opposed to allowing companies to elect different reporting regimes because of the added cost and complexity such 

choices create for investors and the added cost and complexity involved in developing a U.S. financial reporting and educational infrastructure to support a two-GAAP system for U.S. public companies. 

Accordingly, instead of permitting U.S. companies an open-ended 

choice between IFRS and U.S. GAAP for an extended period of 

time, we believe it would be preferable to move all U.S. public companies to an improved version of IFRS over a transition period following the blueprint we are advocating be developed. 

Finally, on the more imminent question of whether the SEC 

should remove the reconciliation requirement for foreign private 

issuers that use IFRS, we are aware of a variety of views on this 

issue. We believe that either way the decision in the near future 

whether or not to eliminate the reconciliation requirement will 

have important implications for the continued development of a 

global reporting system. On the one hand, we certainly acknowledge the concerns of those in the United States who believe that 

dropping the reconciliation would be premature and would result 

in a loss of information that some investors and other users clearly 

find important and useful. On the other hand, this change only relates to relatively small number of SEC registrants in relation to 

the overall size of our capital market. And maintaining the current 

reconciliation requirement could be viewed by many parties outside 

this country as a clear signal that the U.S. is not truly interested 

in participating in an international reporting system. 


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Conversely, we also believe that once the reconciliation requirement is eliminated, there are some parties in other countries who 

have viewed the convergence effort between the IASB and the 

FASB as the price of getting the SEC to eliminate the reconciliation, will see no further benefit in continued convergence between 

IFRS and U.S. GAAP, and will call for a cessation of further improvements to IFRS, particularly those designed to achieve convergence with U.S. So in removing the reconciliation requirements, we 

feel that it would be important to make it clear that getting to a 

single set of high-quality international standards remains the ultimate goal and that further convergence and improvement of standards is necessary to achieve that goal. 

Last, we strongly agree with the SEC proposal that the reconciliation requirement only be eliminated for those foreign private 

issuers that fully apply IFRS as issued by the IASB and not for 

those who use an as-adopted version of IFRS. To do otherwise 

would, in our view, be inconsistent with the goal of getting to a single set of global accounting standards. 

In conclusion, we are firmly committed to continuing to work 

with the IASB, the SEC, and others to achieve a single set of highquality international accounting standards that will benefit investors and the capital markets domestically and across the world. 

Thank you. 

Chairman REED. Thank you very much, Mr. Herz. 

Mr. Hewitt. 

STATEMENT OF CONRAD W. HEWITT, CHIEF ACCOUNTANT, 

SECURITIES AND EXCHANGE COMMISSION 

Mr. HEWITT. Chairman Reed, Ranking Member Allard, Senator 

Bennett, thank you for the opportunity to testify today, on my 

birthday, on behalf of the Securities and Exchange Commission 

concerning ongoing efforts to foster development and use of highquality, globally accepted accounting standards. As the SEC’s Chief 

Accountant, I advise the Commission on accounting and auditing 

matters. 

The Commission has a long history of supporting the goal of 

high-quality, globally accepted accounting standards. The reason 

for the Commission’s support is that the global accounting standards help investors to understand investment opportunities more 

clearly and increase access to foreign investment opportunities. 

Global accounting standards reduce costs for issuers, who no longer 

have to incur the expense of preparing financial statements using 

differing sets of accounting standards. Also, lower costs facilitate 

cross-border capital formation as well as benefit shareholders, who 

ultimately bear the burden of the entire cost of the financial reporting system. 

The SEC has pursued the goal of high-quality, globally accepted 

accounting standards through a variety of international multilateral and bilateral venues. This includes the International Organization of Securities Commissions, a bilateral dialog with the Committee of European Securities Regulators, and with fellow securities regulators from countries that have moved to or are moving to 

IFRS reporting. The SEC’s staff has also participated, in some 

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counting Standards Board’s Advisory Council, its Interpretations 

Committee, and certain of its working groups. 

Over 100 countries now either require or permit the use of IFRS 

for the preparation of financial statements by their domestic listed 

companies. Under a regulation adopted in 2002, the EU required 

its listed companies to report using endorsed IFRS beginning in 

2005. Japan’s accounting standard setter, with whom I met on Friday of last week, and the IASB have agreed to work to accelerate 

convergence between Japanese accounting standards and IFRS, 

with certain interim target dates in 2008 and 2011. Other countries, such as China, Israel, and India, have either begun to move 

toward the use of IFRS—that is, China and Israel—or have announced plans to do so—India’s case. Closer to home, Canada has 

announced plans to move to IFRS reporting around 2011, while we 

understand Mexico is working to incorporate IFRS aligned content 

into Mexican accounting standards. The incentives and reasons for 

these national IFRS policy decisions, as well as the method and 

timing of the transition to IFRS reporting for companies in a particular country, are as varied as the profiles of the countries involved. 

This summer, the Commission began a process to determine 

whether it is appropriate and timely to allow foreign and domestic 

registrants the alternative to submit for SEC filing purposes financial statements prepared in accordance with the International Financial Reporting Standards as published by the International Accounting Standards Board. I defer to my colleague John White to 

discuss these proposals in detail. 

Given the increasing globalization of capital markets, it is imperative that the Commission be vigilant in keeping our regulatory 

standards up-to-date for the protection of investors, for the maintenance of efficient and orderly markets, and for the promotion of 

capital formation. Our ongoing work in the area of accounting and 

financial reporting is an important part of the Commission’s wideranging efforts in this regard. 

Thank you for the opportunity for me to appear before you today, 

and we will be pleased to respond to any of your questions. 

Chairman REED. Thank you, Mr. Hewitt. 

I understand, Mr. White, you are not going to make a statement 

but you are prepared for questions. 

Mr. WHITE. Actually, I had a statement. 

Chairman REED. Well, then, please. 

Mr. WHITE. I had a short statement to fill in the details than 

Conrad had laid out. 

Chairman REED. Please fill in the details. Go ahead, sir. 

STATEMENT OF JOHN W. WHITE, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION 

Mr. WHITE. Thank you also for the opportunity to testify before 

you today. I am the Director of the Division of Corporation Finance, and we are the group at the SEC responsible for overseeing 

disclosures of domestic and foreign reporting companies in the 

United States. And what I wanted to do was describe the two releases that the Commission put out this summer regarding the poVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A361.XXX A361

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tential use in the U.S. capital markets of international reporting 

standards as published by the IASB. And I particularly underline 

as published by the IASB. 

First, a proposal was issued in July to allow foreign private 

issuers to use IFRS financial statements without a U.S. GAAP reconciliation. Under the Commission’s current requirements, foreign 

private issuers have two alternatives when preparing their financial statements. They can either prepare them under U.S. GAAP 

or, alternatively, they can prepare them under IFRS or under a national GAAP, and provide in either of those cases reconciling information to U.S. GAAP. That was the first release. 

Second, in August, the Commission issued a concept release to 

explore a more far-reaching project, and that is the possibility of 

giving our own domestic issuers the alternative of preparing their 

financial statements using IFRS. Today, of course, domestic issuers 

may only use U.S. GAAP. 

The comment period on the foreign private issuer proposal ended 

in late September. The comment period on the U.S. issuer concept 

release is actually still open and closes in mid-November. 

These releases address the core policy issue of what role, if any, 

the use of IFRS should play in the U.S. public capital markets. And 

with any policy issue, any policy decision like this, a determination 

requires that we give due consideration at the Commission to both 

the benefits and the costs. 

In all of the Commission’s work to date, a consistent premise has 

been that investors are better served by having available highquality financial information across issuers, regardless of their 

domicile. This obviously aids investors in making informed decisions in allocating their capital among competing alternatives. Investors also benefit if the costs of compliance are reduced for 

issuers entering and staying in our capital markets, as this opens 

up additional investment opportunities. 

Of course, adjusting to a new set of accounting standards also 

presents issues to consider. With respect to the foreign private 

issuer proposal, investors would be required to work with IFRS financial statements directly without the benefit of U.S. GAAP reconciliation. But the impact of this loss of reconciliation depends 

both on the extent to which investors are currently using that reconciliation and also the extent to which U.S. GAAP and IFRS continue to differ. 

The impact also depends on the number of issuers who are actually using the alternative. And just to give you a few numbers to 

work with as we proceed today, currently there are approximately 

110 foreign private issuers who prepare their financial statements 

using IFRS as published by the IASB and, therefore, would be eligible for the proposal that was put out this summer. There are an 

additional 70 foreign private issuers that prepare their financial 

statements using a jurisdictional adaptation, a jurisdictional variation of IFRS. So it is that 110 and the additional 70. 

The additional 70 would be eligible if they were able to state that 

their financial statements were prepared in accordance with IFRS 

as published by the IASB. But I suppose we should also look a little bit ahead because, between now and 2011, there are a couple 

of other jurisdictions who we expect will come online. We have 100 


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foreign private issuers from Israel and 500 from Canada, and as 

Conrad alluded to, they are coming online in the future. 

So that is kind of the two proposals. I guess the only other thing 

to comment on is we have received 120 comment letters, which is 

actually quite a few, so far on the foreign private issuer release, 

and the comment letters are still coming in on the U.S. issuer concept release. We are actively in the process of analyzing those comment letters. They raise a lot of important issues. When we finish 

that review, Conrad and I will be developing a recommendation for 

the Commission, but we still have to finish—well, the letters all 

have to get in, and we have to finish that review. 

So that is really where we stand on the two releases, and I and 

Conrad are ready to answer your questions. 

Chairman REED. Thank you very much. 

Let me begin by echoing the sentiment that Senator Bennett suggested initially. This is not drawing a huge crowd, a throng, but 

this is one of the most important issues that could be decided over 

the next several years because of the centrality of accounting in 

every major business transaction. Many times in transactions it is 

finally the accountant who makes the determination of what can be 

done and what cannot be done—not the lawyer, not even the business leader. And it is critical what you are doing, and we want to 

make sure it is done properly, and that is the purpose of this hearing today. 

Let me follow up, Mr. White, with just the implication of your 

final point. So the universe of issuers that could potentially use 

IFRS without reconciliation, if it is dropped, is about on the order 

of, say, 700 or 800 or so. Is that—or, alternatively, do you see a 

big use of IFRS alone without reconciliation? 

Mr. WHITE. Well, just in total numbers, there are about 1,100 

foreign private issuers. I think our assumption would be that most 

foreign private issuers that were eligible to report without reconciliation would do so, although, in fact, we do have some companies that report in IFRS in their own jurisdictions and still report 

in U.S. GAAP in the United States. 

Also, that 500 number from Canada, a large number of the Canadian companies report directly in U.S. GAAP and do not go through 

the reconciliation process today. I do not know that I would assume 

that they would switch. 

Chairman REED. One of the issues of having accounting standards is comparability between issuers, and an obvious question is 

if you have some that are reporting in IFRS, which is not yet fully 

reconciled with GAAP, how much more difficult is it for investors 

and analysts to make judgments between companies that are reporting with different accounting schemes. I presume there would 

be some cases of material differences the way the accounting is 

treated. 

Mr. WHITE. I mean, there certainly are today differences between 

IFRS and U.S. GAAP, but if we just kind of step back for a second, 

obviously the goal here is a single set of high-quality global standards. 

