The role of U.S. standard setters in international harmonization of accounting standards.

THE ROLE OF U.S. STANDARD SETTERS IN INTERNATIONAL HARMONIZATION OF ACCOUNTING STANDARDS

Following are excerpts from a speech by Philip R. Lochner, Jr., a commissioner of the Securities and Exchange Commission, on the role of the United States in achieving international harmonization of accounting standards. The speech was delivered at the 10th Annual SEC and Financial Reporting Institute Conference held in Los Angeles.

In the decades since the need for international accounting harmonization was first recognized, the forces of internationalization have struck with a vengeance. In 1975, transactions in U. S. securities by foreign investors and transactions in foreign securities by U. S. investors were estimated to have aggregated about $66 billion. By 1989, this figure had increased more than 80 times to a staggering $5.4 trillion.

Unfortunately, the movement toward harmonization of accounting standards has not kept up with the increase in international economic activity. The United States has not recognized any international accounting standards. Further, for a foreign company to offer securities in the United States or list its securities on a U. S. exchange, it must reconcile its financial statements to U. S. generally accepted accounting principles, regardless of the quality of the foreign standards the company may have previously complied with.

Everyone believes harmonization will happen, but apparently no one believes it will happen in his or her lifetime. But there is room for some optimism. The International Accounting Standards Committee (IASC) is entering a crucial phase in its attempt to develop a nucleus of internationally accepted accounting principles and has indicated it expects to complete this process by the beginning of 1993. (For more on the IASC'S current activities, see the interview with IASC Chairman Arthur R. Wyatt, on page 100.)

HARMONIZATION AND ITS BENEFITS

From the point of view of the SEC, an extremely valuable benefit of harmonization would be the increased usefulness of financial statements to U.S. investors in foreign securities. The rules prohibiting foreign companies from offering securities in the United States or listing on U.S. exchanges without compliance with U.S. accounting requirements have not deterred U.S. investors from purchasing foreign securities. U.S. investors must make such purchases on the basis of financial statements prepared in accordance with a variety of accounting standards. However, financial statements prepared in accordance with harmonized accounting standards would be far more comparable than those currently relied on by U.S. investors.

And yet another benefit of harmonization is that it could increase dramatically the willingness of foreign issuers to participate in U. S. securities markets.

THREE APPROACHES TO HARMONIZATION

The first approach to harmonizing standards is a bilateral one, under which regulators in two countries enter into arrangements on accounting harmonization. An example of this is the proposed bilateral disclosure system between Canada and the United States currently pending at the SEC. The advantage of the bilateral approach is that it may be faster and easier to implement than a multilateral agreement involving many countries. The disadvantage is, as more and more separate bilateral agreements are entered into, requirements under one agreement may differ from those under another, perpetuating rather than reducing accounting disparities.

The second approach is regional multilateralism. The best example of this is the European Community (EC), which has taken significant steps, including some involving accounting, to facilitate capital flows among member states. The EC has issued a directive on mutual recognition of member states' prospectuses and related financial statements. It also has participated in international efforts at harmonization through membership in the IASC.

The third approach is international. The goal of this approach is to work through international organizations to develop a body of accounting standards uniformly acceptable to and uniformly used by all national regulators. Under this approach, all countries would adopt the same standards. International uniformity is an attractive goal but may be difficult to achieve in the near term.

An intermediate approach to internationalism is to develop a set of international standards acceptable to each local regulator. This would not prevent a regulator from requiring domestic issuers to comply with further or different local accounting principles. Foreign companies wishing to issue securities in a local securities market would reconcile their home country financial statements to international standards but would not be required to reconcile with local accounting principles. This approach is being pursued by the IASC and has been endorsed by the International Organization of Securities Commissions (IOSCO).

U.S. ROLE IN ACHIEVING HARMONIZATION

The United States, with one of the largest financial markets in the world and a funy developed regulatory structure, plays an essential role in determining the success or failure of efforts (by the IASC and others) to achieve harmonization.

IASC standards have no legal authority except to the extent they are adopted by individual countries. The SEC, through IOSCO, has actively participated in the comparability project. However, U.S. regulators and standard setters have not yet publicly indicated they will support the standards ultimately developed by IASC. The United States should

* Provide public support for the IASC's efforts to develop acceptable international standards and participate constructively in these efforts.

* Be prepared to recognize foreign company financial statements prepared in accordance with or reconciled to IASC standards.

Many in the United States seem to view harmonization with great trepidation because it will inevitably involve the dilution of U. S. standards. In fact, many international standards are at least as conservative as U.S. standards.

An important step to encourage harmonization is to give the U.S. standard-setting process an international focus. The Financial Accounting Standard Board's mission statement, adopted in 1973, does not even mention international considerations and is in urgent need of updating. There have been dramatic changes in the economic environment since 1973, particularly in the internationalization of markets. The mission statement should direct the FASB to undertake every possible effort to work toward harmonization. One concrete way in which it could be facilitated would be if the FASB adopted new standards only in collaboration with international and major non-U. S. standard setters.

COMPRENHENSIVE RENEW

The FASB should undertake a comprehensive review of its existing standards to determine how they compare with international practices. To the extent current FASB standards depart from a respectable, generally accepted international practice, the FASB should consider whether it is appropriate to adopt the international consensus.

International harmonization of accounting standards is no longer just a long-term goal. It can be within our grasp. The substantial benefits of harmonization for the United States and the world economy mandate that the United States do all it can to ensure this opportunity is not lost.