GLOBAL CONVERGENCE AND SUITABILITY FOR SMEs:
CURRENT CHALLENGES IN PROMOTING HIGH-QUALITY
PROFESSIONAL STANDARDS
By Juan José Fermín del Valle
Convergence or equivalence and mutual recognition…?
A single set of standards or differential standards for the SMEs…?
Although there may be other relevant technical debates, such as the scope
and applicability of the use of current market values, these two questions pose
possibly the greatest challenges in issuing high-quality international professional
standards.
These two questions are also interrelated. The position adopted with respect
to SMEs affects the overall process of convergence.
Here, I would like to emphasize what I consider a key point: convergence
gives standards an authority and credibility that cannot be equaled by any other set
of standards, be the issuer a national or regional organization.
Even if a globally accepted set of standards does not include the “best
possible” standards, assuming it is possible to define and identify the “best possible”
standards, if the standards included are high-quality and accepted globally, they will
have a force and an authority that would more than compensate for the cost of not
adopting “the best”. And, most importantly, they would still contribute substantially to
enhancing the performance of accountants worldwide.
In my opinion, a new and greater threat has recently been added to the
difficulties already facing the objective to achieve convergence: the temptation to
abandon the objective.
What has been the principal factor impeding advancement in the
convergence process until now?
Although almost everyone is in favor of convergence in concept, not all are
willing to change the way things are done to achieve this ideal.
This barrier is not a technical matter.
Although it is not explicit; cultural issues, mental models, and political aspects
have a great deal of influence in this process.
The work done during recent years by the International Accounting Standards
Board (IASB) has produced the International Financial Reporting Standards (IFRSs)
that are today a comprehensive, consistent, and high quality set of standards.
Can they be improved?
No doubt they can.
Is their improvement a prerequisite for convergence?
Indeed it is not.
Shouldn’t priority be given to a consistent set of standards and to the
uniformity of the language? What is more valuable today? What best serves the
public interest? Is the answer to find the best standard or is it to reach a consensus
regarding a good standard that may be applied and understood by everyone?
This is not to say that in order to reach harmony we should sacrifice quality;
however, at one point within an acceptable level of quality, it is preferable to
postpone the technical discussion aiming at perfection and make the effort to give up
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certain preferences in favor of a superior objective: to offer the financial reporting
user community a common language, understood by everybody.
There are those who hold that the objective of creating a single set of global
standards should ultimately be subordinate to the objective of preserving and
improving the quality of principle-based IFRS financial reporting. We can agree that
standards based on principles are superior to those based on rules. I am personally
convinced of this. However, in practice the balance always will be a matter of degree
and the precise degree will be subject to due process.
If we accept that in an integrated financial and capital market the logic of a
unique set of standards is obvious, then we should accept that the key condition for
the preservation of this value of convergence is to have an international standard
setter that follows a due process to assure that the standards issued reflect the
consensus of the international community and are oriented to the public interest. In
addition, this international standard setter should have independent oversight and be
accountable to the international community it serves.
If these conditions are fulfilled, then the set of global standards should not be
subject to a predetermined technical focus. The technical discussions and the
discussions about the opportunities for changes should take place within the due
process. As long as the contrary occurs, one side could argue that standards should
be based in principles, and the other side could argue that the standards be based in
rules. Solutions to technical issues should be proposed and resolved within the due
process and with the implicit condition of accepting the results of this process.
Accordingly, if the due process is adequate, it will be transparent and ultimately
reflect the consensus within a frame of technical quality and service to the public.
In addition, lately, it has been suggested that convergence should not
necessarily entail full convergence and that there is no need for an identical set of
standards. This trend of opinion considers that it would be best to progress in a
similar direction while looking for possibilities to establish equivalence and mutual
recognition between different sets of standards and postpone true convergence until
a later date. In the background, there are those who believe total convergence to be
a utopian ideal.
Let me tell you this: if we think that convergence is impossible, without a
doubt it will be impossible. If we believe that it is possible and we do everything that
we can to achieve it, it is very likely that it will be possible. Time is not in our favor,
but rather it works against our objective. The faster we advance, the more probability
there will be for success. This does not mean that we should not pay attention, as we
will soon see, to the question of a stable platform of standards.
The ideas of equivalence and mutual recognition suggested in this manner, in
my opinion, convert into a threat to the achievement of convergence. I believe that in
reality this posture tries fundamentally to do the following:
 To eliminate as soon as possible the requirements of reconciliation, especially
between the countries of the European Union and the United States.
 To maintain a stable platform of IFRSs, avoiding frequent changes or
significant changes in the short term.
 To maintain a principles-based set of standards.
The first two objectives can be achieved without the need to argue
postponing convergence. With regard to the last objective, as we have seen, it
should be achieved through the established due process for the issuing of standards.