What we are talking about in terms of eliminating the reconciliation requirement is having a period of time when there would be 

two sets of accounting standards for foreign private issuers in the 


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United States. They would both be high-quality standards, but 

there would be two different sets. The purpose, obviously, even 

though it applies to a pretty small group of companies, would be 

to allow U.S. investors to get familiar with IFRS directly to foster 

more understanding of it, and certainly I think to allow the infrastructure to build. There have been references, I think in your 

opening remarks, about the colleges and the schools and all. But, 

I mean, we are talking about initially less than 200 companies out 

of, you know, a total, I think, of 11,000 public companies that report in the United States would be doing this. So it is kind of an 

opening step. 

Chairman REED. Let me ask a final question, and then I want 

the panel to comment on sort of the more general issues that we 

have been discussing. Would you consider any special disclosures— 

not full reconciliation but special disclosures for these companies 

that are now reporting exclusively in IFRS? 

Mr. WHITE. One of the questions that was asked in the proposing 

release was whether if companies did not provide reconciliation, 

whether we should have additional disclosures about the differences, the principal differences. So that is one of the questions 

we have asked and we will get comment on and consider in the 

process. 

Chairman REED. Let me just go down. Mr. Hewitt, there are a 

couple, I think, very obvious issues. One is the consequences of 

dropping reconciliation, both good and bad, or the costs and benefits, as Mr. White described them. And second would be the timing 

issue. I mean, there is a good deal of opinion that is saying this 

is a fine idea, once the convergence has been completed between 

the international accounting standards and GAAP standards, and 

that has not occurred yet. 

So could you comment on your view of what the consequences, 

both good and bad, are and also the issue of timing? 

Mr. HEWITT. Yes, Senator, I would be very happy to. Lifting the 

reconciliation, right now the foreign issuers, the information that 

they file with us on reconcilement items are approximately 7 

months old. So it is not very timely information. And the sophisticated investors understand the differences between U.S. GAAP and 

IFRS when they analyze these 100-plus companies. 

The timing difference, it will take some time for everybody to understand what is happening on lifting the reconciliation, but we believe that there is enough information and disclosure in these financial statements that an investor will be able to understand 

these differences. And we have differences within our own U.S. 

GAAP that investors, sophisticated investors, can understand those 

differences. The average retail investor probably cannot. So the differences are not that large, and eventually there will be convergence of these differences. 

Chairman REED. Mr. Herz, the same two questions basically: 

your view of what the consequences are, both good and bad, for the 

elimination of reconciliation; and, also, is it a good idea but its time 

has not yet come? 

Mr. HERZ. I think that the benefits are potentially bringing more 

people into our capital markets, more foreign companies, and that 

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ices industry. It may be thought of as a good thing in bringing 

them into a system that is more investor protection oriented, as 

well as that. So if it does actually encourage more people to come 

to our markets, there would be that benefit. 

I think it would have a benefit also, as John said, of people in 

this country beginning to learn a little bit more about IFRS. It 

would be the beginning of that effort. And I think the important 

thing is that if you go to other parts of the world that are supporting the convergence movement and the setting up of a global 

system, there are questions, have been questions outside of our 

convergence efforts as to whether the SEC is truly committed to 

having the U.S. go into a global system, because there have been 

many kind of starts around times, you know, back to the 1990’s, 

a few other times, when it was deemed that it was too early. And 

I am not saying that now is definitely the right time, but people 

outside the U.S. have been skeptical as to whether or not, you 

know, we really truly want to become part of that system. 

I think the costs of it are that there clearly are some investors 

and other users of information that do use that information. Even 

though it does arrive late, they do use it. That seems to be mixed 

among investors. There are some investors who are very comfortable already with IFRS, who already analyze global companies 

that are used to it and the like, and they do not need the reconciliation in their view. But there are others that want to see things 

put on an apples-to-apples basis. And as we have commented, there 

still are differences, and some of those differences can be significant to individual company results and the like. 

I think that, as I said in my remarks, all three organizations 

here are clearly committed to continuing the road to get to a single 

set of high-quality standards across the world that, you know, 

blend the best of the two sets of standards, and sometimes we develop something new, often. But there are people in other parts of 

the world that, you know, for them the end of the road has been 

getting the reconciliation removed. They have viewed that as kind 

of, you know, the easier passport into our capital market, the most 

cost-effective one, and are not that keen on the convergence with 

the U.S. continuing, in part because they believe that the U.S. system—I am not going to make a normative judgment as to whether 

it is right or wrong with the litigation, everything else, you know, 

that we are almost like an infecting agent into a system that they 

would prefer versus our approach. I do not happen to agree with 

that, but that is a view, and you do hear it when you go over to 

certain parts of the world. 

That is why I said in my comments that I think it is just important that it be made clear that this is not the end of the road. If 

the SEC does remove the reconciliation requirement, this is a move 

toward the end of the road, but there is a lot more work to be done 

to get to the ultimate goal. 

Chairman REED. Thank you, Mr. Herz. 

Sir David, I do want to ask the same question, but my time has 

expired, and I am going to call on Senator Allard. But we will have 

a chance at the end of his comments and Senator Bennett’s comments. 

Senator ALLARD. Thank you, Mr. Chairman. 


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I want to clarify. How many companies are currently subject to 

requirements to reconcile their statements to U.S. GAAP? 

Mr. WHITE. There are about 1,100 foreign private issuers. 

Senator ALLARD. Oh, 1,100. 

Mr. WHITE. Yes. Now, some number of those in a number of 

countries already, they report in U.S. GAAP so that they have the 

option of reporting in a foreign GAAP or the U.S. GAAP. 

Senator ALLARD. Right. 

Mr. WHITE. I do not actually have that number—about 200 report directly in U.S. GAAP, so I guess it would be about 900 reconcile. 

Senator ALLARD. Nine hundred that actually reconcile. 

Mr. WHITE. Today. 

Senator ALLARD. Well, how many new U.S. listings could we expect to see with the elimination of reconciliation? Do we have any 

idea—particularly given the fact that the EU has pushed back 

against the requirements to use international standards as written 

by IASB. 

Mr. WHITE. I would not have thought that we were expecting any 

significant increase in the number of U.S. listings. One of the 

things we did last summer was adopt a de-registration provision 

that actually allowed foreign private issuers to de-register, and we 

have had, I think, about 70 foreign private issuers actually have 

de-registered since that rule went into effect in June, which got us 

down to the 1,100. I suppose the number could go up somewhat, 

but I would not have thought it would be—— 

Senator ALLARD. Have you or has anybody done an analysis on 

the elimination of the reconciliation requirement, what would happen, other than what you just stated? Have you gone any further 

than that? 

Mr. WHITE. You mean an analysis of whether there would be additional listings. 

Senator ALLARD. Yes. 

Mr. WHITE. No, I do not believe we have. I mean, understand 

that certainly one of the benefits of eliminating reconciliation 

would be—could be either additional listings or companies not delisting. But our important drivers for this are not just that issue. 

What we are really focusing on is having the opportunity for U.S. 

investors to be able to look at foreign companies using a single set 

of—the ultimate goal of having a single set of accounting standards. And this is all driven toward the ultimate goal of one international set of standards. 

Senator ALLARD. I understand that it is getting to this ultimate 

goal. That sounds great. But when we get there, then we could be 

giving foreign countries that understand this a choice of one system 

or another, where American companies may not have that choice. 

How would that impact behavior, particularly among American— 

I mean, do we create an unfair competition because one set of companies that are foreign can use maybe a lesser standard than what 

is required of American companies? 

Mr. WHITE. Well, if the foreign company were still using—I do 

not know, I will call it Antarctica GAAP, they would have to reconcile to U.S. GAAP. I mean, the only companies that we are talking about—— 


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Senator ALLARD. Yes, but we are not talking about eliminating 

reconciliation—— 

Mr. WHITE. I am sorry. We are talking about eliminating reconciliation only with respect to companies that follow the IFRS 

standards as promulgated by the IASB. 

Senator ALLARD. I see. 

Mr. WHITE. Not foreign issuers that follow the GAAP of Antarctica or whatever their country is. 

Senator ALLARD. So that would be a very limited number of companies that would be involved to start with, and those countries 

that have a modification of the international standards would not 

be included. 

Mr. WHITE. Correct. The initial numbers I was giving there, 

today there are 110 companies that would be eligible. There are another 70 that follow IFRS with a jurisdictional adaptation. 

Now, when they follow a jurisdictional adaptation, they may still 

be able to—they may still be following the IASB version so that 

they would be able to have their—they would be able to certify and 

have their auditors certify that what they actually did was the 

IASB version, so that some of those 70 may be able to come into 

the U.S. as well—excuse me, would be able to eliminate reconciliation as well. Is that clear or—— 

Senator ALLARD. I think we are getting you down on the record, 

and we may have more questions later on on that. 

You know, I wonder about our educational requirements. In this 

country, accountants take a great deal of continuing education, and 

I do not know how other countries—what kind of requirements 

they have on their accountants and their continuing—and here in 

this country, a lot of that is licensing that falls under the various 

States and what-not, and then, again, do we currently have an educational infrastructure in place for a rapid switch to the IFRS? 

Mr. WHITE. Since I am the only lawyer up here, maybe I 

should—we should ask the accountants. 

Senator ALLARD. Well, yes, and I think on that question maybe 

everybody should try and answer that question and see. I want to 

see how our continuing education matches in, or are our accountants prepared to work with the new system, and those accounts in 

other countries, would they be prepared to go with our system, to 

know about our system. 

Mr. HERZ. A couple of thoughts on that. 

First, a lot of other countries have gone through this exercise, 

and a lot of materials have been developed in those countries, just 

on IFRS, a lot of it by institutes, by the IASC Foundation, by the 

major accounting firms. So I think that is available, but it has not 

yet been embedded in our educational system, and that is, again, 

one of the reasons that I think we need this blueprint and some 

timetable that is, you know, specific and also reasonable to get 

these kinds of things accomplished. 

I think there is another issue and it kind of goes to Senator Bennett’s comments about, you know, rules based versus principles 

based. While I do not completely accept that dichotomy, we do in 

this country like to have lots of guidance and lots of detail. And we 

have it, whether it comes from us or the SEC or the accounting 

firms or what else. And this will require a little bit of a cultural 


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and mind shift a little bit. That is one of the reasons that Con 

Hewitt and I were very much in favor of what has now become the 

SEC Advisory Committee on improving our financial reporting system to look at some of these issues in our own system as to what 

drives that perceived need for all sorts of rulings, detail, and the 

like. And that is also going to probably come up with some recommendations that may hopefully have some impact on our ability 

to be able to deal with a less detailed system of less specific guidance and the like. But it will be a challenge. 

Senator ALLARD. You know, when we went through this period 

where we had a number of companies have accounting problems 

that began to impact the markets, you know, the Congress felt like 

they needed—in particular, this Committee I think felt they needed 

to do something, at least this one member did, felt we needed to 

do something to try and bring confidence back to the market. 

I am one who does not like to see a lot of rules and regulations. 

I like to rely on the professional. But in this particular case, the 

professional fell short. At least in a few instances, it kind of reflected totally on the whole profession as well as the attitudes on 

the market. 

I would like to see us get more to the general concept, but, you 

know, it seems like consumer confidence rests much more on rules 

and regulations than perhaps we have, you know, had to in the 

past prior to those instances. 

How do we ensure that movement does not outpace the ability 

of the accounting industry to keep up? How do we ensure that? Do 

we make sure we put the schedule in with plenty of leeway in it, 

or what have you got in mind on that? 

Mr. HERZ. I am just calling for a plan to be put together, to get 

the right people together and put the plan together and agreed to, 

and think about it, you know, in an orderly, complete way. You 

know, I could probably think of 10 or 15 broad things that need to 

get thought about as we contemplate this move, and there are 

probably other people from their point of view in companies, in the 

accounting industry, who would say we also need to think about 

this and that. 

