News: Analysis & Commentary
Commentary: Can the SEC Make Foreign Companies Play by Its Rules?
Securities & Exchange Commission Chairman Arthur Levitt Jr. has put accounting abuses near the top of his agency's target list. To protect investors, the SEC has launched high-profile cases against U.S. companies that fiddled with their books, as well as accountants and auditors who turned a blind eye. But now the commission is debating letting European and Asian companies trade their stocks in U.S. markets without adopting American number-crunching, relying instead on looser international rules that give investors less data. Is Levitt turning in his green eyeshade and sleeve garters?
Hardly. The SEC's Feb. 16 request for comments on how well the international standards work is a shrewd ploy by the SEC chief. His hope: to bolster his stand against the weaker accounting rules by building support from U.S. companies. The idea is that Corporate America won't want to compete at home for capital with foreign firms that are trumpeting big earnings calculated under easier international rules. If Levitt succeeds, the result could be better accounting for all companies--foreign and domestic.
The forces pushing for easier accounting are formidable. Near the front are the New York Stock Exchange and Nasdaq. They face growing competition, both from electronic markets at home and from foreign exchanges such as Deutsche Bourse. It has applied to put its terminals in New York to let U.S. investors trade on European markets. The U.S. markets hope to fight back by giving European and Asian companies direct access to the world's richest capital market. But many foreign companies won't list on Wall Street if they must meet American rules. They want the U.S. to accept the International Accounting Standard Committee's way of toting up assets and earnings."BENCHMARK." Levitt's challenge to IASC supporters: Prove that the new global math is as good as U.S.-style generally accepted accounting principles. It's a hurdle proponents will have a hard time leaping. IASC rules usually are looser and require less disclosure (table). That means that earnings and other data could be less reliable. Research-and-development expenses can be amortized, for example, giving managers a pot of money useful for smoothing earnings.
The SEC also fears that international rules won't be applied very rigorously. They deliberately allow inconsistencies, which will likely confuse investors. The rules will set a "benchmark" for, say, valuing financial assets, then offer options that a company can choose instead. Accounting rules in the U.S. allow such exceptions only rarely.
Fans of the international standards say that flexibility is a plus. For example, the IASC requires that a company building its own facilities write off interest on the project immediately--but also accepts a U.S. rule requiring that the interest be spread out. "We thought that would help win more support," says IASC vice-chair Pat McConnell, an accounting analyst at Bear, Stearns & Co.
So far it hasn't. But in the end, that Chinese-menu flexibility could help the SEC's quest for the best standards. For foreign firms, the commission could specify international rules in the few cases when they're tougher and GAAP from the U.S. elsewhere. Investors would get a clear picture because every foreign company trading in the U.S.--and perhaps eventually even domestic companies--would follow the same system. And U.S. leadership could someday make this rulebook the world's standard. Long after he's left the SEC, Levitt's eyeshade may shield investors around the globe.By Mike McNamee; McNamee Covers Finance from Washington, D.C.Return to top
How international and U.S. accounting rules varyFIXED ASSETS
International standards allow companies to revalue buildings and equipment when they choose, creating an opportunity to boost equity if assets increase in value. U.S. rules value assets at cost.MERGERS
International rules almost completely bar "pooling of interest" in mergers, since it allows companies to ignore the full cost of acquisitions. Pooling is easier under U.S. rules, but rule-makers are trying to limit it.R&D COSTS
Under U.S. accounting, research and development must be subtracted from current earnings. International standards allow companies to spread out some development expenses, which could enable them to smooth annual earnings growth.GOODWILL
U.S. rules set a 40-year maximum for writing off goodwill, which reduces earnings. International standards don't specify a maximum. That allows companies to reduce the impact on profits by taking smaller write-offs over a longer period.
DATA: SEC, FINANCIAL ACCOUNTING STANDARDS BOARDReturn to top