IFRS Fundamentals Course

I am pleased to be here and to welcome to you to the PCAOB’s International Financial Reporting Standards fundamentals training course. I made opening comments at the first Board IFRS training session, in Denver, back in January. It seems to make sense for me to also introduce this last session here in Washington.

The SEC’s IFRS roadmap -- which you will be hearing about in detail today -- lays out a long and steep route to the use of IFRS, instead of U.S. GAAP, by all 12,000 U.S. public companies. [1]

That would be a formidable challenge for everyone in the United States that is involved in public company financial reporting and auditing, including the Board. This training program is one early step on the Board’s road into the IFRS world.

I thought I would set the stage by spending a few minutes highlighting some of the issues that IFRS poses for us. Of course, my views are solely my own, and not necessarily those of the Board, other Board members, or the PCAOB’s staff.

I. Will the U.S. Follow the Roadmap?

First, it is important to bear in mind that a switch to IFRS on the timetable the SEC has proposed is by no means a certainty. A lot has changed since last August when the SEC voted to issue its roadmap. Given both the market crisis and recent scandals, the priority of a move to IFRS and the benefits of devoting resources to it in the short-term look different than they did just a few months ago.

Two Compliance Week articles capture that change in attitude. In January, I began my comments by discussing an article entitled &quotSEC Begins Long March to IFRS Mandate by 2014." [2] That article described the roadmap and how it would be put into effect. Two weeks ago, the same publication carried an article that begins with this sentence: &quotMomentum to adopt international accounting standards in the United States, which had appeared to be a certainty as recently as last summer, is suddenly disappearing more quickly than an AIG bonus." [3]

The comments that the SEC is receiving on the roadmap illustrate what the Compliance Week columnist had in mind. Many voice doubts about the roadmap. For example, the FASB said:

"[W]hile the FAF and the FASB continue to support strongly the ultimate goal of a single set of high-quality global accounting standards as part of a global financial reporting system, in our view, additional study is needed to better identify, understand, and evaluate the strengths, weaknesses, costs, and benefits of possible approaches the U.S. should take in moving toward that goal." [4]

United Technologies was even blunter: &quotWe encourage the Commission to focus their immediate attention on helping our government restore confidence and stability in the U.S. financial markets, at the expense of the IFRS initiative."[5]

At this point, you might be saying to yourself that enrolling in this training was obviously a bad idea, since the U.S. isn’t going adopt IFRS after all, and wondering how you can sneak out of the room without being noticed. While there may be some unanticipated detours on the roadmap, I think leaving now would be a mistake.

In my view, IFRS is still coming, although the form and timing of the transition are less clear than they were. The movement from GAAP to IFRS may end up as more of a convergence than a sudden switch. The new SEC Chair, Mary Schapiro, has put it this way:

"When it comes to international accounting standards, it’s critical that these standards are converged in a way that does not kick off a race to the bottom. American investors deserve and expect high standards of financial reporting, transparency, and disclosure -- along with a standard-setter that is free from political interference and that has the resources to be a strong watchdog." [6]

As Chairman Schapiro highlighted, there are serious and difficult policy issues regarding the comparative quality of IFRS and GAAP. A continuation of the ongoing convergence of IFRS and GAAP may be preferable to a near-term abandonment of GAAP in favor of IFRS.

That doesn’t, however, change the fact that, as, IFRS proponents argue, there would also be real benefits to a single, comparable basis for financial reporting worldwide. In my view, most of the people in this room will, by the end of their careers, be living and working in an IFRS-based financial reporting world -- either because the switch to IFRS that the roadmap contemplates will have finally occurred, or because, through the ongoing convergence process, the FASB and the IASB will have made GAAP and IFRS functionally the same. Either way, given the Board’s responsibilities, it’s critical that we begin to prepare for that world.

II. What the IFRS Roadmap Means for the Board

With that in mind, I would like to highlight four areas that raise particular issues for the PCAOB as we start to draw up our own roadmap.

A. Training

Perhaps the most direct challenge for us is training, particularly of the inspections staff. IFRS is currently not a part of the accounting curriculum in the United States and is not tested on the CPA exam. Yet, if the audits we inspect are of IFRS financial statements, then obviously the Board’s staff must be as conversant with IFRS as the auditors we oversee and their clients. The roadmap explicitly recognizes the challenge this presents and notes that &quotthe PCAOB has already begun to implement training courses in IFRS to assist its staff in carrying out inspections." [7]

Our training is just one side of the coin. Accounting firms -- large and small -- that audit public companies will also have to make sure that their staffs are fluent in IFRS. In fact, firm IFRS training may have to be added to the list of quality control issues we review when we perform an inspection.

