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Whose Trojan Horse? the Dynamics of Resistance Against Ifrs

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Whose Trojan Horse? the Dynamics of Resistance Against Ifrs GELTER (DO NOT DELETE) 3/16/2015 4:04 PM WHOSE TROJAN HORSE? THE DYNAMICS OF RESISTANCE AGAINST IFRS MARTIN GELTER* & ZEHRA G. KAVAME EROGLU** The introduction of International Financial Reporting Standards (“IFRS”) has been debated in the United States since at least the account- ing scandals of the early 2000s. While publicly traded firms around the world are increasingly switching to IFRS, often because they are required to do so by law or by their stock exchange, the Securities Exchange Com- mission (“SEC”) seems to have become more reticent in recent years. Only foreign issuers have been permitted to use IFRS in the United States since 2007. By contrast, the EU has mandated the use of IFRS in the con- solidated financial statements of publicly traded firms since 2005. In the United States, IFRS, which are promulgated by the London-based Inter- national Accounting Standards Board (“IASB”), are often seen as an at- tempt by Europeans to colonize U.S. accounting standard setting, and as an element of a foreign legal system alien to U.S. capital markets and se- curities law. In this article, we suggest that this perception is actually a myth, which we attempt to debunk. In fact, the introduction of IFRS in Europe, particularly Continental Europe, was far from controversial. IFRS were promoted by Anglo-Saxon jurisdictions and strongly support- ed by the United States, particularly when capital markets international- ized in the 1990s. They were—and still are—in many ways at odds with the Continental European accounting cultures of countries such as France and Germany, on whose examples we draw. In spite of the EU mandate for publicly traded firms, accounting law in these jurisdictions * Associate Professor, Fordham University School of Law, and Research As- sociate, European Corporate Governance Institute. For helpful comments we thank Jake Brooks, Larry Cunningham, Roberta Karmel, Christine Tan, and partic- ipants of the Society for the Advancement of Socio-Economics 26th Annual Con- ference, Chicago (July 10–12, 2014), of the Columbia Law School, Careers in Law Teaching Program Workshop (September 12, 2014), and of the International Busi- ness Law Workshop at Brooklyn Law School (November 10, 2014). ** Adjunct Professor and SJD Candidate, Fordham University School of Law. LL.M., Columbia Law School (‘08), LL.B., Bahçeşehir University (’07), BBA, Istan- bul University (‘01). 89 Published by Penn Law: Legal Scholarship Repository, 2015 GELTER (DO NOT DELETE) 3/16/2015 4:04 PM 90 U. Pa. J. Int’l L. [Vol. 36:1 has still not fully absorbed IFRS; nevertheless, for now a solution that reconciles traditional and international accounting has been found. In this article, we explore the problems and resistance of IFRS in Continen- tal Europe and seek to draw lessons for the United States. We argue that given the shared heritage of U.S. Generally Accepted Accounting Princi- ples (“GAAP”) and IFRS as investor-oriented accounting standards, their introduction in the United States should be considerably easier than it was on the other side of the Atlantic. “IFRS are dangerous and obsolete.” (from a French accounting textbook published in 2011)1 1 JACQUES RICHARD, CHRISTINE COLLETTE, DIDIER BENSADON & NADINE JAUDET, COMPTABILITE FINANCIERE: NORMES IFRS VERSUS NORMES FRANÇAISES 1 (9th ed. 2011). https://scholarship.law.upenn.edu/jil/vol36/iss1/2 GELTER (DO NOT DELETE) 3/16/2015 4:04 PM 2014] WHOSE TROJAN HORSE? 91 TABLE OF CONTENTS 1. INTRODUCTION ..............................................................................92 2. THE U.S. DEBATE ABOUT THE INTRODUCTION OF IFRS ............97 2.1. FASB-IASB Relations over the Past Decade ...........................97 2.2. Objections to the Adoption of IFRS .......................................104 2.2.1. Too Big to Fail: The U.S. Economy and the Role of the SEC ................106 2.2.2. Delegating Authority to a Private International Body .......................................109 2.2.3. The Rules-Principles Debate in Accounting ...............115 2.2.4. “Vague Principles” and Their Fit with Prevalent Investor Litigation ............................122 3. THE INTERNATIONALIZATION OF EUROPEAN ACCOUNTING ..............................................................................130 3.1. European Accounting Before IAS/AFRS ..............................130 3.1.1. The Institutional Framework.......................................130 3.1.2. Continental European Objectives of Accounting ........138 3.2. The Growth of Capital Markets and the Decline