So I am always good at calling for plans. I am not so good at developing them. 

Senator ALLARD. My time is running out here. Would you list for 

me, and response back to the Committee, you know, 10 or 15 

things, broad things that you would consider? Unless you have 

got—— 

Mr. HERZ. Yes, there are a lot of them in my detailed written testimony. 

Senator ALLARD. OK. We have got it. Good. 

Chairman REED. Thank you very much. 

Senator Bennett. 

Senator BENNETT. Thank you, Mr. Chairman. 

Let’s get practical now for just a minute. I am an investor and 

I have interest in a company, and I get two sets of books—one 

under GAAP and one under is it fair to say. What is the first thing 

I am going to notice in terms of the differences between the two? 

Mr. HEWITT. I will start this. When you get your annual report 

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ment of all the differences, material differences, although some 

companies put immaterial differences in their reconcilement. Sometimes there may be only two items of reconcilement items, sometimes there may be a dozen items. And those reconcilement items 

are explained as they pertain to U.S. accounting standards. And 

when you get done with those reconcilement items, you are going 

to end up with a different number for the net income or loss than 

you started with under IFRS. However—— 

Senator BENNETT. Is it going to be higher or lower? 

Mr. HEWITT. Sometimes both. I have reviewed a number of these, 

and sometimes they are both ways. And over a period of time, if 

you take a snapshot today and look at it today, because of the differences in how a company uses capitalized items versus expensed 

items, over a period of time, 5 years, there may not be any difference. If you just take 1 year, yes. If you go over a number of 

years, those differences tend to come out to zero, just as they do 

in U.S. GAAP when a company has different alternative methods 

of depreciation or anything else. 

Senator BENNETT. OK. So it will be the allocation of long-term 

costs, appreciation and amortization. Let’s talk about cash-flow. 

One of the things that I want to look at is EBITDA. Will EBITDA 

be different? 

Mr. HEWITT. EBITDA would be different since that is earnings 

before depreciation, interest, and taxes, and the recording of those 

items under IFRS may be different than they do under U.S. GAAP. 

So you may have a different EBITDA, yes. 

Senator BENNETT. OK. And it may be higher and it may be 

lower? 

Mr. HEWITT. May be lower. But over a period of time, I personally think they equate out. 

Senator BENNETT. All right. U.S. taxes, we have seen examples 

where the books kept for tax purposes are different than the books 

kept for reporting purposes. And that was part of the fight we had 

over the issue of expensing stock options and how you value that. 

That continues to be a very fertile field for accountants and lawyers to earn their fees. 

How would the IFRS deal with U.S. taxes differently than 

GAAP? 

Mr. HERZ. The two current standards are very close. The basic 

principles are the same. The problem is we have had a few exceptions in each standard, but they have been different exceptions, 

and we now have a project which we are close to issuing a document on that either eliminates the exceptions or has the common 

one, so the standards will be the same. 

Senator BENNETT. OK. Stepping back from the particulars, if Sir 

David has formed a company and puts out a prospectus and it is 

in both forms, and I start looking at that prospectus, assuming that 

his superior management will be there on both forms, am I likely 

on the one form to say this is a good deal and on another form to 

say, gee, I better not put my money in it? Or will you come close 

enough in both of them that you will arrive at basically the same 

decision? 

Mr. TWEEDIE. Well, since this is my company, perhaps I should 

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tween U.S. GAAP and international standards, and that has been 

the whole thrust of our program, and we took them from the reconciliation. That is how we started off under the Norwalk Agreement. We listed all the major issues, income taxes. There were others such as the fair value option, joint ventures, and so on. We 

worked right the way through, and what we did to start with is we 

just eliminated the differences. That was going to take a huge 

amount of time if we went through every single detail, down to 

2015. 

And then what I thought was a real inspiration from the SEC, 

when we called this together about 2005, 2006, we thought, well, 

how can we do this faster? And we decided what we would do, 

there were certain things that we could change very quickly. Basically the standards were the same, but there was some principle 

that was not quite the same. Well, why don’t we just take the better principle and we would do it? So that locks another lot out, and 

we have done that more quickly. 

We were then left with ten areas where sometimes there are differences and sometimes there are not, but we know exactly where 

they are. And we can highlight that, and we can explain what the 

policy is. For example, in consolidation, internationally we base it 

on control. If you control something, you consolidate. The U.S. 

tends to be more do you have majority equity shares. Well, we 

think it is broader than that, and that is part of the issue that we 

are working with FASB on. 

Leasing, for example, the good news is that we have very similar 

standards. The bad news is they do not work. They are hopeless. 

[Laughter.] 

And nothing is on the balance sheet if it is leased. One of my big 

ambitions is to fly an airplane. It is actually on an airlines balance 

sheet. And the reason it is not is because the standard really was 

written 20-odd years ago and does not reflect the economics. You 

know, if you have a legal commitment to pay, that is a liability. 

And when you think leases a year ago amounted to $582 billion, 

and that is just for 1 year, and most of that is off balance sheet. 

Now, Bob—— 

Senator BENNETT. It sounds like Enron. 

Mr. TWEEDIE. Well, it has been there for years, but, you know, 

that is one actually we both get exactly the same answer, which 

is nonsense. And what we are trying to do now is work a joint 

standard, and we were discussing that just yesterday. We will come 

out with a joint standard when we will move from not showing any 

leases to showing almost all of them on balance sheet. 

So while we have ten major differences between us, some of them 

really—not so much ten major differences. Ten major projects. 

Some of them do not lead to differences, and the other ones we 

know exactly what the differences are caused by, and that can be 

disclosed. So there is, if you like, a flag for the investor. 

Senator BENNETT. So the bottom line—this is what I am driving 

toward. The bottom line is an analyst or an investor who tries to 

do his own analysis can, in fact, understand enough about the differences so that he or she will come to basically the same decision 

regardless of which set of accounting terms looking at—the educational process that you have been talking about necessary to 


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equip the analyst with the skills to dig into a corporation under 

IFRS are not that difficult to acquire, and the analyst will be able, 

with a little bit of study to say, OK, it is a slightly different pattern, but I can get the same information I want if I am focused on 

EBITDA, I know what it will mean; if I am focused on some other 

aspect or valuation of what the market cap really ought to be, I can 

get those data out of this new set without having to go back to 

school for 2 or 3 years in order to understand it. 

Is that a safe assumption? 

Mr. TWEEDIE. You will not get exactly the same data in the sense 

without doing the accounts twice, but what you will get is you will 

get very similar answers, which are getting more and more similar 

as time goes by. And the second thing you will know is the fact 

there may be a difference in this area. Take, for example, consolidations. One of the big issues that we have had—and Enron was 

a classic—was special purpose entities, and now with the credit 

crunch we have got conduits. How do we handle those things? The 

U.S. handles it in a rather different way from us. We look at do 

you control this. 

In the aftermath of Enron, the U.S. brought out 46R, which is 

a method of looking at what are the benefits you are getting out 

of this thing. Well, we think that is worth exploring, too. 

So we are trying to produce a joint standard which will look at 

maybe the central theory should be control. But what happens if 

you do not control? Can we make sure you get it? 

So you will not yet get exactly the same answers, but that does 

not mean to say that the IASB answer is better than FASB’s. It 

is in some situations and maybe not quite so good in others. But 

the idea is we merge and get the best of both worlds, and that is 

actively going on at the moment. So it is going to get less and less, 

the differences. 

Analysts in Europe must have had quite a job because, while 

IFRS and U.S. standards are similar, when you looked at some of 

the continental European standards, they were totally different. So 

there was a complete mind-set’s change from looking at tax accounts or accounts based for creditors to accounts based for the equity markets, which is the way we do it and the way FASB does 

it. 

So I think the differences are not as bad as people think they 

are. The U.S., in fact, will be better equipped than most countries 

to deal with this. 

Senator BENNETT. Thank you. 

Chairman REED. Thank you, Senator Bennett, and let’s take a 

brief second round. 

Sir David, you pointed out the butting of jurisdictional versions 

as a potential difficulty in reconciling and totally converging. And 

even within the EU, most of the countries are not—or all of those 

countries are not using the precise standards promulgated by the 

International Accounting Standards Board. Is that correct? There 

are some changes that they have mandated? 

Mr. TWEEDIE. Well, it is very small. It is about seven paragraphs 

of one standard in 2,000 pages of standards. 

I think what has happened, we are a rather unusual organization in the sense we are modeled on the FASB, we are indeVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\A361.XXX A361

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pendent, we can issue standards as we decide upon them. That is 

not normally the way we deal internationally with treaties and 

laws. People like yourself, sir, would meet with opposite numbers 

in different countries, and you would come to an iterative compromise, and that would be the international rule. 

We do not do that. We just listen to the arguments and say that 

is what we think the answer is. And we do give—after we have 

issued the standards, we then give—2 years later there is still lots 

of antagonism toward it. We will look at it again, but do not necessarily agree to change it. 

Now, one of the things then is that jurisdictions are suddenly 

saying, well, wait a minute, these people are actually passing laws 

and we are having to take them and what right have we to say 

this. 

So I think what is starting to happen is an issue of is the present 

structure suitable without giving, say, the U.S. a say in the composition of our trustees or Europe. At the moment you have not. 

The trustees, like FASB trustees, are self-elected. They replace 

themselves, their successors, and it is geographic. But, nonetheless, 

as far as jurisdictions are concerned, there is no actual direct influence. And one of the big questions then is: Should there be some 

governance body that actually helps to appoint the trustees and 

representatives from different countries and so on, so that people 

have more say—but not to control the standards, because otherwise 

we will get, if I may say so, political influence into the standards, 

and that would be an appalling thing, as I am sure you would 

agree, sir. This is the—— 

Chairman REED. That is why we have FASB. 

Mr. TWEEDIE. This is the issue I think that has still to be discussed. 

Chairman REED. So there is a simultaneous effort to really make 

this work, is to get all countries to adopt the version promulgated 

by the International Accounting Standards Board, and that has to 

go on, too, because as Mr. White and everyone has pointed out, the 

jurisdictional varieties will not qualify for special treatment under 

the proposal. 

Mr. WHITE. Yes, that is correct. Just to clarify, if you remember, 

I mentioned 110 and 70. The category of companies that are in the 

category of the 70, they are not in most cases—in fact, I think in 

all cases, they are not required under the jurisdictional adaptation 

to follow that jurisdictional adaptation. There tend to be more different options that they can follow. But they can follow the IASB 

version. And so if they—they can still report—they can still eliminate reconciliation and come here if they certify that they are following the IASB version. 

Chairman REED. Right. Just a final point, and Sir David brought 

up in terms of in the aftermath of Enron, there was special attention to what is described as variable interest entities now. And I 

understand—and going back to the whole issue of reconciliation— 

that that is one of the items that is included in a reconciliation by 

a filer who is using international antitrust standards. Is that correct? Mr. Herz? 

Mr. HERZ. There are a few areas of difference. We have a standard interpretation of 46R that has principles and then has below 


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it a bunch of guidance, as we do, that is an approach that basically 

says if nobody seems to control that entity, because one of these vehicles that has been set up, you have to do an analysis of all the 

arrangements and decide based on that whether there is a party 

that gets a majority of the risk and/or reward. And then if you cannot do that qualitatively, it lays out a quantitative approach to 

doing that. The international standard is based more on control, although they do have some risk and reward type backstops in it, but 

it is a lot less specific. 

