16th Volume November 2013 Issue #1
Harmonisation of Accounting Standards Interview L. van der Tas
Column M. Pronk
Partner at EY
Accounting Disintegration
p24
p23
Column G. Groeneveld
“Maatschappelijk Verantwood Bankieren�
p26
Ondernemers helpen groeien met jouw cijfermatig inzicht?
Financieel talent Sta jij aan het begin van een carrière als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de uitbreiding van een transportonderneming, de fusie van twee bedrijven of een audit in de publieke sector. Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.
www.werkenbijbakertillyberk.nl
ACCOUNTANTS EN BELASTINGADVISEURS
Financial Business Cycle Shell In-house day 28 November Deadline 18 November
Flowtraders In-house day 29 November Deadline 19 November
Achmea In-house day 2 December Deadline 22 November
Bain & Co In-house day 3 December Deadline 22 November
Kempen & Co In-house Day 4 December Deadline 25 November
OC&C In-house day 7 January Deadline 6 December
Rabobank In-house day 8 January Deadline 6 December
Optiver In-house day 10 January Deadline 6 January
fsrforum • volume 16 • issue #1
Harmonisation of Accounting Standards
Preface
Dear reader, This is the first edition of the sixteenth year of the FSR Forum. The goal of the FSR Forum is to connect theory with practice. You will find the theory in the scientific articles and the columns provided by Prof.dr. M. Pronk and mister Groeneveld. You will find the practice part in the company presentations and the columns from a former FSR board member and a current FSR member. The theme of this edition is Harmonisation of Accounting Standards. Whilst the impact of globalisation and harmonisation is currently being witnessed around the globe, the need to embrace a standard set of accounting rules has increased. The financial crisis has created distrust and increased the need for accountability and transparency in financial reporting. The European Union already adopted a standard set of accounting rules, namely the International Financial Reporting Standards, IFRS. The IFRS is mandatory for listed companies within the EU. Not only in the EU the IFRS is used, but in many parts of the world. Worldwide adoption will not only be beneficial for investors or other users of financial statements, but also companies will benefit as investors will be more willing to provide financing. Also this year we have three scientific articles. The first article of this edition is from Marianne Ojo. This article will provide you with an explanation for the pace of response in the adoption and adaption of IFRSs in selected jurisdictions. The second article is from one of the professors of the Erasmus School of Economics: Edith Leung. This paper examines the stock market reaction to several events relating to IFRS adoption in the United States. The third article is written by Isabel Brusca and Vicente Condor. This article is about the harmonisation of public sector accounting. In this edition we interviewed an expert in the field of IFRS. Leo van der Tas is the global IFRS leader of EY, a member of the IFRS Advisory Council of the IFRS Foundation in London and professor at the University of Tilburg. I am pleased that I may tell you that mister Groeneveld PhD RA RV has again decided to devote his time four times this year on his column ‘K(r)anttekening’ in the FSR Forum. Also this year different teachers will write a column for the FSR Forum. The first teacher that writes a column this year is Prof. dr. M. Pronk from the Erasmus School of Economics. Prof. dr. M. Pronk has written on the topic of Accounting Disintegration in his column. Since two years the FSR Forum contains the News Update. With this item we will inform you about the news and developments around the subject of the FSR Forum. In this edition we discuss the fact that IFRS is constantly changing. As in every edition of the FSR Forum a former FSR board member and a FSR member will talk about their experiences in the working sector or internship. Some FSR committees will give a short description of the events they already have been organized. There will be an activity report about the master kick-off, International Banking Cycle, Big 4 Cycle and the Active Members Course.
2 • Preface
After the activity reports we will end with the FSR Activity Calender, where you will find all the events that the FSR will organize this year. Finally I would like to thank the editorial committee Lisanne Frijling, Myrna Baadjou and my board members for helping with this edition. I am confident that Lisanne and Myrna will be of great value for the FSR Forum. Furthermore I would like to thank my predecessor Maaike Lanphen for all her help and tips that we needed to make the FSR Forum. I hope you enjoy reading this FSR Forum! Sincerely, Martine Nieuwenhuijzen Kruseman Editor in Chief FSR Forum FSR board 2013-2014
Preface • 3
fsrforum • volume 16 • issue #1
Harmonisation of Accounting Standards
Table of contents
The need for the adoption of International Financial Reporting Standards: Some Explanation For the Pace of Implementation M. Ojo
In this paper we see that the impact of globalisation and harmonisation is currently witnessed around the globe, and the need to embrace of International Financial Reporting Standards (IFRSs) is becoming increasingly evident and that certain jurisdictions have been much quicker in their embrace, adoption and adaption of International Financial Reporting Standards than others. 6
Towards the Harmonization of Public Sector Accounting State of the Art I. Brusca and V. Condor
Although efforts to harmonize public sector accounting have not gone so far as those of the business sector, the global financial crisis had emphasized the importance of producing comparable information, especially in the EU, where the control of deficit and debts is one of the main current objectives. This paper briefly review that a global public sector accounting architecture has emerged, with a set of International Public Sector Accounting Standards, many of them based on the International Financial Reporting Standards. 8
Investor Perceptions of Potential IFRS Adoption in the United States P. Joos and E. Leung
The goal of this paper is to assess whether investors perceive the switch to IFRS as beneficially or costly. The research suggests that the overall findings are relevant to the current debate on IFRS adoption in the U.S. and highlights the importance of convergence to investors. 14
Colofon FSR FORUM appears four times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 16th volume, number 1, circulation 1900 copies
4 • Table of contents
Editor in chief Martine Nieuwenhuijzen Kruseman Editorial department Lisanne Frijling Myrna Baadjou Editorial advisory Dr. M.B.J. Schauten Dr. W.F.C. Verschoor Drs. R. Van der Wal RA
With the cooperation of M. Ojo P. Joos E. Leung I. Brusca V. Condor L. van der Tas M. Pronk Drs. J.G. Groeneveld RA RV W. Hooimeijer A.Duindam
Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu
Column professor
Advertisers
23
M. Pronk Interview l. van der Tas
Baker Tilly Berk www.werkenbijbakertillyberk.nl EY www.ey.nl/carriere
24
Partner at EY Column Joost Groeneveld PhD
26
“Maatschappelijk Verantwood Bankieren”
FSR News Word of the Chairman
30
News Update
31
FSR former board member
32
FSR member
33
Activity reports
34
Introduction Committees
36
Company Presentations EY www.ey.nl/carriere KPMG www.kpmg.com/nl/starten PwC www.werkenbijpwc.nl
Subscription EUR Students through membership FSR; costs E 5,00. Others through subscription. To obtain information, contact the editorial department; costs E 27.50 (including VAT and postage). Bank ABN-AMRO 50.15.61.331
12 20 28
Address Changes Send an e-mail to secretary@fsr.nl or fill out the form on www.fsr.nl. Graphic Design and printing Haveka the graphics partner www.haveka.nl
Photos and illustrations www.istockphoto.com Advertising acquisition Floris Mathol
No portion of the information in this magazine may be reproduced in any form or by any means without the prior written consent of the editorial board. Although the information is with great care collected, the correct functioning is in no manner guaranteed.
Table of contents • 5
fsrforum • volume 16 • issue #1
The Need for the Adoption of International Financial Reporting Standards: Some Explanations For the Pace of Implementation By Marianne Ojo
A. Introduction Whilst the impact of globalisation and harmonisation is currently being witnessed around the globe, and the need to embrace the adoption of International Financial Reporting Standards is becoming increasingly evident, certain differences in the accounting and legal systems present persisting challenges for several jurisdictions in their efforts to embrace a set of global standards aimed at facilitating transparency, as well as consistency in their application and interpretation. Differences in accounting and legal standard settings and systems are also considered to be contributory to explaining the level of financial development attained by various jurisdictions. The adoption of International Financial Reporting Standards across the globe also plays a crucial role in its facilitation of corporate transparency and is of immense importance given the need for reliability and relevance in matters relating to accounting information – such that investors (both foreign and domestic) are able to rely on such information to protect their investments.
B. Adoption Of IFRSs in Nigeria and China In jurisdictions such as Nigeria, and with regards to the need for a change in accounting standard setting in Nigeria, through the adoption of International Financial Reporting Standards (IFRS), drivers behind such a move are attributable to the need to “revamp age old legislations and develop accounting and reporting regulations acceptable and understandable to users – this having become an important policy issue confronting emerging nations such as Nigeria.”2
The inadequacy of financial reporting practices in Nigeria was highlighted in a study conducted by the World Bank Group on the Observance of Standards and Codes for Nigeria.3 Furthermore, Umoren remarks that, over the years, extensive revisions have been conducted on IFRS – which have not been reflected in the SASs; large sections and paragraphs in IFRS which have been newly incorporated cannot be found in the SASs; and that the SASs do not address all aspects of financial reporting and are insufficient in constituting a basis for the preparation of high quality financial statements – in accordance with the IFRS. Countries such as China have also encountered challenging situations in its adoption of IFRS. Two main factors which, in Tang’s view, are responsible for driving the standard setting process of Chinese accounting toward internationalisation are its i) economic reforms; ii) increasing international exchange activities. The difficulties in the Accounting Standards Setting in China, according to Tang include the following: • Many accountants in China did not have a thorough understanding of the theoretical reasoning behind the conceptual frameworks that were developed in other countries. • The need for improvement in accounting education • The fact that many accountants in China did not understand how to change or adopt to existing accounting practices in China to achieve conformity with the new basic accounting standards.
6 • The Need for the Adoption of International Financial Reporting Standards: Some Explanations For the Pace of Implementation
• The lack of readiness of the accounting profession • The need for greater input on the part of academics in contributing to the development of accounting theory and practice.4
The Impact of Accounting Reforms on Financial and Economic Development Certain studies have examined “whether differences in accounting standards are a key explanatory variable“ (in respect of certain international variations)5, whilst other studies carried out by Levine, Loayza and Beck have resulted in discoveries and findings which include suggestions that “legal and accounting reforms that strengthen creditor rights, contract enforcement and accounting practices can boost financial development and accelerate economic growth.” 6 In Cunningham’s view, certain reforms adopted in response to financial fraud require a two staged procedure to correct important inherent oversights: • That the forward looking disclosure regime should include delineation of probable variability in financial data and that; • Financial data should be presented in ranges rather than discrete numerals.
