[Introductory note: James J. Leisenring joined
the staff of the Financial Accounting Standards Board in 1982 as
director of research and technical activities and became chairman
of the Emerging Issues Task Force when it was formed in 1984. He
was appointed as a member of the FASB in October 1987 and was appointed
its vice chairman effective January 1, 1988. Mr. Leisenring is currently
serving a five-year term as a member of the FASB that was effective
on July 1, 1995.
Prior to joining the Board, he was a partner and director of accounting
and auditing for Bristol, Leisenring, Herkner & Co. of Battle
Creek, Michigan, a firm that is now a part of Plante & Moran.
He served as chairman of the Auditing Standards Board of the American
Institute of CPAs and has been a member of several other Institute
committees. From 1964 to 1969 he was a member of the faculty of
Western Michigan University.
Mr. Leisenring received his BA from Albion College and an MBA from
Western Michigan University. In 1981 he was named Accountant of
the Year by the national Beta Alpha Psi accounting fraternity.]
It is an honor to be asked to present the Emanuel Saxe Lecture at
Baruch College this evening.
The Mission Statement of the Financial Accounting Standards Board
(FASB) states, "Accounting standards are essential to the efficient
functioning of the economy because decisions about the allocation
of resources rely heavily on credible, concise, and understandable
financial information."
The Mission Statement also concludes:
"The Board believes that this broad public interest is best
served by developing neutral standards that result in accounting for
similar transactions and circumstances similarly and for different
transactions and circumstances differently."
Those two conclusions are fundamental to our mission, and there is
nothing about an international border that would suggest those same
conclusions aren't as appropriate for cross-border international reporting
and accounting standard setting as they are here in the United States.
That, of course, is based on the assumption that we are talking about
open capital markets, not those controlled by a government. Indeed,
the Board's Mission Statement also states that we will "promote
the international comparability of accounting standards concurrent
with improving the quality of financial reporting."
The Strategic Plan of the FASB indicates that our efforts in international
activities should be guided by the belief that the ultimate goal of
internationalization of accounting standards should be a body of superior
accounting standards. Later, I will discuss the attributes we think
are essential for accounting standards to be judged of high quality.
ENVIRONMENTAL INFLUENCES ON ACCOUNTING STANDARDS
Accounting standards are influenced by the economic and social environment
in which they are established and applied. Several characteristics
of the U.S. environment are important in that regard. These characteristics
also influence the ways in which the United States adapts to and promotes
the internationalization of accounting standards.
The first and most dominant of these characteristics is heavy reliance
on open capital markets. In the United States, both debt and equity
capital are raised in large measure through marketable securities
issued in active auction markets where buyers are both individual
and institutional investors. Bank loans and private placements are
important, but they are priced and transacted in the shadow of the
auction markets. U.S. law prohibits banks from owning significant
equity interests in industrial companies. Thus, unlike the close,
long-term banking relationships that are common in Germany, Japan,
and some other countries--bound by such ties as equity interests and
interlocking directorates--capital seekers and capital suppliers in
U.S. markets tend to be independent, with both parties looking for
targets of opportunity.
A second and closely related characteristic of the U.S. environment
is that U.S. financial accounting standards are designed almost exclusively
to facilitate investor-creditor decision making. Audited general-purpose
external financial statements help bridge the information gap between
suppliers and seekers of capital. Financial statements are a substitute
for close relationships whereby capital suppliers have continuing
access to confidential information about the entities in which they
invest.
A third characteristic of the U.S. environment is an extensive network
of capital market regulation. The Securities and Exchange Commission
(SEC) and no less than five bank regulatory agencies at the national
level are augmented by similar regulatory agencies in the 50 states.
All of the national regulators have the power, if they choose to exercise
it, to impose accounting requirements for regulatory purposes. But,
unlike in some other countries, our regulators don't assess the merits
of any investments.
In that regard, a fourth characteristic of the U.S. environment is
a tradition of private-sector standard setting for generally accepted
accounting principles (GAAP). The SEC has the authority to set accounting
standards for securities market registrants, but the Commission has
always relied on the private sector--first on the American Institute
of Certified Public Accountants (AICPA) and now on the FASB. As a
matter of long-standing policy and, more recently, as a matter of
law, bank regulators also look primarily to private-sector standards,
but they often impose special requirements for regulatory reporting
purposes.
A fifth characteristic is the nearly total separation of financial
and tax accounting. There is really only one instance in which U.S.
tax law directly imposes constraints on general purpose financial
reporting.(2) This
separation differs markedly from some other industrial countries,
notably Germany and Japan.