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In fact, it is advisable, while working towards convergence, that agreements
of mutual recognition be reached without requiring an identical set of standards but
on the basis of two sets of standards that lead to financial statements that have an
equivalent value of high quality information.
In turn, if while attempting to facilitate the removal of the requirements of
reconciliation it is argued that convergence can be understood in a distinct manner in
which a single set of standards is not needed and that it is sufficient to have different
standards that lead to similar investors’ decisions in identical economic situations,
this could encourage a move away from the objective of convergence. This is all
without considering that the concept of equivalence in itself, defined as it has been, is
very difficult to apply in practice.
It is true, in turn, that in order to achieve this, the set of standards can not be
subject to the variability that works against its consistent application and
understanding by the preparers and the users. A stable platform of standards should
be supported, but this can be achieved through adequately establishing the effective
dates of future approved standards. However, again, this cannot be unilaterally
imposed. It should come from a decision taken by the international standard setter
following the corresponding due process.
It is worth asking whether or not the concept of convergence should have the
same scope and significance for all the different sets of standards.
The criteria of convergence should be the most restrictive and demanding in
the case of accounting standards. Accountancy is a language and globalization of
financial activity increasingly demands a common language. Of course, identical
standards do not mean that translation should be done literally word for word. Rather,
it means the translation should reflect with integrity and faithfulness the requirement
in the official version in English. The involvement of professionals who have
adequate technical understanding along with comprehension of the languages will be
required.
In the case of the other standards, like for example those of auditing, ethics,
or quality control, the possible focus may be different. In these cases, the priority
should be to assure the appropriate level of quality in each of these areas. In order
for the national standards to be regarded as being in compliance with the
international standards, they should include all of the requirements and guidance of
the latter. Accordingly, additions could be permitted as long as they are consistent
with said requirements and guidance or if the additions are derived from national
laws or regulations and are also consistent with the precepts of the international
standards. Within these types of standards, it is more difficult to think about
eliminations required by conflicts with national legal or regulatory standards. But if
conflicts do occur, an adequate replacement should be found.
The independent Public Interest Activity Committees of IFAC are working to
issue guidelines in relation to these questions.
Beyond the fact that audit, ethics, and quality control standards can be seen
as best practices, it is still true that uniform global standards would be healthy and
would facilitate efficient action by all actors in the financial reporting supply chain.
Especially, in the case of the independence standards, the existence of diverse
national standards, some with transnational implications, generate unnecessary
difficulties in the professional practice, without the existence of a clear benefit for the
public interest. Something similar occurs with the oversight systems, the
homogenization of which would contribute significantly to global efficiency.
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Let’s switch over now to the suitability of the international standards for
SMEs.
With regard to accounting standards, even though the IASB may, in the past,
has believed, that IFRSs were suitable for all private sector entities, listed and
unlisted, large and small, it is also true that today the IFRSs are designed to satisfy
the needs of the entities that work in the financial market and global capital market.
Accordingly, the IFRSs necessarily reach a degree of complexity that exceeds the
needs of the entities that are not subject to the same level of demand of information.
In fact, in Europe, where all listed companies have adopted IFRSs for their
consolidated financial statements, only a few member states require IFRSs for
SMEs.
In June 2004, when the IASB issued the first Discussion Paper, Preliminary
Views on Accounting Standards for Small and Medium Sized Entities, with the
purpose of determining if the IASB should develop special financial reporting
standards for SMEs and for which types of entities, the extraordinary diversity of the
answers received demonstrated that the IASB was facing a difficult problem.
One of the difficulties, in my opinion, comes from the way in which the
problem is presented.
Let me use an analogy to illustrate my point. If we were in the clothing
industry and we were discussing the best materials to use for making clothes, it
would not occur to anyone to suggest that this would depend on the size of the
person. On the contrary, the analysis would center on the use of the clothing,
whether it be for the office, to play golf, skiing, etc.
In the same way, if we are analyzing which accounting standards are
appropriate, the analysis should focus on the use of the information and not the size
of the entity. It is true that there is a certain correlation between the size of the
entities and the use required of the information they generate. But from the
conceptual point of view, the analysis is much better facilitated if the factor being
considered is the requirement of the information and its cost, rather that the size per
se. In fact, even though the IASB continues referring to this project as relative to
accounting standards for SMEs, the content of the project refers to the development
of accounting standards suitable for entities that do not have public accountability
and publish general purposes financial statements for external users.
It is true that, today, there is a majority of countries that believe there should
be a different set of standards for SMEs and, in fact, in many they exist or are being
developed.
