When a tide turns you can hear, down on the foreshore, a huge noise. It is the sound of pebbles being pulled this way and that as the waters change direction. Journalists love the idea of tides turning. It is a wonderful metaphor and an easy one to use. But often when we speak of tides turning we are describing an idea rather than a process. Often we are describing something which we think ought to come about rather than something which is actually happening. Often the roar of pebbles being upturned in a changing flood of water is missing.
But I do think that when it comes to describing what is happening in the world of American financial reporting and regulation we can genuinely say that the tide is turning. There is a distinct sound of turmoil down on the foreshore.
For years the American market has sat there unchanging. Most companies in America depend on the internal market for their competitive advantage and profits. What happens in the rest of the world is less important. And for years its regulatory authorities, like the Securities and Exchange Commission, and standard-setting bodies, like the Financial Accounting Standards Board, have intoned their mantras. These have been unchanged. Only in America is there rigorous regulation. Only in America is due process in financial reporting properly observed. After all, in both cases – the existence of a regulator like the SEC and the existence of accounting standards – long pre-date any comparable efforts elsewhere in the world. For very good reasons America has felt that it, and only it, produced financial reporting and accounting standards which were properly implemented and properly regulated and thus provided security to investors.
Enron was only the first breach of this confidence. And it could, along with WorldCom and several others, be seen as an unfortunate aberration which could be cleared up swiftly with the judicious application of Sarbanes-Oxley legislation. But the haemorrhage of confidence did continue. And the rest of the world embarked on changes which would tilt the global balance.
Now, it is impossible for anyone on the American corporate scene to deny that around the world international financial reporting standards are becoming the global standard in financial reporting. The growth in confidence in stock markets other than New York has dealt a comparable blow. The standard model for a global company now is that it lists in London or Hong Kong and provides its financial disclosures under IFRS. The idea that this is the norm has come as a huge shock to the American business and regulatory world.
This is why the tide is turning. One sign is a simple one. Diehards in America argue that their system of corporate governance is fine. But at the top of the process the first moves are being made to prepare for change. The chairman of the SEC, Christopher Cox, has commissioned a study of how Europe and much of the rest of the world deals with such issues as shareholder powers. The gulf between the cosy American world where shareholders have hardly any power to bring about change and where the idea of the chairman and the CEO being one and the same all-powerful, buccaneering tyrant is seen as fine, has now opened up to such an extent that it is embarrassing.
The American system is now seen by the rest of the world as old-fashioned, inefficient and far from being in investors’ interests. Once upon a time it would not have mattered whether the rest of the world felt that way. Now, to corporate America, it does. The study which Cox has commissioned is the first step towards saying, quietly, that, well, these European ways of doing things are, well, pretty effective. From there it is a short walk to producing proposals for reform of the American system. You can start to hear the pebbles moving.
At the same time, concepts which would have been unthinkable in the pronouncements of senior American regulators even last year are starting to be aired. Look at what Cox said in early March. Talking about the prospects for the convergence of IFRS and US generally accepted accounting principles, US GAAP, he introduced what, to American ears, would once have sounded simply incredible. “That original commitment [to convergence] was enormously consequential,” he told a roundtable in Washington, “because it implied a great deal. It meant that IFRS and US GAAP would someday compete freely in America’s capital markets, and that two accounting systems would operate side by side – at least until the process of convergence concludes with actual convergence and there is truly one global accounting standard and seamless international comparability of reporting. It meant that issuers, markets and investors would have a choice – because they, not the government, will decide between IFRS and GAAP”.
Anyone listening to that would probably find it quite hard to hear for all the noise of a tide most definitely turning.
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View photos of last night's awards ceremony in London
View photos of all the winners from the 2018 Channel Awards
After a glittering awards evening in Battersea celebrating 25 years of the Awards, we are pleased to share the list of winners and judges' commended winners