Peeling away financial reporting issues one layer at a time

Accounting Research Slam Dunks SEC Proposal to Allow IFRS without Reconciliation to GAAP

Would you like your staff to learn more about
SEC reporting? 
Click here for a sample in-house training agenda!

Teri Lombardi Yohn, an associate professor at Indiana University, has provided Senate testimony on the SEC’s proposal (Rel. No. 33-8818)to permit foreign private issuers to file their Form 20-F in accordance with International Financial Reporting Standards (IFRS) without information about differences between IFRS and U.S. GAAP (principally, reconciliations of net income and shareholders’ equity).

Yohn’s remarks synthesize about 25 high-quality academic research studies on the effects of (1) the IFRS – U.S. GAAP reconcialtion on investor decision making, and (2) securities regulations affecting the competitiveness U.S. capital markets.  With respect to (1), Yohn made the following observations from the research pertinent to the SEC proposal:

  • Research using stock prices indicate that the reconciliation is ‘value relevant.’  In other words, investors use the reconciliation in their decision making.  (Huge point!)
  • U.S. investors appear to prefer U.S. GAAP over IFRS.
  • Uniform standards across countries would not result in uniform implementation.
  • Enforcement of accounting standards is currently not, and unlikely to be uniform.  (Nothing in other regulatory regimes compares to the vigilance of the SEC. 
  • The SEC already has difficulty enforcing rigorous implementation of IFRS by 20-F filers, and would likely become less effective if it were forced to monitor IFRS reporting by foreign issuers–over whom its jurisdiction is more subject to question.
  • Evidence from reconciliations indicates greater opportunities for earnings management under IFRS, as reported income is higher on average than U. S. GAAP.

With respect to the competitiveness of U.S. capital markets:

  • Foreign firms cross-listed in the U.S. appear to be valued higher than their counterparts, because it improves the quality of the information provided to investors.
  • SOX has not eroded the benefits of a U.S. listing, and these benefits are unique.

If Yohn is anywhere near accurate, it’s a slam dunk that "the elimination of the required IFRS – U.S. GAAP reconciliation is premature … and will cause U.S. investors to possess a significantly diminshed set of relevant information for investment-related decision making."  If it were not for the political influence of special interests (see my earlier post), we wouldn’t be wasting our time debating it.      

You can access the full text of Yohn’s testimony with this link to my website.  On a scale of 0 – 100, I give it a 98 (I’m a hard grader).  It is wonderful to see how loosely-connected bits of specialized accounting research can be formed into a coherent and unambiguous message pertinent to a pretty high-stakes decision.  While a critic might point out that no single point made would be regarded as incremental information in the debate, nothing can match Yohn’s rigorous, evidence-based approach. My two-point deduction in score is only because the language does not promote easy digestion by the big-picture bloviators.  Not everyone can get away with talking like Alan Greenspan.

Would you like your staff to learn more about
SEC reporting? 
Click here for a sample in-house training agenda!

No Comments

Leave a Comment