C. Has Enron Really Made a Difference in the Response to Adopt International Financial Reporting Standards in the United States? Having regards to the consequences of Enron’s collapse, it is reasonable to expect that the Securities and Exchange Commission (SEC) and the FASB could have been more responsive in its adoption of IFRS. There may however be historical related explanations for the manner of response. Historical Developments Influencing the Accounting Standards Framework in the United States One historical related reason is particularly directed at the fact that financial reporting in the United States is not entirely premised on a rules based approach. Following the collapse of Enron, a lot of comparisons were drawn between the principles based approach which existed in jurisdictions such as the UK, and the US rules based approach. The inference of an approach which is not entirely premised on a rules based system derives from the fact that the SEC has always relied on a more subjective and judgemental based approach which incorporates finance theory, rather than traditional accounting concepts, in “requiring extensive disclosure of forward looking information.” In other words, finance theory’s influence over the area of accounting and corporate reporting.
According to Cunningham, Enron’s managers were influenced by modern finance theory. Its practices “reflect widespread cultural obsession with cash flows, justified by systematic diminishing of another longstanding principle of accounting, the accrual system).
The adoption of International
Financial Reporting Standards across the globe also plays a crucial role in its facilitation of corporate transparency. In view of the greater emphasis dedicated by IFRS to fair value accounting, it could be argued that this should not present significant changes to the environment in which accounting standards are currently operating in the U.S. It could also be argued that the adoption of IFRS in the U.S should facilitate greater disclosure and transparency than is the case at present – hence supporting Cunningham’s proposal for correcting oversight of reforms aimed at addressing fraud in the U.S (that, is his proposal that financial data should be presented in ranges rather than discrete numerals). Whilst the impact of Finance Theory (in the United States) on financial reporting pre Enron and post Enron (and even following the adoption of IFRS in many jurisdictions), cannot be denied, it is also important to highlight the impact of the principles based approach to financial reporting and the fact that judgemental or subjective approaches do not necessarily facilitate creative accounting practices – as long as these are exercised within the mandated boundaries of legal and stipulated requirements.
D. Conclusion Perhaps the level at which principles operate with the IASB has been a deterrent factor in the FASB’s efforts to embrace IFRS. The IFRS focus on fair value accounting however, should not present such a deterrence. Further, where corporate governance practices are effectively exercised, these should narrow down the possibilities for abuse of the use of cash flows as instruments for predictive purposes.
Notes 1 Covenant University
“Finance theory is considered to diminish (and to have diminished) the relevance of accounting information. Following the exposure of widespread frauds, Congress passed laws that address the symptoms of finance’s futurism – and not the underlying and fundamental problem of regulatory mandates requiring extensive disclosure of forward looking information. Finance theory’s rise to intellectual and policy influence began in the 1970s. Until the 1970s, the SEC had prudently prohibited such futuristic disclosure as inherently unreliable.7
2 A Umoren, “Accounting Disclosures and Corporate Attributes” 2008 at page 4. 3 See A Umoren, “Accounting Disclosures and Corporate Attributes” 2008 at page 4 and World Bank, 2004 at page 1 4 See Tang, “Bumpy Road Leading to Internationalization: A Review of Accounting Development in China, Volume 14 No 1 March 2000 pp 93 – 102) 5 See Lombardo and Pagano “Legal Determinants of the Return on Equity” 6 Bushman and AJ Smith, “Transparency, Financial Accounting Information and Corporate Governance” FRBNY Economic Policy Review /April 2003 at page 75. 7 L Cunningham “Finance Theory and Accounting Fraud: Fantastic Futures versus Conservative Histories”, 2005
The Need for the Adoption of International Financial Reporting Standards: Some Explanations For the Pace of Implementation • 7
fsrforum • volume 16 • issue #1
Towards the Harmonization of Public Sector Accounting: State of the art By Isabel Brusca and Vicente Condor Business and Economy Faculty, University of Zaragoza
8 • Towards the Harmonization of Public Sector Accounting: State of the art
1. INTRODUCTION If there is anything that characterises public accounting in the international context today, it is precisely the general introduction of significant reforms in the public accounting systems of many countries. In these processes, a series of common approaches can be identified, especially the growing similarity of public and private accounting systems in different countries, but we can also detect that there are some efforts towards the harmonization of public sector accounting systems. Even though the harmonization of public sector accounting may be considered less important than that of business accounting, because there are no stock-market information requirements, many reasons support the relevance of governmental information comparability, especially for countries belonging to the European Union. In a world of globalization, professionals and academics are becoming aware of the importance of accounting harmonization in the public sector (Benito and Brusca, 2004; IFAC 2004, Benito et al. 2007; Christiaens et al., 2010). The financial crisis and the problems of deficit and debt in the European Union Member States have introduced also an important change in this field. Some countries and international organisations have started a process which provides evidence of this and which has the aim of reducing the differences between different countries in public sector accounting. In these processes of reform, the International Public Sector Accounting Standards (IPSASs) issued by International Public Sector Accounting Standard Board (IPSASB) have played an important role (Jensen and Smith, 2013). In fact, a variety of organizations, such as the UN, the OECD and the European Commission, have committed substantial resources to promote and adopt international accounting standards. The IPSASs can be seen as a tool for governmental accounting harmonization, just as the International Financial Reporting Standards (IFRS) have been in the business sector. In this paper, we will refer first to the benefits and problems of international accounting harmonization. Later, we want to show the role of the IPSAS for harmonizing public accounting in the international context. Finally we will refer to the developments in the harmonization of public sector accounting in the European Union.
2. INTERNATIONAL ACCOUNTING HARMONIZATION First at all, it is convenient to clearly define the term international accounting harmonisation and its differences with that of standardization. Nobes and Parker (2010) state that “harmonization is a process of increasing the compatibility of accounting practice by setting bounds to their degree of variation. Harmony is the state where compatibility has been achieved. Standardization appears to imply working towards a more rigid and narrow set of rules. Thus, it means guaranteeing that accounting information is comparable by reducing accounting diversity”. The arguments used in the private sector, fundamentally a consequence of market globalisation, can not be used as such in the public sector, so it is necessary to search for specific reasons for public sector accounting harmonization. Although we recognise that the necessity of this harmonization
might not be thought important, because there are no problems similar to the quoting of multinational companies on the stock market, we consider that there are reasons that support the importance of reaching an agreement on this theme, especially within the European Union. We can differentiate between harmonization at international level and European level. Among the reasons that can be put forward in favour of international accounting harmonization in the public sector, we wish to highlight the following (Brusca and Condor, 2002): • Externalisation in the financial activity of public administrations, inasmuch as they can emit public bonds on the international market and ask for loans from foreign financial institutions. • To aid the elaboration and comparability of Macroeconomic Accounting. If public accounting systems were homogeneous, it would be a great help towards elaborating National Accounting, and even for using it with some of the objectives for which National Accounting is used, such as controlling public deficit or the level of national debt. • The job of International Organisations that use information from different countries would be easier, because they could compare the information of public institutions. • Furthermore, this would lead to generally accepted accounting principles in the international context, which could be very useful for supranational public organizations, such as the OCDE or European Union Institutions, who would know the standards to take as a reference. They would also serve as a reference for countries who wish to modernize their accounting systems. • To aid the general modernisation of accounting systems in less developed countries. The harmonization process can be a stimulus towards improving public accounting information, especially in countries which maintain traditional public accounting systems, in which it can push forward reform and modernisation. The need for public accounting system harmonization in European Union countries is justified more easily by the following arguments (Brusca and Condor, 2002): • The need to establish comparisons between different countries, so that the accounting systems are more comparable. • The need for consolidating financial statements of the member countries to get an overall picture of the financial situation of the Community. • The need for an equal treatment of European Union grants and European Union dues in the national accounting systems, so that for example, the use of funds awarded by the European Union is more transparent and national governments can better be held accountable for proper and efficient spending. • The need of the citizens, as well as possible investors, to compare the situation of different member countries, who would need comparable information on the financial position and changes in the financial position of the member countries. The citizens should also be able to compare the performance of different countries. • European Union Institutions could adopt the generally accepted accounting principles in the European Union and their financial statements could be understood by all European citizens. Thus, we would have comparable accounting systems between different countries and between them and the European Institutions.
»
Towards the Harmonization of Public Sector Accounting: State of the art • 9
fsrforum • volume 16 • issue #1
• The harmonization of public accounting could contribute to guarantee the proper functioning of the common market. • The harmonization of public accounting systems would bring about the comparability of the debt and deficit of Member States, which is, without doubt, an important question. • The European professionals of public accounting and auditing would have a common benchmark of reference. To the above reasons we could add those we have mentioned previously for accounting harmonization at international level, and especially that which makes reference to Macro economic Accounting. In spite of the European System of Integrated Economic Accounts (ESA), which makes National Accounting comparable and useful for economic comparisons between countries, it can be said that this information is insufficient in a world of continuous and growing international political, economic and financial interdependencies. In spite of the high degree of national accounting standardisation in Europe, the relevance, reliability and transnational comparability of the ratios that are meant to assess government financial condition are questionable. An improvement of this situation requires a shift of governmental accounting bases towards accrual as well as a transnational standardisation of procedures and practices (Lüder, 2000, p. 127).
Harmonization is a process of increasing the compatibility of accounting practice by setting bounds to their degree of variation.
Although we recognize that international harmonization of governmental accounting and financial reporting systems can have important benefits, we also realise that it is by no means an easy task. There are some obstacles to this harmonization that indicate the long hard road that will have to be walked. Among these obstacles we can highlight the following: the overimportance that the legal framework exerts on public accounting, derived from the importance of the budget and the standards which regulate it; cultural and language differences; differences in the economic development of the countries in the international framework, in which it seems impossible to give priority to accounting harmonization when they have not even developed adequate accounting systems yet; the attitudes of public administrations themselves, inasmuch as they do not see important benefits in the comparability of information at transnational level; the little pressure exerted by potentially interested groups, which can not be compared to the pressure exerted by international investors, international stock markets or multinational accounting and auditing firms in the business sector; the deep-rooted nationalism, whereby each country considers its accounting system the most adequate; the general conservatism of public administrations in the question of change.
