[Senate Hearing 110-951]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-951

 
                  INTERNATIONAL ACCOUNTING STANDARDS:
        OPPORTUNITIES, CHALLENGES, AND GLOBAL CONVERGENCE ISSUES

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                SECURITIES AND INSURANCE AND INVESTMENT

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

   OPPORTUNITIES, ISSUES, DIFFERENCES AND CHALLENGES AS THE U.S. AND 
INTERNATIONAL COUNTRIES MOVE TOWARDS CONVERGENCE OF IFRS WITH U.S. GAAP 
   ALONG WITH THE IMPACT OF THESE PROPOSED EFFORTS ON STAKEHOLDERS, 
        INCLUDING REGULATORS, INVESTORS, AUDITORS AND COMPANIES


                               __________

                      WEDNESDAY, OCTOBER 24, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                       Dean V. Shahinian, Counsel
           Mike Nielsen, Republican Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                          Jim Crowell, Editor

                                 ------                                

        Subcommittee on Securities and Insurance and Investment

                   JACK REED, Rhode Island, Chairman
                 WAYNE ALLARD, Colorado, Ranking Member
ROBERT MENENDEZ, New Jersey          MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            JOHN E. SUNUNU, New Hampshire
CHARLES E. SCHUMER, New York         ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
ROBERT P. CASEY, Pennsylvania        JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
JON TESTER, Montana

                     Didem Nisanci, Staff Director
              Tewana Wilkerson, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, OCTOBER 24, 2007

                                                                   Page

Opening statement of Chairman Reed...............................     1

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     3
    Senator Bennett..............................................     4
    Senator Schumer..............................................     5
        Prepared statement.......................................    41

                               WITNESSES

Sir David Tweedie, Chairman, International Accounting Standards 
  Board..........................................................     6
    Prepared statement...........................................    42
Robert H. Herz, Chairman, Financial Accounting Standards Board...     9
    Prepared statement...........................................    60
Conrad W. Hewitt, Chief Accountant, Securities and Exchange 
  Commission.....................................................    12
    Prepared statement...........................................    84
    Response to written questions of:
        Senator Reed.............................................   157
John W. White, Director, Division of Corporation Finance, 
  Securities and Exchange Commission.............................    13
    Prepared statement...........................................    87
    Response to written questions of:
        Senator Reed.............................................   157
Jack T. Ciesielski, President, R.G. Associates, Inc..............    28
    Prepared statement...........................................    91
Charles E. Landes, Vice President, Professional Standards and 
  Services, American Institute of Certified Public Accountants...    29
    Prepared statement...........................................   102
    Response to written questions of:
        Senator Reed.............................................   160
Teri Lombardi Yohn, Associate Professor, Kelley School of 
  Business, University of Indiana................................    31
    Prepared statement...........................................   131
Lynn E. Turner, Managing Director, Glass Lewis & Co..............    33
    Prepared statement...........................................   147


  INTERNATIONAL ACCOUNTING STANDARDS: OPPORTUNITIES, CHALLENGES, AND 
                       GLOBAL CONVERGENCE ISSUES

                              ----------                              


                      WEDNESDAY, OCTOBER 24, 2007

                               U.S. Senate,
        Subcommittee on Securities, Insurance, and 
                                        Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The subcommittee met at 2:01 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Jack Reed (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF CHAIRMAN JACK REED

    Chairman Reed. Let me call the hearing to order, and I want 
to thank the witnesses, obviously. This afternoon, we are 
holding a hearing on International Accounting Standards: 
Opportunities, Challenges, and Global Convergence Issues.
    In recent months, the Securities and Exchange Commission 
has been prioritizing a number of regulatory reforms aimed at 
providing foreign private issuers greater access to the U.S. 
securities market. The Commission's proposals on the 
elimination of reconciliation to U.S. GAAP for foreign private 
issuers who apply the International Accounting Standards 
Board's version of International Financial Reporting Standards 
by 2009 is one such proposal. The Commission also issued a 
concept release which raises the possibility of U.S. companies 
having the option of filing their financial statements using 
either IFRS or U.S. GAAP and the establishment of an advisory 
committee to examine complexities in the U.S. financial 
reporting system.
    These proposals are part of an effort to establish a single 
set of global accounting standards. There is no doubt a single 
set of high-quality accounting standards would benefit the 
United States as well as global markets. However, there are a 
number of significant issues which should be seriously 
considered. Most importantly, we need to ensure that this new 
single set of globally accepted accounting standards continues 
to protect and provide enhanced transparency to investors while 
promoting market integrity. This effort should incorporate the 
best of both standards to build the strongest protections for 
investors. This hearing is an opportunity to discuss progress, 
opportunities, and challenges in achieving convergence, but 
also to understand the impact of the SEC's proposals on 
investors, regulators, auditors, and businesses.
    Increased globalization of markets and wide adoption of 
IFRS have been significant drivers of convergence. In 
recognition of this trend, in 2002 the FASB and the IASB agreed 
on a framework to eliminate differences between the two 
standards and to collaborate on future ones. This process has 
set a good balance for moving ahead with new standards, mindful 
of eventual convergence.
    However, it is also important to note that these efforts 
provide not only truly comparable transparency and accurate 
financial results to investors, but they must also ensure 
comparable enforcement, interpretation, and implementation by 
regulators.
    To that end, it is clear that some countries using IFRS are 
tailoring these accounting standards to their needs, resulting 
in jurisdictional versions of IFRS. In its review of more than 
100 foreign private issuers' filings, the SEC has found that, 
``The vast majority of companies asserted compliance with a 
jurisdictional version.'' As Sir David Tweedie has suggested, 
the butting of these jurisdictional versions and variances will 
ultimately make true convergence difficult.
    There are also significant questions raised in the area of 
implementation and interpretation of IFRS. Again, the SEC's 
study of the filings of firms reported on an IFRS basis in the 
U.S. found problems with the implementation of IFRS, including 
in the area of the presentation of cash-flow statements, 
accounting for common control mergers, recapitalizations, and 
similar transactions. According to an Ernst & Young report, 
because IFRS standards generally include only broad principles, 
preparers and auditors may in good faith interpret company-
specific facts differently, which may result in different 
accounting treatments for the same or similar transactions 
among companies.
    The issue of timing should also be considered carefully. 
Many prominent investors and users of financial statements, 
including the CFA Institute and FASB's Investors Technical 
Advisory Committee, ITAC, conclude that it is premature for the 
SEC to eliminate the reconciliation requirement. Some have 
asked, with the projected convergence of U.S. GAAP with IFRS by 
2011 or 2012, why there is such a rush before the frameworks 
are substantially harmonized.
    Additionally, while this effort may ease the filing 
requirements on foreign private issuers, IFRS is still in its 
infancy and may, in fact, be dependent upon reconciliation with 
U.S. GAAP. Moreover, some companies, like S&P, have indicated 
that if reconciliation is eliminated, it will continue to ask 
companies to provide reconciliation as part of a package of 
non-public information credit rating agencies' requests. If 
companies will indeed need to continue to prepare 
reconciliation information for credit rating agencies, why 
shouldn't the SEC require companies to provide that information 
to public investors as well?
    There are numerous other issues which I hope we can address 
today, including: Will the elimination of reconciliation lead 
to the abandonment of convergence? How prepared are we for the 
greater use of IFRS standards in the U.S. markets when there 
are virtually no accounting programs in our universities that 
teach accounting students IFRS standards? And shouldn't we be 
concerned about the lack of knowledge of IFRS standards by U.S. 
accountants and CFOs? What does this mean for the future role 
of the SEC and the FASB in providing oversight of U.S. 
financial reporting? Another key question is: Will investors be 
served by this change?
    These are challenging times for financial regulators. If 
done properly, convergence of international accounting 
standards can have positive impact on U.S. and global markets. 
However, the events of recent months remind us of the ever 
increasing complexity of financial products and the 
interconnectedness of our financial systems. We have learned 
that complex financial products, while spreading risk, can also 
hide that risk. Financial reporting and accounting standards 
play a critical role in decoding some of that complexity to 
investors and regulators, and we must push to further enhance 
transparency to restore confidence in our markets. With our 
uniquely large retail base of investors and millions of 
individuals investing their futures in our capital markets, it 
is critical that we get this right and make certain that there 
are no unintended consequences.
    Thank you for allowing me--this is an important topic, and 
I wanted to be expansive, and I think I have accomplished that. 
But now, Senator Allard, do you have an opening statement?

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. I do. You did not think I would turn down 
an opportunity to speak, did you?
    Chairman Reed. No.
    [Laughter.]
    Senator Allard. Thank you, Mr. Chairman. I would like to 
thank you for holding this hearing to examine the convergence 
of the global accounting standards. Although accounting 
standards might not seem like the most exciting topic to some, 
it is important to the economic vitality of the United States 
and its trading partners around the world. Clear, accurate, 
consistent, and reliable accounting standards are necessary for 
investors to have the information necessary to make decisions. 
The quality of decisions generally cannot be better than the 
quality of the information on which they are based. Credible 
information has been an important foundation for the success of 
our capital markets, just as bad information is often at the 
heart of market meltdowns.
    As markets become increasingly global, we have begun to 
examine accounting standards in an international context. The 
credibility of information is critical, but even credible 
information is more useful when it is comparable. Accordingly, 
discussion turned to international convergence of accounting 
standards. Convergence of accounting standards holds many 
possibilities, including the prospect of better transparency 
through greater comparability, reducing costs, improving market 
confidence, and improving market competitiveness. All of the 
opportunities are predicated upon credible standards from a 
credible standard-setting body. Anything less will be a step 
backwards for U.S. markets.
    It is also important that U.S. regulators are mindful of 
the practical details in moving toward a global standard. The 
industry infrastructure must be in place to ensure that the new 
standards can be applied accurately and rigorously. This is 
particularly important with regards to the many small and 
medium-sized accounting firms and businesses.
    We have an excellent line-up of witnesses today, and I am 
certain that they will be able to help us better understand the 
potential benefits of global convergence, as well as 
highlighting the issues that must be addressed first. Their 
testimony will be very helpful in increasing the Subcommittee's 
understanding of the issue.
    Finally, I would like to take this opportunity to offer a 
special welcome to one of my constituents, Lynn Turner. Mr. 
Turner served as the Chief Accountant of the Securities and 
Exchange Commission from July 1998 to August of 2001. He has 
also been a professor of accounting in the College of Business 
and the director of the Center for Quality Financial Reporting 
at Colorado State University. Mr. Turner currently serves as 
the Managing Director of Research at Glass Lewis.
    Again, welcome, Lynn, and, again, thank you, Mr. Chairman.
    Chairman Reed. Thank you, Senator Allard.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you very much, Mr. Chairman, for 
holding this hearing. This is not a very sexy issue. I realized 
that as I walked in, walked down the hall. My first reaction 
was the hearing must have been canceled because there was no 
pile of lobbyists in the hall. I come into the room, there are 
enough people in the room to justify the kind of attention we 
are giving it, but it does not get the sort of headlines that 
we often see.
    That does not mean it is not important. That just means 
that it is a little complex and does not lend itself to the 
kinds of quick headlines and 1-minute sound bite summaries that 
we get on television than some of the other issues are.
    I have been interested in this ever since I became aware of 
the Merkel Initiative and got involved in that at the Brussels 
forum earlier this year. I understand that Gunter Verheugen and 
Al Hubbard are meeting weekly on this issue. Mr. Hubbard is 
known to us in the United States as the President's Domestic 
Adviser or all-around economic guru. And when I asked what 
Gunter Verheugen, if I am pronouncing his name correctly--if 
not, I apologize. When I asked what his counterpart role was, 
they said he is basically the Al Hubbard for the EU.
    This is an essential area, however dry and difficult it is 
to get into, and we need to move forward on it if we are going 
to have the maximum benefit that will come out of international 
trade.
    The shorthand version of the difference between the 
American system and the European system is that the American 
system is rule based and the European system is principle 
based. I am congenitally more interested in a principle-based 
system than I am a rule-based system because a principle-based 
system is usually easier to adapt to the situation on the 
ground than rules that have been adopted in one set of 
circumstances that then have to be twisted and distorted to 
deal with another. And I am encouraged by the comment of 
Secretary Paulson, who said, if I can quote him correctly, 
``Where practical, of moving''--consideration should be given 
``where practical, of moving toward a principle-based system,'' 
noting that added complexity and more rules are not the answer 
for a system that needs to provide accurate and timely 
information to investors in a world where best-of-class 
companies are continually readjusting their business models to 
remain competitive.
    The other issue, which we probably will not get into today 
but that broods over us and that we should be aware of as we 
are talking about this, is the lawsuit that is moving forward 
in the Supreme Court, shorthand term is Stoneridge v. 
Scientific Atlanta, and it is over the question of whether or 
not we can open up a window to allow foreign firms--to allow 
U.S. trial lawyers to get at foreign firms who are doing 
business with American firms on a basis that I, a non-lawyer, 
find absolutely incredible.
    As the former Chancellor of the Exchequer in the United 
Kingdom, Norman Lamont, wrote in the Wall Street Journal 
earlier this month, he said, ``Currently in the U.S., a company 
must actually make statements that are fraudulent to be the 
target of a private securities lawsuit. This is a clear line 
that discourages the kind of speculative or predatory 
litigation that has become a feature of American law. Should 
the plaintiffs in Stoneridge prevail, any non-U.S. business, 
whether it be a law firm, accounting firm, buyer, banker, or 
seller, that has U.S.-listed companies as customers, suppliers, 
or clients, we risk being sucked into America's security 
litigation vortex.''
    I can think of nothing more chilling to international trade 
than the concept of the class action suits being brought 
against non-U.S. businesses simply because they have a customer 
or a supplier who has made some kind of statement that the 
lawyers decide could be challenged. Bill Durack is on his way 
to jail, but the virus of excessive litigation is still very 
much with us, and I think that concern is a parallel concern to 
getting the accounting standards right. If we have the 
accounting standards right, it will make it easier to do 
business, and it will also act as some kind of a firewall 
against the litigation storm that I hope never breaks over this 
part of international trade.
    So, again, Mr. Chairman, thank you for holding the hearing, 
and I look forward to hearing what the witnesses have to say.
    Chairman Reed. Thank you, Senator Bennett.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you and Senator Allard and all of the witnesses for being here 
on a very important subject, which is the convergence of the 
international accounting standards, because we live in an era, 
of course, that is defined by globalization of capital markets, 
a trend that was documented in the report that Mayor Bloomberg 
and I issued. And you cannot have a global market and 22 
different accounting standards. It is inefficient, at best, and 
fraught with peril, at worst.
    Our report made a whole number of recommendations to help 
the United States maintain its historic role as the leader in 
global financial markets, and one of these was the accelerated 
convergence of U.S. Generally Accepted Accounting Principles, 
GAAP, with International Financial Reporting Standards, IFRS.
    So in today's world, where a typical investment consists 
often of a Russian investor purchasing shares in a Japanese 
company listed on an American stock exchange, you just cannot 
have different auditing standards for different countries. 
Globalization will only continue to accelerated, making the 
need for this greater than ever before. And the fact that IFRS 
is well on its way to becoming the global language which the 
rest of the world uses means that we here in America have to 
get with it and try to do our best to integrate the standards.
    When it comes to the way companies balance their books, 
Wall Street and the rest of the world should be on the same 
page. And IFRS will be the language of worldwide business for 
future generations. We have to start allowing it to be spoken 
in the U.S., and eventually U.S. businesses must be allowed to 
speak this language themselves. So I am glad to see FASB and 
the IASB working together toward the convergence of their 
accounting standards.
    With that, Mr. Chairman, I will ask that the rest of my 
statement be read into the record, and I look forward to 
reading--I will not be able to stay, but reading the testimony 
of the witness.
    Chairman Reed. Without objection, all statements will be 
made part of the record.
    Now, let me introduce the panel. First, Sir David Tweedie, 
Chairman of the International Accounting Standards Board. Thank 
you, Sir David.
    Mr. Conrad Hewitt, Chief Accountant, Securities and 
Exchange Commission; Mr. John White, Director of the Office of 
Corporate Finance, Securities and Exchange Commission; and Mr. 
Robert Herz, who is the Chairman of the Financial Accounting 
Standards Board.
    I want to specifically recognize Sir David for his strong 
leadership while serving as the Chairman of the International 
Accounting Standards Board during a very critical period. Also, 
thank you, Sir David, for the assistance you have given this 
Committee on numerous occasions. We thank you very much.
    I also understand that this is Mr. Hewitt's birthday, so we 
are all going to resist the temptation to sing but wish you the 
best, and thank you for sharing some of your special day with 
us, Mr. Hewitt.
    Sir David.

