Article identity
The title of the article under review in this research paper is, “statement by SEC staff: A securities regulator looks at convergence”. This article has been authored by Donald Nicolaisen, who is a chief accountant with U.S. SEC (United States Securities and Exchange Commission). The article has been published by the International Business and Law Journal at Northwestern in April 2005.
This is a 23-page article that was released to the public on February 24, 2006. The article is an expression of the views and opinion of the author, and these are in no way a reflection of the U.S. SEC (United States Securities Exchange Commission). The article is also available online.
Relationship of the article to the course
The article under investigation bears a correlation with certain sections of the course in advanced accounting theory. For example, this article dwells on the issue of the establishment of accounting standards that are set and accepted at the global level, with a view to benefiting the capital markets.
Further, the article dwells on IFRS (international financial reporting standards), as they affect both the creditors and the investors at the capital market, by way of providing them with consistency as well as quality when they are making their financial reporting.
In addition, this article also explores the U.S. GAAP (the United States Generally Accepted Accounting Principles) as a tool that shall allow the capital markets in the United States to take advantage of accounting that has been accepted globally, in a single set. As can be seen, there is relevancy between the content of this article, and the issues that chapter 3 and 4 of the syllabus on advanced accounting theory dwell on.
For example, these chapters have sought to lay emphasis on accounting issues international business accounting systems development, the applications of international accounting standards, and the conceptual framework of IFRS (International Financial Reporting Standards). Also, the article has explored the importance of employing accounting standards of high quality, at a time when financial statements of companies are being prepared.
This is a call to the accountant to display professionalism while executing their duties. As such, the accountants are ethically bound by their accounting responsibilities at a time when they are reporting financial statements, in line with the last section (week ten) of the advanced accounting theory course on the disclosure requirements for financial reporting, as well as ethical responsibilities.
Summary
The author of this article offers an explanation as to why he believes that the embracing by the global capital markets of accounting standards that are globally accepted could benefit not just the capital market, but also the various stakeholders involved, and more so the investors. As such, the article cites the need to prepare the financial statements of a company via the use of high-quality accounting standards, to enable the investors to such accompany come to terms with the prospects of the company that they have a stake in (IOSCO, 2005).
This is important, not just to enhance the prospects of the company to amass more capital, but also as a way of avoiding the difficultly that investors could be faced with, at a time when they may wish to differentiate between, on the one hand, a good company that followed the stipulated accounting standards and on the other hand, one that does not.
Those financial statements that follow accounting standards that are generally accepted enable investors to understand better the available opportunities for investment, relative to those who fail to follow these (Mintz, 2006). Further, investors when confronted with differing accounting standards may result in them harboring doubt as regards the true financial results of a given investment, and this may very well act to derail investors’ confidence.
On the other hand, those accounting standards which have both been generally accepted on a global scale, and at the same time experience suitable due process, have been seen to augment investor confidence. The implementation of general accounting standards has also been seen to result in reduced costs, from the point of view of the issuers.
In this case, there are immense potential benefits that are to be gained through the implementations of ‘a common set of accounting standards (FASB, 2002), and this may perhaps explain why a number of the individual jurisdictions are intent on pursuing a convergence route that shall bring together the IFRS standards on the one hand, and those of the individual jurisdictions at the national level, on the other hand. In this case, we have European Union member countries, along with Australia, as some of the countries that have sought to adopt these general accounting standards.
Nevertheless, such countries may have to first go through a clearance process, prior to their bringing forth novel standards into law, or even attempting to adopt these. Such an approach could therefore result in a number of the policymakers endeavoring to retain the already existing national standard setter, to enable them either to establish local standards for their private capital markets or alternatively, to enable them to make an input in the work of setting standards for IFRSs.
The success of the capital markets rests on the market forces, as these provide the much-needed incentive. On the other hand, the implementation of IFRSs may be expected to be plagued with a number of complexities (Weinstein, 2005) and at the very least, a resistance of the desirable change, such as an apprehension by the investors of a possible variation of financial information being reported through the use of IFRSs that are different from what they are used to.
Hypothetically, the various attempts to bring about a convergence of the capital market may result in a number of capital markets from different jurisdictions attaining similar investor-oriented financial statements of high quality. This is the case since those jurisdictions that embrace IFRSs, or whose national standards are at par with the IFRSs, are basically calling upon organizations to copy their way of preparing financial statements.