10 • Towards the Harmonization of Public Sector Accounting: State of the art
3. THE ROLE OF THE IPSASs The Public Sector Committee (PSC) of the International Federation of Accountants (IFAC), currently designated IPSASB, emerged in 1986 as a standing committee of the IFAC, with the objective of developing programs for improving public sector financial management and accountability (Sutclife, 2003). Its labour can be compared to that of International Accounting Standard Board (IASB) in business accounting. The IPSASB receives support (both direct financial and in-kind) from the World Bank, the Asian Development Bank, and the governments of Canada, New Zealand, and Switzerland (IPSASB, 2013). The impact of its work (various studies, guidelines and accounting standards have been issued, while other projects are still under way) on international governmental accounting has been decisive. In 1996 the IFAC-PSC embarked upon a project to develop a set of accounting standards for public sector entities know as International Public Sector Accounting Standards (IPSASs), whose aim is to improve the quality of general purpose financial reporting by public sector entities, leading to better information for decision-making processes and increasing transparency and accountability (Bergmann, 2010b). Most of these are based on the standards issued by the IASB. Since then, they have come a long way on the road to success and the Committee remains as an international standard setter, with a reform process in 2003-2004, that included the recommendations of an Externally Chaired Review Panel (IFAC, 2004). The standards aim to enhance the comparability of financial statements around the world, but neither the Committee nor the accounting profession has the power to require compliance with IPSASs. Moreover, IPSASs do not override the regulations of general purpose financial statements in a particular jurisdiction. Each regulatory body has to decide whether to adopt the IPSASs, and the Committee strongly encourages their adoption and the harmonization of national requirements they bring. Since 1997, the IPSASB has developed and issued 32 accrual standards and a cash-basis standard for countries moving toward full accrual accounting. The IPSASB encourages public sector entities to adopt the accrual basis of accounting, which will improve financial management and increase transparency resulting in a more comprehensive and accurate view of a government’s financial position (IPSASB, 2013). Chan (2008) characterized IPSAS as an international version of national standards (the Anglo-American model of government accounting); as a government version of business accounting standards and as a professional version of law and regulations. IPSASB has published not only the standards, but also studies and research reports in order to interest many actors in public sector reform. Studies provided advice on financial reporting issues in the public sector. They are based on the study of the best practices and most effective methods for dealing with the issues being addressed. Occasional Papers and Research Reports provided information that contributes to the body of knowledge about public sector financial reporting issues and developments. They are aimed at providing new information or fresh insights and generally result
from research activities such as literature searches, questionnaire surveys, interviews, experiments, case studies and analysis. To date, the IPSASs have played an important role in accounting reform processes around the world (Christiaens et al., 2010; Adhikari and Mellemvik, 2010; Jensen and Smith, 2013). An important path for the diffusion of IPSAS has been their adoption by international organizations. The Organization for Economic Co-operation and Development (OECD) published financial statements in accordance with the IPSAS in 2000. This was the first organization, but it was soon followed by the European Commission, which in 1999 decided to reform its accounting system and later to adopt IPSASs: its financial statements of 2005 were based on IPSAS (European Commission, 2008). The North Atlantic Treaty Organization (NATO), with 21 bodies, the Council of Europe and the International Criminal Police Organization (INTERPOL) have also adopted the IPSAS. Recently, the United Nations has issued a mandate that all agencies become IPSAS Compliant, arguing that donors and member nations have requested compliance. Consequently, UN organizations such as the FAO are adopting them (28 bodies in total). The adoption of IPSASs by international financial, economic and political institutions means that they have become a clear and useful reference when requesting faithful financial information from countries and public entities. This has become a powerful tool to gain some sort of influence on the evolution and reform of financial reporting in countries which benefit from financial aids or loans (especially underdeveloped countries), as well as on public entities audited by supranational audit bodies, such as the European Union (EU) Court of Auditors. At the moment, there are many European countries that have initiated processes to adapt their normative to IPSAS (Ernst and Young, 2012), including Austria, the Czech Republic, Estonia, Lithuania, Malta, Romania, Spain, Sweden and the UK, as well as Latin-American countries, such as Colombia (Gómez y Montesinos, 2012), Costa Rica (Araya et al., 2012), Peru and Mexico.
4. THE DEVELOPMENTS IN THE EUROPEAN UNION The financial crisis has also raised several public sector accounting issues. Many governments have important deficits and a high level of debt and their control has been fixed as a primordial objective of most national governments. Politicians have included in their language the importance of high-quality governmental financial reporting. Moreover, the financial crisis has created distrust and increased the need for accountability and transparency in the public sector (Bergman, 2010a; Ball, 2012). In this context, European Union countries have to contain deficit and debt in order to maintain budgetary stability. Among other measures, the European Parliament issued a Council directive on requirements for the budgetary frameworks of Member States that includes a reference to IPSAS, stating that “The Commission shall assess the suitability of the International Public Sector Accounting Standards for the Member States by 31 December 2012”. The need for a new approach to government accounting arises because high quality government finance statistics GFS data is needed to ensure the proper functioning of EU fiscal surveillance, especially given recent economic developments. The imple-
mentation of uniform and comparable accruals-based accounting practices for all the sectors of General Government, that is, Central Government, State Government, Local Government and Social Security, can help ensure high quality statistics (European Commission, 2012). As a consequence, the European Commission (2012), through Eurostat, issued a Public Consultation on the suitability of the IPSAS for EU Member States in order to produce a report about the suitability of implementing IPSAS based standards in the Member States. At the same time, the Commission contracted a study about the situation of public sector accounting in all the European Union Member countries. After this process, the Commission (2013a, p. 7) recognized that “IPSAS is currently the only internationally recognised set of public sector accounting standards. As a consequence, the IPSAS standards represent an indisputable reference for potential EU harmonized public sector accounts”. However, (p. 8) it seems that IPSASs cannot easily be implemented in EU Member States as they stand currently. The Commission considers that the best path is to develop European Union Standards adapted to IPSAS (renaming them European Public Sector Accounting Standards, EPSAS). The aim is that with the application of EPSAS, the harmonization of public sector accounting in Member States can be achieved. At the moment, it is being studied how this process can be carried out.
CONCLUSIONS One of the aspects that has characterized public sector accounting information in recent years is the introduction of many norms in almost all countries. Furthermore, there is a growing interest in the international harmonization of accounting, driven by the work of the International Public Sector Accounting Standard Board (IPSASB). Since the creation of the Board (previously Committee) for public sector accounting, it has had an important role in the reform of public sector accounting systems. At the moment, these standards are currently considered as the most appropriate reference for reforming accounting systems. Many international organizations, such as the European Commission, the OECD, NATO and the United Nations have adopted or adapted the IPSASs and they are considered as an example for other countries. There are also many countries that have initiated processes for the adaptation to IPSASs, including European continental countries (Spain, Romania and Austria), Anglo-Saxon countries (Australia, New Zealand and the UK) and Latin American countries (Costa Rica, Peru, Colombia and Mexico). At the moment, the European Union is considering the development of European Public Sector Accounting Standards based on the IPSASs in order to harmonize public accounting between different European Countries, taking into account the importance of obtaining comparable data for analyzing and controlling debt and deficit. This is an important path for recognizing the role of the IPSAS for the harmonization of public sector accounting standards in the international context.
Towards the Harmonization of Public Sector Accounting: State of the art • 11
A better working world stArts with you.
We want to build a better working world — for you and with you. Because we employ some of the world’s best talent, your career will be enriched by the EY experience — no matter when you join us or how long you stay. Why not start now? Visit ey.nl/carriere.
© 2013 EYGM Limited. All Rights Reserved.
Maak het verschil door mee te bouwen aan ‘a better working world’
Het is onze overtuiging dat wanneer het bedrijfsleven beter werkt, de gehele wereld beter werkt. Onze bedrijfsmissie ‘Building a better working world’ heeft alles te maken met het groeiend belang van duurzaamheid; hoe gaan we om met de wereld, de mensen en de natuur? Meer concreet willen we met ons statement een belangrijke bijdrage leveren aan het verbeteren van de werkende wereld voor ondernemers en bedrijven. Maar ook voor onze werknemers. Daarom doen we er alles aan om talenten te werven en te ontwikkelen. Met gerichte coaching door ervaren collega’s. Training op maat. En door talent bij elkaar te brengen in de best presterende teams. Wij willen dat voor iedereen geldt dat, onafhankelijk van de tijd die je bij ons werkt, je ervaring bij EY van grote waarde blijft voor de rest van je leven. Duurzame ontwikkeling dus. En natuurlijk kunnen wij alleen onze uitzonderlijke dienstverlening aan cliënten waarmaken met de inzet van de beste mensen. Veel van onze opdrachtgevers zijn grote internationale ondernemingen. Om hen optimaal van dienst te zijn, hebben wij een internationale structuur en werken wij op basis van multiculturele en multidisciplinaire teams. Zo is de hele wereld ons werkterrein. En heb jij volop mogelijkheden je loopbaan mondiaal vorm te geven.
Internationale teams
EY in Nederland is onderdeel van het cluster EMEIA: Europa, Midden-Oosten, India en Afrika. Binnen je team heb je toegang tot de support en expertise van collega’s over de hele wereld in meer dan 140 landen. Andersom gaan die steeds meer op jou rekenen naarmate je kennis en ervaring toenemen. Of je nu op een regionaal kantoor werkt, in een groot commercieel centrum of in een opkomende markt. Dit betekent overigens niet dat je altijd moet reizen of in het buitenland moet werken. Maar wel dat je de kans hebt alles uit jezelf te halen door samen te werken met enkele van de belangrijkste ondernemingen ter wereld.
Toonaangevend in financiële dienstverlening
Met 167.000 medewerkers wereldwijd is EY toonaangevend in assurance, tax, transactions, advisory en financial services. Specialiteiten die steeds belangrijker worden. Zo is betrouwbare financiële informatie van onschatbare betekenis voor ondernemers, managers en toezichthouders. Meer en meer ondernemingen willen weten hoe hun zakelijke strategie in een complexe wereld zich verhoudt tot de hoeveelheid belasting die ze betalen. Adviseurs van EY bereiden het bedrijfsleven voor op de wereld van morgen met even grote als noodzakelijke verandertrajecten. Weer anderen helpen onze opdrachtgevers bij complexe strategische beslissingen over hun kapitaal. En bij financial services bieden we al deze expertise geïntegreerd aan internationale businessleaders aan.
Past dit bij jou?