of Traditional Accounting During the 1990s ....147 3.3. Continental Criticism of IFRS ...............................................159 3.4. The Road Ahead of Europe.....................................................163 4. LESSONS FOR THE U.S. DEBATE ...................................................166 4.1. IFRS or U.S. GAAP ..............................................................167 4.1.1. Should U.S. Firms Be Required to Apply IFRS ..........167 4.1.2. Should U.S. Firms Be Permitted to Voluntarily Adopt IFRS ..............................................170 4.1.3. Should There Be Regulatory Competition Between Standard Setters? .........................................173 4.2. Changing Institutions ...........................................................180 4.2.1. The Future of FASB If IFRS Are Adopted in the US ....................................................................................180 4.2.2. Funding the IFRS Foundation from U.S. Sources ......186 5. CONCLUSION ...............................................................................189 Published by Penn Law: Legal Scholarship Repository, 2015 GELTER (DO NOT DELETE) 3/16/2015 4:04 PM 92 U. Pa. J. Int’l L. [Vol. 36:1 1. INTRODUCTION The United States is the last major economy that has not yet adopted International Financial Reporting Standards (“IFRS”) while, from Europe to Canada, from Australia to China, around 120 countries are already requiring or permitting IFRS; this figure will likely rise to 150 countries in the near future.2 The introduc- tion of IFRS has been debated in the United States for several years.3 The Securities and Exchange Commission (“SEC”) first is- sued a paper that included a plan for possible implementation, and several SEC Staff Reports followed up until the July 2012 Final Staff Report with regard to the work plan.4 However, whether 2 Analysis of the IFRS Jurisdictional Profiles, IFRS (last updated Sept. 25, 2014), http://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction- Profiles.pdf, (listing and outlining profiles of countries adopting IFRS for publicly traded firms); Geoffrey Pickard, Simplifying Global Accounting, J. ACCT., July 2007, at 36 (providing an interview with Sir Tweedie discussing “the future of IFRS, U.S. GAAP and the global accounting profession” and reporting Tweedie’s pre- diction that the number of countries requiring or permitting IFRS will rise to 150); see Sir David Tweedie, Chairman of the International Accounting Standards Board, Speech at Empire Club of Canada at the Toronto Conference (Apr. 25, 2008) (discussing the existence of a “clear momentum towards accepting IFRS as a common financial reporting language throughout the world.”); Lawrence A. Cunningham, The SEC’s Global Accounting Vision: A Realistic Appraisal of a Quixotic Quest, 87 N.C. L. REV. 1 (2008) (critiquing the SEC’s approach, as set out in the SEC Concept Release of Aug. 7, 2007, infra note 4). 3 See generally Peter White, It’s Greek to Me: The Case for Creating an Interna- tional Agency to Enforce International Accounting Standards to Promote Harmonization and International Business Transactions, 27 WIS. INT’L L.J. 195 (2009). 4 Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, Exchange Act Release Nos. 33–8831, 34–56217, Fed. Sec. L. Rep. (CCH) (Aug. 7, 2007) [hereinaf- ter SEC Concept Release] (requesting information about whether U.S. issuers should be permitted to prepare financial statements in accordance with IFRS to satisfy SEC rules and regulations); see Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Stand- ards by U.S. Issuers, Exchange Act Release Nos. 33–8982, 34–58960, Fed. Sec. L. Rep. (CCH) (Nov. 14, 2008) [hereinafter SEC Roadmap, November 14, 2008] (pro- posing a roadmap to allow the use of IFRS by U.S. issuers for the purpose of the SEC filings); Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Re- porting System for U.S. Issuers: Final Staff Report (July 13, 2012) [hereinafter SEC Final Staff Paper, July 13, 2012], available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final- report.pdf (summarizing results of key areas identified for study in the SEC Work Plan); Office of the Chief Accountant, Work Plan for the Consideration of Incorpo- rating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: A Comparison of U.S. GAAP and IFRS, A Securities and https://scholarship.law.upenn.edu/jil/vol36/iss1/2 GELTER (DO NOT DELETE) 3/16/2015 4:04 PM 2014] WHOSE TROJAN HORSE? 93 domestic issuers should be permitted to use IFRS is very contro- versial. Obviously, the “internationalization” of accounting would have far-reaching consequences for U.S. firms, for the relationship between managers and investors,
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