    STATEMENT OF SIR DAVID TWEEDIE, CHAIRMAN, INTERNATIONAL 
                   ACCOUNTING STANDARDS BOARD

    Mr. Tweedie. Thank you, Mr. Chairman, Ranking Member 
Allard, and Senators Bennett and Schumer.
    As I said when I first appeared before the Banking 
Committee, it is a great privilege to be back here in the 
Colonies to continue my missionary work----
    [Laughter.]
    To discuss the relevance of international reporting 
standards in the United States and in the international markets 
in general. This week, we have just finished our second meeting 
of the year with the FASB. It went very well, probably one of 
our best ones, and we are looking very closely at the SEC's 
deliberations on the Proposed Rule and Concept Released.
    I am very glad that Conrad Hewitt, Bob Herz, and John White 
are here with me because the FASB and the SEC were instrumental 
in forming the IASB. Its structure, governance, and 
independence are modeled on that of the FASB. And, in fact, if 
anything has gone wrong, it is entirely due to Lynn Turner, who 
was a major----
    [Laughter.]
    A major instrument.
    When I first appeared before the Committee, we had hardly 
been going for about a year, and there were very few countries 
that actually used our standards. But the objective which was 
set for us by the SEC and FASB was very clear. We had to come 
up with one single set of high-quality global standards, so it 
did not matter the transaction took place here in Washington or 
in Winnipeg, Warsaw, or Wellington. We should get the same 
answer. And, historically, that has not been the case.
    The European Union started us off, 25 countries which 
previously had 26 different ways of accounting, because they 
used U.S. GAAP and international standards as well. And it told 
us how difficult it was to meld international standards 
together. Cultures are different. In Britain, everything is 
permitted unless it is prohibited. In Germany, it is the other 
way around; everything is prohibited unless it is permitted. In 
the Netherlands, everything is prohibited even if it is 
permitted. And in France, of course, everything is permitted 
especially if it is prohibited.
    [Laughter.]
    But now we have 108 countries that are using our standards. 
Australia, Hong Kong, New Zealand, and South Africa all joined 
Europe very early on. Brazil, China, India, and Russia have 
agreed to take our standards. And, similarly, Chile, Canada, 
Israel and Korea have all recently decided to make the tie, as 
has Japan, who did it just a month or so ago. So there is clear 
momentum toward having one single set of standards.
    It is understandable that the U.S. was not among that group 
because you have a well-established and respected standard-
setting body, a high degree of transparency in your standards 
that have been tested over a long period of time, and a high 
degree of acceptance internationally.
    However, the world is changing. The realities of 
globalization, the integration of the capital markets, and the 
emergence of IFRSs as a viable and high-quality set of 
standards are changing the policy equation. Senator Schumer's 
report has documented these issues.
    The U.S. requirement for reconciliation, as the Committee 
will be well aware, has caused resentment among non-U.S. 
companies forced to go through the reconciliation exercise. The 
hope of many of the registrants in using IFRS was that 
eventually it would become the passport to all markets, 
including that of the United States.
    I obviously have a bias on what I would like the U.S. to do 
in this situation, but it is really for the SEC and Congress to 
decide that. But that is why we place such a high priority on 
convergence with the United States.
    The benefits to the U.S. companies are similar to those in 
Europe. Many of their subsidiaries are already reporting in 
IFRS terms. All this has to be converted back to U.S. GAAP. For 
U.S. investors, they now will be more aware of the accounting 
in other countries. Previously, when you were faced with a 
myriad of different systems, it is very difficult. Now you 
should be faced with one major system worldwide.
    For auditors, a single set of accounting standards helps 
training and helps people to understand, and for regulators, 
they, too, are dealing with just one set of standards rather 
than many.
    One of the questions is that if we have competition in 
accounting standards, will there be a race to the bottom. I 
always think of John Glenn when I think of that. He always 
said, as he hurtled around space in his capsule, the thought 
that was ever prevalent in his mind was the fact that every 
single component in that capsule had been supplied by the 
lowest bidder. Well, we are not going to have a race to the 
bottom. In fact, that is why we are working together, and Bob's 
intention and mine with our boards is to have a ``best of 
breed'' convergence program.
    Irrespective of the SEC decision, our convergence work will 
be undertaken. It is very important to us both. The early 
progress we made after Norwalk has gone into the Memorandum of 
Understanding, and we now have 11 major subjects that we are 
dealing with which are critical to the general well-being of 
financial markets: consolidations, post-retirement benefits, 
leasing and financial instruments, among others. This is a 
critical aspect of the financial infrastructure we have to fix.
    Our joint efforts to produce joint standards on these 
issues signal a double win and--improved accounting for both of 
us in important areas and the elimination of differences 
between U.S. GAAP and international standards.
    It is understandable that those affected by the standard-
setting process will want to know how the future will look. We 
intend, Bob and I, to make sure our joint standards are 
different from our existing IFRS and U.S. standards. We want 
these to be principle based.
    Basically, are they written in plain English? Can they be 
explained in a matter of a minute or so? Does it make intuitive 
sense? And does management believe it actually helps them 
manage their business?
    These standards should eliminate anti-abuse provisions. A 
tough principle is very difficult to get around; whereas, if 
you have if A, B, and C happens, the answer is X. The financial 
engineers come up with B, C, and D and claim a different 
answer.
    It will rely on judgment, and we will have to force people 
back to the core principles. We have to make sure we do not 
give too much guidance. Do we really need this guidance or can 
we actually rely on judgment?
    That is the vision we have for the future of the 
convergence. It will not be easy. The Lord's Prayer has 57 
words; the Ten Commandments, 297; the U.S. Declaration of 
Independence--big mistake that was--300 words; and the European 
Directive on the import of caramel products, 26,911 words.
    [Laughter.]
    I know several commentators have said if the reconciliation 
is removed, a major incentive of convergence goes. That is not 
the case. We have made an agreement with the SEC and the FASB 
we will converge on this program. We intend to keep that 
agreement. And if we did not, we would end up with two sets of 
standards. That is not in our constitution, and it is not our 
objective.
    So I am optimistic, Mr. Chairman, about what is going to 
happen. There are some challenges ahead. We must resist 
countries' having national versions of IFRS, and we are working 
on that with the regulators to make sure we know exactly what 
they have done. We are trying to make sure that the 
interpretation is done through our Interpretation Committee, 
and the regulators are helping in that. And, finally, we want 
to try and ensure the enforcement is good. So the regulators 
are very important to us in this work.
    We are at a crucial point in the development of IFRSs. The 
United States has played a huge part in encouraging the 
adoption of our standards throughout the world. The world's 
fastest growing economies are converging with IFRS. But this is 
no time to rest on our laurels. We recognize the effect of our 
work on the economy of the world, and we are delighted that 
U.S. policymakers are now considering options for the U.S. 
markets.
    We appreciate, sir, your continued interest in 
international convergence, and we are committed to doing all we 
can to complete the work program in the MOU.
    We are at an interesting stage. When I was at school, I 
played in goal for my school's soccer team, and in a cup 
semifinal, we were winning 1-0 with a few moments to go. One of 
the opposing forwards came through and hit the ball so hard, it 
went past me before I could move. But, fortunately, it hit a 
goalpost and rebounded to him, and he hit it again. And this 
time, I threw myself to the left and turned the ball around the 
post. And my teammates were ecstatic. What they did not realize 
was I was trying to save his first shot.
    [Laughter.]
    We will not get a second chance. This is our best chance 
ever, with Bob's help, to merge our two sets of standards and 
come up with the world's best. And that is what we are trying 
to do.
    Thank you, sir.
    Chairman Reed. Thank you, Sir David.
    Mr. Herz.

             STATEMENT OF ROBERT H. HERZ, CHAIRMAN,
              FINANCIAL ACCOUNTING STANDARDS BOARD

    Mr. Herz. Thank you, Chairman Reed, Ranking Member Allard, 
and Members of the Subcommittee. I am Bob Herz, Chairman of the 
FASB, and thank you for asking us to participate in this 
hearing today. And thanks for throwing a little gathering to 
celebrate Con Hewitt's birthday with all his friends, too.
    I would also like to take this opportunity to thank both 
the Banking Committee and this Subcommittee for your support 
over the years of the FASB, of independent accounting standard 
setting, and our international convergence activities.
    Recent years have been marked by a clearly continuing, 
rapid, and accelerating globalization of capital markets, 
cross-border investing, and international capital-raising. We, 
therefore, agree with both the IASB and the SEC that a widely 
used single set of high-quality international accounting 
standards for listed companies around the world would greatly 
benefit the global capital markets and investors. The ultimate 
goal, we believe is a common, high-quality global financial 
reporting system across the capital markets of the world.
    However, achieving the ideal system requires improvements 
and convergence in various elements of the infrastructure 
supporting the international capital markets, including a 
single set of common, high-quality accounting standards. But 
improvements in convergence are also needed in disclosure 
requirements; regulatory, enforcement, and corporate governance 
regimes; auditing standards and practices; and education of 
capital market participants.
    In regard to accounting standards, the FASB, with the IASB 
and other major national standard setters, has been working for 
many years to improve and converge accounting standards. The 
pace of these convergence activities has increased 
significantly since the formation of the IASB in 2001, and 
there has been a clear movement in many parts of the world 
toward IFRS. Many jurisdictions around the world have mandated 
or permit the use of IFRS, and many others are planning to move 
in this direction. However, in some of these jurisdictions, the 
standards issued by the IASB have been modified, resulting in 
so-called as-adopted versions of IFRS, and also differences in 
implementation between countries have resulted in national 
variants of IFRS.
    In the U.S., we at the FASB and IASB committed in 2002 to 
the goal of developing a set of high-quality, compatible 
standards. Our 2002 Norwalk Agreement described the plans for 
achieving that goal, including working together on major 
projects and eliminating more narrow differences in other 
areas. Our 2006 Memorandum of Understanding added specific 
milestones to that effort.
    Since 2002, we have made steady progress toward 
convergence, but that effort is not yet complete, with work in 
process in a number of key areas. In addition, differences 
between U.S. GAAP and IFRS remain right now, which can result 
in significant differences in the reported numbers under the 
two sets of standards. Thus, it will likely take more years to 
reach the goal of full convergence using our current approach.
    Accordingly, and in light of the growing use of IFRS in 
many other parts of the world, we believe that now may be the 
appropriate time to consider ways to accelerate the convergence 
effort and the movement in the U.S. toward IFRS. For to be 
truly international, any set of standards would need to be 
adopted and used in the world's largest capital market--the 
United States.
    Thus, we believe that planning for a transition of U.S. 
public companies to an improved version of IFRS would be an 
effective and logical way forward to achieving the goal of a 
set of common, high-quality global standards.
    However, a smooth transition will not occur by accident, 
and to plan for and manage this change, we suggest that a 
blueprint for coordinating and completing the transition should 
be developed and agreed to by all major stakeholders in the 
process. The blueprint should identify an orderly and cost-
effective approach to transitioning to an improved version of 
IFRS and should set a target date or dates for U.S. registrants 
to move the standards toward IFRS, allowing adequate time for 
making the many necessary changes.
    The plan should also address needed changes on the 
international front, including those necessary to bolster the 
IASB as a global standard setter and to reduce or eliminate the 
as-adopted versions of IFRS that have emerged. And it should 
identify and establish timetables to accomplish the many 
changes to the U.S. financial reporting infrastructure that 
will be necessary to support the move to IFRS. Such changes 
will likely take a number of years to complete, during which 
time the FASB and the IASB will continue our joint efforts to 
develop common, high-quality standards in key areas where both 
existing U.S. GAAP and IFRS are currently deficient.
    In other areas that are not the subject of those joint 
improvement projects, we envisage that U.S. public companies 
would adopt the IFRS standards as is based on an established 
timetable. We believe that this sort of well-planned approach 
would provide an orderly and effective transition of U.S. 
public companies into the global reporting system.
    Let me now briefly turn to the two SEC releases relating to 
the reconciliation requirement and to the possible use of IFRS 
in the U.S. I commend the SEC for bringing forward these timely 
and important issues.
    The SEC Concept Release seeks comments on whether U.S. 
issuers should be given a choice between U.S. GAAP and IFRS. We 
are generally opposed to allowing companies to elect different 
reporting regimes because of the added cost and complexity such 
choices create for investors and the added cost and complexity 
involved in developing a U.S. financial reporting and 
educational infrastructure to support a two-GAAP system for 
U.S. public companies.
    Accordingly, instead of permitting U.S. companies an open-
ended choice between IFRS and U.S. GAAP for an extended period 
of time, we believe it would be preferable to move all U.S. 
public companies to an improved version of IFRS over a 
transition period following the blueprint we are advocating be 
developed.
    Finally, on the more imminent question of whether the SEC 
should remove the reconciliation requirement for foreign 
private issuers that use IFRS, we are aware of a variety of 
views on this issue. We believe that either way the decision in 
the near future whether or not to eliminate the reconciliation 
requirement will have important implications for the continued 
development of a global reporting system. On the one hand, we 
certainly acknowledge the concerns of those in the United 
States who believe that dropping the reconciliation would be 
premature and would result in a loss of information that some 
investors and other users clearly find important and useful. On 
the other hand, this change only relates to relatively small 
number of SEC registrants in relation to the overall size of 
our capital market. And maintaining the current reconciliation 
requirement could be viewed by many parties outside this 
country as a clear signal that the U.S. is not truly interested 
in participating in an international reporting system.
    Conversely, we also believe that once the reconciliation 
requirement is eliminated, there are some parties in other 
countries who have viewed the convergence effort between the 
IASB and the FASB as the price of getting the SEC to eliminate 
the reconciliation, will see no further benefit in continued 
convergence between IFRS and U.S. GAAP, and will call for a 
cessation of further improvements to IFRS, particularly those 
designed to achieve convergence with U.S. So in removing the 
reconciliation requirements, we feel that it would be important 
to make it clear that getting to a single set of high-quality 
international standards remains the ultimate goal and that 
further convergence and improvement of standards is necessary 
to achieve that goal.
    Last, we strongly agree with the SEC proposal that the 
reconciliation requirement only be eliminated for those foreign 
private issuers that fully apply IFRS as issued by the IASB and 
not for those who use an as-adopted version of IFRS. To do 
otherwise would, in our view, be inconsistent with the goal of 
getting to a single set of global accounting standards.
    In conclusion, we are firmly committed to continuing to 
work with the IASB, the SEC, and others to achieve a single set 
of high-quality international accounting standards that will 
benefit investors and the capital markets domestically and 
across the world.
    Thank you.
    Chairman Reed. Thank you very much, Mr. Herz.
    Mr. Hewitt.