Ben jij wellicht één van de architecten van ‘a better working world’? Wil jij een verschil maken en vind je dat jij bij ons past? Vertel het ons tijdens één van onze recruitmentevenementen of in een sollicitatiegesprek. Kijk ook eens op www.ey.nl/carriere.
fsrforum • volume 16 • issue #1
Investor Perceptions of Potential IFRS Adoption in the United States1 Philip Joos - Tilburg University Edith Leung – Erasmus School of Economics
14 • Investor Perceptions of Potential IFRS Adoption in the United States
1. Introduction This study investigates to what degree the U.S. stock market reacted to public events associated with the adoption of International Financial Reporting Standards (IFRS) by domestic U.S. firms. On April 24, 2007, the Securities and Exchange Commission (SEC) announced it was contemplating the mandatory use of IFRS by U.S. companies. The SEC's motivation was that U.S. investors would benefit from a single set of high-quality global standards. Although several studies have documented positive effects of IFRS adoption in Europe (Barth et al. 2008; Daske et al. 2008; Armstrong et al. 2010), it is unclear whether a switch to IFRS would be beneficial in the U.S. Since current U.S. accounting standards (i.e., U.S. GAAP) and U.S. reporting are generally considered to be of high quality (Leuz et al. 2003; Bradshaw et al. 2004), the switch may not provide significant benefits in terms of “higher quality” financial reporting. It is also unclear whether investors expect the switch to lead to convergence benefits, such as reduced costs of comparing firms' financial reporting globally (SEC 2008; Armstrong et al. 2010; Hail et al. 2010) and greater consistency of financial information by enabling auditors and their clients to develop consistent global practices to deal with accounting issues (Tweedie 2006), especially since U.S. GAAP and IFRS have become increasingly similar in recent years. This study provides empirical evidence on how investors evaluate the potential switch to IFRS in the U.S. We examine U.S. stock market reactions to events that affect the likelihood of IFRS adoption, similar to Christensen et al. (2007) and Armstrong et al. (2010).2 If investors perceive IFRS adoption to be beneficial, we expect to observe a positive (negative) market reaction to events that increase (decrease) the likelihood of adoption. Our main analysis focuses on a differential effect of IFRS adoption across U.S. firms for which we make three predictions. First, we expect a lower market reaction if investors believe IFRS will adversely affect reporting quality due to the lack of implementation guidance, which is a particular concern for firms in the extractive and insurance industries and firms with high litigation risk.2 3 Second, we predict that investors will react more positively if they expect IFRS to result in convergence benefits, which is more likely in industries where IFRS is already widely adopted by non-U.S. peer firms. Third, we expect investors' reaction to IFRS adoption to vary with the direct cost impact of introducing these standards and focus on firms that currently report under both U.S. GAAP and IFRS and those that apply LIFO. We identify 15 events between April 24, 2007 and January 15, 2009 that affected the likelihood of IFRS adoption in the U.S. We use the cumulative three-day market-adjusted return centered on each event date for a sample of U.S. firms to capture investors' reactions to these events. Indicator variables based on SIC codes are assigned to identify whether the firms are in the insurance, extractive, or high-litigation-risk industries. We also expect investors in industries where IFRS is most commonly used compared to other internationally used local standards to benefit from convergence to a greater extent, since the potential reduction in information-processing costs is presumed to be larger for such industries (SEC 2008). Finally, we identify whether a firm applies LIFO and whether it operates in countries that apply IFRS to examine the potential costs and cost reductions associated with IFRS adoption.
Overall, we find a positive market reaction to the events that increase the likelihood of adoption. We also find that the positive reaction is stronger if the adoption of IFRS is expected to result in convergence benefits, and weaker for firms with high litigation risk. However, the findings do not show that investors in insurance or extractive firms are concerned about the lack of industry-specific guidance, which is inconsistent with concerns put forward by the SEC and the Financial Accounting Standards Board (FASB). In addition, we do not find that investors react more positively to IFRS adoption events if cost reductions are expected and the market reaction
This study provides empirical evidence on how investors evaluate the potential switch to IFRS in the U.S. is not lower for LIFO firms. Our results are consistent with the view that convergence benefits matter to investors, and that the lower implementation guidance under IFRS appears to be an issue for investors in high-litigation-risk firms. Although the study is subject to several caveats, such as the correct identification of events and the assumption that investors respond rapidly to events, the findings are relevant to the current debate on whether the SEC should move forward with the transition to IFRS, especially given the scarcity of empirical evidence to guide this decision.4 The paper also contributes to the recent literature on the economic consequences of IFRS adoption (e.g., Barth et al. 2008; Daske et al. 2008; Armstrong et al. 2010) and provides evidence on the importance of convergence to investors. Next, Section 2 offers an overview of the events that affect the likelihood of IFRS adoption in the U.S. The theoretical background is presented in Section 3, Section 4 discusses the sample and variables, and the main results are presented in Section 5. Section 6 provides concluding remarks.
2. Event History In Spring 2007, the SEC announced for the first time that it was contemplating allowing U.S. companies to use IFRS instead of U.S. GAAP. The SEC was motivated by a longstanding desire to move to a single set of high-quality global accounting standards and by the widespread adoption of IFRS in almost 120 countries to date (IASB 2011). The underlying argument was that investors would benefit from such a move; for example, it would decrease the costs of comparing financial reports on a global basis. However, previous studies suggest that investors might not benefit significantly from this move (e.g., Hail et al. 2010), and there is little empirical evidence to substantiate the SEC's claims. We provide such evidence by examining U.S. investors' reactions to events that affect the likelihood of IFRS adoption in the U.S. These events are summarized in Table 1. This methodology has also been used in previous studies to assess the perceived net benefits or costs of new regulations for investors, including Christensen et al. (2007), Zhang (2007), and Armstrong et al. (2010).
»
Investor Perceptions of Potential IFRS Adoption in the United States • 15
fsrforum • volume 16 • issue #1
Table 1: Summary of Key Events Event
Description of Event
Increasing/ Decreasing Likelihood of Adoption
Predicted Market Reaction if: Benefits > Costs (Costs > Benefits)
1) April 24, 2007
SEC announces plan to allow IFRS for U.S. issuers.
Increasing
+ (-)
2) August 7, 2007
SEC Concept Release on allowing U.S. issuers to prepare financial statements in accordance with IFRS.
Increasing
+ (-)
3) October 24, 2007
Senate hearing about international accounting standards.
Increasing
+ (-)
4) November 7, 2007
FAF/FASB positive response to Concept Release. Proposals for improving IASB governance.
Increasing
+ (-)
5) November 15, 2007
SEC approves elimination of Form 20-F reconciliation requirements for foreign issuers using IFRS as issued by IASB.
Increasing
+ (-)
6) December 13, 2007
SEC roundtable: Should U.S. switch to IFRS?
Increasing
+ (-)
7) December 17, 2007
SEC roundtable: What are practical implications of switching to IFRS?
Increasing
+ (-)
8) April 18, 2008
SEC chairman Cox states that SEC is working on a roadmap for adoption of IFRS.
Increasing
+ (-)
9) June 16, 2008
FAF/FASB conference on IFRS: Participants voice need for firm date for IFRS adoption.
Increasing
+ (-)
10) July 21, 2008
IASB officially publishes discussion documents on IASCF Monitoring Group.
Increasing
+ (-)
11) August 4, 2008
SEC roundtable on performance of IFRS during subprime crisis and progress of IFRS.
Increasing
+ (-)
12) August 27, 2008
Outlines of roadmap discussed during open meeting on IFRS held by SEC.
Increasing
+ (-)
13) October 13, 2008
IASB adapts IAS39.
Unsigned
?
14) November 14, 2008
Roadmap for potential use of financial statements prepared in accordance with IFRS by U.S. issuers.
Increasing
+ (-)
15) January 15, 2009
SEC chairwoman Mary Schapiro expresses doubts about IFRS plans.
Decreasing
(+)
Table 1 presents a summary of all events included in the sample and their expected impact on the likelihood of IFRS adoption.
3. Theoretical Background 3.1. Convergence and IFRS Adoption Whether convergence in accounting standards benefits investors is a much-debated issue. Convergence means increasing the compatibility of accounting standards while maintaining a high level of quality (Pacter 2005; Zeff 2007). For U.S. GAAP and IFRS in particular, convergence efforts have ranged from the joint efforts of the FASB and IASB to make existing standards more similar to the potential adoption of IFRS for use by U.S. companies. Regulators and standard setters often emphasize that convergence benefits investors through lower information-processing costs, since it reduces the need for investors to learn and understand different sets of accounting standards (Chi 2009). Convergence could increase the quality and comparability of financial reporting (SEC 2008; Hail et al. 2010) and enhance the consistency of financial information by enabling auditors and their clients to develop consistent global practices to deal with accounting issues (Tweedie 2006).5 However, the extent to which these benefits will be realized is unclear. For instance, Barth et al. (1999) show that conceptually, the effect of harmonization or convergence is ambiguous. Depending on its impact on the precision of GAAP and investors' costs and benefits of acquiring expertise in understanding different GAAPs, harmonization may not always lead to more precise information and capital market benefits. In addition, there are different views on whether uniformity in accounting standards is desirable. On the one hand, the SEC has long supported global convergence in accounting standards (SEC 2007) and Barth (2008) states that the use of a common reporting language in business, or a single set of accounting standards, is an important step in making financial reporting more comparable. However, opponents argue that convergence may not leave room for “considering differences in circumstances among companies or countries” (Zeff 2007) and could even result in less informative reporting if a “one-size-fits-all” approach obscures underlying performance or characteristics of firms and thus could result in a loss of information (Chi 2009). Moreover, Kothari
16 • Investor Perceptions of Potential IFRS Adoption in the United States
et al. (2010) predict that forcing FASB and IASB to compete instead of converge would lead to GAAP rules that facilitate efficient capital allocation. Finally, prior research also highlights the importance of reporting incentives together with accounting standards (e.g., Hung 2000; Ball et al. 2000, 2003; Ball and Shivakumar 2005; Burgstahler et al. 2006), meaning that convergence alone may not necessarily result in more informative reporting and capital market benefits. Empirically, findings from prior literature provide evidence that convergence does result in capital market benefits and changes in financial reporting characteristics. For instance, Chi (2009) examines whether investors' ability to process earnings information is hindered by firms' use of different GAAPs. She finds that when multiple firms announce their earnings on the same day, the price and trading-volume reaction is greater and the post-earnings-announcement drift is smaller if these firms use fewer different domestic GAAPs. This suggests that investors are able to process information more efficiently when the analysis is not complicated by the presence of multiple standards, which supports convergence as being beneficial to capital markets. Other studies on the effects of IFRS adoption in particular have shown that IFRS results in greater reporting quality and requires greater disclosure than most local GAAPs (Ashbaugh and Pincus 2001; Barth et al. 2008), and can result in greater reporting comparability (Yip and Young 2011). Theoretical research shows that this can reduce information asymmetry problems and estimation risk, which in turn has benefits for liquidity and the cost of equity (Diamond and Verrecchia 1991; Lambert et al. 2007). Armstrong et al. (2010) find empirical support for this prediction in a European setting, where share prices react positively to events that increase the likelihood of IFRS adoption, in particular for firms that are expected to benefit from IFRS in terms of higher information quality and convergence. Beuselinck et al. (2011) find that disclosure under IFRS revealed new firm-specific information in the year of mandatory adoption in the EU, which subsequently reduced the surprise of future disclosures. There is also evidence that mandatory IFRS adopters experience improvements in liquidity, cost of capital, and equity valuation (Daske et al. 2008). Drake et al. (2010) find that these increases in market liquidity are greater for firms with high-quality pre-adoption information environments. Since these firms are unlikely to benefit from increased reporting quality, Drake et al. (2010) attribute these positive market effects to increased comparability. Li (2010) also shows that mandatory IFRS adopters experience a decrease in cost of equity and that this can be attributed in part to increased comparability as well as to greater disclosure under IFRS. Wu and Zhang (2010) find that in the EU the use of relative performance evaluation with international industry peers increases after IFRS adoption, while DeFond et al. (2011) report increased U.S. mutual fund ownership in firms that credibly adopt IFRS, which they interpret as consistent with increased comparability under IFRS. Furthermore, in line with prior research, the cited studies show that the effect of IFRS is highly dependent on reporting incentives shaped by regulatory enforcement and other institutional factors.