A final characteristic of the U.S. environment is a high incidence
of litigation. The objective of U.S. securities law is investor protection,
which requires fair and equal treatment of investors, founded on full
disclosure to all market participants of information about the financial
and other risks of investment alternatives. The law abhors insider
trading, misleading or substandard financial reporting, substandard
auditing, and, of course, financial fraud. And we have a host of lawyers
ready to litigate at the slightest sign of financial impropriety.
All of these factors have played a prominent role in the development
of U.S. accounting standards. But differences in domestic business
organization and capitalization, legal and political systems, and
historical and cultural factors influence all national accounting
systems. Like the United States, other countries' accounting systems
have developed in response to the environment in each country.
In today's global economy we have to cope not only with the pressures
of the domestic environment, but also with the protocols and complexities
of reaching multijurisdictional agreements. Since the eighties, there
has been an increasing awareness that accounting can be an impediment
to cross-border financing, and thus there has been a demand for comparability
in financial reporting among companies of different domestic origin.
CONCERNS IN THE CURRENT INTERNATIONAL ENVIRONMENT
The globalization of capital markets is an irreversible process,
and there are many potential benefits to be gained from mutually recognized
and respected international accounting standards. Common standards
cut the costs of doing business across borders by reducing the need
for supplementary information. They make information more comparable,
thereby enhancing evaluation and analysis by users of financial statements
and reducing user costs. Users become more confident of the information
they are provided, and presumably this reduced uncertainty promotes
an efficient allocation of resources and reduced capital costs.
Comparability, which has always been one of the driving forces of
U.S. accounting standards, has become the focus of cross-border financial
reporting. Comparability assumes there is a common measuring yardstick
by which to distinguish similarities and differences that informed
users can rely upon in making decisions about providing resources,
that companies can rely upon to conclude whether they have properly
prepared financial statements, and that securities regulators can
rely upon to adequately detect potential misinformation in a timely
manner.
Standards also help maintain the credibility of financial reporting
to the public and increase the efficiency of auditing that information.
By providing mutually accepted financial information and thereby opening
access to various capital markets, multinational enterprises can reap
the benefits of greater visibility, greater liquidity, better share
prices, lower costs of capital, and better access to investors.
There are inherent problems with setting international standards,
however. Because of the competing perspectives of different nations,
along with the universal tendency to resist change, too often cooperation
comes only from compromise and sometimes to the detriment of quality.
A fundamental problem with accounting standards is that the compromise
in the negotiation of the standards often leads to a "lowest-common-denominator"
approach. The belief often is that any agreement is better than no
agreement. This often will lead to suboptimal standards at best. The
International Accounting Standards Committee (IASC) has faced, and
continues to face, these issues in attempting to develop mutually
recognized international accounting standards. While the lowest common
denominator is not the target of IASC standards, the standards often
contain so much purposeful ambiguity that when applied, they will
not enhance comparability.
On the regulatory side, another problem arises even if international
accounting standards exist. Some actions that are designed to promote
international comparability may actually detract from comparability
within a particular market. For instance, if the SEC were to allow
foreign issuers to use IASC accounting standards in U.S. capital markets
without reconciliation to U.S. GAAP that action would raise concerns
about comparability between foreign and domestic issuers. Unfortunately,
eliminating reconciliation takes valuable information out of the hands
of financial statement users--information that is intended to compensate
for noncomparability.
Tolerating the use of different standards by foreign and domestic
companies not only detracts from comparability, but may also undermine
our domestic financial reporting. If different standards are acceptable
for foreign companies to use when listing in U.S. capital markets,
it becomes difficult to justify different requirements for our domestic
companies. Introducing differences in financial accounting standards
in domestic capital markets where they did not exist before is the
antithesis of harmonization, and the ultimate effect of various proposals
in the United States to ease requirements for foreign issuers could
significantly erode comparability. At some point, differences will
have to be eliminated.
The FASB believes that increased comparability in financial reporting
levels the playing field for both foreign and domestic companies.
Standardizing the requirements for accessing capital markets also
is important. At the same time, however, we must be concerned about
the way we make the transition from the current system of independent,
national standard setters to an emerging global system.
Though we believe strongly in the need for market forces to be able
to work freely in the global economy, we are unwilling to accept international
standards derived from a lowest-common-denominator approach simply
in the name of internationalization. In working toward an acceptable
body of international standards, standard setters must work together
to minimize differences while improving the quality of financial reporting
around the world.
