The US’s current share of global market capitalisation now stands at just over 30 per cent, compared to an average of 45 per cent between 1996 and 2006. US financial markets have not shrunk; it’s just that other parts of the world—in particular the Asian financial centres—have become global players.
These developments call for the United States to play a key role in developing global standards. The California Public Employees’ Retirement System, or CalPERS, the largest public pension fund in the United States, explained in its submission to the SEC why it believes the SEC should move forward with adoption of IFRSs. In closing, CalPERS stated that “the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors’ trust in financial reporting.”
US investors, preparers and capital market providers recognise the substantial benefits that come from everyone speaking the same financial language, while securities regulators understand that, without it, opportunities for regulatory arbitrage will remain. That is why Mr Hoogervorst believes that the case for global accounting standards, and with it the case for US adoption of IFRSs, remains compelling.
This is an important decision for the United States, as well as for other parts of the world that have yet to commit formally to IFRSs. There are various arguments for or against incorporation of IFRSs in the US financial reporting regime.
A major comfort to the United States should be that if they adopt IFRSs the SEC will remain in full control of enforcement. So there is absolutely no danger of importing different enforcement standards from abroad into the United States. Indeed, it is much more likely that international standards of IFRS enforcement will benefit from the SEC’s rich experience and active participation.
It is difficult to imagine that, after a decade of investment in convergence, a negative decision could be a possible outcome, or that the United States would intentionally choose to discard international leadership, in something as fundamental as financial reporting.
It is also not clear what the alternative would be. IFRSs will continue to evolve. A US commitment to maintaining existing levels of convergence with IFRSs would require the FASB to spend most of its time eliminating new differences. Is this the best use of the FASB’s considerable talents, expertise and knowledge of the international environment? If the US chooses not to maintain convergence, it would lead to divergence. That is certainly not what policymakers need as they navigate the ongoing financial crisis.
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