3.2. Potential Effects of IFRS Adoption in the U.S. Although prior studies find positive capital market effects associated with convergence and IFRS adoption in particular, these findings do not necessarily apply to the U.S. context.
The findings are relevant to the current debate on whether the SEC should move forward with the transition to IFRS, especially given the scarcity of empirical evidence to guide this decision.
First, there are opposing views on whether IFRS is, overall, of higher quality than U.S. GAAP (Hail et al. 2010). IFRS proponents argue that it is less complex than U.S. GAAP, and that the nature of current U.S. standards induces managers to follow rules rather than to consider whether financial reporting reflects the underlying economics of a firm. On the other hand, critics of IFRS claim that its principles-based nature can be abused by managers, since more discretion and less guidance leave more room for earnings management. Also, IFRS and U.S. GAAP have become increasingly similar over time, as the FASB and IASB have worked together intensively to increase and maintain the compatibility of standards (Hail et al. 2010). Examples include IASB's new standards on borrowing costs (IAS23R) and segment reporting (IFRS8) that mirror U.S. GAAP. If investors believe that these convergence efforts have sufficiently reduced the differences, then adopting IFRS would not result in significant convergence benefits and would bias against finding a more positive market reaction. However, anecdotal evidence suggests that the application of U.S. GAAP versus IFRS still results in different reporting outcomes. For example, Ahold, a Dutch food retailer that operates internationally, showed a net profit of €120 million for 2005 under IFRS, but reported a net loss of €20 million for the same year under U.S. GAAP in its reconciliation footnote. This illustrates that despite ongoing convergence, the use of different accounting standards has a material impact on financial reporting. Second, since reporting quality in the U.S. is among the highest in the world (Leuz et al. 2003), and factors such as incentives play an important role in determining this quality, it is unclear whether the adoption of IFRS will have a significant impact on the quality of reporting in the U.S. We acknowledge that it is difficult to predict the overall effect of IFRS adoption. However, we expect cross-sectional variation in the extent to which it is beneficial or costly. We therefore focus on three settings where the effects of adopting IFRS are expected to be most pronounced. First, we examine whether IFRS adoption is perceived by investors as more costly in industries where it will most likely decrease the quality of standards. Although U.S. GAAP and IFRS have become increasingly similar (Hail et al. 2010), the SEC and FASB have expressed concerns about the lack of IFRS implementation guidelines for certain industries, notably the extractive and insurance industries. Their concern is that investors might lose information that is currently available under U.S. GAAP. To the extent that the lack of industry-specific guidance is indeed a concern, then investors in these firms might be
opposed to IFRS adoption and react negatively to events that increase the likelihood of adoption. Also, the lack of specific rules could be problematic for industries with high litigation risk. Managers will have to rely more on their own judgment when interpreting IFRS, which could result in more legal challenges to their decisions. To avoid this, firms might make overly conservative accounting choices (Hail et al. 2010) that reduce the informativeness of financial reporting. If the lack of implementation guidance is indeed viewed as a valid concern by investors, we would expect to observe a less positive market reaction for firms in extractive, insurance, and high-litigation-risk industries. Second, we expect convergence benefits to be more pronounced in industries where many non-U.S. peer firms have already adopted IFRS. Widespread adoption of IFRS in a particular industry may be an indication that the benefits (such as reduced information-processing costs) of adopting these standards are greater, resulting in a larger proportion of non-U.S. firms adopting IFRS. Analogously, these benefits may also apply to U.S. firms in such industries, thus resulting in a more positive market reaction to IFRS adoption events for these firms. In line with this argument, the fact that many global competitors use IFRS would indicate more consistent global practices to deal with accounting issues, and possibly greater familiarity among the international investment community with IFRS reporting in that industry. Supporting this view, the SEC considered allowing certain U.S. firms for which IFRS would be most beneficial to adopt IFRS early, and proposed that the use of IFRS by a majority of significant competitors should be the key requirement for deciding which firms would be eligible for this option (SEC 2008). For these reasons, we expect that U.S. firms in such industries would benefit from IFRS adoption to a greater extent than firms in industries where IFRS is not widely adopted by non-U.S. peers. Third, we examine the potential costs and cost reductions of IFRS adoption. Experience with the adoption of new accounting regulations has shown that there are substantial implementation costs. For example, the implementation of SOX Section 404 costs an estimated $3 to $8 million per firm (FEI 2004). The Institute of Chartered Accountants in England and Wales (ICAEW) issued a report discussing the compliance costs of IFRS adoption in Europe. They estimated these costs to be between 0.05 percent (for larger companies) and 0.31 percent (for smaller companies) of revenue. The SEC's estimate of implementation costs for the largest U.S. firms is around 0.125 percent of revenue, or around $32 million per firm for the first three years of filings on Form 10-K (SEC 2008).
»
Investor Perceptions of Potential IFRS Adoption in the United States • 17
fsrforum • volume 16 • issue #1
IFRS could also result in a recurrent loss of tax benefits for firms that use LIFO. Since U.S. tax regulations require the use of LIFO for tax-reporting purposes, and IFRS does not permit the use of this method, firms applying LIFO valuation would be forced to forgo tax benefits.6 Although Hail et al. (2010) suggest several approaches to this issue, such as dropping the book-tax conformity requirement or providing a tax credit to LIFO firms, investors in LIFO firms might react negatively to IFRS if it results in substantially higher taxes and lower cash inflows. By contrast, U.S.-based multinationals might benefit from recurrent cost reductions. Corporations with subsidiaries in countries with mandatory IFRS reporting may be able to reduce their costs because they no longer have to report under both U.S. GAAP and IFRS (SEC 2008; Hail et al. 2010). Investors in these multinationals might therefore react positively to IFRS adoption.
4. Sample Selection Because we are mainly interested in the cross-sectional differences in investor responses, the sample includes all domestic U.S. firms that have the necessary price and financial statement data for the period 2007 to 2009 encompassing the 15 events. Firms are not required to have data for all 15 events, i.e., they are included if they have return data for at least one event and data for the corresponding variables in the cross-sectional analyses. We start with 63,597 domestic U.S. firm-event observations with return data for one of the 15 events. We do not exclude any industries, but do exclude observations for firms with a negative book value of equity, resulting in 61,610 observations. We further exclude firms for which we lack data to calculate the test or control variables, resulting in the final sample of 59,285 firm-event observations for 4,820 firms.
5. Results 3.3. Predictions Based on the above discussion, we make the following crosssectional predictions regarding market reactions. First, investors are likely to be concerned that IFRS will adversely affect reporting quality because of the lack of implementation guidance for extractive and insurance firms and firms with high litigation risk. We therefore expect a less positive market reaction for such firms. Second, we expect investors to react more positively if they expect IFRS to result in convergence benefits, which is more likely in industries where IFRS is already widely adopted by non-U.S. peer firms. Finally, we examine whether investors consider the cost impact of IFRS in their valuations. IFRS is expected to decrease costs for firms that must comply with both U.S. GAAP and IFRS, so we expect such firms to experience a most positive market reaction. By contrast, we expect a lower reaction for firms that use LIFO because of the higher costs resulting from a loss of tax benefits.
Table 3: Overall Reaction to Events Affecting Likelihood of IFRS Adoption Event date
Impact on Adoption Likelihood
CR
S&P 500 index
STOXX 1800 ex America
CRSTOXX ex Am.
STOXX 600 Asia-Pacific
CRSTOXX A.P.