STATEMENT OF CONRAD W. HEWITT, CHIEF ACCOUNTANT, SECURITIES AND 
                      EXCHANGE COMMISSION

    Mr. Hewitt. Chairman Reed, Ranking Member Allard, Senator 
Bennett, thank you for the opportunity to testify today, on my 
birthday, on behalf of the Securities and Exchange Commission 
concerning ongoing efforts to foster development and use of 
high-quality, globally accepted accounting standards. As the 
SEC's Chief Accountant, I advise the Commission on accounting 
and auditing matters.
    The Commission has a long history of supporting the goal of 
high-quality, globally accepted accounting standards. The 
reason for the Commission's support is that the global 
accounting standards help investors to understand investment 
opportunities more clearly and increase access to foreign 
investment opportunities. Global accounting standards reduce 
costs for issuers, who no longer have to incur the expense of 
preparing financial statements using differing sets of 
accounting standards. Also, lower costs facilitate cross-border 
capital formation as well as benefit shareholders, who 
ultimately bear the burden of the entire cost of the financial 
reporting system.
    The SEC has pursued the goal of high-quality, globally 
accepted accounting standards through a variety of 
international multilateral and bilateral venues. This includes 
the International Organization of Securities Commissions, a 
bilateral dialog with the Committee of European Securities 
Regulators, and with fellow securities regulators from 
countries that have moved to or are moving to IFRS reporting. 
The SEC's staff has also participated, in some cases on behalf 
of IOSCO, as an observer to the International Accounting 
Standards Board's Advisory Council, its Interpretations 
Committee, and certain of its working groups.
    Over 100 countries now either require or permit the use of 
IFRS for the preparation of financial statements by their 
domestic listed companies. Under a regulation adopted in 2002, 
the EU required its listed companies to report using endorsed 
IFRS beginning in 2005. Japan's accounting standard setter, 
with whom I met on Friday of last week, and the IASB have 
agreed to work to accelerate convergence between Japanese 
accounting standards and IFRS, with certain interim target 
dates in 2008 and 2011. Other countries, such as China, Israel, 
and India, have either begun to move toward the use of IFRS--
that is, China and Israel--or have announced plans to do so--
India's case. Closer to home, Canada has announced plans to 
move to IFRS reporting around 2011, while we understand Mexico 
is working to incorporate IFRS aligned content into Mexican 
accounting standards. The incentives and reasons for these 
national IFRS policy decisions, as well as the method and 
timing of the transition to IFRS reporting for companies in a 
particular country, are as varied as the profiles of the 
countries involved.
    This summer, the Commission began a process to determine 
whether it is appropriate and timely to allow foreign and 
domestic registrants the alternative to submit for SEC filing 
purposes financial statements prepared in accordance with the 
International Financial Reporting Standards as published by the 
International Accounting Standards Board. I defer to my 
colleague John White to discuss these proposals in detail.
    Given the increasing globalization of capital markets, it 
is imperative that the Commission be vigilant in keeping our 
regulatory standards up-to-date for the protection of 
investors, for the maintenance of efficient and orderly 
markets, and for the promotion of capital formation. Our 
ongoing work in the area of accounting and financial reporting 
is an important part of the Commission's wide-ranging efforts 
in this regard.
    Thank you for the opportunity for me to appear before you 
today, and we will be pleased to respond to any of your 
questions.
    Chairman Reed. Thank you, Mr. Hewitt.
    I understand, Mr. White, you are not going to make a 
statement but you are prepared for questions.
    Mr. White. Actually, I had a statement.
    Chairman Reed. Well, then, please.
    Mr. White. I had a short statement to fill in the details 
than Conrad had laid out.
    Chairman Reed. Please fill in the details. Go ahead, sir.