Even then, there are other countries that have opted to rely on their individual national standard-setter for purposes of establishing those standards of accounting that are relevant to the enterprises in the nation (International Accounting Standards Board, 2005). Such a choice could result in the national standards setter opting to supervise and take into consideration the IASB (International Accounting Standards Board) work of setting standards, in effect embracing national standards, with the aim of meeting the requirements of IFRSs.
A case in point here would be the accounting standards setter in the United States, as well as the IASB. Both these bodies have embarked on what is known as “best efforts convergence approach”. On the other hand, there is also the accounting standards setter in Japan, along with IASB, both of which have made an announcement on “…an agreement to launch a joint project to reduce differences between International Financial Reporting Standards (IFRSs) and Japanese accounting standards….” (AICPA, 2005).
This article has also explored the impact that IFRSs have had on the capital markets in the United States. Through a flexible and sustenance of capital markets regulatory environment by SEC, this organization ensures that “investors are protected by regulations that strengthen corporate and fund governance and adhere to high-quality financial reporting standards worldwide”.
In addition, it also means that “regulations are clearly written, flexible, and relevant, and do not impose unnecessary financial or reporting burdens.” (Mintz, 2006). There is a need to have comparable reporting, with regard to the companies enlisted on the U.S. capital market, to enable investors to undertake a comparative assessment of the various companies, for purposes of arriving at informed investment decisions on these.
Moreover, it is important that investors are able to comprehend such global accounting standards as IFRSs. Besides, emphasis has also been stressed on the establishment of an accounting standard-setter that is both independent and professional. This is with a view to producing IASB standards that are of high quality.
Consideration for accounting standards of high quality leads to an easing of the financial understanding of the capital market (FASB, 2005), in addition to assuming the shape of an understandable and logical structure. Such accounting standards are characterized by such attributes as a well-defined scope, in addition to adequate implementation guidance.
The accounting proposal’s input needs to be in line with the purpose or objective of the standard (FASB, 2002). Furthermore, companies ought to ideally be structured around IASB proposal and more so in the event that they fail to comprehend the proposal requirements, along with the associated feasibility concerns. Auditors have been called upon to ensure the objectivity of their inputs during the process of setting accounting standards.
If at all the IFRSs are to be implemented successfully, auditors and issuers alike shall have to first receive a thorough training in investors’ education and IFRSs. It is therefore expected that auditors, regulators, companies and investor organizations shall develop and offer all-inclusive IFRSs training not just for their employees, but for other stakeholders as well.
The possibility of universities and colleges embracing in their curricula IFRSs has also been examined. The significance of including investor education in such curricula has been noted as well, to enable financial statements users come to terms with what IFRSs is offering, and how it varies from the previous reporting.
Companies have been identified as playing a very crucial role in as far as standards application is concerned. Poor standards application, as a result of say, inconsistent approaches to the application or lack of knowledge regarding the standards have been cited as being detrimental to the implementation of accounting standards that are globally recognized.
Companies are therefore called upon to implement a structure, policies as well as consultation protocols that are needed to help employees recognize whenever it is necessary for them to raise questions regarding the application of IFRSs. This is necessary, as it signifies that the company has instituted a process for facilitating the resoling of such questions as may be raised by employees.
Communication across the corporate ladder of an organization when IFRSs protocols are being implemented is a necessity, to ensure that the different business units arrive at accounting policies choices simultaneously.
The implementation by an organization of accounting standards that are globally accepted rests on a premise that investors in such organizations stand to benefit, with an increase in the number of companies that seek to embrace such global accounting standards at a time when they are preparing financial statements. This is so given that investors are in a better position to compare the information of various organizations with relative ease (International Accounting Standards Board, 2005), in effect putting them in good stead to apportion investment capital in line with both the best and the highest application.
On the other hand, these kinds of benefits may only be realized at a time when a company enjoys consistent reporting of its financial statements (FASB, 2002). In a case whereby differences erupt regarding industrial and national transactions, it means that the ensuing accounting under the umbrella of IFRSs, could as well differ, something that is deemed quite appropriate.
Nonetheless, it is not the intention of accounting professionals to yield varying interpretations as regards the standards of accounting for substantially or identical transactions. Otherwise, this may serve to confuse potential and existing investors, and more so should a company label their financial statements as “in accordance with IFRSs”.
Author’s Conclusion
Companies, investors, auditors, regulators, educators and standards setters have a lot of work to ensure that they implement an accounting practice that is globally accepted and one that provides an environment for financial reporting an environment that is in agreement with a distinct set of accounting standards that have gained global acceptance.