VIX
April 24, 2007
Increasing
0.0065
0.0075
-0.0043
0.0108
-0.0099
0.0164
13.12
August 7, 2007
Increasing
0.0443
0.0444
0.0172
0.0271
0.0038
0.0405
21.98
October 24, 2007
Increasing
0.0039
0.0054
0.0135
-0.0096
0.0055
-0.0016
20.79
November 7, 2007
Increasing
-0.0162
-0.0179
-0.0116
-0.0046
-0.0214
0.0052
24.68
November 15, 2007
Increasing
-0.0161
-0.0151
-0.0041
-0.0121
0.0057
-0.0219
26.50
December 13, 2007
Increasing
-0.0103
-0.0065
-0.0262
0.0159
-0.0430
0.0328
22.77
December 17, 2007
Increasing
-0.0229
-0.0225
-0.0214
-0.0014
-0.0361
0.0132
23.48
April 18, 2008
Increasing
0.0136
0.0172
0.0216
-0.0080
0.0387
-0.0252
20.33
June 16, 2008
Increasing
0.0099
0.0084
0.0139
-0.0039
0.0243
-0.0144
21.10
July 21, 2008
Increasing
0.0145
0.0132
0.0175
-0.0029
0.0211
-0.0066
22.76
August 4, 2008
Increasing
0.0072
0.0142
-0.0175
0.0247
-0.0394
0.0466
22.40
August 27, 2008
Increasing
0.0289
0.0265
0.0081
0.0209
-0.0089
0.0378
19.89
October 13, 2008
Unsigned
0.1070
0.0987
0.0601
0.0470
0.0607
0.0463
60.02
November 14, 2008
Increasing
-0.0014
0.0017
-0.0252
0.0238
-0.0361
0.0347
65.10
January 15, 2009
Decreasing
-0.0321
-0.0246
-0.0300
-0.0020
-0.0063
-0.0258
48.75
0.0134
0.0133
0.0048
0.0086
-0.0019
0.0153
Mean return across events T-statistic regular
1.94*
2.39**
(two-sided p-value)
(0.0724)
(0.0318) -0.0040
Non-event average
-0.0006
T-statistic non-event
2.08*
3.00***
(two-sided p-value)
(0.0563)
(0.0095)
Mean return excluding event 13
0.0067
0.0072
0.0008
0.0059
T-statistic regular
1.57
(two-sided p-value)
(0.1408)
-0.0064
0.0131 2.02* (0.0641)
T-statistic non-event
1.73
2.64**
(two-sided p-value)
(0.1072)
(0.0206)
Table 3 presents the value-weighted mean return by event. We multiply returns for event 15 by -1 to calculate the mean across events (see footnote 17). Variables are as defined in Appendix 2 of the original article. S&P500 index is three-day cumulative return for S&P500 index. VIX is the three-day average Chicago Board Options Exchange (CBOE) volatility index. T-statistic regular shows significance of mean return across events with H0 = 0. For T-statistic non-event, H0 = mean of non-overlapping STOXX-adjusted three-day non-event returns over 2007 and 2008. *, **, and *** indicate significance at 0.10, 0.05, and 0.01 levels, respectively.
18 • Investor Perceptions of Potential IFRS Adoption in the United States
5.1. Overall Market Reaction We first examine the overall market reaction to the 15 events to assess whether U.S. investors on average perceive IFRS adoption to be net beneficial or costly. Table 3 shows an average positive abnormal return across all events (adjusting for STOXX 1800 ex America) of 0.86 percent, which is marginally statistically significant (t-statistic = 1.94; two-tailed p-value = 0.0724). The significance is determined using the empirical distribution of the value-weighted returns for the 15 events, assuming that the mean returns per event are uncorrelated across events.7 We use the mean (−0.0006) of non-event returns adjusted for STOXX 1800 ex America measured over non-overlapping three-day windows as the benchmark, rather than assuming H0 = 0 . This allows for unequal variances between event and non-event return distributions and does not assume that the market adjustment fully adjusts for the market return (Armstrong et al. 2010). This second t-statistic is slightly higher (2.08) and marginally statistically significant with a two-tailed p-value of 0.056. We find similar and statistically stronger results with the STOXX Asia-Pacific adjustment. For comparison purposes, we also include the three-day raw returns for the S&P 500 index for each of the 15 events alongside the three-day raw returns of our sample firms in Table 3, to allow readers to assess the representativeness of the sample. We do not find major discrepancies between the returns for our sample and the S&P 500 index in terms of direction or magnitude. Although these returns appear to indicate that the overall market reaction to events that increase the likelihood of adoption is positive, we do not interpret this as evidence for the overall desirability of IFRS adoption. We acknowledge the need to appropriately adjust stock returns and to control for the effect of confounding events. This is especially important because the period of interest coincides with the financial crisis and the heightened volatility of financial markets. The last column of Table 3 shows the Chicago Board Options Exchange Volatility index over the three days of each event window. We find that volatility is especially high during the last three events in our sample. In particular, event 13 coincides with the stock market crash of 2008, which had a large influence on the returns during that event. Immediately preceding this event, the S&P 500 had lost 22 percent of its value over the course of six trading days of October 2 to October 6
(Steverman 2008), while the Dow Jones Industrial Average (DJIA) fell 18 percent in the week starting October 6, making it the worst week in the history of the index (Curran 2008). On Monday October 13, global stock markets temporarily recovered as governments announced plans to bail out financial institutions. These extreme conditions make it difficult to interpret the return on this particular date and it is unlikely that it reflects investors' reaction to IFRS adoption news alone, but it is unclear if and how it would influence the cross-sectional results. In our opinion, the main contribution lies in the cross-sectional analyses presented below, since these results allow for more rigorous testing of alternative explanations for our tests. We find that the results are generally robust to excluding event 13 or any of the 15 events, and discuss this issue in more detail in Section VI.
5.2. Cross-Sectional Analyses This section presents the results from cross-sectional analyses that examine whether market reactions vary across firms according to our theoretical predictions. We estimate the following model, which includes all test variables and control variables simultaneously:
Table 4: Main Cross-Sectional Analyses Panel A: Cross-Sectional Analyses
CRSTOXX ex Am.= f (EXTR, INSUR, HI-LIT, CONVERGENCE+, IFRS SALES%, LIFO, Control Variables) +CONVERGENCE is defined as follows: (1) D(IFRS) (3) D(IFRS SIC3) (2) D(IFRS SIMILAR) (4) D(IFRS ICB)
Intercept
EXTR
INSUR
HI-LIT
CONVERGENCE+
IFRS SALES%
LIFO
SIZE
HERFINDAHL
CRSTOXX ex Am. i, e, = f(EXTRi,e, INSURi,e, HI-LITi,e, D(IFRS)i,e, IFRS SALES%i,e, LIFOi,e, control variables), (1) where i denotes firm i and e denotes the event. We recognize that news of IFRS adoption affects all firms in the sample simultaneously, potentially resulting in crosssectional correlations in returns and biased standard errors (Petersen 2009). To address this concern, the reported t-statistics (in parentheses below the coefficients) are based on standard errors clustered at the event level and are adjusted for heteroscedasticity. Considering the results in the first column of Table 4, we find no support for the idea that investors in extractive and insurance industries respond more negatively to IFRS adoption events. The coefficients for EXTR and INSUR are positive but insignificant. This result could reflect investors' confidence in the efforts of the IASB to develop specific standards for these two industries. In particular, this would include the second phase of the comprehensive insurance contracts project to replace the current IFRS 4, and the efforts aimed at developing a new standard considering all unique issues of the extractive industry, to replace IFRS 6. Second, we find a significantly negative coefficient for the HI-LIT variable. This indicates that investors in firms with high litigation risk react more negatively to events that increase the likelihood of IFRS adoption. This is consistent with concerns that investors may have about the lack of specific guidance under IFRS resulting in higher litigation risk. Third, the significant and positive coefficient for D(IFRS) is consistent with investors expecting IFRS adoption to result in convergence benefits for firms in industries where IFRS is already widely adopted. This finding supports the SEC's claim that the benefits of IFRS adoption are likely to be most pronounced for firms in IFRS-predominant industries.8 In Section VI, we conduct additional analyses to gain more insight into the nature of these convergence benefits. Fourth, the findings on the cost impact variables are inconsistent with the theoretical predictions. The coefficient for
LEVERAGE
TURNOVER
BIG4
Prediction
(1)
(2)
(3)
(4)
?
-0.0261
-0.0209
-0.0225
-0.0237
(-2.58)**
(-2.50)**
(-2.51)**
(-2.50)**
[-1.99]*
[-1.75]
[-1.87]*
[-1.84]*
0.0112
0.0119
0.0096
0.0117
(1.52)
(1.56)
(1.26)
(1.56)
[1.73]
[1.79]
[1.45]
[1.71]
0.0049
0.0037
0.0064
0.0068
(1.00)
(0.81)
(1.23)
(1.25)
[0.84]
[0.62]
[1.08]
[1.15]
-0.0023
-0.0021
-0.0028
-0.0020
(-2.14)**
(-1.91)**
(-2.36)**
(-1.58)*
[-1.70]*
[-1.40]*
[-1.99]*
[-1.40]*
0.0030
0.0076
0.0060
0.0042
(1.92)**
(1.99)**
(1.93)**
(2.27)**
[1.99]**
[2.14]**
[1.92]**
[1.99]**
-0.0009
-0.0005
-0.0014
-0.0014
(-0.22)
(-0.12)
(-0.34)
(-0.33)
[-0.18]
[-0.06]
[-0.30]
[-0.19]
-0.0017
-0.0013
-0.0019
-0.0025
(-0.67)
(-0.56)
(-0.71)
(-0.92)
[-0.84]
[-0.73]
[-0.90]
[-1.00]
0.0018
0.0014
0.0016
0.0017
(1.93)*
(1.74)
(1.88)*
(1.87)*
[1.33]
[1.01]
[1.25]
[1.22]
-0.0003
0.0023
-0.0020
-0.0018
(-0.05)
(0.34)
(-0.23)
(-0.28)
[-0.21]
[0.22]
[-0.21]
[-0.37]
0.0050
0.0047
0.0049
0.0049
(1.15)
(1.19)
(1.23)
(1.12)
[1.67]
[1.74]
[1.78]*
[1.64]
0.0027
0.0025
0.0024
0.0024
-
-
-
+
+
-
?
?
?
?
?
(1.78)*
(1.65)
(1.48)
(1.56)
[2.72]**
[2.59]**
[2.37]**
[2.39]**
0.0019
0.0014
0.0015
0.0023
(2.52)**
(2.17)**
(1.97)*
(2.72)**
[3.26]***
[2.98]***
[2.62]**
[3.29]***
N
59,285
59,284
56,254
51,501
R2
0.0079
0.0090
0.0085
0.0077
Panel B: Correlations D(IFRS) Measures D(IFRS) D(IFRS SIMILAR)
D(IFRS SIMILAR)
D(IFRS SIC3)
0.608
D(IFRS SIC3)
0.344
0.542
D(IFRS ICB)
0.514
0.286
0.328
Table 4 Panel A presents main cross-sectional analyses. Each model includes a different measure of convergence benefits; numbers correspond to variables defined above table. T-statistics in parentheses are based on White standard errors that are also clustered at event level. T-statistics in square brackets are from comparison of coefficients for three-day event-returns (reported in table) and coefficients with three-day non-event returns as dependent variable. The non-event coefficient is used as the benchmark value instead of assuming H0 = 0.*, **, and *** indicate significance at 0.10, 0.05, and 0.01 levels, respectively (two-sided, unless direction is predicted). Spearman correlations between the different convergence benefit measures are provided in Panel B; all correlations are significant at less than the 0.01 level. Variables are as defined in Appendix 2 of the original article.
