Accounting firms and Banking & Finance and Accounting and Sarbanes-Oxley and Manufacturing & Technology and International Business

Accounting firms preparing for new international standards

November 3, 2008
Just as public companies and their auditors are becoming more comfortable with Sarbanes-Oxley regulation, along comes another sweeping change that could have an even larger impact on the accounting profession.

A switch to International Financial Reporting Standards would bring the United States in line with more than 100 countries, including all of Europe. For corporations with a global presence, the transition to a single accounting language should streamline the financial reporting system.

In August, the U.S. Securities and Exchange Commission elected to pursue a "road map" toward adopting the international standards for all public companies by 2014. Although that's six years away, and the shift is far from certain, the majority of the accounting profession thinks it's going to happen.

Most members of the New York-based American Institute of Certified Public Accountants think it will take three to five years to make the changes. But some corporations such as Procter & Gamble already have started using the international standards for their foreign subsidiaries.

"I believe it's inevitable that IFRS is coming," said David Haas, a partner at the local office of New York-based PricewaterhouseCoopers. "Most of the global capital countries have adopted or plan to adopt it."

The number of countries making the change could grow to 150 within the next few years, with Canada and India expecting to transition by 2011.

U.S. companies have been doing business under Generally Accepted Accounting Principles for seven decades. The "generally accepted" part applies to just the United States, where the unique system of financial reporting piles rule on top of rule. The result is 9 inches of pages, compared to 2 inches under the international standards.

Adopted in 1971, those rules gradually gained popularity largely because they are less detailed. International guidance regarding revenue, for instance, is much less extensive than GAAP's and contains little industry-specific instructions. While countries allowed U.S. principles as an alternative, they fell out of favor after the European Union embraced the international standards in 2005.

That prompted the SEC to get serious about following suit, although it and the Financial Accounting Standard Board for years have considered blending the rules. FASB establishes financial accounting and reporting standards.

Whether private companies ultimately adhere to the international rules remains to be seen. But many have adopted provisions of Sarbanes-Oxley, such as the formation of independent audit committees.

Smaller accounting firms such as the locally based BGBC Partners LLP also might be affected. It has no public-company clients but does have several owned by foreign entities. That's prompted Steve Eichenberger, the firm's managing partner, to stay apprised of the developments.

"I think it's a good thing," he said. "To have standardization across the world, it would tend to make sense."

Drawbacks exist

Potential disadvantages persist, however. Companies without operations outside the country might resist because they have no incentive to follow the standards, FASB acknowledged.

Another concern is that many countries claiming to convert to international standards may never get to full compliance. Most reserve the right to carve out selectively, or modify, standards they do not consider in their national interest. That could lead to incompatibility—one of the issues IFRS seeks to address, according to FASB.

And then there's the cost to convert. The amount depends upon the size and nature of the company, although it is expected to be significant. Similar to when Sarbanes-Oxley went into effect, accounting firms will need to spend large sums of money on consultants to incorporate the changes. But the conversion ultimately might result in a reduction of operating costs.

Additional training will be needed, too. Accountants, auditors and others likely will need continuing education to become familiar with the new rules. Trade associations and industry groups will be integrating the standards into their training materials, publications, testing and certification programs.

Corporate executives are beginning to realize the importance of additional training. Seventy-one percent of chief financial officers surveyed by California-based Robert Half Management Resources, a temporary staffing agency for the accounting profession, said international experience will be necessary for accounting and finance professionals five years from now.

The accelerating pace of globalization and the impending adoption of the global standards will continue to drive demand for professionals with international business experience, Paul McDonald, executive director of Robert Half, said in a release.

Colleges unprepared for change

But perhaps the biggest impact will be on colleges and universities, where professors are not yet prepared to incorporate IFRS into the curriculum. In fact, less than a quarter of the 535 surveyed said they felt comfortable doing so this academic year.

More than half said they have yet to make any substantial plans, according to the survey conducted by the American Accounting Association and Big Four firm KPMG LLP.

Jim Sander, an associate professor of accounting at Butler University, is an exception. He's been researching the issue for years and co-wrote an article on the topic published last year in Management Accounting Quarterly.

"All my professional life, I have studied U.S. accounting principles," he said. "Now, I'm going to have to basically replace my understanding and relearn it based on International Financial Reporting Standards."

For two years, Sander has been telling his students the change is likely to happen and occasionally discusses with them the switch. For students already being taught U.S. standards, the transition may be more difficult, Sander said.

He has applied for a sabbatical next year and plans to use the time to further study the international standards whose importance could be unprecedented.

"It's probably the biggest accounting change [I've seen] in my professional life," Sander said, "and I'm 57."
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