HIGH QUALITY ACCOUNTING STANDARDS
We cannot call for superior or high quality accounting standards
without articulating what we mean by high quality. Recently, the EASB
set forth its views on this matter in a working paper.(3)
I quote from the introduction to that paper:
This paper describes the attributes of high-quality accounting
standards that contribute to high-quality financial reporting. This
paper is based on the premise that high-quality financial reporting
is financial reporting that provides decision-useful information
for outside investors, creditors, and others who make similar decisions
about allocation of resources in the economy.
A reasonably complete set of neutral accounting standards that
require relevant, reliable information that is decision-useful for
outside investors, creditors, and others who make similar decisions
would constitute a high-quality set of accounting standards. Each
of those accounting standards should:
- Be consistent with the guidance provided by an underlying conceptual
framework.
- Avoid or minimize alternative accounting procedures, explicit
or implicit, because comparability and consistency enhance the
usefulness of information.
- Be unambiguous so that the standard is understandable by preparers
and auditors who must apply the standard and by users who must
deal with the information produced by the standard.
We believe these characteristics are essential for any set of accounting
standards to meet the demands for decision-useful information in our
capital markets.
The FASB strives to achieve standards of this quality domestically
and in our international activities, and we believe this can best
be done in a very open process. Our working paper also concludes:
Accounting standards in their formative stage must be subjected
to rigorous procedures that encourage all interest groups to communicate
their views to the standard setter. Similarly, the deliberative process
of the standard setter should be open to observation by all interest
groups so that the public is informed on a timely basis about important
developments pertaining to the standard setter's projects. A standard
setter's consideration of the diverse views and concerns of its constituents
enhances the overall quality of the final accounting standard by improving
the standard setter's judgment about matters such as, to cite just
two examples, why certain information is or is not relevant in particular
circumstances or why certain information is or is not reliable if
provided by a particular method or procedure.
FASB'S INTERNATIONAL INITIATIVES
The FASB formally responded to the challenge of the need for international
comparability by developing a strategic plan for international activities
in 1991, which was most recently reviewed in 1995. In the most recent
plan, we identified the ultimate goal or the ideal state of international
accounting standards to be a body of superior standards accepted in
all countries as GAAP for general-purpose external financial statements.
This goal is, of course, beyond the control of any one standard setter.
Each individual standard setter can, however, contribute to the achievement
of that goal.
In the years since we set forth our objectives and strategies in
our international plan, we have undertaken a significant number of
international initiatives. Our activities include standard-setting
activities, as well as other activities.
Standard-setting activities involve direct cooperation with other
standard-setting organizations to resolve specific issues and to work
toward reducing differences in accounting standards between nations.
Initiatives have included a joint standard-setting project on segment
reporting with Canada and working in parallel with the IASC on the
topic of earnings per share. Also, we joined with Canada, Mexico,
and Chile in the wake of the North American Free Trade Agreement to
analyze similarities and differences between accounting standards
in our four countries.
Perhaps our most important activity is our participation in a working
group often referred to as the G4+1. It is not a very accurate description.
Just as the Big Ten Athletic Conference has eleven teams, the G4+1
consists of five standard-setting bodies plus the IASC as the +1 participant.
(The participating standard-setting bodies are from Australia, Canada,
the United Kingdom, New Zealand, and the United States.) While all
of these organizations are based in English language countries, language
is not the common bond that brought the group together.
Each of these standard setters explicitly accepts that the purpose
of financial reporting is decision-useful information for outside
investors, creditors, or potential investors and creditors. That assumption
also is fundamental to our conclusion on high-quality accounting standards.
Decision-useful information is not, however, universally accepted
as the purpose of external financial reporting.
At the present time, the G4+1 standard-setting bodies plus representatives
of standard setters in the Nordic Federation, Japan, Germany, and
France have begun work on a comprehensive financial instruments standard.
Whether progress can be achieved by this group will be closely observed.
We also have given consideration to adopting standards of other standard-setting
bodies for areas where current U.S. GAAP is limited, problematic,
or nonexistent. A recent example of this is our consolidations project,
in which the Board's consideration of the Australian standard and
similar control-based standards in other countries has resulted in
a focus on control, rather than ownership, as a basis for consolidation.
The Board has also agreed to consider very carefully the conclusions
of other standard setters in developing its conclusion about the appropriate
accounting for business combinations.
We have made it a priority to maintain an international network that
promotes cooperative relations and communication between the FASB
and other standard-setting organizations aside from specific issues.
We continue to expand our communications with other standard setters
around the globe through visiting standard setters in other countries,
exchanging, publications, making speeches, and attending international
conferences.
