Speech by SEC Commissioner:
A Path Toward Global Accounting Standards that Puts Investors First

by

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Washington, D.C.
February 24, 2010

Good morning. I join my fellow Commissioners in expressing thanks to our knowledgeable and hard working staff for preparing today’s policy statement and Work Plan. In the months ahead, U.S. companies and investors are counting on the same staff working hard to help the Commission make a decision that is critical to the future of our capital markets. So, my thanks to the staff for all they have done and will do.

Given the “wholesale transformation” being contemplated, engaging in a rigorous study of the issues related to the use of IFRS in the domestic reporting system is the right way to proceed. Accordingly, I support the approach being put forth today. A decision to move to IFRS would need to be based on the Commission’s conclusion that the standards are high quality, are applied within a strong institutional framework, and are enforceable. We should assure ourselves that the financial information provided to investors under IFRS would be in the best interests of investors.

Currently, investors around the world can make decisions about U.S. companies on the solid foundation provided by the U.S. financial reporting system. It is a system that includes accounting standards that are high quality, and that are applied within an institutional framework that includes:

• the Financial Accounting Standards Board (FASB), an independent accounting standard setter overseen by the SEC,
   
• a significant body of guidance and professional literature,
   
• the Public Company Accounting Oversight Board (PCAOB), an independent audit oversight board, and
   
• SEC review of financial reporting filed with us and vigorous SEC and private enforcement of accounting violations.

As a consequence of this regime, U.S. financial statements are respected and trusted in markets throughout the world. And, as a result of the current strength of domestic financial reporting, any move to a different set of standards must be considered carefully.

High quality standards through convergence

Because U.S. GAAP and IFRS are different, I support the efforts of FASB and the IASB to converge these standards. Doing so would go a long way toward facilitating the use of IFRS in the United States and would help our consideration of whether U.S. investors would be better off under IFRS.

And we must be mindful that accounting standards will need to evolve as a result of future experience, as well as to address unforeseen and developing issues. Even if convergence is successful, we must have confidence that future international standards would continue to serve investors.

The financial reporting institutional framework: Financial reporting is about more than standards

In addition to the accounting standards that would result from convergence, we will also need to consider the strength of the institutional framework within which these accounting standards would be are applied. The strength of the institutional framework will be particularly important for standards like IFRS, which can provide financial statement preparers with more discretion than U.S. GAAP. As we all know, discretion can sometimes enable poor to fraudulent reporting. In addition, it can then be difficult for a regulator to demonstrate wrongdoing. The end result is that investors may receive inadequate disclosure and regulators would be less able to police the accounting. Accordingly, a strong regulatory, legal, and auditing framework is essential to ensure robust financial reporting to investors.

Trust is essential in moving forward

However, the strong framework must be accompanied by vigorous enforcement. Trust in the accuracy and quality of financial information has been essential to the historical success of the U.S. capital markets.  Investors can trust the numbers that U.S. public companies report because of the strong infrastructure for financial reporting in the United States, including a robust law enforcement culture that deters and punishes false accounting.  If we move forward with IFRS, it will be because we have determined that the standards are enforceable and U.S. investors can trust the numbers.

Critical issues for future Commission action

Just as important, however, will be for investors to have confidence and trust in the SEC’s analysis and conclusions as to these issues. I look forward to earning that trust. Under the SEC staff Work Plan, our staff has been directed to carefully examine many issues, including some that I believe are critical:

1. Whether financial statements prepared under IFRS would produce information as useful, consistent, and comparable as under U.S. GAAP. I do not see how we can ask companies to go through the expense of changing accounting systems and preparing financial statements that comply with IFRS if investors would receive information that is of lesser quality.
    
2. Whether IFRS-based accounting can be rigorously audited and enforced. It is recognized that application of IFRS would increase discretionary decisions and accounting judgments. A key question for me is, whether we will be able to protect investors from unreasonable judgments. Recognizing this challenge, we should move forward only if improper accounting under IFRS can be adequately deterred through law enforcement.
    
3. Is the international institutional framework within which the standards are applied able to provide reliable, globally consistent, and useful financial information for future generations? Key considerations in this area will include:
    
   
   • The independence of the IASB,
      
   • the quality of regulatory interpretations and consistency of enforcement across jurisdictions, and
      
   • rigorous auditor oversight.
      
4. What would be the costs and benefits to companies and investors under IFRS and in transitioning to IFRS? Because there will be significant costs, we need to make sure they are justified.

It is too early to say whether U.S. financial reporting will move to IFRS. Still, the promise of a single set of globally accepted accounting standards is worth pursuing. In that pursuit, I am committed to continuing to work toward a responsible, informed decision at the end of this process that is in the best interest of investors.

Thank you.