 STATEMENT OF JOHN W. WHITE, DIRECTOR, DIVISION OF CORPORATION 
          FINANCE, SECURITIES AND EXCHANGE COMMISSION

    Mr. White. Thank you also for the opportunity to testify 
before you today. I am the Director of the Division of 
Corporation Finance, and we are the group at the SEC 
responsible for overseeing disclosures of domestic and foreign 
reporting companies in the United States. And what I wanted to 
do was describe the two releases that the Commission put out 
this summer regarding the potential use in the U.S. capital 
markets of international reporting standards as published by 
the IASB. And I particularly underline as published by the 
IASB.
    First, a proposal was issued in July to allow foreign 
private issuers to use IFRS financial statements without a U.S. 
GAAP reconciliation. Under the Commission's current 
requirements, foreign private issuers have two alternatives 
when preparing their financial statements. They can either 
prepare them under U.S. GAAP or, alternatively, they can 
prepare them under IFRS or under a national GAAP, and provide 
in either of those cases reconciling information to U.S. GAAP. 
That was the first release.
    Second, in August, the Commission issued a concept release 
to explore a more far-reaching project, and that is the 
possibility of giving our own domestic issuers the alternative 
of preparing their financial statements using IFRS. Today, of 
course, domestic issuers may only use U.S. GAAP.
    The comment period on the foreign private issuer proposal 
ended in late September. The comment period on the U.S. issuer 
concept release is actually still open and closes in mid-
November.
    These releases address the core policy issue of what role, 
if any, the use of IFRS should play in the U.S. public capital 
markets. And with any policy issue, any policy decision like 
this, a determination requires that we give due consideration 
at the Commission to both the benefits and the costs.
    In all of the Commission's work to date, a consistent 
premise has been that investors are better served by having 
available high-quality financial information across issuers, 
regardless of their domicile. This obviously aids investors in 
making informed decisions in allocating their capital among 
competing alternatives. Investors also benefit if the costs of 
compliance are reduced for issuers entering and staying in our 
capital markets, as this opens up additional investment 
opportunities.
    Of course, adjusting to a new set of accounting standards 
also presents issues to consider. With respect to the foreign 
private issuer proposal, investors would be required to work 
with IFRS financial statements directly without the benefit of 
U.S. GAAP reconciliation. But the impact of this loss of 
reconciliation depends both on the extent to which investors 
are currently using that reconciliation and also the extent to 
which U.S. GAAP and IFRS continue to differ.
    The impact also depends on the number of issuers who are 
actually using the alternative. And just to give you a few 
numbers to work with as we proceed today, currently there are 
approximately 110 foreign private issuers who prepare their 
financial statements using IFRS as published by the IASB and, 
therefore, would be eligible for the proposal that was put out 
this summer. There are an additional 70 foreign private issuers 
that prepare their financial statements using a jurisdictional 
adaptation, a jurisdictional variation of IFRS. So it is that 
110 and the additional 70.
    The additional 70 would be eligible if they were able to 
state that their financial statements were prepared in 
accordance with IFRS as published by the IASB. But I suppose we 
should also look a little bit ahead because, between now and 
2011, there are a couple of other jurisdictions who we expect 
will come online. We have 100 foreign private issuers from 
Israel and 500 from Canada, and as Conrad alluded to, they are 
coming online in the future.
    So that is kind of the two proposals. I guess the only 
other thing to comment on is we have received 120 comment 
letters, which is actually quite a few, so far on the foreign 
private issuer release, and the comment letters are still 
coming in on the U.S. issuer concept release. We are actively 
in the process of analyzing those comment letters. They raise a 
lot of important issues. When we finish that review, Conrad and 
I will be developing a recommendation for the Commission, but 
we still have to finish--well, the letters all have to get in, 
and we have to finish that review.
    So that is really where we stand on the two releases, and I 
and Conrad are ready to answer your questions.
    Chairman Reed. Thank you very much.
    Let me begin by echoing the sentiment that Senator Bennett 
suggested initially. This is not drawing a huge crowd, a 
throng, but this is one of the most important issues that could 
be decided over the next several years because of the 
centrality of accounting in every major business transaction. 
Many times in transactions it is finally the accountant who 
makes the determination of what can be done and what cannot be 
done--not the lawyer, not even the business leader. And it is 
critical what you are doing, and we want to make sure it is 
done properly, and that is the purpose of this hearing today.
    Let me follow up, Mr. White, with just the implication of 
your final point. So the universe of issuers that could 
potentially use IFRS without reconciliation, if it is dropped, 
is about on the order of, say, 700 or 800 or so. Is that--or, 
alternatively, do you see a big use of IFRS alone without 
reconciliation?
    Mr. White. Well, just in total numbers, there are about 
1,100 foreign private issuers. I think our assumption would be 
that most foreign private issuers that were eligible to report 
without reconciliation would do so, although, in fact, we do 
have some companies that report in IFRS in their own 
jurisdictions and still report in U.S. GAAP in the United 
States.
    Also, that 500 number from Canada, a large number of the 
Canadian companies report directly in U.S. GAAP and do not go 
through the reconciliation process today. I do not know that I 
would assume that they would switch.
    Chairman Reed. One of the issues of having accounting 
standards is comparability between issuers, and an obvious 
question is if you have some that are reporting in IFRS, which 
is not yet fully reconciled with GAAP, how much more difficult 
is it for investors and analysts to make judgments between 
companies that are reporting with different accounting schemes. 
I presume there would be some cases of material differences the 
way the accounting is treated.
    Mr. White. I mean, there certainly are today differences 
between IFRS and U.S. GAAP, but if we just kind of step back 
for a second, obviously the goal here is a single set of high-
quality global standards.
    What we are talking about in terms of eliminating the 
reconciliation requirement is having a period of time when 
there would be two sets of accounting standards for foreign 
private issuers in the United States. They would both be high-
quality standards, but there would be two different sets. The 
purpose, obviously, even though it applies to a pretty small 
group of companies, would be to allow U.S. investors to get 
familiar with IFRS directly to foster more understanding of it, 
and certainly I think to allow the infrastructure to build. 
There have been references, I think in your opening remarks, 
about the colleges and the schools and all. But, I mean, we are 
talking about initially less than 200 companies out of, you 
know, a total, I think, of 11,000 public companies that report 
in the United States would be doing this. So it is kind of an 
opening step.
    Chairman Reed. Let me ask a final question, and then I want 
the panel to comment on sort of the more general issues that we 
have been discussing. Would you consider any special 
disclosures--not full reconciliation but special disclosures 
for these companies that are now reporting exclusively in IFRS?
    Mr. White. One of the questions that was asked in the 
proposing release was whether if companies did not provide 
reconciliation, whether we should have additional disclosures 
about the differences, the principal differences. So that is 
one of the questions we have asked and we will get comment on 
and consider in the process.
    Chairman Reed. Let me just go down. Mr. Hewitt, there are a 
couple, I think, very obvious issues. One is the consequences 
of dropping reconciliation, both good and bad, or the costs and 
benefits, as Mr. White described them. And second would be the 
timing issue. I mean, there is a good deal of opinion that is 
saying this is a fine idea, once the convergence has been 
completed between the international accounting standards and 
GAAP standards, and that has not occurred yet.
    So could you comment on your view of what the consequences, 
both good and bad, are and also the issue of timing?
    Mr. Hewitt. Yes, Senator, I would be very happy to. Lifting 
the reconciliation, right now the foreign issuers, the 
information that they file with us on reconcilement items are 
approximately 7 months old. So it is not very timely 
information. And the sophisticated investors understand the 
differences between U.S. GAAP and IFRS when they analyze these 
100-plus companies.
    The timing difference, it will take some time for everybody 
to understand what is happening on lifting the reconciliation, 
but we believe that there is enough information and disclosure 
in these financial statements that an investor will be able to 
understand these differences. And we have differences within 
our own U.S. GAAP that investors, sophisticated investors, can 
understand those differences. The average retail investor 
probably cannot. So the differences are not that large, and 
eventually there will be convergence of these differences.
    Chairman Reed. Mr. Herz, the same two questions basically: 
your view of what the consequences are, both good and bad, for 
the elimination of reconciliation; and, also, is it a good idea 
but its time has not yet come?
    Mr. Herz. I think that the benefits are potentially 
bringing more people into our capital markets, more foreign 
companies, and that may be viewed as a very good thing in terms 
of the financial services industry. It may be thought of as a 
good thing in bringing them into a system that is more investor 
protection oriented, as well as that. So if it does actually 
encourage more people to come to our markets, there would be 
that benefit.
    I think it would have a benefit also, as John said, of 
people in this country beginning to learn a little bit more 
about IFRS. It would be the beginning of that effort. And I 
think the important thing is that if you go to other parts of 
the world that are supporting the convergence movement and the 
setting up of a global system, there are questions, have been 
questions outside of our convergence efforts as to whether the 
SEC is truly committed to having the U.S. go into a global 
system, because there have been many kind of starts around 
times, you know, back to the 1990's, a few other times, when it 
was deemed that it was too early. And I am not saying that now 
is definitely the right time, but people outside the U.S. have 
been skeptical as to whether or not, you know, we really truly 
want to become part of that system.
    I think the costs of it are that there clearly are some 
investors and other users of information that do use that 
information. Even though it does arrive late, they do use it. 
That seems to be mixed among investors. There are some 
investors who are very comfortable already with IFRS, who 
already analyze global companies that are used to it and the 
like, and they do not need the reconciliation in their view. 
But there are others that want to see things put on an apples-
to-apples basis. And as we have commented, there still are 
differences, and some of those differences can be significant 
to individual company results and the like.
    I think that, as I said in my remarks, all three 
organizations here are clearly committed to continuing the road 
to get to a single set of high-quality standards across the 
world that, you know, blend the best of the two sets of 
standards, and sometimes we develop something new, often. But 
there are people in other parts of the world that, you know, 
for them the end of the road has been getting the 
reconciliation removed. They have viewed that as kind of, you 
know, the easier passport into our capital market, the most 
cost-effective one, and are not that keen on the convergence 
with the U.S. continuing, in part because they believe that the 
U.S. system--I am not going to make a normative judgment as to 
whether it is right or wrong with the litigation, everything 
else, you know, that we are almost like an infecting agent into 
a system that they would prefer versus our approach. I do not 
happen to agree with that, but that is a view, and you do hear 
it when you go over to certain parts of the world.
    That is why I said in my comments that I think it is just 
important that it be made clear that this is not the end of the 
road. If the SEC does remove the reconciliation requirement, 
this is a move toward the end of the road, but there is a lot 
more work to be done to get to the ultimate goal.
    Chairman Reed. Thank you, Mr. Herz.
    Sir David, I do want to ask the same question, but my time 
has expired, and I am going to call on Senator Allard. But we 
will have a chance at the end of his comments and Senator 
Bennett's comments.
    Senator Allard. Thank you, Mr. Chairman.
    I want to clarify. How many companies are currently subject 
to requirements to reconcile their statements to U.S. GAAP?
    Mr. White. There are about 1,100 foreign private issuers.
    Senator Allard. Oh, 1,100.
    Mr. White. Yes. Now, some number of those in a number of 
countries already, they report in U.S. GAAP so that they have 
the option of reporting in a foreign GAAP or the U.S. GAAP.
    Senator Allard. Right.
    Mr. White. I do not actually have that number--about 200 
report directly in U.S. GAAP, so I guess it would be about 900 
reconcile.
    Senator Allard. Nine hundred that actually reconcile.
    Mr. White. Today.
    Senator Allard. Well, how many new U.S. listings could we 
expect to see with the elimination of reconciliation? Do we 
have any idea--particularly given the fact that the EU has 
pushed back against the requirements to use international 
standards as written by IASB.
    Mr. White. I would not have thought that we were expecting 
any significant increase in the number of U.S. listings. One of 
the things we did last summer was adopt a de-registration 
provision that actually allowed foreign private issuers to de-
register, and we have had, I think, about 70 foreign private 
issuers actually have de-registered since that rule went into 
effect in June, which got us down to the 1,100. I suppose the 
number could go up somewhat, but I would not have thought it 
would be----
    Senator Allard. Have you or has anybody done an analysis on 
the elimination of the reconciliation requirement, what would 
happen, other than what you just stated? Have you gone any 
further than that?
    Mr. White. You mean an analysis of whether there would be 
additional listings.
    Senator Allard. Yes.
    Mr. White. No, I do not believe we have. I mean, understand 
that certainly one of the benefits of eliminating 
reconciliation would be--could be either additional listings or 
companies not de-listing. But our important drivers for this 
are not just that issue. What we are really focusing on is 
having the opportunity for U.S. investors to be able to look at 
foreign companies using a single set of--the ultimate goal of 
having a single set of accounting standards. And this is all 
driven toward the ultimate goal of one international set of 
standards.
    Senator Allard. I understand that it is getting to this 
ultimate goal. That sounds great. But when we get there, then 
we could be giving foreign countries that understand this a 
choice of one system or another, where American companies may 
not have that choice. How would that impact behavior, 
particularly among American--I mean, do we create an unfair 
competition because one set of companies that are foreign can 
use maybe a lesser standard than what is required of American 
companies?
    Mr. White. Well, if the foreign company were still using--I 
do not know, I will call it Antarctica GAAP, they would have to 
reconcile to U.S. GAAP. I mean, the only companies that we are 
talking about----
    Senator Allard. Yes, but we are not talking about 
eliminating reconciliation----
    Mr. White. I am sorry. We are talking about eliminating 
reconciliation only with respect to companies that follow the 
IFRS standards as promulgated by the IASB.
    Senator Allard. I see.
    Mr. White. Not foreign issuers that follow the GAAP of 
Antarctica or whatever their country is.
    Senator Allard. So that would be a very limited number of 
companies that would be involved to start with, and those 
countries that have a modification of the international 
standards would not be included.
    Mr. White. Correct. The initial numbers I was giving there, 
today there are 110 companies that would be eligible. There are 
another 70 that follow IFRS with a jurisdictional adaptation.
    Now, when they follow a jurisdictional adaptation, they may 
still be able to--they may still be following the IASB version 
so that they would be able to have their--they would be able to 
certify and have their auditors certify that what they actually 
did was the IASB version, so that some of those 70 may be able 
to come into the U.S. as well--excuse me, would be able to 
eliminate reconciliation as well. Is that clear or----
    Senator Allard. I think we are getting you down on the 
record, and we may have more questions later on on that.
    You know, I wonder about our educational requirements. In 
this country, accountants take a great deal of continuing 
education, and I do not know how other countries--what kind of 
requirements they have on their accountants and their 
continuing--and here in this country, a lot of that is 
licensing that falls under the various States and what-not, and 
then, again, do we currently have an educational infrastructure 
in place for a rapid switch to the IFRS?
    Mr. White. Since I am the only lawyer up here, maybe I 
should--we should ask the accountants.
    Senator Allard. Well, yes, and I think on that question 
maybe everybody should try and answer that question and see. I 
want to see how our continuing education matches in, or are our 
accountants prepared to work with the new system, and those 
accounts in other countries, would they be prepared to go with 
our system, to know about our system.
    Mr. Herz. A couple of thoughts on that.
    First, a lot of other countries have gone through this 
exercise, and a lot of materials have been developed in those 
countries, just on IFRS, a lot of it by institutes, by the IASC 
Foundation, by the major accounting firms. So I think that is 
available, but it has not yet been embedded in our educational 
system, and that is, again, one of the reasons that I think we 
need this blueprint and some timetable that is, you know, 
specific and also reasonable to get these kinds of things 
accomplished.
    I think there is another issue and it kind of goes to 
Senator Bennett's comments about, you know, rules based versus 
principles based. While I do not completely accept that 
dichotomy, we do in this country like to have lots of guidance 
and lots of detail. And we have it, whether it comes from us or 
the SEC or the accounting firms or what else. And this will 
require a little bit of a cultural and mind shift a little bit. 
That is one of the reasons that Con Hewitt and I were very much 
in favor of what has now become the SEC Advisory Committee on 
improving our financial reporting system to look at some of 
these issues in our own system as to what drives that perceived 
need for all sorts of rulings, detail, and the like. And that 
is also going to probably come up with some recommendations 
that may hopefully have some impact on our ability to be able 
to deal with a less detailed system of less specific guidance 
and the like. But it will be a challenge.
    Senator Allard. You know, when we went through this period 
where we had a number of companies have accounting problems 
that began to impact the markets, you know, the Congress felt 
like they needed--in particular, this Committee I think felt 
they needed to do something, at least this one member did, felt 
we needed to do something to try and bring confidence back to 
the market.
    I am one who does not like to see a lot of rules and 
regulations. I like to rely on the professional. But in this 
particular case, the professional fell short. At least in a few 
instances, it kind of reflected totally on the whole profession 
as well as the attitudes on the market.
    I would like to see us get more to the general concept, 
but, you know, it seems like consumer confidence rests much 
more on rules and regulations than perhaps we have, you know, 
had to in the past prior to those instances.
    How do we ensure that movement does not outpace the ability 
of the accounting industry to keep up? How do we ensure that? 
Do we make sure we put the schedule in with plenty of leeway in 
it, or what have you got in mind on that?
    Mr. Herz. I am just calling for a plan to be put together, 
to get the right people together and put the plan together and 
agreed to, and think about it, you know, in an orderly, 
complete way. You know, I could probably think of 10 or 15 
broad things that need to get thought about as we contemplate 
this move, and there are probably other people from their point 
of view in companies, in the accounting industry, who would say 
we also need to think about this and that.
    So I am always good at calling for plans. I am not so good 
at developing them.
    Senator Allard. My time is running out here. Would you list 
for me, and response back to the Committee, you know, 10 or 15 
things, broad things that you would consider? Unless you have 
got----
    Mr. Herz. Yes, there are a lot of them in my detailed 
written testimony.
    Senator Allard. OK. We have got it. Good.
    Chairman Reed. Thank you very much.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Let's get practical now for just a minute. I am an investor 
and I have interest in a company, and I get two sets of books--
one under GAAP and one under is it fair to say. What is the 
first thing I am going to notice in terms of the differences 
between the two?
    Mr. Hewitt. I will start this. When you get your annual 
report or they file them at the SEC, if it is in IFRS, it will 
be reconcilement of all the differences, material differences, 
although some companies put immaterial differences in their 
reconcilement. Sometimes there may be only two items of 
reconcilement items, sometimes there may be a dozen items. And 
those reconcilement items are explained as they pertain to U.S. 
accounting standards. And when you get done with those 
reconcilement items, you are going to end up with a different 
number for the net income or loss than you started with under 
IFRS. However----
    Senator Bennett. Is it going to be higher or lower?
    Mr. Hewitt. Sometimes both. I have reviewed a number of 
these, and sometimes they are both ways. And over a period of 
time, if you take a snapshot today and look at it today, 
because of the differences in how a company uses capitalized 
items versus expensed items, over a period of time, 5 years, 
there may not be any difference. If you just take 1 year, yes. 
If you go over a number of years, those differences tend to 
come out to zero, just as they do in U.S. GAAP when a company 
has different alternative methods of depreciation or anything 
else.
    Senator Bennett. OK. So it will be the allocation of long-
term costs, appreciation and amortization. Let's talk about 
cash-flow. One of the things that I want to look at is EBITDA. 
Will EBITDA be different?
    Mr. Hewitt. EBITDA would be different since that is 
earnings before depreciation, interest, and taxes, and the 
recording of those items under IFRS may be different than they 
do under U.S. GAAP. So you may have a different EBITDA, yes.
    Senator Bennett. OK. And it may be higher and it may be 
lower?
    Mr. Hewitt. May be lower. But over a period of time, I 
personally think they equate out.
    Senator Bennett. All right. U.S. taxes, we have seen 
examples where the books kept for tax purposes are different 
than the books kept for reporting purposes. And that was part 
of the fight we had over the issue of expensing stock options 
and how you value that. That continues to be a very fertile 
field for accountants and lawyers to earn their fees.
    How would the IFRS deal with U.S. taxes differently than 
GAAP?
    Mr. Herz. The two current standards are very close. The 
basic principles are the same. The problem is we have had a few 
exceptions in each standard, but they have been different 
exceptions, and we now have a project which we are close to 
issuing a document on that either eliminates the exceptions or 
has the common one, so the standards will be the same.
    Senator Bennett. OK. Stepping back from the particulars, if 
Sir David has formed a company and puts out a prospectus and it 
is in both forms, and I start looking at that prospectus, 
assuming that his superior management will be there on both 
forms, am I likely on the one form to say this is a good deal 
and on another form to say, gee, I better not put my money in 
it? Or will you come close enough in both of them that you will 
arrive at basically the same decision?
    Mr. Tweedie. Well, since this is my company, perhaps I 
should answer this one. Basically, we know what the differences 
are between U.S. GAAP and international standards, and that has 
been the whole thrust of our program, and we took them from the 
reconciliation. That is how we started off under the Norwalk 
Agreement. We listed all the major issues, income taxes. There 
were others such as the fair value option, joint ventures, and 
so on. We worked right the way through, and what we did to 
start with is we just eliminated the differences. That was 
going to take a huge amount of time if we went through every 
single detail, down to 2015.
    And then what I thought was a real inspiration from the 
SEC, when we called this together about 2005, 2006, we thought, 
well, how can we do this faster? And we decided what we would 
do, there were certain things that we could change very 
quickly. Basically the standards were the same, but there was 
some principle that was not quite the same. Well, why don't we 
just take the better principle and we would do it? So that 
locks another lot out, and we have done that more quickly.
    We were then left with ten areas where sometimes there are 
differences and sometimes there are not, but we know exactly 
where they are. And we can highlight that, and we can explain 
what the policy is. For example, in consolidation, 
internationally we base it on control. If you control 
something, you consolidate. The U.S. tends to be more do you 
have majority equity shares. Well, we think it is broader than 
that, and that is part of the issue that we are working with 
FASB on.
    Leasing, for example, the good news is that we have very 
similar standards. The bad news is they do not work. They are 
hopeless.
    [Laughter.]
    And nothing is on the balance sheet if it is leased. One of 
my big ambitions is to fly an airplane. It is actually on an 
airlines balance sheet. And the reason it is not is because the 
standard really was written 20-odd years ago and does not 
reflect the economics. You know, if you have a legal commitment 
to pay, that is a liability. And when you think leases a year 
ago amounted to $582 billion, and that is just for 1 year, and 
most of that is off balance sheet. Now, Bob----
    Senator Bennett. It sounds like Enron.
    Mr. Tweedie. Well, it has been there for years, but, you 
know, that is one actually we both get exactly the same answer, 
which is nonsense. And what we are trying to do now is work a 
joint standard, and we were discussing that just yesterday. We 
will come out with a joint standard when we will move from not 
showing any leases to showing almost all of them on balance 
sheet.
    So while we have ten major differences between us, some of 
them really--not so much ten major differences. Ten major 
projects. Some of them do not lead to differences, and the 
other ones we know exactly what the differences are caused by, 
and that can be disclosed. So there is, if you like, a flag for 
the investor.
    Senator Bennett. So the bottom line--this is what I am 
driving toward. The bottom line is an analyst or an investor 
who tries to do his own analysis can, in fact, understand 
enough about the differences so that he or she will come to 
basically the same decision regardless of which set of 
accounting terms looking at--the educational process that you 
have been talking about necessary to equip the analyst with the 
skills to dig into a corporation under IFRS are not that 
difficult to acquire, and the analyst will be able, with a 
little bit of study to say, OK, it is a slightly different 
pattern, but I can get the same information I want if I am 
focused on EBITDA, I know what it will mean; if I am focused on 
some other aspect or valuation of what the market cap really 
ought to be, I can get those data out of this new set without 
having to go back to school for 2 or 3 years in order to 
understand it.
    Is that a safe assumption?
    Mr. Tweedie. You will not get exactly the same data in the 
sense without doing the accounts twice, but what you will get 
is you will get very similar answers, which are getting more 
and more similar as time goes by. And the second thing you will 
know is the fact there may be a difference in this area. Take, 
for example, consolidations. One of the big issues that we have 
had--and Enron was a classic--was special purpose entities, and 
now with the credit crunch we have got conduits. How do we 
handle those things? The U.S. handles it in a rather different 
way from us. We look at do you control this.
    In the aftermath of Enron, the U.S. brought out 46R, which 
is a method of looking at what are the benefits you are getting 
out of this thing. Well, we think that is worth exploring, too.
    So we are trying to produce a joint standard which will 
look at maybe the central theory should be control. But what 
happens if you do not control? Can we make sure you get it?
    So you will not yet get exactly the same answers, but that 
does not mean to say that the IASB answer is better than 
FASB's. It is in some situations and maybe not quite so good in 
others. But the idea is we merge and get the best of both 
worlds, and that is actively going on at the moment. So it is 
going to get less and less, the differences.
    Analysts in Europe must have had quite a job because, while 
IFRS and U.S. standards are similar, when you looked at some of 
the continental European standards, they were totally 
different. So there was a complete mind-set's change from 
looking at tax accounts or accounts based for creditors to 
accounts based for the equity markets, which is the way we do 
it and the way FASB does it.
    So I think the differences are not as bad as people think 
they are. The U.S., in fact, will be better equipped than most 
countries to deal with this.
    Senator Bennett. Thank you.
    Chairman Reed. Thank you, Senator Bennett, and let's take a 
brief second round.
    Sir David, you pointed out the butting of jurisdictional 
versions as a potential difficulty in reconciling and totally 
converging. And even within the EU, most of the countries are 
not--or all of those countries are not using the precise 
standards promulgated by the International Accounting Standards 
Board. Is that correct? There are some changes that they have 
mandated?
    Mr. Tweedie. Well, it is very small. It is about seven 
paragraphs of one standard in 2,000 pages of standards.
    I think what has happened, we are a rather unusual 
organization in the sense we are modeled on the FASB, we are 
independent, we can issue standards as we decide upon them. 
That is not normally the way we deal internationally with 
treaties and laws. People like yourself, sir, would meet with 
opposite numbers in different countries, and you would come to 
an iterative compromise, and that would be the international 
rule.
    We do not do that. We just listen to the arguments and say 
that is what we think the answer is. And we do give--after we 
have issued the standards, we then give--2 years later there is 
still lots of antagonism toward it. We will look at it again, 
but do not necessarily agree to change it.
    Now, one of the things then is that jurisdictions are 
suddenly saying, well, wait a minute, these people are actually 
passing laws and we are having to take them and what right have 
we to say this.
    So I think what is starting to happen is an issue of is the 
present structure suitable without giving, say, the U.S. a say 
in the composition of our trustees or Europe. At the moment you 
have not. The trustees, like FASB trustees, are self-elected. 
They replace themselves, their successors, and it is 
geographic. But, nonetheless, as far as jurisdictions are 
concerned, there is no actual direct influence. And one of the 
big questions then is: Should there be some governance body 
that actually helps to appoint the trustees and representatives 
from different countries and so on, so that people have more 
say--but not to control the standards, because otherwise we 
will get, if I may say so, political influence into the 
standards, and that would be an appalling thing, as I am sure 
you would agree, sir. This is the----
    Chairman Reed. That is why we have FASB.
    Mr. Tweedie. This is the issue I think that has still to be 
discussed.
    Chairman Reed. So there is a simultaneous effort to really 
make this work, is to get all countries to adopt the version 
promulgated by the International Accounting Standards Board, 
and that has to go on, too, because as Mr. White and everyone 
has pointed out, the jurisdictional varieties will not qualify 
for special treatment under the proposal.
    Mr. White. Yes, that is correct. Just to clarify, if you 
remember, I mentioned 110 and 70. The category of companies 
that are in the category of the 70, they are not in most 
cases--in fact, I think in all cases, they are not required 
under the jurisdictional adaptation to follow that 
jurisdictional adaptation. There tend to be more different 
options that they can follow. But they can follow the IASB 
version. And so if they--they can still report--they can still 
eliminate reconciliation and come here if they certify that 
they are following the IASB version.
    Chairman Reed. Right. Just a final point, and Sir David 
brought up in terms of in the aftermath of Enron, there was 
special attention to what is described as variable interest 
entities now. And I understand--and going back to the whole 
issue of reconciliation--that that is one of the items that is 
included in a reconciliation by a filer who is using 
international antitrust standards. Is that correct? Mr. Herz?
    Mr. Herz. There are a few areas of difference. We have a 
standard interpretation of 46R that has principles and then has 
below it a bunch of guidance, as we do, that is an approach 
that basically says if nobody seems to control that entity, 
because one of these vehicles that has been set up, you have to 
do an analysis of all the arrangements and decide based on that 
whether there is a party that gets a majority of the risk and/
or reward. And then if you cannot do that qualitatively, it 
lays out a quantitative approach to doing that. The 
international standard is based more on control, although they 
do have some risk and reward type backstops in it, but it is a 
lot less specific.
    On the other hand, we have significant differences in the 
accounting for securitization transactions; whereas, I would 
argue theirs are actually tougher than ours in order to get 
something off the balance sheet than ours. So I think the 
things could go either way depending upon the particular 
transaction and structure. But it is something we are--it is on 
our hit list of things----
    Chairman Reed. Well, I think it should be, and just two 
final points. First, Senator Bennett talked about looking at, 
you know, apples and oranges and saying, well, I know it is an 
apple, I know it is an orange, and I feel good about making my 
investment. The problem is looking at an apple and discovering 
later on you have got bananas that you did not think of.
    Mr. Herz. You know, I said on balance I support the SEC 
dropping the reconciliation, but there are pros and there are 
cons to it, and one of the cons for some investors--and I think 
you may hear this in the next panel from some of the people--is 
they do use that information, and it will force them to either 
do more work or they may not be able to quite put apples to 
apples without a lot more work.
    Chairman Reed. Well, I think the goal is one that we all 
can embrace, which is convergence of standards, transparency, 
all of the--but I think this panel has very adroitly and 
elegantly indicated that there are some significant steps along 
the way that have to be taken before we are quite there. Again, 
we will participate, we hope, in that process in a positive 
way.
    Senator Allard.
    Senator Allard. Thank you. I just have three brief areas I 
want to bring up. I want to finish my discussion a little bit 
about regulation and everything. There are a lot of medium-
sized firms in the State that I represent, and I think, you 
know, if they are interested in growing their business, the 
next step is into a larger firm. And they are concerned about 
how this is ever going to get to be a large firm. Will these 
provisions that we are talking about here make it more 
difficult for those medium-sized firms to transition into a 
larger accounting firm, wherever that bright line is? Anybody 
want to comment on that?
    Mr. Tweedie. I wonder if perhaps I could just mention 
something briefly. When people switch to IFRSs, they tend to 
use IFRS for listed companies. And then comes the question of--
--
    Senator Allard. Those are large companies?
    Mr. Tweedie. Large companies. For Europe, for example, 
there are 8,000 listed companies which use IFRS--that is 
compulsory--of which, I may say, only about 30 use the carveout 
that is existent. The rest all use pure IFRS.
    What we have done for the smaller companies is we have 
taken the standards and then sort of said, well, if we were a 
small company, how could we apply this? And we are putting 
out--we have got a draft out at the moment on what we call IFRS 
for small and medium enterprises, and it is probably about 15 
percent of the size of the full standards. We have really 
slashed them down.
    On the other hand, if you do grow, you are basically 
obeying the same sort of principles but in a simplified form, 
so there is not a massive cliff that you go off when you reach 
the listing, or whatever. And that is up to the jurisdiction 
how far they push it. Some will push IFRS down into the medium 
size, others will not. But there is an alternative coming up, 
which is derived from the main standards, and that is what is 
going to be used in many countries of the world.
    Senator Allard. Thank you, Sir David.
    The other subject I wanted to participate in here, the 
Congress has charged several agencies with specific rights and 
responsibilities--the SEC, the PCAOB, and FASB--and we also 
designate the fees to support the setting of accounting 
standards.
    Now, do you have any concerns that convergence will involve 
deferring some of those responsibilities or fees to foreign 
organizations? And do you believe that you will need 
congressional authorization to make any of these changes? This 
is to the whole panel.
    Mr. Hewitt. That is a very interesting question because the 
support fees of FASB are paid by the registrants and then also 
the----
    Senator Allard. But set by the Congress--no, no, I am 
sorry. Yes, we designate the fees.
    Mr. Hewitt. That is true. And I believe that there will be 
no decreases in fees because of lifting the reconcilement, that 
type--I do not see any material effect at all upon both 
standard setters, PCAOB and FASB, in terms of fees.
    Senator Allard. Yes?
    Mr. Herz. I think that is right. I think long term, you 
know, one of the things that David mentioned is that their 
trustees are trying to put in place a mandatory funding scheme 
for them across the world, which would, I think, you know, give 
them more security financially and be able to bolster their 
staff and the like. And, you know, ultimately if we are going 
to be part of this system, I think we would want to also bear 
our fair share of that, whether that would be by taking some of 
our fees, saying, you know, that is directed to you working 
with the IASB, which we do already, or it is a separate fee 
and, of course, ultimately what our organization would look 
like, you know, down the road might change as well.
    So whether that would--I do not know whether that would 
take, you know, you all having to do something with Section 109 
basically of the Sarbanes-Oxley Act or something that the SEC 
could do regulatorily, I am rapidly getting out of my depth as 
a non-lawyer.
    [Laughter.]
    Mr. Tweedie. Just on that point, perhaps I could mention 
that the program of funding for the IASB, when we started, we 
were very fortunate to have Paul Volcker as the Chairman of our 
trustees, and saying no to Paul is very difficult. And he 
certainly asked many companies to contribute on an individual 
basis for the first 5 years, but that was unsustainable. And 
what we are doing now is the trustees are working out a funding 
program which is based on the GDP, and the countries are being 
asked to provide their share. Now, they are doing it in 
different ways. The U.K. and the Netherlands I think are doing 
it very similarly to you in the United States by sort of a 
listing fee. In Australia, they are collecting money for the 
national standard setter and diverting some to us. Japan simply 
is approaching individual companies, but as an organization and 
then passing money up to it. So it has been done in various 
ways, but the idea is to make thousands of companies involved 
in this rather than as it was before, 200 or 300.
    Senator Allard. Yes, I think there was some concern or 
conflict of interest when you go to those people you are trying 
to regulate to support you financially.
    Mr. White.
    Mr. White. Just to answer your question directly, we do not 
believe there would be any required legislative changes to do 
the things we are discussing. And, also, the SEC will continue 
to be the organization that is responsible for all of the 
financial reporting by foreign and domestic issuers in the U.S.
    Senator Allard. Thank you.
    Mr. Chairman, that concludes my questions.
    Chairman Reed. Thank you, Senator Allard.
    Gentlemen, thank you very much, and there might be 
additional questions which we would direct to you in writing, 
and we would ask for your responses in a timely manner. Thank 
you very much.
    I will call forward the second panel.
    Our first witness is Mr. Jack Ciesielski, who is the owner 
of R&G Associates, Inc., an investment research and portfolio 
management firm located in Baltimore. He is the publisher of 
the Analyst Accounting Observer, which is an accounting 
advisory service for security analysts. He is currently a 
member of the FASB's Emerging Issue's Task Force, and a member 
of FASB's Investor Technical Advisory Committee.
    From 1997 to 2000, he served as a member of the Financial 
Accounting Standards Advisory Council, which is the advisory 
body that consults with the FASB on practice issues and advises 
FASB on setting its agenda.
    Ms. Teri Yohn is an Associate Professor at the Kelley 
School of Business at Indiana University. Prior to joining 
Indiana University in the fall of 2007, she served on the 
faculty of Georgetown University for 15 years. Ms. Yohn also 
serves as the Academic Fellow in the Office of the Chief 
Accountant at the Securities and Exchange Commission in 2005 
and 2006 and on the faculty of the University of Massachusetts 
at Amherst in 2006 and 2007.
    Mr. Charles Landes is Vice President, Professional 
Standards and Services for the American Institute of Certified 
Public Accountants. In this capacity, he oversees the technical 
activities of the Auditing Standards Board, Accounting and 
Review Services Committee, Accounting Standards Executive 
Committee, and the PCPS Technical Issues Committee.
    Mr. Landes is a former member of the Auditing Standards 
Board and is a former chairman of the Peer Review Committee of 
the Private Companies Practice Section.
    Mr. Lynn Turner serves as a Senior Advisor to Kroll Zolfo 
Copper, a firm specializing in corporate advisory and 
restructuring and forensic and litigation. He was appointed by 
the Department of Treasury to the Advisory Committee on the 
Auditing Profession. Mr. Turner served as the Chief Accountant 
of the SEC from July 1998 to August 2001. As Chief Accountant, 
Mr. Turner was the principal advisor to the SEC Chairman and 
Commission on auditing and financial reporting and disclosure 
by public companies in the U.S. capital markets as well as the 
related corporate government matters.
    Thank you all for your willingness to join us today and for 
your testimony. Your testimony will be made part of the record, 
your written testimony. So feel free, in fact I would encourage 
you, to summarize your comments and see if we can approach the 
5-minute mark.
    Mr. Ciesielski, please.