Perhaps more important, we also have undertaken to create an organization-wide
awareness and to ensure that the FASB processes take a global perspective.
We have concentrated on increasing our staff and Board members' knowledge
of international issues and their impact. Individual staff members
are assigned to monitor the accounting developments in all the major
countries as well as in various international organizations. The FASB
has also actively pursued opportunities to hire foreign nationals
directly. In addition, we have arranged exchanges of staff with the
Australian standard-setting organization, had our staff assigned in
the United Kingdom, and are exploring exchange opportunities with
other standard setters.
In late 1996 we completed a very comprehensive comparison of U.S.
GAAP and the standards of the IASC. As indicated in the introduction
to the study:
(The) report is designed to assist investors, analysts,
regulators, standard setters, and others in coping with the challenge
of international comparability. Specifically, the four objectives
of the study were:
- To provide a basis for the FASB and the IASC to raise the quality
of their standards while narrowing the differences between them;
- To provide a tool for investors, financial analysts, and other
users of financial statements to use in comparing U.S. firms with
firms that use IASC standards;
- To provide an information base that can be used in assessing
the acceptability of IASC standards for securities listings in
the United States;
- To provide insights into the relative strengths of the IASC
and FASB structures and processes for serving the ongoing information
needs of U.S. capital markets.
In all of our activities we look for exposure to new insights and
ideas from other national and international standard setters and from
financial statement users, preparers, auditors, and educators in other
countries. This affords us the opportunity to evaluate and revise
our international plan to maintain its effectiveness and relevancy.
For instance, the original strategic plan was based on the premise
that domestic financial reporting needs would continue to be the FASBs
first priority and that other national standard setters would likewise
look first to their domestic needs. We now recognize that international
issues are so intertwined with domestic issues that there is no way
to clearly separate the two. Foreign standards that differ from U.S.
standards present analytic obstacles for U.S. investors and concerns
for U.S. companies. Thus, the FASB's obligation to its domestic constituents
demands that it attempt to narrow the range of difference between
U.S. and foreign standards. Addressing those problems is as much a
part of the FASB's domestic agenda as it is of international concern.
LOOKING FORWARD
The FASB perspective on the development of international accounting
standards is, we think, based on the realities of both our domestic
environment and the international standard-setting environment. The
FASB's obligation to the domestic environment necessarily limits its
direct contribution to international comparability. However, we realize
that accounting standard-setting in the United States cannot realistically
be self-centered, and domestic priorities must extend to encompass
international implications.
Thus, there is a symbiotic relationship between accounting standards
and capital markets. Domestic accounting standards play an important
role in domestic capital markets. As capital markets become increasingly
internationalized, domestic priorities may clash with international
pressures. This is increasingly more apparent in the United States,
where foreign companies seek to take advantage of a market where "the
amount of money available ... is by far the largest pool in the world,
and the number of investors, whether institutional or individual,
is broader than in any other country".(4)
The FASB plans to continue with its current international contributions
and recognizes that our role is evolving, as is the role of other
national and international accounting organizations. I believe that
the FASB has an important role to play in the international accounting
environment. We have learned many lessons over the past 20 years or
so, and we gain experience every day. There is no need to reinvent
the wheel in the international arena. Our experience provides a vantage
point, a stepping stone, from which both ourselves and others can
move forward. We need not start from ground zero.
The timing could not be better; we are still at the beginning of
an era. The choices we make today about how we will approach the internationalization
challenge will have far-reaching implications for tomorrow. It is
time to construct the fundamental building blocks for future harmony
in a considered and careful manner, and not create ad hoc compromises
that diminish comparability or standards that sacrifice quality.
These are the key issues we must focus on: comparability and quality.
We also believe that the type of standards that will meet our objectives
will by necessity be created in a very open environment with a due
process available to all interested parties.
In our efforts at the FASB we are striving to help ensure that the
internationalization of accounting is synonymous with the highest
possible quality of financial reporting.
FOOTNOTES
(1) Expressions
of individual views by members of the FASB and its staff are encouraged.
The views expressed in this paper are those of Mr. Leisenring. Official
positions of the FASB are determined only after extensive due process
and deliberation.
(2) U.S. tax law
requires that if LIFO is used for inventory measurement for tax purposes,
it also must be used for financial reporting.
(3) FASB working
paper for American Accounting Association - FASB Financial Reporting
Issues Conference, December 1997.
(4) John A. Jensen,
Jr., quoted in the Wall Street Journal, "Foreign Firms
Raise More and More Money in the U.S. Markets," October 5, 1993,
p. Al.