On the other hand, we have significant differences in the accounting for securitization transactions; whereas, I would argue 

theirs are actually tougher than ours in order to get something off 

the balance sheet than ours. So I think the things could go either 

way depending upon the particular transaction and structure. But 

it is something we are—it is on our hit list of things—— 

Chairman REED. Well, I think it should be, and just two final 

points. First, Senator Bennett talked about looking at, you know, 

apples and oranges and saying, well, I know it is an apple, I know 

it is an orange, and I feel good about making my investment. The 

problem is looking at an apple and discovering later on you have 

got bananas that you did not think of. 

Mr. HERZ. You know, I said on balance I support the SEC dropping the reconciliation, but there are pros and there are cons to it, 

and one of the cons for some investors—and I think you may hear 

this in the next panel from some of the people—is they do use that 

information, and it will force them to either do more work or they 

may not be able to quite put apples to apples without a lot more 

work. 

Chairman REED. Well, I think the goal is one that we all can embrace, which is convergence of standards, transparency, all of the— 

but I think this panel has very adroitly and elegantly indicated 

that there are some significant steps along the way that have to 

be taken before we are quite there. Again, we will participate, we 

hope, in that process in a positive way. 

Senator Allard. 

Senator ALLARD. Thank you. I just have three brief areas I want 

to bring up. I want to finish my discussion a little bit about regulation and everything. There are a lot of medium-sized firms in the 

State that I represent, and I think, you know, if they are interested 

in growing their business, the next step is into a larger firm. And 

they are concerned about how this is ever going to get to be a large 

firm. Will these provisions that we are talking about here make it 

more difficult for those medium-sized firms to transition into a 

larger accounting firm, wherever that bright line is? Anybody want 

to comment on that? 

Mr. TWEEDIE. I wonder if perhaps I could just mention something 

briefly. When people switch to IFRSs, they tend to use IFRS for 

listed companies. And then comes the question of—— 

Senator ALLARD. Those are large companies? 

Mr. TWEEDIE. Large companies. For Europe, for example, there 

are 8,000 listed companies which use IFRS—that is compulsory— 

of which, I may say, only about 30 use the carveout that is existent. The rest all use pure IFRS. 


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What we have done for the smaller companies is we have taken 

the standards and then sort of said, well, if we were a small company, how could we apply this? And we are putting out—we have 

got a draft out at the moment on what we call IFRS for small and 

medium enterprises, and it is probably about 15 percent of the size 

of the full standards. We have really slashed them down. 

On the other hand, if you do grow, you are basically obeying the 

same sort of principles but in a simplified form, so there is not a 

massive cliff that you go off when you reach the listing, or whatever. And that is up to the jurisdiction how far they push it. Some 

will push IFRS down into the medium size, others will not. But 

there is an alternative coming up, which is derived from the main 

standards, and that is what is going to be used in many countries 

of the world. 

Senator ALLARD. Thank you, Sir David. 

The other subject I wanted to participate in here, the Congress 

has charged several agencies with specific rights and responsibilities—the SEC, the PCAOB, and FASB—and we also designate the 

fees to support the setting of accounting standards. 

Now, do you have any concerns that convergence will involve deferring some of those responsibilities or fees to foreign organizations? And do you believe that you will need congressional authorization to make any of these changes? This is to the whole panel. 

Mr. HEWITT. That is a very interesting question because the support fees of FASB are paid by the registrants and then also the—— 

Senator ALLARD. But set by the Congress—no, no, I am sorry. 

Yes, we designate the fees. 

Mr. HEWITT. That is true. And I believe that there will be no decreases in fees because of lifting the reconcilement, that type—I do 

not see any material effect at all upon both standard setters, 

PCAOB and FASB, in terms of fees. 

Senator ALLARD. Yes? 

Mr. HERZ. I think that is right. I think long term, you know, one 

of the things that David mentioned is that their trustees are trying 

to put in place a mandatory funding scheme for them across the 

world, which would, I think, you know, give them more security financially and be able to bolster their staff and the like. And, you 

know, ultimately if we are going to be part of this system, I think 

we would want to also bear our fair share of that, whether that 

would be by taking some of our fees, saying, you know, that is directed to you working with the IASB, which we do already, or it 

is a separate fee and, of course, ultimately what our organization 

would look like, you know, down the road might change as well. 

So whether that would—I do not know whether that would take, 

you know, you all having to do something with Section 109 basically of the Sarbanes-Oxley Act or something that the SEC could 

do regulatorily, I am rapidly getting out of my depth as a non-lawyer. 

[Laughter.] 

Mr. TWEEDIE. Just on that point, perhaps I could mention that 

the program of funding for the IASB, when we started, we were 

very fortunate to have Paul Volcker as the Chairman of our trustees, and saying no to Paul is very difficult. And he certainly asked 

many companies to contribute on an individual basis for the first 


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5 years, but that was unsustainable. And what we are doing now 

is the trustees are working out a funding program which is based 

on the GDP, and the countries are being asked to provide their 

share. Now, they are doing it in different ways. The U.K. and the 

Netherlands I think are doing it very similarly to you in the United 

States by sort of a listing fee. In Australia, they are collecting 

money for the national standard setter and diverting some to us. 

Japan simply is approaching individual companies, but as an organization and then passing money up to it. So it has been done in 

various ways, but the idea is to make thousands of companies involved in this rather than as it was before, 200 or 300. 

Senator ALLARD. Yes, I think there was some concern or conflict 

of interest when you go to those people you are trying to regulate 

to support you financially. 

Mr. White. 

Mr. WHITE. Just to answer your question directly, we do not believe there would be any required legislative changes to do the 

things we are discussing. And, also, the SEC will continue to be the 

organization that is responsible for all of the financial reporting by 

foreign and domestic issuers in the U.S. 

Senator ALLARD. Thank you. 

Mr. Chairman, that concludes my questions. 

Chairman REED. Thank you, Senator Allard. 

Gentlemen, thank you very much, and there might be additional 

questions which we would direct to you in writing, and we would 

ask for your responses in a timely manner. Thank you very much. 

I will call forward the second panel. 

Our first witness is Mr. Jack Ciesielski, who is the owner of R&G 

Associates, Inc., an investment research and portfolio management 

firm located in Baltimore. He is the publisher of the Analyst Accounting Observer, which is an accounting advisory service for security analysts. He is currently a member of the FASB’s Emerging 

Issue’s Task Force, and a member of FASB’s Investor Technical Advisory Committee. 

From 1997 to 2000, he served as a member of the Financial Accounting Standards Advisory Council, which is the advisory body 

that consults with the FASB on practice issues and advises FASB 

on setting its agenda. 

Ms. Teri Yohn is an Associate Professor at the Kelley School of 

Business at Indiana University. Prior to joining Indiana University 

in the fall of 2007, she served on the faculty of Georgetown University for 15 years. Ms. Yohn also serves as the Academic Fellow in 

the Office of the Chief Accountant at the Securities and Exchange 

Commission in 2005 and 2006 and on the faculty of the University 

of Massachusetts at Amherst in 2006 and 2007. 

Mr. Charles Landes is Vice President, Professional Standards 

and Services for the American Institute of Certified Public Accountants. In this capacity, he oversees the technical activities of the Auditing Standards Board, Accounting and Review Services Committee, Accounting Standards Executive Committee, and the PCPS 

Technical Issues Committee. 

Mr. Landes is a former member of the Auditing Standards Board 

and is a former chairman of the Peer Review Committee of the Private Companies Practice Section. 


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Mr. Lynn Turner serves as a Senior Advisor to Kroll Zolfo Copper, a firm specializing in corporate advisory and restructuring and 

forensic and litigation. He was appointed by the Department of 

Treasury to the Advisory Committee on the Auditing Profession. 

Mr. Turner served as the Chief Accountant of the SEC from July 

1998 to August 2001. As Chief Accountant, Mr. Turner was the 

principal advisor to the SEC Chairman and Commission on auditing and financial reporting and disclosure by public companies in 

the U.S. capital markets as well as the related corporate government matters. 

Thank you all for your willingness to join us today and for your 

testimony. Your testimony will be made part of the record, your 

written testimony. So feel free, in fact I would encourage you, to 

summarize your comments and see if we can approach the 5- 

minute mark. 

Mr. Ciesielski, please. 

STATEMENT OF JACK CIESIELSKI, PRESIDENT, 

R&G ASSOCIATES 

Mr. CIESIELSKI. Thank you, Chairman Reed, Ranking Member 

Allard, members of the subcommittee—— 

Chairman REED. I think you have to turn the microphone on. 

Mr. CIESIELSKI. That is better. 

Chairman Reed, Ranking Member Allard, and members of the 

subcommittee, I am pleased to be offering testimony today on the 

subject of international accounting standards. 

From the start, I would like to commend the SEC for trying to 

move the world’s two leading accounting standard setters closer together. The two have made a remarkable amount of progress in the 

last 5 years, since they announced their intention to work together 

on converging their standards and coordinating their efforts on future projects. 

It is the SEC that is an agent provocateur, however, by issuing 

its proposal to eliminate the IFRS to GAAP reconciliation and its 

proposal to allow U.S. companies to choose between U.S. GAAP and 

IFRS. While convergence has progressed well in the last 5 years, 

these proposals have such broad implications that they force all 

players to rethink what is possible or not possible in the current 

environment and in the near future. 

That said, I view the SEC’s proposals as the right questions at 

the wrong time. Much high quality information about the state of 

accounting standard convergence is available from SEC filings. The 

SEC has proposed to eliminate the reconciliations which provide 

quantifiable evidence about the GAAP and the results produced by 

the two reporting systems. Much can be learned about the state of 

convergence from the differences shown in those reconciliations for 

U.S. registrants and targets could then be set for eliminating the 

differences in the relevant standards. 

There is no indication in either of the SEC’s proposals that there 

has been an examination of the existing evidence. Instead, the SEC 

is relying heavily on the fact that there is a process in place for 

convergence to occur in the future without objectively assessing 

how far the convergence of the two systems have progressed. 


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I would not smoke three cigarettes a day because there is a process in place for discovering a cure for lung cancer. It seems a little 

bit—maybe that is an exaggeration, but it is relying heavily on an 

outcome that has not been determined yet to make sure that everything is OK today. 

I support the convergence efforts of the two standard setters and 

I believe that the investors and capital markets would benefit enormously from a single set of high quality standards. At this time, 

however, I do not believe there is sufficient convergence between 

the two sets to warrant either the elimination of the IFRS to GAAP 

reconciliation or to allow U.S. registrants the choice of which accounting standards to use. 

I urge the Commission to isolate the past differences arising from 

non-converged standards having long effects on the future reporting and to develop the proper disclosure for such differences. I also 

urge the Commission to examine the other differences produced by 

the application of the two sets of accounting standards, identify the 

accounting literature responsible for those differences, and work 

with the IASB and the FASB to set realistic deadlines for working 

out those differences through the convergence process. 

That concludes my prepared remarks. 

Chairman REED. Thank you very much. 

Mr. Landes, please. 

STATEMENT OF CHARLES LANDES, VICE PRESIDENT, 

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

Mr. LANDES. Thank you, Chairman Reed, Ranking Member Allard. My name is Chuck Landes and, on behalf of the 340,000 

members of the AICPA, the National Association for Certified Public Accounts, it is my pleasure to testify today, and thank you for 

holding his hearing. 

I want to state as directly as possible that the AICPA supports 

the goal of a single set of high quality, comprehensive accounting 

standards, to be used by public companies in the preparation of 

transparent and comparable financial reports throughout the 

world. 