This situation creates a problem that is described very well by the IASB,
which says that it is observing the following:
- Claims of convergence with, alignment with or similarity with IFRSs are often
somewhat exaggerated;
- National standards for SMEs would not necessarily be consistent with the
IASB’s Framework or standards;
- National standards for SMEs would not necessarily address the needs of
external users of financial statements;
- Financial statements of SMEs would lack comparability across national
boundaries or even within a country; and
- National standards for SMEs would not necessarily allow for an easy
transition to full IFRSs for entities that wish to enter the public capital markets.
The most important thing to consider is that each and every one of these
questions ultimately undermines the credibility of the financial information.
This is reason why this IASB project has such importance today. Many voices
are heard today expressing certain skepticism with respect to the final product of the
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IASB. However, it is very possible that in reality they are thinking about the
information needs of entities that do not need to publish general purpose financial
statements for external users.
We are getting closer to seeing the results of IASB’s product; it is useless to
forecast guesses. The IASB already has a preliminary staff draft of 233 pages, a little
more than the limit of 200 pages that they had imposed on themselves, and it is
understood that the exposure draft will be published for public comments later this
year.
With regard to the auditing standards, there are also voices demanding
differential standards. Nevertheless, the situation here is different. What prevails is
the desired degree of assurance, and in consequence, for the same desired level of
assurance it is difficult to sustain that there could be two distinct processes. However,
it is possible to simplify the execution of determined procedures when dealing with
less complex entities.
Accordingly, the Small and Medium Practices Committee of IFAC will develop
an explanatory guide for implementing the International Standards on Auditing (ISAs)
on SME audit engagements and has planned to launch the guide in 2007. Preserving
the concept that an audit is an audit, this guide will provide the tools to facilitate the
tasks of the auditors in SMEs.
Before concluding and in order to respond to a specific request of the
organizers of this forum, I will make a quick reference to the experience in Argentina
in relation to the questions I have mentioned.
In Argentina, the accounting and auditing standards are issued by the
professional organization. The regulatory organizations, which indeed by law have
authority to issue standards, in general have adopted the standards issued by the
profession, adding in some cases some additional requirements.
Around the end of 1997, the Argentine profession took the decision to
harmonize its accounting standards with the international accounting standards. At
that point in time, it was decided that in place of directly adopting the standards of the
IASB, the local standards should be adapted in order to harmonize with the
international standards to the greatest degree possible.
This process concluded in December 2002, when a new set of Argentine
accounting standards was approved to harmonize with the international standards,
with a few exceptions. This new set was put into effect for all entities, not only the
listed companies, but included some exemptions for disclosure and presentation for
the SMEs.
From that time on, we experienced two fundamental problems. First, after we
had already made enormous efforts to adjust national standards, the IASB made
important modifications to the standards after 2002 leaving our modifications in a
state of disharmony. Secondly, we began to experience some difficulties with the
implementation of the new standards for SMEs, which gave way to doubts that were
reinforced by the global trend in favor of differential standards that I referred to
earlier.
Today, after having these experiences, we think that for the entities that have
public accountability, we should adopt the IFRSs completely, with no adaptations. In
relation to the entities that do not have public accountability and should publish
general purpose financial statements for external users, the idea is to maintain the
actual national standards approved in December 2002, with some additional
exemptions, especially with respect to disclosure and presentation, until the new
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standard of the IASB for SMEs is known. Once this has occurred, their adoption will
be discussed.
With respect to the auditing standards, in the year 2004 the decision was
taken to adopt the ISAs in 2007. The idea in this case was to directly adopt the ISAs,
maybe with some small modifications, but in a way to allow us to say that the national
standards are regarded as being in compliance with the international standards.
This entire process has not been easy. To a great extent, it was inspired by
the understanding that the countries of the European Union and the other developed
countries had decided to adopt the IFRSs and international auditing standards. Any
reverse or change in the conduct of these more developed countries could have a
negative affect on the convergence process.
For this very reason, I believe that if the developed countries lead by
example, this will significantly facilitate the convergence process in the developing
countries. When the concept of mutual recognition is introduced, one has to think
beyond the U.S. and the European Union. If leading countries claim mutual
recognition and if each and every country of the world begins to follow suit, one
quickly realizes that the concept of convergence faces a serious threat.
In conclusion, the key question that we should ask ourselves is: do we really
believe that convergence to high quality professional standards is a key driver for the
promotion of growth and efficiency in capital markets and finally to develop economic
growth and stability across all economies?
If the response is affirmative, then we already know what we have to do. And
within the things to do that we know are right, each one of us should relinquish some
of our personal preferences.
I believe that convergence is possible, better, and easier the sooner we act to
achieve this objective.
In this process, we will have to distinguish different approaches according to
the different types of standards and to consider the particular needs and possibilities
of the SMEs, remembering that they are also important drivers of the economy in
every country.
Thank you for your attention. I would be happy to take your questions.
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