Global Accounting Standards? Not So Fast

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Paul Miller, a professor of accounting at the University of Colorado, would prefer to have competing standards, since the only standards all countries would be able to agree on would be very weak ones. He also believes a unified set of standards, rather than being helpful, would stifle much-needed innovation given that most of the existing accounting standards are more than 60 years old.

Loss of Information

Some investment advisers, including Sondhi, believe investors have already lost valuable information with the SEC's elimination last year of the reconciliation between GAAP and the non-U.S. GAAP standards used in foreign companies' financial reports. "Reconciliation gave me information and told me about [non U.S. companies'] cash flow generating ability that I didn't have from their financial statements alone," Sondhi says.

The fact that many analysts in the U.S. and overseas used to rely on the reconciliation suggests they found the differences between GAAP and foreign standards very useful, says Sondhi. He agrees that competition between different sets of standards might result in better information. "I don't know that either side has achieved a level of standard setting that would lead me to say we can do with one," he says.

Many investment professionals, however, support migrating to a single set of standards, as long as they are of the highest quality. Finnegan at the CFA Institute questions whether the IASB and the FASB can act truly independently given the pressure each has been subjected to by regulators over the past several months as a result of the financial crisis. "When you have that kind of pressure and intervention, you have the possibility of movement to lower-quality standards that's going to appease certain interests at any one point in time, and that's not healthy," he says.

Criticism of fair value accounting has been no less vehement in the U.S. The SEC has resisted pressure to suspend the standard, but Section 132 of the TARP gives the SEC broad authority to suspend the use of SFAS 157 by issuer class or category of transaction (BusinessWeek.com, 10/14/08).

Who Feeds the Watchdogs?

The fact that IASB is funded by corporate contributions also compromises its independence, critics say. Until 2003, the FASB was funded under the same arrangement for 30 years. That changed with the passage of Sarbanes-Oxley, which required the board to be funded by mandatory contributions from the Public Company Accounting Oversight Board (PCAOB), which Congress created to provide better regulatory oversight of the accounting industry.

Miller at the University of Colorado says a better source of funding for a standards board would be stock exchanges, which could charge a fee to buyers and sellers who use the exchanges to do transactions and presumably are users of financial statements. "I would far rather see money going to an international board from users of financial standards than those who prepare them," he says.

Another concern is whether the SEC would continue to have regulatory oversight if U.S. companies adopt IFRS. Says Miller: "The big issue is that sending it offshore diminishes our control, and in a time of crisis where accounting has played a part, I don't think it's especially wise to create a new system that diminishes U.S. control over accounting standards."

Bogoslaw is a reporter for BusinessWeek's Investing channel.