The debate or question should no longer be whether we move to 

convergence of high quality accounting standards, but how soon we 

can accomplish convergence. The FASB and the IASB have made 

tremendous strides in harmonizing accounting standards and the 

SEC has demonstrated U.S. leadership in expediting this process. 

But let’s recognize that convergence is not, nor will it be, without 

challenges and issues. So there is still hard work to be done. 

Will there be bumps in the road as we take this journey? Absolutely. But it is a journey that must be taken. 

Accounting is often referred to as the language of business and 

there is a need for a common global business language, a common 

set of accounting standards. In today’s global economy, that one 

common accounting language will benefit all participants in the 

capital markets. It will first benefit investors because it will facilitate the comparison of financial results of reporting entities domiciled in different countries. It will also benefit U.S. public companies because it will allow them to present their financial statements in the same language as their international competitors. 


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And it will benefit audit firms who audit public companies because 

it will allow them to train their staff around one core set of accounting standards. 

The AICPA supports the SEC’s proposed rule regarding the 

elimination of the reconciliation to U.S. GAAP by foreign private 

issuers and the SEC’s concept release that would give U.S. issuers 

an option to prepare financial statements in accordance with IFRS. 

We believe these are both important steps in the process toward 

the acceptance of a single set of high quality globally accepted accounting standards. 

That is not to say all differences between GAAP and IFRS have 

been resolved. But despite these differences, both U.S. GAAP and 

IFRS promote transparency and are designed to protect investor interest. With respect to the SEC, the AICPA fully supports their 

role of protecting U.S. investors. We encourage the SEC to continue 

to provide input during the IASB standard setting process and to 

solicit user feedback to understand whether these standards meet 

investor needs. 

The AICPA also encourages the SEC to work with other regulators around the world to agree on an appropriate framework for 

the acceptance of IFRS and to work with those regulators to encourage robust enforcement of IFRS. The challenge will be balancing the needs of investors and the needs of the security regulators with one set of global accounting standards. 

In the end, any activity to remove organizational barriers and 

avoid geographical differences ultimately will aid in achieving one 

set of international accounting standards. While this hearing is to 

deal with the acceptance of IFRS financial statements in the SEC’s 

filing of foreign private issuers and granting of an IFRS option to 

U.S. public companies filing with the SEC, the AICPA believes that 

the SEC should view international convergence holistically. That is 

if IFRS are to serve as a basis for U.S. issuers’ financial reporting, 

there will also need to be changes in auditing, regulatory, and legal 

environments. 

With respect to auditing, the SEC, along with the PCAOB, 

should explore convergence of PCAOB auditing standards with 

international standards on auditing. 

With respect to regulatory, because IFRS currently are less detailed than U.S. GAAP, a decision by the SEC to permit an IFRS 

option should carry with it an expectation by regulators and investors that the use of reasoned, professional judgment may yield different outcomes in similar circumstances more often under IFRS 

than U.S. GAAP. 

Additionally, working from less detailed standards and less interpretive guidance may result in more second guessing by regulators 

and users and thereby result in unwarranted increased legal liability for preparers and auditors of financial statements. As a result, 

the SEC should work with Congress and other governmental agencies to explore this potential increased risk and work to mitigate 

this risk when preparers and auditors have applied reasoned professional judgment. 

At the international level, continued progress toward high quality international accounting standards requires an improved fundVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A361.XXX A361

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ing mechanism for IASB that will allow them to remain independent and objective. 

And finally, we acknowledge that we need to fulfill a number of 

responsibilities to make convergence to a single set of global accounting standards for public companies a success. Rest assured 

that we, the AICPA, will meet our responsibilities. 

On behalf of the AICPA, we would like to thank you for the opportunity to appear here today and we would be happy to answer 

any questions that you may have. 

Chairman REED. Thank you very much. Ms. Yohn. 

STATEMENT OF TERI YOHN, KELLEY SCHOOL OF BUSINESS, 

UNIVERSITY OF INDIANA 

Ms. YOHN. Mr. Chairman, Ranking Member Allard, good afternoon. 

I appreciate the opportunity to appear before you today to provide testimony on issues related to the international convergence 

of accounting standards and the potential elimination of the IFRS– 

U.S. GAAP reconciliation requirement for foreign private issuers. 

The views that I represent today are primarily based on my interpretation of academic research on these issues. 

Most, but not all of the academic literature supports the notion 

that convergence of accounting standards is a laudable goal to 

which U.S. standard setters and regulators should strive. In general terms, the purpose of Regulation S–X is to provide U.S. investors with inter-temporally consistent information that is comparable across registrants. To the extent that internationally converged accounting standards increase the comparability of financial 

information, convergence is in the best interest of U.S. investors 

and other stakeholders. 

Convergence of standards is occurring through the joint standard 

setting activities of the IASB and FASB. And academic research 

suggests that IFRS possesses the characteristics of a high quality 

set of standards. Research has documented that IFRS and U.S. 

GAAP are equally value relevant for non-U.S. companies in nonU.S. markets. However, the quality of IFRS in foreign markets is 

not the most important factor in determining whether or not the 

reconciliation requirement should be eliminated in the U.S. Rather, 

the informational needs of U.S. investors should drive this decision. 

Logically, any proposal to eliminate the reconciliation requirement must be based on the premise that U.S. GAAP and IFRS are 

informationally equivalent or that investors can reconstruct comparable U.S. GAAP summary accounting measures from IFRS financial information. Neither of these two criteria appears to hold 

at this point in time. Academic studies have documented that material reconciling items currently exist between IFRS and U.S. 

GAAP and that the reconciliation is value relevant and used by 

U.S. investors, suggesting that U.S. GAAP is more value relevant 

than IFRS in U.S. markets. 

In addition, without the reconciliation, it would be difficult, if not 

impossible, to reconstruct U.S. GAAP income and equity from 

IFRS-based financial statements and footnotes. Furthermore, it 

does not appear that U.S. stakeholders have the necessary expertise in IFRS to understand the differences between the two sets of 


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standards. Universities are still attempting to fully integrate IFRS 

into their curricula, and even the largest accounting firms have revealed concerns about the lack of IFRS expertise within their domestic professional staff. 

The existence of significant reconciling items and the value relevance and use of the reconciliation by U.S. investors, as well as 

the inability to reconstruct the reconciliation from public information and the lack of expertise in IFRS by U.S. stakeholders suggests that the elimination of the reconciliation requirement is premature. It would perhaps be prudent to revisit the issue on a regular basis and to reconsider eliminating the required reconciliation 

where the differences are immaterial and when U.S. investors appear to view IFRS and U.S. GAAP as providing equivalent information. 

Deferring the elimination of the reconciliation requirement will 

also allow regulators to address some of the major challenges of 

convergence. Academic research has documented that institutional 

differences lead to differential implementation of even uniform accounting standards across countries. In addition, while the U.S. 

has the reputation for providing the strictest enforcement of securities markets, evidence on SEC enforcement has concluded that the 

SEC rarely acts to enforce the law against cross-listed firms and 

that there are legal and institutional obstacles to private litigation 

against foreign forms in the U.S. 

Differential implementation of standards across countries and 

differential enforcement of domestic and cross-listed firms diminishes the comparability of financial statements, even with converged standards. Whether or not the reconciliation requirement 

mitigates these issues remains an open question that should be addressed. 

An argument for eliminating the required reconciliation is that 

it would reduce the cost of foreign firms of listing on U.S. markets. 

Research has concluded that U.S. cross-listing provides benefits to 

foreign firms in the form of greater access to capital and improved 

information environment, greater investment protection, and evaluation premium. Despite these benefits, some are concerned that 

the U.S. securities markets have lost their competitiveness in recent years due to onerous requirements. However, existing evidence 

on the New York versus London stock exchanges does not support 

this argument and suggests that the newly cross-listed firms on 

foreign exchanges tend to be small and unlikely candidates for 

cross-listing in the U.S. The research also suggests that the net 

benefit of listing on a U.S. exchange has not eroded in recent years. 

In summary, most of the academic research suggests that the 

convergence of accounting standards is beneficial to U.S. investors 

and is therefore a laudable goal. The research also suggests, however, that the elimination of the IFRS–U.S. GAAP reconciliation requirement is premature because it will reduce the comparability of 

financial statements across registrants and will leave U.S. investors with a diminished set of relevant information for decisionmaking. 

Thank you. 

Chairman REED. Thank you, very much. Mr. Turner, please. 


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STATEMENT OF LYNN TURNER, MANAGING DIRECTOR, 

GLASS, LEWIS & CO. 

Mr. TURNER. Let me just start by thanking Senator Allard for 

those kind and generous remarks at the beginning. I know that in 

the future you will be leaving the Senate. As a citizen of Colorado, 

I know you have done tremendous public service for us and have 

made tremendous personal sacrifice, including your wife, in being 

back here. So thank you very much for all you have done for us 

as a State. 

My only regret in being here, actually, today is that tonight on 

the plane ride home I am going to miss the Colorado Rockies first 

World Series win. 

Chairman REED. I will refrain. 

[Laughter.] 

Mr. TURNER. Anyway, high quality financial reporting has been 

the lifeblood our capital markets, as noted by former SEC Chairman Levitt. I could not agree with those remarks more. It is this 

information that provides investors with the ability to make informed judgments as to where they should allocate their capital, 

thus resulting in allocations where there is higher returns with 

lower risk. And that attracts a tremendous supply of capital to any 

capital market. When the quality of this information, however, is 

lowered, markets do pay a price as we have seen throughout this 

decade, both here and abroad. 

Based on my experience, I believe maintaining that high quality 

financial reporting is important to the competitiveness of the U.S. 

markets. As a former CFO and business executive, I know it is important that you strive not just to match what the other markets 

or competition is doing, but to beat their product. 

U.S. markets will not maintain their current prominence if they 

simply become the equal of other markets, employing the same 

strategies and approach to business. Certainly, the fallout from the 

subprime fiasco and structured investment vehicles, the SIVs, 

around the globe is a classic example of this as we saw in August 

when foreign investors pulled billions, tens of billions of dollars out 

of the U.S. capital markets over that situation. 

I would also like to clarify what true convergence is, in terms of 

financial reporting. It is a single set of high quality financial reporting and disclosure standards that result in companies reporting 

the true economics of the transactions they enter into. I seriously 

doubt if what is known as the SIV IFRS-lite standards are going 

to come up and meet that goal. 

They are standards that result in consistent reporting methods 

from period to period and comparable reporting by companies who 

enter into comparable transactions. A couple of the Senators today 

have already highlighted the importance of investors being able to 

compare from one company to the other. Without that, you do not 

have an efficient market. 

They are a complete set of standards covering all the significant 

industries, including in industries like the extractive mining, oil, 

and gas, which is important to my State, financial services including insurance. 

They are transactions being reported in the financial statements 

and not left off the balance sheet and out of the income statement, 


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as investors have seen time and time again in recent years the special purpose entities, the SIVs, and off balance sheet financing of 

securitizations and other assets. And this is an area where, quite 

frankly, today I think it would be difficult for the public to buy that 

we have high quality standards either in the U.S. or international 

standards. I have a number of e-mails from foreign investors complaining about even their standards in this area. 

I also note that in 2002 Senator Allard exhibited great leadership 

when he wrote a letter to the FASB on off balance sheet vehicles, 

encouraging them to fix this problem and bring it back on balance 

sheet. So he certainly had the foresight. Unfortunately, 5 years 

later we still have not gotten there. 