This, therefore, calls for these stakeholders to not only work smarter and harder, but to also ensure that they cooperate with one another, to ensure that they reap the maximum benefits of global capital markets, and to the satisfaction of all these stakeholders. With respect to the capital market in the United States, it is important to ensure that the investor’s needs are sufficiently satisfied via the applications of IFRSs, in the absence of calling of demanding for a reconciliation from, on the one hand, the IFRSs, and on the other hand, the U. S. GAAP.
Diverse activities that bear a connection to the setting of accounting standards endeavor for convergence of such standards of accounting. This is in addition to the role they play in as far as the development of the market for financial services within the European Union member countries and beyond. Also, there is a need to ensure that common accounting standard of the highest quality are set.
Furthermore, the various players within the accounting professionals should make it their duty to encourage the applications of IFRSs when dealing with cross-border activities of the securities market, and also on a global scale (Blanthorne, Kovar, & Fisher, 2007).
The aforementioned streams of activities, as they impact on the setting of accounting standards that are globally accepted, rests on a premise that by ensuring that potential and existing investors gain access s to financial information of the highest quality, this act alone shall, in the long-term, augment the confidence and understanding of such investors.
By extension, this will ensure enhanced liquidity of the capital market, along with its growth. This is in addition to enhanced resource allocations and improvements with regard to the making of investment decisions. Ultimately, such activities shall greatly contribute to enhanced economic conditions for all the various stakeholders involved.
Personal Reaction
The idea of embracing the capital markets of accounting standards that are globally accepted, all on a single set, is a welcome respite. This may further be seen as a culmination of the efforts of standards setters, practitioners, as well as business leaders, who have over the years worked tirelessly to ensure that a global set of accounting standards are adopted, for the benefit of the players within the capital market.
Furthermore, this would also be an indication that SEC is living up to its mission: that of affording protection to the investors, maintenance of efficient and orderly markets, in addition to aiding in the formations of capital (Blanthorne et al, 2007).
Unexpectedly, this development takes place when the participants of the capital market on the domestic and global arena are in a dire need of a consistent and high-quality application of financial reporting. For this reason, the emerging expanded application of IFRSs paves way for an exclusive chance to give the creditors and investors alike the financial reporting of high quality and that is consistent.
At the capital markets, and more so the U.S. capital market, we have a lot of anxious stakeholders who cannot wait to take advantage of the benefits that come about following the implementation of accounting standards that have generally been accepted globally.
At a time when the U.S. GAAP and the IFRSs converge, the United States as a nation, along with the capital markets from other countries shall have the chance to take advantage of the ensuing benefits that often accompanies accounting standards of a single set, and which have received acceptance on a global scale. This is good news, considering that bilaterally, convergence seeks to reduce potential differences between on the one hand, the U.S. GAAP and on the other hand, IFRSs, and simultaneously ensuring that both of these attain the highest levels of quality possible.
At a time when an investor has confidence in the financial statements of say, a company that they have a vested interest in, and one that has embraced accounting standards that are recognized worldwide, this acts to instill in such investor confidence, and they are more likely to either increase their stake in such a company or tell others about it. Consequently, the company realizes growth and by extension, brings growth and expansion to the capital market.
It is the firm conviction of this writer that at a time when we have a widespread application of accounting standards of high quality, and which have been generally recognized on a worldwide scale, within the context of the capital market, it follows that the investors in such a stock market stands to benefit immensely.
This writer would therefore wish to offer support to the opinion of the authors for the article being scrutinized by this research paper, by way of applauding the efforts of individuals that have dedicated their lives and efforts towards the expanding development, along with the applications of the standards discussed by the article.
References
Blanthorne, C., Kovar, S., & Fisher, D. (2007), “Accounting Educators’ Opinions about Ethics in the Curriculum: An Extensive View,” Issues in Accounting Education, 22 (3): 335-390.
FASB (2002). Financial Accounting Standards Board and International Accounting Standards Board, Memorandum of Understanding, “The Norwalk Agreement.” Web.
AICPA (2005). American Institute of Certified Public Accountants: Code of Professional Conduct. Web.
International Accounting Standards Board (2005). IASB and Accounting Standards Board of Japan Agree to Next Steps in Launching Joint Project for Convergence. (Press Release). Web.
IOSCO (2005). International Organization of Securities Commissions Technical Committee, Statement on the Development and Use of International Financial Reporting Standards in 2005. Web.
Mintz, S. (2006). “Accounting Ethics Education: Integrating Reflective Learning and Virtue Ethics,” Journal of Accounting Education, 24 (2/3): 97-117.
Weinstein G. (2005), “A Tool for Accessing Accounting Cases,” Journal of Accounting Education, 23 (3): 204-214.