            STATEMENT OF JACK CIESIELSKI, PRESIDENT,
                         R&G ASSOCIATES

    Mr. Ciesielski. Thank you, Chairman Reed, Ranking Member 
Allard, members of the subcommittee----
    Chairman Reed. I think you have to turn the microphone on.
    Mr. Ciesielski. That is better.
    Chairman Reed, Ranking Member Allard, and members of the 
subcommittee, I am pleased to be offering testimony today on 
the subject of international accounting standards.
    From the start, I would like to commend the SEC for trying 
to move the world's two leading accounting standard setters 
closer together. The two have made a remarkable amount of 
progress in the last 5 years, since they announced their 
intention to work together on converging their standards and 
coordinating their efforts on future projects.
    It is the SEC that is an agent provocateur, however, by 
issuing its proposal to eliminate the IFRS to GAAP 
reconciliation and its proposal to allow U.S. companies to 
choose between U.S. GAAP and IFRS. While convergence has 
progressed well in the last 5 years, these proposals have such 
broad implications that they force all players to rethink what 
is possible or not possible in the current environment and in 
the near future.
    That said, I view the SEC's proposals as the right 
questions at the wrong time. Much high quality information 
about the state of accounting standard convergence is available 
from SEC filings. The SEC has proposed to eliminate the 
reconciliations which provide quantifiable evidence about the 
GAAP and the results produced by the two reporting systems. 
Much can be learned about the state of convergence from the 
differences shown in those reconciliations for U.S. registrants 
and targets could then be set for eliminating the differences 
in the relevant standards.
    There is no indication in either of the SEC's proposals 
that there has been an examination of the existing evidence. 
Instead, the SEC is relying heavily on the fact that there is a 
process in place for convergence to occur in the future without 
objectively assessing how far the convergence of the two 
systems have progressed.
    I would not smoke three cigarettes a day because there is a 
process in place for discovering a cure for lung cancer. It 
seems a little bit--maybe that is an exaggeration, but it is 
relying heavily on an outcome that has not been determined yet 
to make sure that everything is OK today.
    I support the convergence efforts of the two standard 
setters and I believe that the investors and capital markets 
would benefit enormously from a single set of high quality 
standards. At this time, however, I do not believe there is 
sufficient convergence between the two sets to warrant either 
the elimination of the IFRS to GAAP reconciliation or to allow 
U.S. registrants the choice of which accounting standards to 
use.
    I urge the Commission to isolate the past differences 
arising from non-converged standards having long effects on the 
future reporting and to develop the proper disclosure for such 
differences. I also urge the Commission to examine the other 
differences produced by the application of the two sets of 
accounting standards, identify the accounting literature 
responsible for those differences, and work with the IASB and 
the FASB to set realistic deadlines for working out those 
differences through the convergence process.
    That concludes my prepared remarks.
    Chairman Reed. Thank you very much.
    Mr. Landes, please.