Convergence is effective audits that ensure claim compliance has 

been achieved. And it is authorities with the expertise and experience to globally enforce these accounting standards and audits 

wherever they are used in reporting to investors. As we just heard 

from Ms. Yohn, that unfortunately is a situation that does not exist 

globally today as many of these conditions do not. In fact, no regulators and governments have fully committed themselves to this effort, to fund it and to provide it with adequate resource. And no 

time table has been set among all the countries internationally to 

fully achieve the changes needed to ensure complete and timely 

convergence. 

Instead, the efforts are, at best, being done in a piecemeal, haphazard fashion. And as such, we are moving these safeguards and 

protections such as the reconciliation before we get there does run 

the risk of creating significantly more scandals and problems for 

investors. 

In striving to achieve convergence, I think it is important that 

there are a few key points worth noting. These are all laid out in 

the written testimony and I would ask, Senator, that the entire 

written testimony and appendix be included in the record. 

But in striving to achieve convergence, which I do think is important, having been one of the people that led the effort to create the 

IASB as we know it today in the first place, convergence on high 

quality standards will be best achieved through the private sector 

standard setting process, not one influenced by outside specialist 

interest, overbearing regulators, and a lack of direct involvement. 

We are on the right path today, letting Mr. Herz, Mr. Tweedie and 

their organizations take care of the reconciliation by eliminating 

the differences in a reasonable fashion and thereby letting them 

eliminate the reconciliation. It should not be the SEC doing it. 

There needs to be assurance that the necessary supporting infrastructure set forth the SEC concept release in 2000 is, in fact, put 

in place. And it was interesting that in their proposing release, the 

SEC almost totally ignores that infrastructure and whether or not 

it exists. 

There are concerns regarding the independence of IASB and lack 

of meaningful representation of investors as members of its board. 

There is no meaningful representation from the investor community on the voting board members or on the trustees whatsoever. 

It is an issue that in March of this year Chairman Levitt pointed 

out as a serious shortcoming. 


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Comparability and consistency in reporting by companies has 

been a hallmark of high quality financial reporting by investors 

and the FASB’s conceptual framework for several decades. Negatively impacting that will have consequences for investing public 

around the globe. 

And finally, in the U.S. there is a lack of resources, skills, and 

training to make an orderly transition to IFRS anytime soon. And 

I do fear that to require a change in the near term would disadvantage many small auditing firms and result in significant costs for 

smaller companies at a time when those of us on the Treasury 

Committee are looking for ways to make the smaller auditing firms 

more competitive. 

With that, I will conclude my remarks and take any questions. 

Chairman REED. Thank you very much. Thank you all for your 

excellent testimony. Let me start, Mr. Turner, with a question. 

Under Section 108 of the amendments to Sarbanes-Oxley, there 

was the setting out standards for—recognizing accounting standards. There is a question, at least, and I think the previous panel 

suggested that they have concluded that they have the authority. 

But there is a question, at least, whether they would have the authority without a statutory change to recognize these standards 

without reconciliation. 

Do you have a view on that? 

Mr. TURNER. Yes. Actually, having been involved with the drafting of that, I personally think that they would need to come back 

to Congress and get Congress’s approval to do that. I do not recall, 

in any of the conversations at the time, that there was a notion 

that FERC funds, for example, would be diverted from the FASB 

to the IASB. So I clearly do not think it was the intent of Congress 

to open it up like that. So I would say the SEC does need to come 

back to Congress. 

Chairman REED. Thank you. 

I want to go back to Mr. Ciesielski and Mr. Landes and Professor 

Yohn also, in that the discussion in the previous panel, trying to 

sort of determine what the difference is between international 

standards company reporting and company reporting under U.S. 

GAAP. There was a suggestion that they are similar but not identical. 

But then there is a view that there could really be material missing information. So Mr. Ciesielski, could you sort of give us a comment and maybe an example to flesh out this discussion? 

Mr. CIESIELSKI. I would be glad to. 

Chairman REED. Can you turn your microphone on, please? 

Mr. CIESIELSKI. I am sorry. 

Chairman REED. That is quite all right. 

Mr. CIESIELSKI. I go back to the last panel, I believe Mr. Herz 

thought there were 11 areas that needed to be reconciled between 

the current body of literature of the FASB and Mr. Tweedie believed there were 10. Close, they are similar. They are not exactly 

the same. 

There are projects in the literature that they are working on that 

will be prospectively smoothed out. And I am confident that the 

convergence process will work on that. 


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But in the meantime, there are differences in the literature that 

has not been addressed—excuse me, that is being addressed, that 

produces current differences in the area of taxes, pensions, and also 

what I refer to as legacy differences. 

If you go back to prior to 2002, there were differences in the 

GAAP literature and the IASC literature that have an effect at the 

time a transaction is consummated. My favorite example is business combination accounting. There are some companies, and we 

cite some in our report which is part of the record, where there 

were business combinations that took place that did not qualify for 

what was called pooling of interest accounting in the United States 

at the time. There was a comparable procedure called uniting of interests in the IASC literature, which was adopted by the IASB. Because it did not meet the criteria in the United States for pooling 

of interests, it had to be reported in the reconciliation as a purchase, which is what we use in the United States all the time now. 

Those differences can have lingering effects on income that last 

into the decades. And if the reconciliation is removed, those differences will never be known to investors. There are examples, 

again, of that in the report that is filed as part of the testimony. 

Those differences, often, I recall, were favorable in terms of producing income figures that were higher under IFRS than under 

U.S. GAAP. There is no way that analysts could go back and recreate that information. 

I like to say that analysts and investors are reviewing the company from 30,000 feet when they are reading the financial statements. Those kinds of transactions occur at ground level. They do 

not have visibility into those transactions to try and estimate for 

themselves how they affect current report. And even if they did 

have access to much of that information, it would still be an estimate. I think a lot of that information would be lost for good and 

it would create an unlevel playing field. 

And also, I would point out that I believe it was Con Hewitt 

pointed out that the information is old and stale by the time it 

reaches analysts. I think that is a great argument for saying it 

should be reported more frequently to iron out those differences as 

U.S. companies report. 

One final remark, I believe there is a perception that analysts 

and investors do not use the reconciliation. I would disagree. I 

think they use it in much the same way they use other information 

that is contextual, like the business description part of every 10K 

filing. If you are picking up a foreign company for the first time 

that is filing an IFRS and you do not know much about them, but 

you do understand U.S. reporting, this provides a context and a 

reason to understand why they are different in terms of U.S. reporting versus IFRS reporting. This does lay it out. 

I would also mention that a lot of U.S. analysts are just passably 

familiar with U.S. GAAP. When they look at this reconciliation 

they are getting, I would say, prima facie evidence of what they do 

not know. And they do have a way of putting it into context in U.S. 

terms and they can follow up and build their knowledge if they 

want to. 

Chairman REED. Thank you. 


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Mr. Landes, your comments on the same issues of is this just 

similar information or is there missing information perhaps? 

Mr. LANDES. Well, Senator Reed, we certainly acknowledge that 

eliminating the reconciliation would result in a loss of information. 

We, however, look at this a little differently. We believe that the 

elimination shows that the U.S. is willing to put some skin in the 

game, to use a golf term or perhaps even a poker term. Sir David 

mentioned that there are some foreign filers who look at the reconciliation and are offended by that. And so we think that this is 

a way for the U.S. to step up and say yes, we are serious about 

convergence. 

I have some personal experience, not on the accounting side but 

actually on the auditing side, where the AICPA’s Auditing Standards Board has been working very hard now for three or four, almost 5 years on converging U.S. auditing standards for non-issuers 

with international auditing standards. And what we found was 

that the day that we publicly remarked that we are working toward convergence, we were embraced in a different way by the 

international community. 

Prior to that, when we would try to make arguments, they would 

look and say that is all well and good. But you all do not use international auditing standards, so why should we care? And we see 

the elimination of the reconciliation as a first step in the process 

of telling the world we do care about international convergence. 

And we actually believe that the elimination may speed up the convergence. And we know that that is a view not shared by others 

but nevertheless, from our own personal experience, what we have 

found on the auditing side. 

Chairman REED. Thank you. Professor Yohn, please. 

Ms. YOHN. I think the academic literature is focused on what is 

the impact and the use of the reconciliation for U.S. investors. And 

like I said earlier, it seems that there are material differences, 

even looking as recently as 2004–2005. There are material differences. The average, I think, reconciling difference was about— 

the mean was 13 percent of stockholder’s equity. And that the investors use this. That if you control for the IFRS earnings, the difference between IFRS earnings and U.S. GAAP explains changes 

in stock prices. So it suggests that the investors do use the information and it makes material differences. 

Chairman REED. Thank you. Senator Allard. 

Senator ALLARD. In your testimony, Mr. Landes, you made the 

statement that AICPA supports the goal of the single set of high 

quality comprehensive accounting standards to be used by public 

companies. Does the association or the institute feel that the 

United States has the best set of accounting standards? 

Mr. LANDES. We would all love to believe that what we have in 

the United States is the best, whether it be accounting standards, 

whether it be auditing standards, regulatory processes. What we 

have found is that we may not always have the best answers. I 

have, if I may—— 

Senator ALLARD. Can you give me some examples where the 

international accounting standards might be superior to what we 

have in the United States? 


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Mr. LANDES. Well, I believe that one of the items that Sir David 

talked about was prior to the FASB’s issues of FIN 46, where they 

had some consolidation standards that may actually have been better than the U.S. standards at the time. So I do not—— 

Senator ALLARD. That is where you talked about the majority, as 

opposed to controlling interest? 

Mr. LANDES. That is correct. That is correct, Senator Allard. I do 

not have any specifics that I could give you today. I am not prepared to offer specifics where I think one is necessarily better than 

the other. That is a debate that we personally do not believe is one 

that we should be having. We believe—and I believe Senator Reed 

mentioned, and perhaps you alluded to it, as well—that we should 

not be looking at whether one set is better than the other. But 

what we ought to be doing is looking at them both and saying how 

can we draw the best answer out of both of those standards to create one set of high quality standards. 

Senator ALLARD. And that is what I am driving at, is for that 

clarification. Because when I looked at that statement, oh my gosh, 

it sounds to me like he would not be in favor of convergence. But 

you are in favor of convergence, working with other foreign countries to come up with a common standard? 

Mr. LANDES. Absolutely, Senator. 

Senator ALLARD. In some cases, we might have to give a little bit 

to accept a foreign standard. 

Mr. LANDES. That is correct. That is part of the convergence 

process. 

Senator ALLARD. Now there are some—well, let me drop that 

right there. Mr. Turner, let me get back to you and it is kind of 

along the same lines I was talking to him. 

You are obviously very familiar with the Enron, Global Crossing, 

other firms, those problems there that we had that Congress ended 

up enacting Sarbanes-Oxley. And we did that to raise our corporate 

governance standards. What we found out, what this committee 

has begun to hear over the last couple of years, is that this higher—although we expected the higher standards to help our markets, when we raised those standards, many companies seem to 

have fled our stock markets, going to Tokyo. That is the report 

back to the committee—the Tokyo, London markets, and Toronto, 

I believe, is where the other markets are. 

When we try and level out and reach a convergence like Mr. 

Landes talked about, some of the European countries have carved 

out exceptions. How can we be assured that we will not have a 

similar adverse impact on our businesses here in this country? 

Mr. TURNER. Actually, at this point in time, I do not think you 

can be assured of that because the process is young and we do not 

know how it is going to work out. As I mentioned earlier, I do get 

concerned about competitiveness between one and the other. Some 

people would say oh, let’s just look like the Europeans. Well, if your 

product all looks alike, I can guarantee you as a former businessman you are not going to be the one selling most of the product. 