Our training needs will have to be met quickly. The SEC has already permitted foreign private issuers to file their financials in IFRS without a GAAP reconciliation. This means that we are already inspecting some foreign private issuer engagements in which IFRS financial statements were audited.

B. Limited Early Use Proposal

There is a second reason why our inspections program may encounter IFRS filers sooner rather than later -- the SEC’s early use proposal.

The SEC’s roadmap release includes a proposal to let some U.S. companies use IFRS voluntarily. [8] Early use would be allowed for a limited number of U.S. issuers for fiscal years ending after December 15, 2009 – that is, for filings made beginning in 2010. These early users would have to be in industries where their competitors -- the companies to which their financials are typically compared -- are already reporting in IFRS.

It is difficult to tell how many issuers would elect to participate in the early use program. Issuers’ decisions will undoubtedly be impacted by the estimated costs, as well as by the risk of having to “revert back to U.S. GAAP” if the Commission determines not to require IFRS. We have heard informally that, in light of the current financial crisis, very few companies are interested in being early IFRS adopters. At some point, however, we may need to be ready for the possibility that our inspectors will encounter the limited early use program.

C. Changes to Internal Control Systems

A third way in which the roadmap may raise new issues for us relates to the effect on information systems and controls.

The roadmap notes that the "[u]se of any new accounting standards requires changes to financial reporting systems and procedures." It adds -- with some understatement -- that "[c]hanging numerous accounting standards at the same time * * * would require numerous changes in a company’s policies and procedures and system of internal controls." [9]

The possibility that all public companies in the United States will need to change their financial reporting systems and internal controls raises a host of issues. For example --

  • How do the independence rules apply to audit firms providing IFRS consulting services to audit clients?
  • How would these systems’ transitions affect audit risk? How would these changes in policies, procedures and control systems affect our engagement selection process?
  • How would IFRS-driven changes to a company’s internal control system impact the internal control aspect of integrated audits? In turn, how would our inspections be affected?

D. Need for Additional Auditing Guidance

Finally, a move to IFRS would affect Board standard setting.

One of the biggest issues in this area relates to the role of judgment. It is often observed that IFRS is shorter and more principles-based than GAAP. In essence, what this means is that there are more areas in which there is room for -- in fact an unavoidable need for -- preparers and auditors to make judgments about the appropriate accounting.

The SEC’s Advisory Committee on Improvements in Financial Reporting recommended that the SEC issue guidance on how it evaluates accounting judgments and that the Board issue guidance on how we evaluate auditing judgments.[10] Dealing with company accounting decisions in areas where there is latitude for judgment is already one of the most difficult tasks that auditors -- and therefore our inspectors -- face. The move to IFRS would expand the role of judgment in accounting and auditing and put new pressure on us to provide this sort of guidance.

IV. Conclusion

In conclusion, the possible transition to IFRS reporting clearly raises challenging issues for the PCAOB and for auditors. The Board has established an IFRS Working Group to coordinate our response. The efforts of that working group -- as well as the leadership of Kecia Williams Smith -- gave birth to this training program. Regardless of when and exactly how the IFRS shift happens, the program begins our effort to get ahead of the curve for what will be a once-in-a-lifetime change in financial reporting,

With that, I will turn it over to the course leaders. However, if there are any questions or comments for me, I would be happy to take them now.

Thank you being here this morning, and I hope you find the training useful and interesting.


[1] Securities Act Release No. 8982 (November 14, 2008) ("Roadmap Release").

[2] Aguilar, &quotSEC Begins Long March to IFRS Mandate by 2014," Compliance Week at 1 (January 2009).

[3] Aguilar, "Enthusiasm for IFRS Roadmap Fading Fast," Compliance Week at 1(March 24, 2009).

[4] Brennan and Herz, Comment Letter from theAccounting Standards Board relating to the Roadmap Release at 7 (March 11, 2009).

[5] Smythe, Comment Letter from United Technologies Corporation relating to the Roadmap Release at Financial Accounting Foundation and the Financial 1 (March 13, 2009).

[6] Responses to Questions from Senator Carl Levin for Mary Schapiro, Nominee to be Chair of the Securities and Exchange Commission at 4-5 (January 8, 2009).

[7] Roadmap Release at 30.

[8] Roadmap Release at 30-32; 51-78.

[9] Roadmap Release at 39.

[10] Final Report of the Advisory Committee on Improvements to Financial Reporting to the U.S. Securities and Exchange Commission at 93-96 (August 1, 2008).

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