STATEMENT OF CHARLES LANDES, VICE PRESIDENT, AMERICAN INSTITUTE 
                OF CERTIFIED PUBLIC ACCOUNTANTS

    Mr. Landes. Thank you, Chairman Reed, Ranking Member 
Allard. My name is Chuck Landes and, on behalf of the 340,000 
members of the AICPA, the National Association for Certified 
Public Accounts, it is my pleasure to testify today, and thank 
you for holding his hearing.
    I want to state as directly as possible that the AICPA 
supports the goal of a single set of high quality, 
comprehensive accounting standards, to be used by public 
companies in the preparation of transparent and comparable 
financial reports throughout the world.
    The debate or question should no longer be whether we move 
to convergence of high quality accounting standards, but how 
soon we can accomplish convergence. The FASB and the IASB have 
made tremendous strides in harmonizing accounting standards and 
the SEC has demonstrated U.S. leadership in expediting this 
process. But let's recognize that convergence is not, nor will 
it be, without challenges and issues. So there is still hard 
work to be done.
    Will there be bumps in the road as we take this journey? 
Absolutely. But it is a journey that must be taken.
    Accounting is often referred to as the language of business 
and there is a need for a common global business language, a 
common set of accounting standards. In today's global economy, 
that one common accounting language will benefit all 
participants in the capital markets. It will first benefit 
investors because it will facilitate the comparison of 
financial results of reporting entities domiciled in different 
countries. It will also benefit U.S. public companies because 
it will allow them to present their financial statements in the 
same language as their international competitors. And it will 
benefit audit firms who audit public companies because it will 
allow them to train their staff around one core set of 
accounting standards.
    The AICPA supports the SEC's proposed rule regarding the 
elimination of the reconciliation to U.S. GAAP by foreign 
private issuers and the SEC's concept release that would give 
U.S. issuers an option to prepare financial statements in 
accordance with IFRS. We believe these are both important steps 
in the process toward the acceptance of a single set of high 
quality globally accepted accounting standards.
    That is not to say all differences between GAAP and IFRS 
have been resolved. But despite these differences, both U.S. 
GAAP and IFRS promote transparency and are designed to protect 
investor interest. With respect to the SEC, the AICPA fully 
supports their role of protecting U.S. investors. We encourage 
the SEC to continue to provide input during the IASB standard 
setting process and to solicit user feedback to understand 
whether these standards meet investor needs.
    The AICPA also encourages the SEC to work with other 
regulators around the world to agree on an appropriate 
framework for the acceptance of IFRS and to work with those 
regulators to encourage robust enforcement of IFRS. The 
challenge will be balancing the needs of investors and the 
needs of the security regulators with one set of global 
accounting standards.
    In the end, any activity to remove organizational barriers 
and avoid geographical differences ultimately will aid in 
achieving one set of international accounting standards. While 
this hearing is to deal with the acceptance of IFRS financial 
statements in the SEC's filing of foreign private issuers and 
granting of an IFRS option to U.S. public companies filing with 
the SEC, the AICPA believes that the SEC should view 
international convergence holistically. That is if IFRS are to 
serve as a basis for U.S. issuers' financial reporting, there 
will also need to be changes in auditing, regulatory, and legal 
environments.
    With respect to auditing, the SEC, along with the PCAOB, 
should explore convergence of PCAOB auditing standards with 
international standards on auditing.
    With respect to regulatory, because IFRS currently are less 
detailed than U.S. GAAP, a decision by the SEC to permit an 
IFRS option should carry with it an expectation by regulators 
and investors that the use of reasoned, professional judgment 
may yield different outcomes in similar circumstances more 
often under IFRS than U.S. GAAP.
    Additionally, working from less detailed standards and less 
interpretive guidance may result in more second guessing by 
regulators and users and thereby result in unwarranted 
increased legal liability for preparers and auditors of 
financial statements. As a result, the SEC should work with 
Congress and other governmental agencies to explore this 
potential increased risk and work to mitigate this risk when 
preparers and auditors have applied reasoned professional 
judgment.
    At the international level, continued progress toward high 
quality international accounting standards requires an improved 
funding mechanism for IASB that will allow them to remain 
independent and objective.
    And finally, we acknowledge that we need to fulfill a 
number of responsibilities to make convergence to a single set 
of global accounting standards for public companies a success. 
Rest assured that we, the AICPA, will meet our 
responsibilities.
    On behalf of the AICPA, we would like to thank you for the 
opportunity to appear here today and we would be happy to 
answer any questions that you may have.
    Chairman Reed. Thank you very much. Ms. Yohn.

 STATEMENT OF TERI YOHN, KELLEY SCHOOL OF BUSINESS, UNIVERSITY 
                           OF INDIANA

    Ms. Yohn. Mr. Chairman, Ranking Member Allard, good 
afternoon.
    I appreciate the opportunity to appear before you today to 
provide testimony on issues related to the international 
convergence of accounting standards and the potential 
elimination of the IFRS-U.S. GAAP reconciliation requirement 
for foreign private issuers. The views that I represent today 
are primarily based on my interpretation of academic research 
on these issues.
    Most, but not all of the academic literature supports the 
notion that convergence of accounting standards is a laudable 
goal to which U.S. standard setters and regulators should 
strive. In general terms, the purpose of Regulation S-X is to 
provide U.S. investors with inter-temporally consistent 
information that is comparable across registrants. To the 
extent that internationally converged accounting standards 
increase the comparability of financial information, 
convergence is in the best interest of U.S. investors and other 
stakeholders.
    Convergence of standards is occurring through the joint 
standard setting activities of the IASB and FASB. And academic 
research suggests that IFRS possesses the characteristics of a 
high quality set of standards. Research has documented that 
IFRS and U.S. GAAP are equally value relevant for non-U.S. 
companies in non-U.S. markets. However, the quality of IFRS in 
foreign markets is not the most important factor in determining 
whether or not the reconciliation requirement should be 
eliminated in the U.S. Rather, the informational needs of U.S. 
investors should drive this decision.
    Logically, any proposal to eliminate the reconciliation 
requirement must be based on the premise that U.S. GAAP and 
IFRS are informationally equivalent or that investors can 
reconstruct comparable U.S. GAAP summary accounting measures 
from IFRS financial information. Neither of these two criteria 
appears to hold at this point in time. Academic studies have 
documented that material reconciling items currently exist 
between IFRS and U.S. GAAP and that the reconciliation is value 
relevant and used by U.S. investors, suggesting that U.S. GAAP 
is more value relevant than IFRS in U.S. markets.
    In addition, without the reconciliation, it would be 
difficult, if not impossible, to reconstruct U.S. GAAP income 
and equity from IFRS-based financial statements and footnotes. 
Furthermore, it does not appear that U.S. stakeholders have the 
necessary expertise in IFRS to understand the differences 
between the two sets of standards. Universities are still 
attempting to fully integrate IFRS into their curricula, and 
even the largest accounting firms have revealed concerns about 
the lack of IFRS expertise within their domestic professional 
staff.
    The existence of significant reconciling items and the 
value relevance and use of the reconciliation by U.S. 
investors, as well as the inability to reconstruct the 
reconciliation from public information and the lack of 
expertise in IFRS by U.S. stakeholders suggests that the 
elimination of the reconciliation requirement is premature. It 
would perhaps be prudent to revisit the issue on a regular 
basis and to reconsider eliminating the required reconciliation 
where the differences are immaterial and when U.S. investors 
appear to view IFRS and U.S. GAAP as providing equivalent 
information.
    Deferring the elimination of the reconciliation requirement 
will also allow regulators to address some of the major 
challenges of convergence. Academic research has documented 
that institutional differences lead to differential 
implementation of even uniform accounting standards across 
countries. In addition, while the U.S. has the reputation for 
providing the strictest enforcement of securities markets, 
evidence on SEC enforcement has concluded that the SEC rarely 
acts to enforce the law against cross-listed firms and that 
there are legal and institutional obstacles to private 
litigation against foreign forms in the U.S.
    Differential implementation of standards across countries 
and differential enforcement of domestic and cross-listed firms 
diminishes the comparability of financial statements, even with 
converged standards. Whether or not the reconciliation 
requirement mitigates these issues remains an open question 
that should be addressed.
    An argument for eliminating the required reconciliation is 
that it would reduce the cost of foreign firms of listing on 
U.S. markets. Research has concluded that U.S. cross-listing 
provides benefits to foreign firms in the form of greater 
access to capital and improved information environment, greater 
investment protection, and evaluation premium. Despite these 
benefits, some are concerned that the U.S. securities markets 
have lost their competitiveness in recent years due to onerous 
requirements. However, existing evidence on the New York versus 
London stock exchanges does not support this argument and 
suggests that the newly cross-listed firms on foreign exchanges 
tend to be small and unlikely candidates for cross-listing in 
the U.S. The research also suggests that the net benefit of 
listing on a U.S. exchange has not eroded in recent years.
    In summary, most of the academic research suggests that the 
convergence of accounting standards is beneficial to U.S. 
investors and is therefore a laudable goal. The research also 
suggests, however, that the elimination of the IFRS-U.S. GAAP 
reconciliation requirement is premature because it will reduce 
the comparability of financial statements across registrants 
and will leave U.S. investors with a diminished set of relevant 
information for decisionmaking.
    Thank you.
    Chairman Reed. Thank you, very much. Mr. Turner, please.

          STATEMENT OF LYNN TURNER, MANAGING DIRECTOR,
                       GLASS, LEWIS & CO.

