The Sarbanes-Oxley Act requires that all filers be reviewed at least every three years. Over the last couple years, the SEC's Division of Corporation Finance studied the filings of more than 100 foreign private issuers. Those studies resulted in comment letters on the filings, and they're available in fairly raw form at the SEC's website. They were just waiting for someone to come along and stratify them so that some conclusions could be drawn about a) the state of foreign private issuer filings, relative to GAAP or IFRS application and b) how the SEC handled the reviews.

Fortunately, someone did come along: Deloitte. They've put together a report that's available for the right price (free) which puts together some interesting observations. From their summary:

"In the comment letters we reviewed, we noted several overall themes:

• Focus was more on the primary IFRS financial statements than on the U.S. GAAP reconciliation.

• Presentation and disclosure were significant areas of focus across industries.

• Recognition and measurement comments varied by industry.

• There was a particular interest in “converged” standards.

• Comments were geared toward understanding the judgments made and assumptions used in applying IFRSs."

That first observation is interesting - and it meshes well with the SEC's mention (in the proposing release for the IFRS/GAAP reconciliation elimination) that its first practical experience with IFRS came with its review of the FPI filings. And the fact that the focuse was more on primary IFRS financials than on the GAAP reconciliation hints at where the SEC's mind has been for the last couple of years.

On average, there were 19 comments for each filer.

The report also mentions that "certain" comments were issued on a forward-looking basis - meaning, comments were made to the effect that "something wasn't disclosed completely, but you can do it right next year." The report also mentions that a few comments required restatement.  It makes sense that the SEC wouldn't drill companies too hard - as enthusiastic as they've been about  encouraging the spread of IFRS, it wouldn't be too  wise to make it look like adoption would require restatements or a lot of head-butting with the SEC staff. Look at the corporate angst over something as  elemental as  internal controls. IFRS proponents don't want to experience that kind of wrath.

Call that a principles-based title. It gets the point across, but doesn't it make you just a little bit uneasy about the content of what you're about to read?

Well, that's perfectly normal for you to be uneasy perhaps, if you've been reading these posts for a while. But my point is that there's almost a mindless infatuation with "principles-based standards" going on in the big auditing firms. The simplification promised by moving to international accounting standards and all their "principled-ness" is coming down to the level expressed in that title.

Evidence: the Global Public Policy Symposium held in New York on Tuesday. At that conference, the Big 4 + 2, unveiled a joint presentation on "Principles-Based Accounting Standards." There's not a lot of really new thinking in it, but what's striking is the unanimity of the CEOs of those firms: they're all thinking in lockstep on the subject, all heartily endorsing IFRS. 

IFRS is a noble goal, as well as convergence of US standards with IFRS. But before blindly blaming every capital market problem on "rules-based" accounting standards, wouldn't it be a good idea to consider that IFRS is still pretty young at heart system - one that hasn't been road-tested with quite the same rigor as US GAAP?

And why do audit firms spend so much time trying to push for one system over another? Or why do they spend so much time on accounting principles in general? Shouldn't they work on auditing principles more than accounting principles? Just asking.

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Thanks to the Financial Times and their accounting editor, Jennifer Hughes, for featuring in their "Accountancy" column our post about the time gap between earnings releases and 10-Qs. I hope many of their readers share our sentiments.

There are plenty of high expectations for international convergence of accounting standards. Promoters plug the portability of capital, and the fact that one language will make it easier for capital to cross borders. If the ultimate vision of future markets is that the elimination of barriers makes it all one big, happy market where capital is peddled night and day non-stop, one reporting language isn't a luxury - it's a necessity.

Markets will probably never become completely homogenous - but they're certain to look more like each other as time goes by. That means some markets will give up what differentiates them from others. And one of the unfortunate side effects of converging US accounting standards with international financial reporting standards is that, if done in pell-mell fashion, US investors might not enjoy some of the same rich disclosures to which they've become accustomed.

How so? Suppose for instance, the IASB and the FASB (with the help of the SEC) decide to converge standards on a pick-and-choose, "best of breed" basis over the next five years. Maybe the FASB standard wins; maybe the IASB standard wins. One merit sure to be a criterion: how many countries in the world already use an IASB standard that's pretty close to one used in the United States? That would tilt things in favor of the IASB standard versus the FASB standard.

For example: the benefit plan disclosures required by the IFRS standard are not as deep as what's required in the FAS 158 and 132(R) - and whenever there's stress placed on pension plans in the US, investors seem to find that there's more information they need that hasn't been supplied by the existing standards. 

Another example: there is no equivalent disclosure of "fair value hierarchy" in the IFRS standard for financial instruments. That's a disclosure that hasn't even been common yet, but you can bet in this credit/valuation environment, investors are going to keep an eagle-eye on those disclosures.

That's not the way it's planned yet. Nevertheless, as the convergence process develops, investors in the United States need to keep an eagle-eye on it - and step up to the plate if they think their interests are going to be diminished. 

After the miserable market action of the last week, it feels as though the holidays were months ago, not merely days ago. New Year's Eve will provide a lingering hangover for investors as they sort through the fourth quarter earnings reports. The sticky markets for esoteric instruments like collateralized debt obligations will make for challenging (to say the least) valuations of assets for which no readily available quotes existed on New Year's Eve.

It's not even a Statement 157 world yet: that standard's effective date (recently upheld by the FASB) will be for fiscal years beginning after November 15, 2007. So the fourth quarter will not see the disclosure of fair value hierarchies for financial instruments. Starting with the March quarter however, this will be a reporting reality - one that will be of keen interest to investors, especially those investors who have holdings in the financial industry. With both sides of the balance sheets for these firms composed of mostly financial instruments, investors will want to know whether financial assets and financial liabilities are mostly Level 1, of the highest quality - or if they're mostly Level 3, the most suspect of the three levels of fair value inputs and presentation. If asset/liability presentations depend on Level 2 inputs, then investors will want to know just how Level 2 inputs were derived. Many investors view Level 2 inputs with suspicion: they wonder if logical contortions have been made to get genuine Level 3 valuations moved up a notch, out of the Level 3 dungeon. Scary - and it could happen.

These are serious issues for investors. There's genuine utility to investors in the fair value hierarchy and they seem quite ready to embrace it. The big problem with the hierarchy: it isn't available to investors until the 10-Q (or 10-K, in the case of the fourth quarter) is filed. Firms aren't required to address the fair value hierarchy at the time earnings are released; there's nothing that governs the dissemination of information at earnings release time beyond Regulation. That would be a bit like regulating free speech. The only way that analysts will necessarily hear about fair value hierarchies will be when they ask about them. And there are no guarantees of a robust answer. The companies with the most to hide would be the least likely to volunteer information that would put them in an unflattering light.

The time between the earnings release and the 10-Q can be considerable: a firm can be talking up (or talking down) the next quarter by the time the 10-Q is filed covering the earnings release. By the time the 10-Q is filed, the fair value hierarchy information is stale. Investment decisions have already been made.

How big is the gap between earnings release and 10-Q filing? We did some digging in 10-K Wizard for the third quarter 2007 earnings releases of December year end companies and found 2,336 Item 2.02 8-Ks. We tied the dates of those "Results of Operations" 8-Ks to the filing dates of the associated 10-Qs. The table below summarizes, by sector, the gap between the time the 8-K was filed with the time the 10-Q was filed.

 3Q2007: Median Days Between Filing Earnings & 10Q

Sector
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