IFRS SALES% is insignificant, which does not support the idea that firms with sales in IFRS countries would benefit significantly from reduced preparation costs. One explanation could be that from the investors' point of view, the cost impact is not important enough to lead to a significant response to news about IFRS adoption. Another explanation is that the tests lack power. IFRS SALES% captures the firms that operate in IFRS countries, but not necessarily those that are required to use IFRS. Unfortunately, we cannot identify which U.S. firms are legally required to report in IFRS for their foreign subsidiaries. Also, firms that apply LIFO do not react more negatively to IFRS adoption. Although the LIFO variable has the expected negative sign, it is not significant (p = 0.51). Since this variable does not take into account the extent to which LIFO is used, and thus what the cost impact would be of adopting IFRS, we also use the ratio LIFO Reserve/Total Assets and identify firms that use LIFO as their primary inventory-valuation method as alternative proxies, but obtain similar results.
Âť
Investor Perceptions of Potential IFRS Adoption in the United States • 19
w w w. K P M G .c o M /N L /s ta r t e N
Fa s t F o r wa r d j e ca r r i è r e b i j K P M G
© 2013 KPMG N.V., alle rechten voorbehouden.
Je kunt als bedrijf nog zo veel willen, je krijgt pas wat voor elkaar met goede mensen Over KPMG
Aan de slag als accountant
KPMG biedt accountancy- en adviesdiensten aan
Bij KPMG Audit start je na afronding van je universi-
uiteenlopende organisaties. Van controle- en advies-
taire studie of hbo-opleiding als trainee. Je gaat
opdrachten aan (beursgenoteerde) multinationals tot
direct in de praktijk aan de slag bij alle soorten
de nationale of regionale ‘middenmarkt’ die onze
klanten. Tegelijk volg je een opleiding tot registerac-
totale dienstverlening inschakelt. Het spectrum is
countant aan een business school. Na het afronden
breed, de uitdagingen talrijk. In ruim een eeuw is
ben je gekwalificeerd registeraccountant en beëdigd
KPMG uitgegroeid van één Amsterdams kantoor tot
om de financiële rapportage (zoals jaarverslagen) van
een organisatie met ruim 152.000 medewerkers
grote (inter)nationale, veelal beursgenoteerde, onder-
wereldwijd. Alleen al in Nederland zijn er zo’n 3.200
nemingen te verzorgen. Naarmate je meer kennis en
actief, verdeeld over 13 kantoren. Omdat je advies op
ervaring hebt, krijg je een grotere rol binnen het team
maat geeft, merk je praktisch weinig van die grootte.
met meer verantwoordelijkheid.
Maar intussen profiteren je klant en jij natuurlijk wel van die gigantische bron.
Of als adviseur Bij KPMG Advisory begin je als junior adviseur en
…over ons werk
start je direct met uitdagende adviesopdrachten
Er zijn klanten die alleen controlediensten (audit) bij
voor verschillende organisaties. Daarbij lever je op
ons afnemen. Vaak zijn dat de beursgenoteerde,
diverse gebieden een bijdrage aan rapportages,
internationaal actieve ondernemingen die een strikte
presentaties en adviezen. Je ontwikkeling wordt aan-
scheiding hebben tussen controle- en adviesop-
gevuld met doelgerichte opleidingen. Afhankelijk van je
drachten. Een andere groep - ook vaak grote -
universitaire studie en interesse kun je kiezen uit de
opdrachtgevers maakt om diezelfde reden juist alleen
verschillende onderdelen binnen Advisory. Van organi-
gebruik van onze adviesdiensten (advisory).
satieadvies tot fusies en overnames, van het kwantifi-
Een derde groep opdrachtgevers (met name nationaal
ceren van complexe financiële- en operationele risico’s
of regionaal georiënteerde organisaties) schakelt
tot tactisch en strategisch IT-advies. De keuze is aan
onze totale dienstverlening in: audit en advisory.
jou. Waar je ook voor gaat: kansen genoeg om samen met je collega’s aan iets moois te bouwen.
…en onze cultuur
KPMG Recruitment Centre Laan van Langerhuize 1 1186 DS Amstelveen (020) 656 7162 recruitment@kpmg.nl www.kpmg.com/nl/starten
We hebben een uitgesproken cultuur. Bij KPMG vind
Meer informatie
je gedreven en ambitieuze collega’s die aandacht
Ga naar www.kpmg.com/nl/starten of maak een af-
voor elkaar hebben en gericht zijn op samenwerking
spraak met het KPMG Recruitment Centre (020) 656
in plaats van persoonlijk gewin. Integere professio-
7162 of mail naar recruitment@kpmg.nl. Daarnaast
nals die elkaar in hun waarde laten en respect hebben
zijn er nog andere manieren om met ons in contact te
voor elkaars persoonlijkheid en vakmanschap.
komen. Denk bijvoorbeeld aan een (afstudeer)stage,
Die combinatie van passie en ambitie aan de ene kant
of onze internationale Business Course. We hebben
en teamgeest en collegialiteit aan de andere kant
ook regionale activiteiten, vaak in samenwerking met
maakt KPMG bijzonder. We bouwen samen aan het
studieverenigingen. Een overzicht van alle activiteiten
succes van ons bedrijf.
en contactmogelijkheden vind je op onze site.
© 2013 KPMG N.V., alle rechten voorbehouden.
fsrforum • volume 16 • issue #1
Similar to the explanations for the insignificance of IFRS SALES%, it could be that investors do not expect that disallowing the use of LIFO under IFRS will have a major cost impact and therefore do not react more negatively to IFRS adoption events. Fifth, the market reaction is positively and significantly related to the control variables SIZE, TURNOVER, and BIG4. As explained in Section IV, one explanation for the positive relation between size and event returns is that convergence benefits could be larger, since larger firms are more likely to compete and be compared on a global basis. Moreover, larger and more liquid firms attract institutional ownership and analyst following (O'Brien and Bhushan 1990; Gompers and Metrick 2001). Since institutional investors and analysts have been shown to favor conformity in accounting choices or outcomes (Bradshaw et al. 2004; De Franco et al. 2011), this might be another reason for the positive coefficients for these variables. Finally, the positive coefficient for BIG4 indicates that investors react more favorably to IFRS adoption for firms with a Big 4 auditor, consistent with these auditors being more able to support the transition from U.S. GAAP to IFRS.9
IASB and FASB to reduce the differences between IFRS and U.S. GAAP, investors still react positively to news that increases the likelihood of having a single set of standards. Our findings highlight the importance of convergence benefits to investors and show that there are both costs and benefits to the use of a common global accounting standard.
Notes 1 This article was first published in a modified version in March 2013 in The Accounting Review, Vol. 88(2), pp. 577-609. The American Accounting Association is the copyright holder of this article. This version has been abbreviated to present the main results; please refer to the original article for detail on event selection, variable measurement and additional analyses. 2 We focus on market reactions for two reasons. First, since the switch to IFRS was proposed by the SEC and its foremost mission is to protect investors, it makes sense to examine the benefits and costs from the investors' viewpoint. This was explicitly stated by the SEC's chief accountant, James Kroeker, at the 2009 AICPA Conference. He stressed that “the fundamental focus of our evaluation of implementing a set of high-quality international standards must be on the impact to investors. I believe that implementing a single set of global accounting standards for U.S. issuers can, and must, be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC's mission of protecting investors” (Kroeker 2009, emphasis in the original). Second, since IFRS has not yet been adopted in the U.S., we cannot examine the direct effects of the standards on financial reporting outcomes.
6. Conclusion The goal of this study is to provide empirical evidence for the costs and benefits of IFRS adoption by U.S. firms from the investors' point of view. We use the stock market reaction to events that affect the likelihood of IFRS adoption and examine whether this varies cross-sectionally in a predictable manner. We find that investors react more positively to events that increase the likelihood of IFRS adoption in cases where IFRS is expected to result in convergence benefits. We find a significantly more positive market reaction for firms operating in industries where IFRS is the predominant choice worldwide, for larger and more liquid firms that are more likely to attract investors who stand to benefit from convergence, and for firms with high foreign institutional ownership. Collectively, these findings suggest that investors expect U.S. adoption of IFRS to result in net convergence benefits. Further, investors in firms with high litigation risk respond less positively to events that increase the likelihood of IFRS, consistent with the notion that IFRS may increase the likelihood of expensive legal challenges or may lead to overly conservative behavior by these firms to avoid litigation. The findings of this paper must be interpreted carefully in light of several limitations. First, our focus is only on investors, rather than on all parties that could be affected by the change. Second, the methodology relies on a correct identification of events and requires that event-related information be incorporated into stock prices rapidly and without bias (Armstrong et al. 2010). We have carefully identified the relevant events and dates, but we cannot exclude the possibility that participants were privy to relevant information prior to the dates identified here. Third, the findings relate to the expected effects of IFRS adoption, rather than to the realized effects, and should therefore be seen as preliminary evidence for the effects of IFRS adoption. Despite these limitations, our findings are relevant to the current debate on whether the U.S. should switch to IFRS. The SEC has stated that the transition should be made only if it benefits U.S. investors and capital markets, and this paper provides evidence relevant to that issue. A final contribution is our finding that despite the ongoing efforts of the
22 • Investor Perceptions of Potential IFRS Adoption in the United States
3 A “lower” market reaction indicates a less positive or more negative reaction, whereas a “higher” market reaction indicates a more positive or less negative reaction, i.e., we are referring to the algebraic direction and not the absolute magnitude of the impact. 4 We are aware of only one other study that examines the impact of IFRS in the U.S. Lin and Tanyi (2010) investigate market reactions to events relating to the general acceptance and use of IFRS. However, they focus on whether investors react to events that increase the use or acceptance of IFRS (e.g., their sample also includes events that capture convergence efforts between IASB and FASB) and they investigate only comparability. In contrast, this study focuses on the impact of IFRS adoption, since this is the key topic of debate in the U.S., and investigates several potential consequences for investors. 5 Similar to Armstrong et al. (2010) and Hail et al. (2010), we view increased reporting quality and convergence benefits as two different but related effects of IFRS adoption. Because there is no standard definition of reporting quality, we view it as the extent to which financial reporting reflects a firm's underlying economic performance. Research has associated quality with earnings attributes such as the degree of earnings management, timely loss recognition, and value relevance (e.g., Francis et al. 2004; Barth et al. 2008) or the quantity of disclosure (e.g., Botosan 1997; Leuz and Verrecchia 2000). As explained above, convergence benefits are broader than reporting quality and can include reduced information-processing costs due to greater ease in comparing firms' financial performance globally. One potential benefit of convergence is comparability, which is the extent to which the information presented allows investors “to identify the similarities in and differences between two sets of economic phenomena” (FASB 1980). Even if reporting quality is held constant, comparability can increase the usefulness of reporting to investors by making it less costly to compare firms (Hail et al. 2010), which has been a key motivation for allowing or requiring the use of IFRS (see, e.g., FASB 2008; FAF 2009; FCAG 2009). 6 Although this may seem a minor concern, more than 120 U.S. companies have joined the LIFO Coalition, which aims to preserve the use of LIFO, and have lobbied against the adoption of IFRS (see http://www.sec.gov/comments/s7-27-08/s72708-45.pdf). It is ultimately an empirical question whether investors consider the potential loss of tax benefits to be economically significant. 7 To calculate the t-statistics in Table 3 and for the cross-sectional analyses in Tables 4 to 6, we multiply the returns for event 15, which is classified as decreasing the adoption likelihood by −1. This is done to ease the interpretation of the t-statistics, since all the other events are classified as increasing adoption likelihood or are unsigned (Armstrong et al. 2010). 8 3We also examine whether event returns are positively related to the proportion of global industry peers using IFRS. Untabulated results indicate that the market reaction is significantly positively associated with this proportion, similar to the results for D(IFRS). This is consistent with investors valuing convergence benefits, and with these benefits increasing with the number of firms that use IFRS in a given industry. 9 The original article presents additional analyses that provide further evidence on the presence of convergence benefits and rule out alternative explanations for our results.