    Mr. Turner. Let me just start by thanking Senator Allard 
for those kind and generous remarks at the beginning. I know 
that in the future you will be leaving the Senate. As a citizen 
of Colorado, I know you have done tremendous public service for 
us and have made tremendous personal sacrifice, including your 
wife, in being back here. So thank you very much for all you 
have done for us as a State.
    My only regret in being here, actually, today is that 
tonight on the plane ride home I am going to miss the Colorado 
Rockies first World Series win.
    Chairman Reed. I will refrain.
    [Laughter.]
    Mr. Turner. Anyway, high quality financial reporting has 
been the lifeblood our capital markets, as noted by former SEC 
Chairman Levitt. I could not agree with those remarks more. It 
is this information that provides investors with the ability to 
make informed judgments as to where they should allocate their 
capital, thus resulting in allocations where there is higher 
returns with lower risk. And that attracts a tremendous supply 
of capital to any capital market. When the quality of this 
information, however, is lowered, markets do pay a price as we 
have seen throughout this decade, both here and abroad.
    Based on my experience, I believe maintaining that high 
quality financial reporting is important to the competitiveness 
of the U.S. markets. As a former CFO and business executive, I 
know it is important that you strive not just to match what the 
other markets or competition is doing, but to beat their 
product.
    U.S. markets will not maintain their current prominence if 
they simply become the equal of other markets, employing the 
same strategies and approach to business. Certainly, the 
fallout from the subprime fiasco and structured investment 
vehicles, the SIVs, around the globe is a classic example of 
this as we saw in August when foreign investors pulled 
billions, tens of billions of dollars out of the U.S. capital 
markets over that situation.
    I would also like to clarify what true convergence is, in 
terms of financial reporting. It is a single set of high 
quality financial reporting and disclosure standards that 
result in companies reporting the true economics of the 
transactions they enter into. I seriously doubt if what is 
known as the SIV IFRS-lite standards are going to come up and 
meet that goal.
    They are standards that result in consistent reporting 
methods from period to period and comparable reporting by 
companies who enter into comparable transactions. A couple of 
the Senators today have already highlighted the importance of 
investors being able to compare from one company to the other. 
Without that, you do not have an efficient market.
    They are a complete set of standards covering all the 
significant industries, including in industries like the 
extractive mining, oil, and gas, which is important to my 
State, financial services including insurance.
    They are transactions being reported in the financial 
statements and not left off the balance sheet and out of the 
income statement, as investors have seen time and time again in 
recent years the special purpose entities, the SIVs, and off 
balance sheet financing of securitizations and other assets. 
And this is an area where, quite frankly, today I think it 
would be difficult for the public to buy that we have high 
quality standards either in the U.S. or international 
standards. I have a number of e-mails from foreign investors 
complaining about even their standards in this area.
    I also note that in 2002 Senator Allard exhibited great 
leadership when he wrote a letter to the FASB on off balance 
sheet vehicles, encouraging them to fix this problem and bring 
it back on balance sheet. So he certainly had the foresight. 
Unfortunately, 5 years later we still have not gotten there.
    Convergence is effective audits that ensure claim 
compliance has been achieved. And it is authorities with the 
expertise and experience to globally enforce these accounting 
standards and audits wherever they are used in reporting to 
investors. As we just heard from Ms. Yohn, that unfortunately 
is a situation that does not exist globally today as many of 
these conditions do not. In fact, no regulators and governments 
have fully committed themselves to this effort, to fund it and 
to provide it with adequate resource. And no time table has 
been set among all the countries internationally to fully 
achieve the changes needed to ensure complete and timely 
convergence.
    Instead, the efforts are, at best, being done in a 
piecemeal, haphazard fashion. And as such, we are moving these 
safeguards and protections such as the reconciliation before we 
get there does run the risk of creating significantly more 
scandals and problems for investors.
    In striving to achieve convergence, I think it is important 
that there are a few key points worth noting. These are all 
laid out in the written testimony and I would ask, Senator, 
that the entire written testimony and appendix be included in 
the record.
    But in striving to achieve convergence, which I do think is 
important, having been one of the people that led the effort to 
create the IASB as we know it today in the first place, 
convergence on high quality standards will be best achieved 
through the private sector standard setting process, not one 
influenced by outside specialist interest, overbearing 
regulators, and a lack of direct involvement. We are on the 
right path today, letting Mr. Herz, Mr. Tweedie and their 
organizations take care of the reconciliation by eliminating 
the differences in a reasonable fashion and thereby letting 
them eliminate the reconciliation. It should not be the SEC 
doing it.
    There needs to be assurance that the necessary supporting 
infrastructure set forth the SEC concept release in 2000 is, in 
fact, put in place. And it was interesting that in their 
proposing release, the SEC almost totally ignores that 
infrastructure and whether or not it exists.
    There are concerns regarding the independence of IASB and 
lack of meaningful representation of investors as members of 
its board. There is no meaningful representation from the 
investor community on the voting board members or on the 
trustees whatsoever. It is an issue that in March of this year 
Chairman Levitt pointed out as a serious shortcoming.
    Comparability and consistency in reporting by companies has 
been a hallmark of high quality financial reporting by 
investors and the FASB's conceptual framework for several 
decades. Negatively impacting that will have consequences for 
investing public around the globe.
    And finally, in the U.S. there is a lack of resources, 
skills, and training to make an orderly transition to IFRS 
anytime soon. And I do fear that to require a change in the 
near term would disadvantage many small auditing firms and 
result in significant costs for smaller companies at a time 
when those of us on the Treasury Committee are looking for ways 
to make the smaller auditing firms more competitive.
    With that, I will conclude my remarks and take any 
questions.
    Chairman Reed. Thank you very much. Thank you all for your 
excellent testimony. Let me start, Mr. Turner, with a question.
    Under Section 108 of the amendments to Sarbanes-Oxley, 
there was the setting out standards for--recognizing accounting 
standards. There is a question, at least, and I think the 
previous panel suggested that they have concluded that they 
have the authority. But there is a question, at least, whether 
they would have the authority without a statutory change to 
recognize these standards without reconciliation.
    Do you have a view on that?
    Mr. Turner. Yes. Actually, having been involved with the 
drafting of that, I personally think that they would need to 
come back to Congress and get Congress's approval to do that. I 
do not recall, in any of the conversations at the time, that 
there was a notion that FERC funds, for example, would be 
diverted from the FASB to the IASB. So I clearly do not think 
it was the intent of Congress to open it up like that. So I 
would say the SEC does need to come back to Congress.
    Chairman Reed. Thank you.
    I want to go back to Mr. Ciesielski and Mr. Landes and 
Professor Yohn also, in that the discussion in the previous 
panel, trying to sort of determine what the difference is 
between international standards company reporting and company 
reporting under U.S. GAAP. There was a suggestion that they are 
similar but not identical.
    But then there is a view that there could really be 
material missing information. So Mr. Ciesielski, could you sort 
of give us a comment and maybe an example to flesh out this 
discussion?
    Mr. Ciesielski. I would be glad to.
    Chairman Reed. Can you turn your microphone on, please?
    Mr. Ciesielski. I am sorry.
    Chairman Reed. That is quite all right.
    Mr. Ciesielski. I go back to the last panel, I believe Mr. 
Herz thought there were 11 areas that needed to be reconciled 
between the current body of literature of the FASB and Mr. 
Tweedie believed there were 10. Close, they are similar. They 
are not exactly the same.
    There are projects in the literature that they are working 
on that will be prospectively smoothed out. And I am confident 
that the convergence process will work on that.
    But in the meantime, there are differences in the 
literature that has not been addressed--excuse me, that is 
being addressed, that produces current differences in the area 
of taxes, pensions, and also what I refer to as legacy 
differences.
    If you go back to prior to 2002, there were differences in 
the GAAP literature and the IASC literature that have an effect 
at the time a transaction is consummated. My favorite example 
is business combination accounting. There are some companies, 
and we cite some in our report which is part of the record, 
where there were business combinations that took place that did 
not qualify for what was called pooling of interest accounting 
in the United States at the time. There was a comparable 
procedure called uniting of interests in the IASC literature, 
which was adopted by the IASB. Because it did not meet the 
criteria in the United States for pooling of interests, it had 
to be reported in the reconciliation as a purchase, which is 
what we use in the United States all the time now.
    Those differences can have lingering effects on income that 
last into the decades. And if the reconciliation is removed, 
those differences will never be known to investors. There are 
examples, again, of that in the report that is filed as part of 
the testimony. Those differences, often, I recall, were 
favorable in terms of producing income figures that were higher 
under IFRS than under U.S. GAAP. There is no way that analysts 
could go back and recreate that information.
    I like to say that analysts and investors are reviewing the 
company from 30,000 feet when they are reading the financial 
statements. Those kinds of transactions occur at ground level. 
They do not have visibility into those transactions to try and 
estimate for themselves how they affect current report. And 
even if they did have access to much of that information, it 
would still be an estimate. I think a lot of that information 
would be lost for good and it would create an unlevel playing 
field.
    And also, I would point out that I believe it was Con 
Hewitt pointed out that the information is old and stale by the 
time it reaches analysts. I think that is a great argument for 
saying it should be reported more frequently to iron out those 
differences as U.S. companies report.
    One final remark, I believe there is a perception that 
analysts and investors do not use the reconciliation. I would 
disagree. I think they use it in much the same way they use 
other information that is contextual, like the business 
description part of every 10K filing. If you are picking up a 
foreign company for the first time that is filing an IFRS and 
you do not know much about them, but you do understand U.S. 
reporting, this provides a context and a reason to understand 
why they are different in terms of U.S. reporting versus IFRS 
reporting. This does lay it out.
    I would also mention that a lot of U.S. analysts are just 
passably familiar with U.S. GAAP. When they look at this 
reconciliation they are getting, I would say, prima facie 
evidence of what they do not know. And they do have a way of 
putting it into context in U.S. terms and they can follow up 
and build their knowledge if they want to.
    Chairman Reed. Thank you.
    Mr. Landes, your comments on the same issues of is this 
just similar information or is there missing information 
perhaps?
    Mr. Landes. Well, Senator Reed, we certainly acknowledge 
that eliminating the reconciliation would result in a loss of 
information. We, however, look at this a little differently. We 
believe that the elimination shows that the U.S. is willing to 
put some skin in the game, to use a golf term or perhaps even a 
poker term. Sir David mentioned that there are some foreign 
filers who look at the reconciliation and are offended by that. 
And so we think that this is a way for the U.S. to step up and 
say yes, we are serious about convergence.
    I have some personal experience, not on the accounting side 
but actually on the auditing side, where the AICPA's Auditing 
Standards Board has been working very hard now for three or 
four, almost 5 years on converging U.S. auditing standards for 
non-issuers with international auditing standards. And what we 
found was that the day that we publicly remarked that we are 
working toward convergence, we were embraced in a different way 
by the international community.
    Prior to that, when we would try to make arguments, they 
would look and say that is all well and good. But you all do 
not use international auditing standards, so why should we 
care? And we see the elimination of the reconciliation as a 
first step in the process of telling the world we do care about 
international convergence. And we actually believe that the 
elimination may speed up the convergence. And we know that that 
is a view not shared by others but nevertheless, from our own 
personal experience, what we have found on the auditing side.
    Chairman Reed. Thank you. Professor Yohn, please.
    Ms. Yohn. I think the academic literature is focused on 
what is the impact and the use of the reconciliation for U.S. 
investors. And like I said earlier, it seems that there are 
material differences, even looking as recently as 2004-2005. 
There are material differences. The average, I think, 
reconciling difference was about--the mean was 13 percent of 
stockholder's equity. And that the investors use this. That if 
you control for the IFRS earnings, the difference between IFRS 
earnings and U.S. GAAP explains changes in stock prices. So it 
suggests that the investors do use the information and it makes 
material differences.
    Chairman Reed. Thank you. Senator Allard.
    Senator Allard. In your testimony, Mr. Landes, you made the 
statement that AICPA supports the goal of the single set of 
high quality comprehensive accounting standards to be used by 
public companies. Does the association or the institute feel 
that the United States has the best set of accounting 
standards?
    Mr. Landes. We would all love to believe that what we have 
in the United States is the best, whether it be accounting 
standards, whether it be auditing standards, regulatory 
processes. What we have found is that we may not always have 
the best answers. I have, if I may----
    Senator Allard. Can you give me some examples where the 
international accounting standards might be superior to what we 
have in the United States?
    Mr. Landes. Well, I believe that one of the items that Sir 
David talked about was prior to the FASB's issues of FIN 46, 
where they had some consolidation standards that may actually 
have been better than the U.S. standards at the time. So I do 
not----
    Senator Allard. That is where you talked about the 
majority, as opposed to controlling interest?
    Mr. Landes. That is correct. That is correct, Senator 
Allard. I do not have any specifics that I could give you 
today. I am not prepared to offer specifics where I think one 
is necessarily better than the other. That is a debate that we 
personally do not believe is one that we should be having. We 
believe--and I believe Senator Reed mentioned, and perhaps you 
alluded to it, as well--that we should not be looking at 
whether one set is better than the other. But what we ought to 
be doing is looking at them both and saying how can we draw the 
best answer out of both of those standards to create one set of 
high quality standards.
    Senator Allard. And that is what I am driving at, is for 
that clarification. Because when I looked at that statement, oh 
my gosh, it sounds to me like he would not be in favor of 
convergence. But you are in favor of convergence, working with 
other foreign countries to come up with a common standard?
    Mr. Landes. Absolutely, Senator.
    Senator Allard. In some cases, we might have to give a 
little bit to accept a foreign standard.
    Mr. Landes. That is correct. That is part of the 
convergence process.
    Senator Allard. Now there are some--well, let me drop that 
right there. Mr. Turner, let me get back to you and it is kind 
of along the same lines I was talking to him.
    You are obviously very familiar with the Enron, Global 
Crossing, other firms, those problems there that we had that 
Congress ended up enacting Sarbanes-Oxley. And we did that to 
raise our corporate governance standards. What we found out, 
what this committee has begun to hear over the last couple of 
years, is that this higher--although we expected the higher 
standards to help our markets, when we raised those standards, 
many companies seem to have fled our stock markets, going to 
Tokyo. That is the report back to the committee--the Tokyo, 
London markets, and Toronto, I believe, is where the other 
markets are.
    When we try and level out and reach a convergence like Mr. 
Landes talked about, some of the European countries have carved 
out exceptions. How can we be assured that we will not have a 
similar adverse impact on our businesses here in this country?
    Mr. Turner. Actually, at this point in time, I do not think 
you can be assured of that because the process is young and we 
do not know how it is going to work out. As I mentioned 
earlier, I do get concerned about competitiveness between one 
and the other. Some people would say oh, let's just look like 
the Europeans. Well, if your product all looks alike, I can 
guarantee you as a former businessman you are not going to be 
the one selling most of the product.
    And right now, quite frankly, we are selling the most. Our 
capital markets still, to this day, have the best risk premium 
on them for investors. Those companies that have gone to the 
London market, for the most part, would not meet the listing 
requirements of the New York Stock Exchange or NASDAQ, 
regardless of what is SOX. So SOX has nothing to do with it.
    As Goldman Sachs, probably a premier firm if not the 
premier firm, has truly shown and demonstrated, it is not 
anything to do with the regulatory regime that has caused 
people to think about going elsewhere. It is either typically 
most people do like to list in their home country. And you know 
that is not a novel idea here. Most companies here like to list 
here, as well.
    It is because of the GDP growth in some of the emerging 
Asian markets like India and China are growing at three to five 
times our GDP. Their businesses are growing. That provides much 
greater opportunity for growth in the businesses and that is 
where the investment returns are going to be higher.
    In fact, I serve on a mutual fund and we are reallocating 
to some of the foreign markets more money because those are the 
ones where they are going to generate the most return.
    So it is not the regulatory scheme that is getting us down. 
It is not the litigation that is getting us down. So I think 
those are misnomers. What the focus really has to be on is how 
do we make our markets different such that they are going to 
give investors the higher returns?
    And unfortunately, one of the things that foreign 
investors, the largest pension funds in Europe and around the 
globe, Australia, have written to the Commission and said is 
that if they continued to be denied the same shareholder rights 
that they have in their home countries like the U.K. and those, 
if they continue to be denied those rights, they are going to 
withdraw their money from the U.S. capital markets. And that 
should concern us. It should concern us that we are not looking 
for those opportunities to get better.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Reed. Thank you. I have one other area I would 
like to touch on with Ms. Yohn and Mr. Landes. And that is this 
would cause a sea change, I think, in the accounting profession 
in terms of the practice, the routine, the rules, whatever. And 
I have just had the experience, my godson went through and 
passed all the tests for his CPA spending hours, excruciating 
hours, late late at night, learning GAAP. And is that all for 
naught? Maybe that is the best question.
    But it would seem to me that this would be a huge cultural 
change in the accounting profession. And are we prepared for 
that? And not just in the profession itself but in academic, 
those who prepare the accounts.
    So Ms. Yohn, on this final point, unless Senator Allard has 
different questions, if you could comment and then Mr. Landes, 
on this whole issue of education and cultural change, how long 
will it take, and whatever?
    Ms. Yohn. I do not think that the educational system is 
ready now for a move to IFRS. I know that universities have 
been trying to incorporate IFRS into the classes, into the 
accounting programs, and they are doing so. But they are trying 
to figure out the best way to do so and they are doing it 
slowly.
    And so I do not think right now we are ready. And I know 
that some representatives of the auditing firms have come to 
the universities and said can you help us because we are 
concerned about the lack of expertise in IFRS within our 
offices in the U.S. So they see it as a big issue, as well.
    So I agree, it would be a big sea change that I do not 
think we are ready for.
    Chairman Reed. Mr. Landes.
    Mr. Landes. Senator Reed, when you become a CPA one of the 
things that you learn very quickly is that you have committed 
yourself to a lifetime of learning. And even under our existing 
GAAP structure, things change.
    When I think back to the time when I passed the CPA exam, 
there were five standards, five accounting standards. Now there 
are 159. There were only 30 auditing standards and now there 
are 140-some, excuse me 114.
    And so what we are talking about here is part of a 
continuing process of education. I would agree that we are not 
ready today. But that does not mean that we should not start.
    The AICPA has a course. We have several courses on IFRS. 
They are not the best sellers today but I suspect that they 
will gain traction over the next months and years as more CPAs 
become engaged in IFRS and the whole international convergence 
process.
    But we recognize our responsibility to educate our members, 
to do what we need to do to bring them along, to help them walk 
that journey that will be the new accounting environment of the 
future. And that includes working with those folks in academic, 
working with textbook authors, our own CPA exam to make sure 
that it begins to change. And certainly, and I know both of you 
have expressed some concern, and rightfully so, with members 
from smaller companies or smaller CPA firms, who again may feel 
very overburdened with just the number of new standards that 
are out there today just in our own system.
    And so one argument for moving to one core set is that you 
do not have to learn two, that you can begin simplifying and 
learning one. Will it take time? Absolutely. Are we 
absolutely--are we ready to turn the light switch on tomorrow? 
No, we are not. But I do not think anybody is saying we should 
turn the light switch on tomorrow.
    Senator Allard. I do not have any more questions. I just 
would thank the panel for their testimony. I appreciate your 
comments.
    Chairman Reed. I would concur. Thank you all very much for 
making time out of your very busy schedules to join us today.
    There may be additional written questions by my colleagues 
or members of the staff. If you could respond before Wednesday, 
October 31st for my colleagues. We will get the questions to 
you as quickly as we can.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 4:17 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER

    Good afternoon, Chairman Reed and Ranking Member Allard. Thank you 
for holding today's hearing on the convergence of international 
accounting standards. We live in an era that has been defined by the 
increasing globalization of capital markets--a trend that was well 
documented in a report issued earlier this year by New York City Mayor 
Bloomberg and myself.
    Our report made a number of recommendations to help the U.S. 
maintain its historical role as the global leader in financial markets, 
but one of the most important of these was the accelerated convergence 
of U.S. Generally Accepted Accounting Principles--GAAP--with 
International Financial Reporting Standards--IFRS.
    In today's world, where a typical investment often consists of a 
Russian investor purchasing shares in a Japanese company listed on an 
American stock exchange, it simply makes no sense to have different 
auditing standards for different countries. As the trend of 
globalization continues to accelerate, it is critical that we establish 
one common language for reporting financial results to investors.
    The fact is that IFRS is well on the way to becoming the global 
language which the rest of the world uses. More than 100 countries 
throughout the world, including all of the major financial centers 
outside of the U.S., already use IFRS. Furthermore, as all of you today 
acknowledge, IFRS standards are robust and high quality accounting 
principles that serve investor interests well. Therefore, the U.S. 
requirement that non-U.S. companies must reconcile their financial 
results to GAAP is a very costly, and in my view, unnecessary one, and 
is a deterrent for many foreign companies that might otherwise choose 
to list in the United States.
    The requirement that foreign companies reconcile their accounting 
results to GAAP is, in my opinion, a key factor in the decline of the 
preeminence of U.S. capital markets, which have seen their market share 
decline from 57% of global IPO proceeds in 1999 to just 18% last year. 
Last year, only 3 of the top 25 IPOS chose to list in the U.S. We must 
reverse this trend, and recognizing IFRS is absolutely critical to 
doing this. When it comes to the way companies balance their books, 
Wall Street and the rest of the world should be on the same page.
    IFRS will be the language of worldwide business for future 
generations and we must start allowing it to be spoken in the U.S. And 
eventually, U.S. businesses must be allowed to speak this language 
themselves, which is why I am glad to see FASB and IASB working 
together towards the convergence of their accounting standards. We must 
ensure that American entrepreneurs and investors can communicate freely 
and openly on the international stage.
    But we must also be judicious in how we proceed with the 
convergence of accounting standards. This should not be a race to the 
bottom, nor should the historical role of FASB be ignored. I am pleased 
to hear that FASB and the IASB are working together to try to come up 
with a ``best of breed'' approach to converging GAAP and IFRS. It is 
imperative that the United States, which has been the nexus of the 
world's financial markets, continue to act as a leader in establishing 
the future of capital markets.
    I think it is also quite critical that in considering how future 
accounting standards will be set, we make sure that individual national 
political considerations do not poison the well. In this country, we 
have fortunately had a historical tradition of having an independent 
accounting board--FASB--which politicians have been loath to try to 
influence for short-term political gain. It is absolutely necessary for 
any accounting system that hopes to serve the best interests of 
investors to be similarly independent from the political considerations 
of individual nations. And so I would ask FASB, IASB, and the SEC to 
consider measures to strengthen the independence of IASB from the 
political considerations of member nations as this debate goes forward.
    I would like to thank all of the witnesses appearing today. This is 
a project that many of you have been working tirelessly upon for quite 
a long time, and I look forward to hearing your thoughts on the 
convergence issue. I am also quite eager to hear from the SEC in 
particular, to learn more about the status of this convergence proposal 
in the United States.
    I thank you Mr. Chairman and I also thank the witnesses for all 
their hard work on this obviously complicated and important subject.

