Hoogervorst Has War of Words with Former SEC Chair Cox
Hoogervorst Has War of Words with Former SEC Chair Cox
June 12, 2014
Christopher Cox advocated adoption of IFRS during his three-and-a-half-year tenure in charge of the SEC. Now he thinks domestic companies and investors will be better served if they stick with U.S. GAAP.The change of heart can be traced, at least in part, to Cox’s concerns that U.S. interests aren’t getting their due in the FASB’s standard-setting.He also believes the standard the boards are writing may contradict the established legal precedents for lease contracts.
Christopher Cox was a steady supporter of U.S. adoption of IFRS during his three-and-a-half-year tenure in charge of the SEC.
Now the onetime proponent has done an about-face.In a June 5, 2014, speech at the University of Southern California’s Financial Reporting Conference, Cox paraphrased Shakespeare and said, “I come to bury IFRS, not to praise them.”
According a transcript of the speech, Cox said, “The fact is, far too much time has gone by with no meaningful progress.I think we have to fairly conclude that the moment has passed.Full-scale adoption of IFRS in the U.S. might once have been possible, but it is no longer.This is not a prognosis.It’s just a statement of fact.”
The outright dismissal of IFRS was a sharp contrast to Cox’s words and actions at the SEC.
In 2007, the agency adopted a rule in Release No. 33-8879,Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP,that permitted foreign companies to submit regulatory filings in IFRS, provided the companies said they were using the standards as they had been issued by the IASB without modifying them.
In 2008, the agency proposed to set domestic companies on a course to abandon U.S. GAAP in Release No. 33-8982,Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers.
At the August 2008 meeting that approved the proposal, Cox in his prepared remarks said, “To help fulfill its statutory missions of protecting investors and facilitating capital formation, the commission is duty bound to determine what role IFRS should play in U.S. capital markets — including whether it should be available for use by U.S. public companies.”
As recently as last fall, Cox was still supporting U.S. adoption, and faulted the SEC’s reluctance since his departure to commit to IFRS for the lingering problems the FASB and IASB were having in converging accounting standards.
What caused the change of heart?Cox, who’s now a partner in the Costa Mesa, California, office of the law firm Bingham McCutchen LLP, wasn’t readily available to explain his reasoning in the days following the conference.The speech’s transcript mirrored some criticisms of the IASB and its parent organization, the IFRS Foundation, found in the SEC’s June 2012Final Staff Report: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.
The report was prepared under Cox’s successor at the agency, Mary Schapiro, who stepped down five months after the report was published.
Cox faulted the IASB for what he described as a lack of independence from regional biases or undue influence along with a lack of accountability to regulators and other supervisory bodies.He also said the international board had been unresponsive to U.S. interests.
IASB Chairman Hans Hoogervorst issued a statement through a spokesman that said, “Former Chairman Cox has shifted his focus from a single set of high quality global standards to maintaining a national standard-setter that is supple when responding to domestic priorities and concerns.We continue to believe that investors are best served by high quality globally comparable information, and that includes U.S. investors.”
The disagreement is also remarkable given that Cox describes Hoogervorst as a friend.
Cox had specific problems with the 2013 joint proposal published by the FASB as Proposed Accounting Standards Update (ASU) No. 2013-270,Leases (Topic 842),and the IASB as Exposure Draft (ED) No. 2013-6,Leases.In his view, the proposed standards were far too reflective of international interests and largely overlooked U.S. concerns.
“What seems to have changed in the FASB due process as a result of the collaboration with the IASB is that practical concerns for U.S. stakeholders aren’t getting resolved as one would expect,” Cox said.With the lease standard, the boards overlooked some established principles in U.S. GAAP and the law regarding lease contracts businesses take for granted.The lease proposal, as it’s written, could contradict the legal precedents.
“The lack of reconciliation of the proposals to the practical business concerns of U.S. stakeholders, including investors and users of financial statements, has shown us the dark side of global standard-setting,” Cox said.
In his response to Cox, Hoogervorst said, “I believe that we are on the right track with leases and have disagreed before with former Chairman Cox about this.Both the IASB and the FASB have reaffirmed the heart of our proposals — that lessees need to put this missing obligation on their balance sheet.This is what the SEC staff itself suggested in a 2005 report under Sarbanes-Oxley.At the same time, they cautioned that these reforms would be highly controversial and meet strong resistance.I’m sorry to say that they were right.”
According to Cox, in U.S. bankruptcy law, most leases are treated as a type of transaction called an “executory contract” and aren’t considered an asset or liability.The lease proposal contradicts the legal treatment.
Cox gave a detailed description about the judicial precedents for lease contracts in a March 14 comment letter he submitted to the accounting boards on behalf of a client, Majestic Realty Corp., a commercial property developer in City of Industry, California. The letter stopped short of drawing conclusions about the lease proposal.A voice mail message and email to Majestic’s spokesperson were not returned as this story was being written.
One of Cox’s more interesting assertions concerned the European Union’s reaction to the SEC’sFinal Staff Report on IFRS.According to Cox, the European Commission threatened to have Schapiro kicked off the IFRS Monitoring Board because of the U.S.’s unwillingness to adopt IFRS.European dissatisfaction with Schapiro’s lack of support for IFRS was well known at the time of the report’s publication.But no one involved in the apparent incident could confirm that it ever materialized into an actual threat.Spokespeople for the IASB and SEC had no comment.
A spokeswoman for European Commissioner for Internal Markets Michel Barnier, who is the European representative on the IFRS Monitoring Board, said in an email that she was unaware of such an attempt.A spokeswoman for the Financial Services Agency of Japan, whose Vice Commissioner Masamichi Kono chairs the IFRS Monitoring Board, said in an email that she was not aware of an attempt to remove Schapiro.
For her part, Schapiro was unwilling to discuss the European response to thestaff reporton the record.In a brief interview she said, “From my perspective, this was always a decision that we would make at the SEC based on what was best for the U.S. capital markets and for investors.”