And right now, quite frankly, we are selling the most. Our capital markets still, to this day, have the best risk premium on them 

for investors. Those companies that have gone to the London market, for the most part, would not meet the listing requirements of 


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the New York Stock Exchange or NASDAQ, regardless of what is 

SOX. So SOX has nothing to do with it. 

As Goldman Sachs, probably a premier firm if not the premier 

firm, has truly shown and demonstrated, it is not anything to do 

with the regulatory regime that has caused people to think about 

going elsewhere. It is either typically most people do like to list in 

their home country. And you know that is not a novel idea here. 

Most companies here like to list here, as well. 

It is because of the GDP growth in some of the emerging Asian 

markets like India and China are growing at three to five times 

our GDP. Their businesses are growing. That provides much greater opportunity for growth in the businesses and that is where the 

investment returns are going to be higher. 

In fact, I serve on a mutual fund and we are reallocating to some 

of the foreign markets more money because those are the ones 

where they are going to generate the most return. 

So it is not the regulatory scheme that is getting us down. It is 

not the litigation that is getting us down. So I think those are misnomers. What the focus really has to be on is how do we make our 

markets different such that they are going to give investors the 

higher returns? 

And unfortunately, one of the things that foreign investors, the 

largest pension funds in Europe and around the globe, Australia, 

have written to the Commission and said is that if they continued 

to be denied the same shareholder rights that they have in their 

home countries like the U.K. and those, if they continue to be denied those rights, they are going to withdraw their money from the 

U.S. capital markets. And that should concern us. It should concern us that we are not looking for those opportunities to get better. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman REED. Thank you. I have one other area I would like 

to touch on with Ms. Yohn and Mr. Landes. And that is this would 

cause a sea change, I think, in the accounting profession in terms 

of the practice, the routine, the rules, whatever. And I have just 

had the experience, my godson went through and passed all the 

tests for his CPA spending hours, excruciating hours, late late at 

night, learning GAAP. And is that all for naught? Maybe that is 

the best question. 

But it would seem to me that this would be a huge cultural 

change in the accounting profession. And are we prepared for that? 

And not just in the profession itself but in academic, those who 

prepare the accounts. 

So Ms. Yohn, on this final point, unless Senator Allard has different questions, if you could comment and then Mr. Landes, on 

this whole issue of education and cultural change, how long will it 

take, and whatever? 

Ms. YOHN. I do not think that the educational system is ready 

now for a move to IFRS. I know that universities have been trying 

to incorporate IFRS into the classes, into the accounting programs, 

and they are doing so. But they are trying to figure out the best 

way to do so and they are doing it slowly. 

And so I do not think right now we are ready. And I know that 

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sities and said can you help us because we are concerned about the 

lack of expertise in IFRS within our offices in the U.S. So they see 

it as a big issue, as well. 

So I agree, it would be a big sea change that I do not think we 

are ready for. 

Chairman REED. Mr. Landes. 

Mr. LANDES. Senator Reed, when you become a CPA one of the 

things that you learn very quickly is that you have committed 

yourself to a lifetime of learning. And even under our existing 

GAAP structure, things change. 

When I think back to the time when I passed the CPA exam, 

there were five standards, five accounting standards. Now there 

are 159. There were only 30 auditing standards and now there are 

140-some, excuse me 114. 

And so what we are talking about here is part of a continuing 

process of education. I would agree that we are not ready today. 

But that does not mean that we should not start. 

The AICPA has a course. We have several courses on IFRS. They 

are not the best sellers today but I suspect that they will gain traction over the next months and years as more CPAs become engaged 

in IFRS and the whole international convergence process. 

But we recognize our responsibility to educate our members, to 

do what we need to do to bring them along, to help them walk that 

journey that will be the new accounting environment of the future. 

And that includes working with those folks in academic, working 

with textbook authors, our own CPA exam to make sure that it begins to change. And certainly, and I know both of you have expressed some concern, and rightfully so, with members from smaller companies or smaller CPA firms, who again may feel very overburdened with just the number of new standards that are out there 

today just in our own system. 

And so one argument for moving to one core set is that you do 

not have to learn two, that you can begin simplifying and learning 

one. Will it take time? Absolutely. Are we absolutely—are we ready 

to turn the light switch on tomorrow? No, we are not. But I do not 

think anybody is saying we should turn the light switch on tomorrow. 

Senator ALLARD. I do not have any more questions. I just would 

thank the panel for their testimony. I appreciate your comments. 

Chairman REED. I would concur. Thank you all very much for 

making time out of your very busy schedules to join us today. 

There may be additional written questions by my colleagues or 

members of the staff. If you could respond before Wednesday, October 31st for my colleagues. We will get the questions to you as 

quickly as we can. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 4:17 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER 

Good afternoon, Chairman Reed and Ranking Member Allard. Thank you for holding today’s hearing on the convergence of international accounting standards. We 

live in an era that has been defined by the increasing globalization of capital markets—a trend that was well documented in a report issued earlier this year by New 

York City Mayor Bloomberg and myself. 

Our report made a number of recommendations to help the U.S. maintain its historical role as the global leader in financial markets, but one of the most important 

of these was the accelerated convergence of U.S. Generally Accepted Accounting 

Principles—GAAP—with International Financial Reporting Standards—IFRS. 

In today’s world, where a typical investment often consists of a Russian investor 

purchasing shares in a Japanese company listed on an American stock exchange, 

it simply makes no sense to have different auditing standards for different countries. As the trend of globalization continues to accelerate, it is critical that we establish one common language for reporting financial results to investors. 

The fact is that IFRS is well on the way to becoming the global language which 

the rest of the world uses. More than 100 countries throughout the world, including 

all of the major financial centers outside of the U.S., already use IFRS. Furthermore, as all of you today acknowledge, IFRS standards are robust and high quality 

accounting principles that serve investor interests well. Therefore, the U.S. requirement that non-U.S. companies must reconcile their financial results to GAAP is a 

very costly, and in my view, unnecessary one, and is a deterrent for many foreign 

companies that might otherwise choose to list in the United States. 

The requirement that foreign companies reconcile their accounting results to 

GAAP is, in my opinion, a key factor in the decline of the preeminence of U.S. capital markets, which have seen their market share decline from 57% of global IPO 

proceeds in 1999 to just 18% last year. Last year, only 3 of the top 25 IPOS chose 

to list in the U.S. We must reverse this trend, and recognizing IFRS is absolutely 

critical to doing this. When it comes to the way companies balance their 

books, Wall Street and the rest of the world should be on the same page. 

IFRS will be the language of worldwide business for future generations 

and we must start allowing it to be spoken in the U.S. And eventually, U.S. 

businesses must be allowed to speak this language themselves, which is 

why I am glad to see FASB and IASB working together towards the convergence of their accounting standards. We must ensure that American entrepreneurs and investors can communicate freely and openly on the international stage. 

But we must also be judicious in how we proceed with the convergence of accounting standards. This should not be a race to the bottom, nor should the historical 

role of FASB be ignored. I am pleased to hear that FASB and the IASB are working 

together to try to come up with a ‘‘best of breed’’ approach to converging GAAP and 

IFRS. It is imperative that the United States, which has been the nexus of the 

world’s financial markets, continue to act as a leader in establishing the future of 

capital markets. 

I think it is also quite critical that in considering how future accounting standards 

will be set, we make sure that individual national political considerations do not 

poison the well. In this country, we have fortunately had a historical tradition of 

having an independent accounting board—FASB—which politicians have been loath 

to try to influence for short-term political gain. It is absolutely necessary for any 

accounting system that hopes to serve the best interests of investors to be similarly 

independent from the political considerations of individual nations. And so I would 

ask FASB, IASB, and the SEC to consider measures to strengthen the independence 

of IASB from the political considerations of member nations as this debate goes forward. 

I would like to thank all of the witnesses appearing today. This is a project that 

many of you have been working tirelessly upon for quite a long time, and I look 

forward to hearing your thoughts on the convergence issue. I am also quite eager 

to hear from the SEC in particular, to learn more about the status of this convergence proposal in the United States. 

I thank you Mr. Chairman and I also thank the witnesses for all their hard work 

on this obviously complicated and important subject. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM CONRAD W. HEWITT AND JOHN W. WHITE 

Q.1. Specifically, Section 108(a) of the Sarbanes Oxley Act directed 

the SEC to establish a program for recognizing accounting principles as ‘‘generally accepted,’’ by among other things considering 

the qualifications of the accounting standards-setter. The Act set 

forth several required qualifications, including that the standardssetter have independent funding in the same manner that the 

PCAOB and FASB have and that the standards-setter ‘‘considers, 

in adopting accounting principles, . . . the extent to which international convergence on high quality accounting standards is necessary or appropriate in the public interest and for the protection 

of investors.’’ 

In his testimony before the Subcommittee, Mr. Herz echoed some 

of the concerns underlying Section 108, when he testified that the 

blue print for international convergence ‘‘should also address 

strengthening the IASB as an independent, global standard setter 

by establishing mechanisms to ensure the sufficiency and stability 

of its funding and staffing.’’ 

• Has the Commission or its staff considered how to apply Section 108 in the context of the IASB? That is, what is your process for evaluating whether the IASB satisfies the criteria set 

forth by Congress? 

• Second, Congress determined in passing Section 108 that the 

accounting principles used for compliance with our federal securities laws should be established by an independent standards-setter with an independent source of funding. In your 

statement today you testified that the IASB does not have such 

a funding source at this time. Wouldn’t the elimination of the 

reconciliation effectively mean, though, that the SEC is in essence recognizing the IASB as an independent standards-setter 

for purposes of filings by foreign private issuers? If so, is such 

recognition justified when the IASB does not have an independent funding source? 

A.1. We believe that Section 108 of the Sarbanes-Oxley Act is not 

applicable to the Commission’s decision to allow foreign private 

issuers to file their financial statements under IFRS as promulgated by the IASB, without reconciliation to the U.S. GAAP. 

Since the passage of the Securities Act in 1933 and the Securities 

Exchange Act in 1934, Congress has given the Commission broad 

statutory authority to set the requirements for financial information in filings by issuers. That authority includes the power to determine the methods to be followed in the preparation of financial 

statements, as well as the contents of the financial statements 

themselves. (See 1933 Act Section 19(a); 1934 Act Section 13(b).) 

Sections 108 and 109 of the Sarbanes-Oxley Act complement this 

long-standing statutory scheme. Section 108(c) explicitly recognizes 

the Commission’s existing authority in this area, and provides that 

‘‘[n]othing in this Act . . . impair[s] or limit[s] the authority of the 

Commission to establish accounting principles or standards for purposes of enforcement of the securities laws.’’ Further, Congress included a general savings clause at Section 3(c)(2) of the SarbanesOxley Act, that expressly preserves the Commission’s authority to 


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set accounting standards in terms nearly identical to Section 

108(c). 

What Sections 108 and 109 do accomplish is to provide an appropriate funding (and governance) mechanism for any accounting 

standard setter that the Commission chooses to recognize for the 

purposes of establishing ‘‘generally accepted’’ accounting principles. 

By its terms, Section 108 is permissive and does not require the 

Commission to recognize any particular standard-setting body: ‘‘[i]n 

carrying out its authority under [1933 Act Section 19(a)] and under 

[1934 Act Section 13(b)] the Commission may recognize, as ‘generally accepted’ for purposes of the securities laws, any accounting 

principles established by a standard setting body’’ meeting certain 

conditions (emphasis added). 

In allowing foreign private issuers to file financial statements 

prepared in accordance with IFRS without reconciliation to U.S. 