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         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
            FROM CONRAD W. HEWITT AND JOHN W. WHITE

Q.1. Specifically, Section 108(a) of the Sarbanes Oxley Act 
directed the SEC to establish a program for recognizing 
accounting principles as ``generally accepted,'' by among other 
things considering the qualifications of the accounting 
standards-setter. The Act set forth several required 
qualifications, including that the standards-setter have 
independent funding in the same manner that the PCAOB and FASB 
have and that the standards-setter ``considers, in adopting 
accounting principles, . . . the extent to which international 
convergence on high quality accounting standards is necessary 
or appropriate in the public interest and for the protection of 
investors.''
    In his testimony before the Subcommittee, Mr. Herz echoed 
some of the concerns underlying Section 108, when he testified 
that the blue print for international convergence ``should also 
address strengthening the IASB as an independent, global 
standard setter by establishing mechanisms to ensure the 
sufficiency and stability of its funding and staffing.''

      Has the Commission or its staff considered how to 
apply Section 108 in the context of the IASB? That is, what is 
your process for evaluating whether the IASB satisfies the 
criteria set forth by Congress?

      Second, Congress determined in passing Section 
108 that the accounting principles used for compliance with our 
federal securities laws should be established by an independent 
standards-setter with an independent source of funding. In your 
statement today you testified that the IASB does not have such 
a funding source at this time. Wouldn't the elimination of the 
reconciliation effectively mean, though, that the SEC is in 
essence recognizing the IASB as an independent standards-setter 
for purposes of filings by foreign private issuers? If so, is 
such recognition justified when the IASB does not have an 
independent funding source?

A.1. We believe that Section 108 of the Sarbanes-Oxley Act is 
not applicable to the Commission's decision to allow foreign 
private issuers to file their financial statements under IFRS 
as promulgated by the IASB, without reconciliation to the U.S. 
GAAP.
    Since the passage of the Securities Act in 1933 and the 
Securities Exchange Act in 1934, Congress has given the 
Commission broad statutory authority to set the requirements 
for financial information in filings by issuers. That authority 
includes the power to determine the methods to be followed in 
the preparation of financial statements, as well as the 
contents of the financial statements themselves. (See 1933 Act 
Section 19(a); 1934 Act Section 13(b).)
    Sections 108 and 109 of the Sarbanes-Oxley Act complement 
this long-standing statutory scheme. Section 108(c) explicitly 
recognizes the Commission's existing authority in this area, 
and provides that ``[n]othing in this Act . . . impair[s] or 
limit[s] the authority of the Commission to establish 
accounting principles or standards for purposes of enforcement 
of the securities laws.'' Further, Congress included a general 
savings clause at Section 3(c)(2) of the Sarbanes-Oxley Act, 
that expressly preserves the Commission's authority to set 
accounting standards in terms nearly identical to Section 
108(c).
    What Sections 108 and 109 do accomplish is to provide an 
appropriate funding (and governance) mechanism for any 
accounting standard setter that the Commission chooses to 
recognize for the purposes of establishing ``generally 
accepted'' accounting principles. By its terms, Section 108 is 
permissive and does not require the Commission to recognize any 
particular standard-setting body: ``[i]n carrying out its 
authority under [1933 Act Section 19(a)] and under [1934 Act 
Section 13(b)] the Commission may recognize, as `generally 
accepted' for purposes of the securities laws, any accounting 
principles established by a standard setting body'' meeting 
certain conditions (emphasis added).
    In allowing foreign private issuers to file financial 
statements prepared in accordance with IFRS without 
reconciliation to U.S. GAAP, the Commission has not thereby 
recognized the IASB as a standard-setting body. This is so, 
because the Commission has not recognized IFRS as ``generally 
accepted'' accounting principles. Nor need it recognize IFRS in 
this way. The Securities Act and the Securities Exchange Act do 
not require the use in Commission filings only of financial 
statements meeting the requirements of U.S. generally accepted 
accounting principles (U.S. GAAP).
    Historically, in cases in which the Commission has 
permitted financial statement of foreign private issuers to be 
filed based on foreign accounting systems, it has also required 
a reconciliation to U.S. GAAP. Reconciliation to U.S. GAAP does 
not, however, turn financial statements prepared on the basis 
of another set of accounting principles into U.S. GAAP 
financial statements. It rather provides quantitative 
disclosures (in footnote form) of some--but by no means all--of 
the differences between the foreign private issuer's financial 
results under its primary set of accounting principles and the 
results had its financial statements been prepared on the basis 
of U.S. GAAP. Nothing in the Sarbanes-Oxley Act itself (or the 
Act's legislative history) suggests that Congress believed the 
Commission should cease allowing foreign private issuers to 
file financial statements prepared on the basis of a set of 
accounting principles other than U.S. GAAP. Had Congress meant 
that in 2002, filings made since then using not only IFRS but 
also other non-U.S. accounting standards would not have 
satisfied these requirements. The Commission does not believe 
Congress intended this result.

Q.2. Some prominent academic research suggests that the 
additional uncertainty that will likely result from the 
increased use of IFRS by companies listed on the US exchanges 
will result in greater US stock market volatility. Have you 
performed or reviewed any relevant research on how the 
elimination of the reconciliation requirement and the greater 
use of IFRS in the US markets might impact market volatility?

A.2. The Commission's staff reviewed the academic research 
cited in the comment letter of the American Accounting 
Association (AAA) and that cited in Professor Yohn's testimony 
before the Subcommittee. We believe this research shows the way 
in which financial reporting affects capital markets, including 
volatility, is a function of the attestation, legal and 
regulatory environment, as well as the accounting standards 
used. In considering the adoption of amendments, the Commission 
carefully considered many factors, including the input received 
from the commenters, including that of the AAA, as part of the 
notice and comment process.

Q.3. How many current employees at the SEC would you 
characterize as experts in IFRS? How many IFRS experts does the 
SEC plan to hire in the next three years to assist in the 
enforcement of IFRS standards by foreign companies listing in 
the U.S. markets?

A.3. In 2006, the SEC conducted comprehensive IFRS training for 
all Commission staff responsible for reviewing, consulting on, 
and enforcing corporate disclosure filings. We will regularly 
augment this training through our continuing education program.
    Organizationally, the Commission staff is not divided as to 
accountants that are responsible for IFRS and those that are 
responsible for U.S. GAAP. Rather, in both the Office of Chief 
Accountant and the Division of Corporation Finance, accountants 
are responsible for their knowledge of IFRS just as they are 
for U.S. GAAP. More specifically, in the Office of the Chief 
Accountant the staff members who consult on financial reporting 
policy and application matters are generally organized by 
subject matter (e.g., pensions, leases and so forth), hence 
they focus on those subject matters with respect to both IFRS 
and U.S. GAAP. In the Division of Corporation Finance the staff 
members who review the registrant filings are generally 
organized by industry sector (e.g., manufacturing, financial 
services and so forth), hence they focus on the application of 
both IFRS and U.S. GAAP within that industry. Further, there 
are other staff members within both the Office of the Chief 
Accountant and the Division of Corporation Finance who have 
experience with and are engaged in IFRS matters in connection 
with their more general responsibilities. We plan to perform 
future hiring to fill these roles as part of the normal course 
of carrying out our work.
    The SEC staff has several years' experience with IFRS as 
some foreign private issuers have filed their home country 
financial statements under IFRS for many years. Further, in 
2006, the staff reviewed the annual reports of more than 100 
foreign private issuers containing financial statements 
prepared for the first time on the basis of IFRS. These reviews 
covered a wide range of industries. The staff has continued to 
review the filings of foreign private issuers that use IFRS and 
reviews the primary financial statements, regardless of the set 
of accounting standards used or the inclusion of a U.S. GAAP 
reconciliation, in foreign private issuer filings with the 
Commission. The more widespread use of IFRS has reduced the 
number of home country accounting standards used in SEC filings 
which has reduced the number of sets of accounting standards 
with which the SEC staff must be familiar.

Q.4. Would elimination of the reconciliation requirement affect 
the cross-listing premium that non-U.S. companies listed on 
U.S. exchanges currently enjoy? What steps could help to 
maintain the cross-listing premium and thus retain the 
competitiveness of U.S. markets? Would reliance on non-U.S. 
companies' home country interpretation and enforcement of IFRS 
affect the cross-listing premium that non-U.S. companies listed 
on U.S. exchanges currently enjoy?

A.4. Any cross-listing premium may be attributed to a number of 
factors, including U.S. disclosure and corporate governance 
requirements, and enforcement mechanisms that contribute to the 
robustness of the U.S. capital markets. We do not believe that 
eliminating the reconciliation requirement diminishes the 
attractiveness of the U.S. market--one manifestation of which 
would be any cross-listing premium.
    In addition, our policy work related to removing the 
reconciliation requirement considered factors consistent with 
the Commission's statutory mission of facilitating capital 
formation, maintaining fair and orderly capital markets, and 
protecting investors. To those ends, accepting financial 
statements from foreign private issuers prepared in accordance 
with IFRS was one of the actions that could provide an 
opportunity to reduce the number of home country accounting 
standards used in SEC filings while, at the same time, 
fostering the use of a set of globally accepted accounting 
standards and realizing the attendant benefits this would 
bring.
    Finally, it is important to recognize that the SEC is not 
bound by decisions of regulators in other countries because 
their national mandates cannot supersede our statutory 
responsibility to enforce the U.S. securities laws. 
Consultation with other regulators does, however, contribute to 
our ability to effectively enforce the application of IFRS. The 
SEC has consultation protocols in place with other regulators 
to exchange information and to learn from their thinking and 
experience on IFRS matters.
                                ------                                --
----


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
                     FROM CHARLES E. LANDES

Q.1. Would elimination of the reconciliation requirement affect 
the cross-listing premium that non-U.S. companies listed on 
U.S. exchanges currently enjoy? What steps could help to 
maintain the cross-listing premium and thus retain the 
competitiveness of U.S. markets? Would reliance on non-U.S. 
companies' home country interpretation and enforcement of IFRS 
affect the cross- listing premium that non-U.S. companies 
listed on U.S. exchanges currently enjoy?

A.1. We have no views or opinions as to how, if at all, the 
elimination would affect the cross-listing premium.

Q.2. Do you believe that the current quality of the 
implementation, auditing, and enforcement of IFRS standards by 
companies using those standards in the US markets is equivalent 
to the current quality of the implementation, auditing, and 
enforcement of U.S. GAAP in the U.S. markets? Why or why not?

A.2. We believe that IFRS is of a high quality, as demonstrated 
by the fact that many major capital marketplaces throughout the 
world either follow or have committed to follow IFRS. As for 
the implementation, audit and enforcement of IRFS standards, we 
believe that the quality is equivalent for those foreign firms 
auditing foreign private issuers filing with the SEC since 
those foreign firms auditing foreign private issuers are 
required to be registered with the PCAOB and subject to its 
inspection process.

Q.3. The SEC's proposal in its concept release allows U.S. 
companies to choose between IFRS and U.S. GAAP. What will the 
impact be of creating a two tiered system for investors and 
businesses?

A.3. We support the goal of a single set of high quality, 
comprehensive accounting standards to be used by public 
companies because (1) we believe one common accounting language 
would benefit investors, as well as issuers and the capital 
markets, and (2) it would facilitate the comparison of 
reporting entities domiciled in different countries.
    Our support for an IFRS option for U.S. issuers is 
postulated on a manageable number of U.S. issuers choosing the 
option in the foreseeable future. Should a large number of 
companies desire to choose the option immediately, system-wide 
readiness may become an issue. Accordingly, we recommended that 
the SEC solicit information on the number of issuers that are 
likely to choose an IFRS option immediately to help the SEC 
form its views on timing of giving such an option. We believe 
that during an optional period U.S. businesses would choose to 
adopt IFRS if they believe doing so would reduce their cost of 
capital, considering both the internal costs of preparing 
financial statements and the reaction of the financial markets 
to IFRS.
    Allowing such market forces to play a significant role in 
the decision-making process allows for implementation 
difficulties and costs to be borne initially by those companies 
that expect to benefit. Initial participation by a motivated 
voluntary filing population will permit the issues that arise 
and are resolved to benefit those that follow on later. Market 
forces already have provided the impetus for many constituents 
to develop familiarity and expertise with IFRS. Some U.S. 
companies have subsidiaries in locations where IFRS is 
required. And auditors have increasingly been asked to provide 
more services around IFRS reporting.
    To be clear, our views, as expressed herein, relate to the 
use of IFRS by U.S. issuers (public companies) only. The AICPA 
believes that a separate, dedicated effort would be required to 
consider the appropriateness of the IFRS option for U.S. 
private companies and not-for-profit organizations, which also 
currently apply U.S. GAAP as promulgated by the FASB.

Q.4. Many accounting experts believe that the reconciliation 
requirement has resulted in the introduction of important 
quality control processes at the ``Big Four'' accounting firms 
in which foreign private issuer financial statements are 
typically subject to review by firm experts in U.S. GAAP and 
IFRS, respectively, before those statements are issued to the 
public. Some experts are concerned that those processes will be 
abandoned if the reconciliation requirement is eliminated. 
Given that many companies have only recently begun to apply 
IFRS, should we be concerned that the elimination of the 
reconciliation requirement may weaken the quality control 
processes at the ``Big Four'' accounting firms?

A.4. No. The policy and procedures referred to (commonly known 
as Appendix K procedures) were developed so that SEC filings of 
foreign private issuers including reports of non-U.S. firms 
would have procedures performed by a person knowledgeable about 
U.S. GAAP, U.S. GAAS, and SEC independence matters. The filing 
reviewer would discuss with the engagement team the evaluation 
of significant differences between the requirements in the U.S. 
with respect to GAAP, GAAS, SEC reporting requirements, and 
auditor independence and the requirements applied in the home 
country. Please note that Appendix K predates current 
requirements that foreign firms auditing foreign private 
issuers be registered with the PCAOB and subject to its 
inspection process and other developments.
    At the time this guidance was developed, non-U.S. auditors 
were allowed to report that the audit was conducted using non-
U.S. auditing standards that were substantially similar to U.S. 
generally accepted auditing standards (U.S. GAAS). As the 
audits did not need to be conducted in accordance with U.S. 
GAAS, the guidance was developed so a person knowledgeable 
about U.S. GAAS would discuss with the engagement team the 
evaluation of whether the auditing procedures performed were 
substantially similar to U.S. GAAS.
    Subsequent to the development of the Appendix K procedures, 
the Commission adopted International Disclosure Standards--
Securities Act Release No. 7745. This guidance required that 
the audit be performed using U.S. GAAS--now the standards of 
the PCAOB--and that the report include a specific statement to 
that effect.
    Likewise, there have been changes with respect to the 
procedures for gathering and reporting information on scope of 
services since the adoption of the Appendix K procedures. For 
example, as a result of amendments made in 2003 to the 
independence rules contained in Securities Act Release No. 
8183, work performed by the auditor is required to be 
preapproved by the audit committee.
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