Hints of Change in SEC Reporting Requirements?

Yesterday, Mary Jo White, President Obama’s nominee to head the SEC, waltzed through her grilling by the Senate Banking Committee. What happens in the SEC is of considerable importance to Canada and Canadian capital markets, not least because we have over 350 sizable companies listed on US exchanges that must file reports with the SEC.

Ms White will be taking the reins during a difficult time for the world’s top regulator, and has a lot of challenges ahead of her. Those challenges will include addressing the issues around high frequency trading, the Volcker rule for trading at the big banks, and the future of money market funds, which played a big role in the last banking crisis. But there will be other, perhaps more mundane, but extremely important, issues on her desk.

One of them is whether the US will adopt (International Financial Reporting Standards) IFRS for financial reporting purposes. US companies now follow US Generally Accepted Accounting Principles (GAAP) in preparing their financial statements. Those rules determine how much profit to report and what disclosures are required in their financial reports. This is the basic information that ultimately drives the capital markets.

Much of the rest of the world, however, including Canada, uses IFRS for their reporting. The US has been under some pressure to move to IFRS, but its relative size and power in international capital markets have enabled it to resist the change so far and the SEC has deferred making a decision.

Among US companies and in the accounting profession, there has been a good deal of controversy about the change, with some pointing out that US GAAP are rules based, and fit well with the US system of jurisprudence, while the IFRS is principles based and therefore is more general and does not contain as much detail as the rules. There is fear that without the detailed rules to which they have become accustomed, US companies’ reporting practices might vary all over the map.

Ms White will have to make a final decision on this issue. Clearly if she goes with US GAAP, different rules between Canada and the US will cause some difficulty for Canadian companies in the reporting process, although Canadian companies are allowed to report in US GAAP and some do so already. This doesn’t do much, however, to help investor understanding of corporate results.

And once again, it frustrates Canadian companies dealing in the tightly integrated North American capital markets, who have wished for decades that there could be a unified accounting and reporting system for North America.

In a world where capital markets have gone global, it makes no sense to retain the old system of different financial reporting standards for different countries.