GAAP, the Commission has not thereby recognized the IASB as a 

standard-setting body. This is so, because the Commission has not 

recognized IFRS as ‘‘generally accepted’’ accounting principles. Nor 

need it recognize IFRS in this way. The Securities Act and the Securities Exchange Act do not require the use in Commission filings 

only of financial statements meeting the requirements of U.S. generally accepted accounting principles (U.S. GAAP). 

Historically, in cases in which the Commission has permitted financial statement of foreign private issuers to be filed based on foreign accounting systems, it has also required a reconciliation to 

U.S. GAAP. Reconciliation to U.S. GAAP does not, however, turn 

financial statements prepared on the basis of another set of accounting principles into U.S. GAAP financial statements. It rather 

provides quantitative disclosures (in footnote form) of some—but by 

no means all—of the differences between the foreign private 

issuer’s financial results under its primary set of accounting principles and the results had its financial statements been prepared 

on the basis of U.S. GAAP. Nothing in the Sarbanes-Oxley Act 

itself (or the Act’s legislative history) suggests that Congress believed the Commission should cease allowing foreign private 

issuers to file financial statements prepared on the basis of a set 

of accounting principles other than U.S. GAAP. Had Congress 

meant that in 2002, filings made since then using not only IFRS 

but also other non-U.S. accounting standards would not have satisfied these requirements. The Commission does not believe Congress 

intended this result. 

Q.2. Some prominent academic research suggests that the additional uncertainty that will likely result from the increased use of 

IFRS by companies listed on the US exchanges will result in greater US stock market volatility. Have you performed or reviewed any 

relevant research on how the elimination of the reconciliation requirement and the greater use of IFRS in the US markets might 

impact market volatility? 

A.2. The Commission’s staff reviewed the academic research cited 

in the comment letter of the American Accounting Association 

(AAA) and that cited in Professor Yohn’s testimony before the Subcommittee. We believe this research shows the way in which financial reporting affects capital markets, including volatility, is a funcVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00162 Fmt 6621 Sfmt 6602 E:\HR\OC\A361.XXX A361

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tion of the attestation, legal and regulatory environment, as well 

as the accounting standards used. In considering the adoption of 

amendments, the Commission carefully considered many factors, 

including the input received from the commenters, including that 

of the AAA, as part of the notice and comment process. 

Q.3. How many current employees at the SEC would you characterize as experts in IFRS? How many IFRS experts does the SEC 

plan to hire in the next three years to assist in the enforcement 

of IFRS standards by foreign companies listing in the U.S. markets? 

A.3. In 2006, the SEC conducted comprehensive IFRS training for 

all Commission staff responsible for reviewing, consulting on, and 

enforcing corporate disclosure filings. We will regularly augment 

this training through our continuing education program. 

Organizationally, the Commission staff is not divided as to accountants that are responsible for IFRS and those that are responsible for U.S. GAAP. Rather, in both the Office of Chief Accountant 

and the Division of Corporation Finance, accountants are responsible for their knowledge of IFRS just as they are for U.S. GAAP. 

More specifically, in the Office of the Chief Accountant the staff 

members who consult on financial reporting policy and application 

matters are generally organized by subject matter (e.g., pensions, 

leases and so forth), hence they focus on those subject matters with 

respect to both IFRS and U.S. GAAP. In the Division of Corporation Finance the staff members who review the registrant filings 

are generally organized by industry sector (e.g., manufacturing, financial services and so forth), hence they focus on the application 

of both IFRS and U.S. GAAP within that industry. Further, there 

are other staff members within both the Office of the Chief Accountant and the Division of Corporation Finance who have experience with and are engaged in IFRS matters in connection with 

their more general responsibilities. We plan to perform future hiring to fill these roles as part of the normal course of carrying out 

our work. 

The SEC staff has several years’ experience with IFRS as some 

foreign private issuers have filed their home country financial 

statements under IFRS for many years. Further, in 2006, the staff 

reviewed the annual reports of more than 100 foreign private 

issuers containing financial statements prepared for the first time 

on the basis of IFRS. These reviews covered a wide range of industries. The staff has continued to review the filings of foreign private 

issuers that use IFRS and reviews the primary financial statements, regardless of the set of accounting standards used or the inclusion of a U.S. GAAP reconciliation, in foreign private issuer filings with the Commission. The more widespread use of IFRS has 

reduced the number of home country accounting standards used in 

SEC filings which has reduced the number of sets of accounting 

standards with which the SEC staff must be familiar. 

Q.4. Would elimination of the reconciliation requirement affect the 

cross-listing premium that non-U.S. companies listed on U.S. exchanges currently enjoy? What steps could help to maintain the 

cross-listing premium and thus retain the competitiveness of U.S. 

markets? Would reliance on non-U.S. companies’ home country inVerDate Nov 24 2008 00:21 Jan 20, 2010 Jkt 050361 PO 00000 Frm 00163 Fmt 6621 Sfmt 6602 E:\HR\OC\A361.XXX A361

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terpretation and enforcement of IFRS affect the cross-listing premium that non-U.S. companies listed on U.S. exchanges currently 

enjoy? 

A.4. Any cross-listing premium may be attributed to a number of 

factors, including U.S. disclosure and corporate governance requirements, and enforcement mechanisms that contribute to the robustness of the U.S. capital markets. We do not believe that eliminating the reconciliation requirement diminishes the attractiveness of 

the U.S. market—one manifestation of which would be any crosslisting premium. 

In addition, our policy work related to removing the reconciliation requirement considered factors consistent with the Commission’s statutory mission of facilitating capital formation, maintaining fair and orderly capital markets, and protecting investors. To 

those ends, accepting financial statements from foreign private 

issuers prepared in accordance with IFRS was one of the actions 

that could provide an opportunity to reduce the number of home 

country accounting standards used in SEC filings while, at the 

same time, fostering the use of a set of globally accepted accounting 

standards and realizing the attendant benefits this would bring. 

Finally, it is important to recognize that the SEC is not bound 

by decisions of regulators in other countries because their national 

mandates cannot supersede our statutory responsibility to enforce 

the U.S. securities laws. Consultation with other regulators does, 

however, contribute to our ability to effectively enforce the application of IFRS. The SEC has consultation protocols in place with 

other regulators to exchange information and to learn from their 

thinking and experience on IFRS matters. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM CHARLES E. LANDES 

Q.1. Would elimination of the reconciliation requirement affect the 

cross-listing premium that non-U.S. companies listed on U.S. exchanges currently enjoy? What steps could help to maintain the 

cross-listing premium and thus retain the competitiveness of U.S. 

markets? Would reliance on non-U.S. companies’ home country interpretation and enforcement of IFRS affect the cross- listing premium that non-U.S. companies listed on U.S. exchanges currently 

enjoy? 

A.1. We have no views or opinions as to how, if at all, the elimination would affect the cross-listing premium. 

Q.2. Do you believe that the current quality of the implementation, 

auditing, and enforcement of IFRS standards by companies using 

those standards in the US markets is equivalent to the current 

quality of the implementation, auditing, and enforcement of U.S. 

GAAP in the U.S. markets? Why or why not? 

A.2. We believe that IFRS is of a high quality, as demonstrated by 

the fact that many major capital marketplaces throughout the 

world either follow or have committed to follow IFRS. As for the 

implementation, audit and enforcement of IRFS standards, we believe that the quality is equivalent for those foreign firms auditing 

foreign private issuers filing with the SEC since those foreign firms 


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auditing foreign private issuers are required to be registered with 

the PCAOB and subject to its inspection process. 

Q.3. The SEC’s proposal in its concept release allows U.S. companies to choose between IFRS and U.S. GAAP. What will the impact 

be of creating a two tiered system for investors and businesses? 

A.3. We support the goal of a single set of high quality, comprehensive accounting standards to be used by public companies because 

(1) we believe one common accounting language would benefit investors, as well as issuers and the capital markets, and (2) it would 

facilitate the comparison of reporting entities domiciled in different 

countries. 

Our support for an IFRS option for U.S. issuers is postulated on 

a manageable number of U.S. issuers choosing the option in the 

foreseeable future. Should a large number of companies desire to 

choose the option immediately, system-wide readiness may become 

an issue. Accordingly, we recommended that the SEC solicit information on the number of issuers that are likely to choose an IFRS 

option immediately to help the SEC form its views on timing of giving such an option. We believe that during an optional period U.S. 

businesses would choose to adopt IFRS if they believe doing so 

would reduce their cost of capital, considering both the internal 

costs of preparing financial statements and the reaction of the financial markets to IFRS. 

Allowing such market forces to play a significant role in the decision-making process allows for implementation difficulties and 

costs to be borne initially by those companies that expect to benefit. 

Initial participation by a motivated voluntary filing population will 

permit the issues that arise and are resolved to benefit those that 

follow on later. Market forces already have provided the impetus 

for many constituents to develop familiarity and expertise with 

IFRS. Some U.S. companies have subsidiaries in locations where 

IFRS is required. And auditors have increasingly been asked to 

provide more services around IFRS reporting. 

To be clear, our views, as expressed herein, relate to the use of 

IFRS by U.S. issuers (public companies) only. The AICPA believes 

that a separate, dedicated effort would be required to consider the 

appropriateness of the IFRS option for U.S. private companies and 

not-for-profit organizations, which also currently apply U.S. GAAP 

as promulgated by the FASB. 

Q.4. Many accounting experts believe that the reconciliation requirement has resulted in the introduction of important quality 

control processes at the ‘‘Big Four’’ accounting firms in which foreign private issuer financial statements are typically subject to review by firm experts in U.S. GAAP and IFRS, respectively, before 

those statements are issued to the public. Some experts are concerned that those processes will be abandoned if the reconciliation 

requirement is eliminated. Given that many companies have only 

recently begun to apply IFRS, should we be concerned that the 

elimination of the reconciliation requirement may weaken the quality control processes at the ‘‘Big Four’’ accounting firms? 

A.4. No. The policy and procedures referred to (commonly known 

as Appendix K procedures) were developed so that SEC filings of 

foreign private issuers including reports of non-U.S. firms would 


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162 

have procedures performed by a person knowledgeable about U.S. 

GAAP, U.S. GAAS, and SEC independence matters. The filing reviewer would discuss with the engagement team the evaluation of 

significant differences between the requirements in the U.S. with 

respect to GAAP, GAAS, SEC reporting requirements, and auditor 

independence and the requirements applied in the home country. 

Please note that Appendix K predates current requirements that 

foreign firms auditing foreign private issuers be registered with the 

PCAOB and subject to its inspection process and other developments. 

At the time this guidance was developed, non-U.S. auditors were 

allowed to report that the audit was conducted using non-U.S. auditing standards that were substantially similar to U.S. generally 

accepted auditing standards (U.S. GAAS). As the audits did not 

need to be conducted in accordance with U.S. GAAS, the guidance 

was developed so a person knowledgeable about U.S. GAAS would 

discuss with the engagement team the evaluation of whether the 

auditing procedures performed were substantially similar to U.S. 

GAAS. 

Subsequent to the development of the Appendix K procedures, 

the Commission adopted International Disclosure Standards—Securities Act Release No. 7745. This guidance required that the 

audit be performed using U.S. GAAS—now the standards of the 

PCAOB—and that the report include a specific statement to that 

effect. 

Likewise, there have been changes with respect to the procedures 

for gathering and reporting information on scope of services since 

the adoption of the Appendix K procedures. For example, as a result of amendments made in 2003 to the independence rules contained in Securities Act Release No. 8183, work performed by the 

auditor is required to be preapproved by the audit committee. 


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