fsrforum • volume 16 • issue #1
Accounting Disintegration?
Prof.dr. Maarten Pronk
Over the past 10 years the International Financial Reporting Standards (IFRS) were introduced in many countries. At the moment over 120 countries use IFRS including three quarters of the G20. In addition, over the past 10 years the International Accounting Standards Board (IASB) and the US based Financial Accounting Standards Board (FASB) have been working together on several convergence projects to better align IFRS and US GAAP. In fact, there were even signals that US companies could start reporting under IFRS within a few years. This harmonization of accounting standards worldwide should improve the access to the world’s capital markets, the quality of internal controls and allocation of resources within a group and improve cross border transactions. In addition, one global standard could reduce the financial reporting costs of multinational companies. These developments also suggest that the IASB is close to reaching one of its main goals, the development of a single set of globally accepted financial reporting standards that help investors, other participants in the various capital markets of the world and other users of financial information in making economic decisions. However, other developments seem to indicate that IASB is probably close to reaching that goal but that IASB will not get any closer or may even get further away from that goal coming years. These developments include, but are not limited to: • the disagreement between the IASB and FASB regarding certain important accounting policies; • the ongoing discussion in the US whether or not IFRS is set of high quality financial reporting standards that could be applied by US companies; • the discussion regarding the application of IFRS for small and medium sized enterprise (IFRS SME) within the European Union; and • a debate within certain European countries that the European Union should abandon IFRS and develop an own set of accounting policies or even allow European countries to (re)develop local accounting policies.
• IFRS is too complex, creates too much volatility and estimation uncertainty in the accounts and requires too many disclosures; • efforts to converge with US GAAP have taken precedence over the objective of developing high quality standards; • the EU does not enjoy as much influence on the standard setting process as it deserves; • lack of enforcement action is creating sense of impunity; and • the diversity in how IFRS are interpreted and applied in various jurisdictions raises concerns about the comparability of IFRS annual reports. It seems fair to say that IFRS is not perfect and that there is still a way to go to get at a single set of high quality, understandable, enforceable and globally accepted financial reporting standards. But is the discussion about IFRS only a discussion about the quality of IFRS based annual reports? Or are IFRS disliked for other reasons e.g. the lack of political influence on the standard setting process or a general sentiment against globalization? Or did everybody expect that accounting harmonization is a “free lunch” with only benefits and no disadvantages and it is hard to accept that “free lunches” do not exist in accounting? Whatever the reasons are, I still believe in the benefits of having global standards and that the benefits are larger than the costs. In addition, I see an important challenge for accounting research to contribute to this debate by providing evidence on the benefits and costs of IFRS and by helping the IASB to further improve the accounting standards.
Some of the arguments that are used by European opponents of IFRS are: • the conceptual framework needs improvement; • the IASB lost credit because several projects to adjust accounting standards got delayed;
Accounting Disintegration? • 23
fsrforum • volume 16 • issue #1
Interview with Leo van der Tas Ondertitel
Martine Nieuwenhuijzen Kruseman, Myrna Baadjou and Lisanne Frijling
In short, what does IFRS means? IFRS stands for International Financial Reporting Standards, the international language with regard to financial reporting. The aim of the standards is to have a set of rules that everyone must adhere to. This will get comparable financial reports regardless of the country and type of company. This will allow analysts, shareholders, bankers and other creditors to compare companies much easier. In the European Union IFRS must be applied by all listed companies. Individual states can expand this and also require or allow this for other companies. So IFRS is not only applied by listed companies, but also by unlisted companies that operate internationally.
In short, what does US GAAP means?
Leo van der Tas is Registeraccountant and partner at EY in Rotterdam, where he is a specialist in Financial Reporting and specifically IFRS, so he covers a great deal of the international aspects. Leo van der Tas joined EY in 1991. He is also the Global IFRS Leader at EY in London and chairman at EYs Global IFRS Policy Committee. In this role he is responsible for the coordination of the IFRS activities within EY worldwide. Since 2009 Van der Tas is a member of the IFRS advisory Council of the IFRS Foundation in London, which advises the International Accounting Standards Board (IASB). In the past he was a member of the Advisory Committee for Financial Reporting of the Dutch Authority for Financial Markets (AFM) in Amsterdam. After graduating in Rotterdam, he worked as a researcher at the Erasmus University, where he got a doctor’s degree in Harmonisation of Financial Reporting. He was a part-time full professor at Erasmus University from 1993 to 2010. Since 2010 Leo van der Tas is a part-time full professor at Tilburg University.
US GAAP are the American rules followed by U.S. companies. For a long time there has been the convergence of IFRS and U.S. GAAP. There was a formal program between the IASB, responsible for IFRS, and the U.S. counterpart FASB (Financial Accounting Standards Board) to bring the two standards closer together. This so-called convergence program, which lasted about 10 years, had some successes. Eventually, the Americans have decided not to move to IFRS in the short term. Following this decision, the IASB decided to stop the convergence program with the US. This happened at about the beginning of this year. The IASB decided to change to a wider structure. A structure in which they not only work with the FASB, but also work with other national standard setters. The relationship between IFRS and U.S. GAAP is thus that they have grown closer to each other, but are yet far from identical.
What is the effect of a possible harmonization of financial reporting on individual companies? Improving comparability and understandability of financial reporting has benefits to the company itself, because they can get cheaper finance. Also the communication with the outside world improves. The outside world isn’t only the shareholders, but also the banks, governments and employees. Harmonization of financial reporting also has its drawbacks. These are international rules, so you can not expect that these are customized for a particular country or economic environment. Thus there are compromises and there may be some companies that will suffer from it. You now see that certain countries or sectors are critical to IFRS. It would not take sufficient account of local circumstances. However, if you take a global look at it, you’ll notice that on balance we are better off.
What is your, and EYs, view on IFRS? Also given the cost and benefits. The accounting profession has always been very supportive of the IASB; in the sense that we have always felt that there is a need for an international standard. This does not mean that we believe that everyone must apply IFRS. It does not make sense to force purely local companies to apply IFRS. You should always make a cost-benefit analysis. Applying IFRS is expensive, complicated and a lot of work, so there is a trade-off. For listed companies, everyone believes that the advantages outweigh the disadvantages. It is ultimately up to governments to decide who must apply IFRS, but we, as EY, think there should be something like IFRS. Since there has been decided for IFRS, there should not be national or regional adaptations. This has no additional benefit and creates confusion and lack of comparability.
24 • Interview
The accounting profession has always been very supportive of the IASB; in the sense that we have always felt that there is a need for an international standard.
It takes EY enormous effort to track what is happening in terms of changes in IFRS. We also provide quite a lot of input to these changes, either at our own initiative or because the IASB . However, ultimately the responsibility lies with the IASB; it is their standard. Once new rules or changes are implemented, we try to be as consistent as possible in applying the rules when we audit or consult our clients.
What was the impact for businesses in 2005, of the mandatory implementation of IFRS for listed companies? There is a fair amount of academic research on the quality of financial reporting and the impact of IFRS since 2005. Some studies are clearer than others, but in general it is concluded that the introduction of IFRS has led to improved quality of financial reporting. Furthermore, it has led to lower bid-ask spreads, or lower transaction costs for shareholders. This shows the quality of the information improved. There are also better forecasts of analysts, so there are many accounting and economic consequences. When I look at the financial statements, these become more extensive; there is more information and that automatically means that the cost of preparing and auditing financial statements have gone up. It takes more time, effort and it is more complex. In contrast, the uniformity within and between countries has grown. What is important I think, is the greater comparability of companies with similar activities.
Do you notice anything from the financial crisis on the use and application of IFRS? Yes, enormous. In 2005 we converted to IFRS and two years later the crisis begun. The crisis has led to an immediate call for adjustments of the standards by the IASB. They should make the rules tighter, for example increasing the provisions for bad loans. These rules were otherwise identical to U.S. GAAP, so they were also asked to tighten the rules. However, this was not easy, since we are in the year 2013 and there are still no new rules for provisions for bad loans.
What was the reason for harmonisation of the accounting rules in Europe?
a big step. In 2002 Europe decided to move to IFRS, which became mandatory in 2005. This decision was part of an overall plan to move towards an integrated European capital market. Financial reporting would only be a part of it, everything had to be integrated. In the absence of such an integration, arbitrage can take place in the area of supervision legislation and financial reporting. So we should focus on an integrated European capital market, with an integrated system of supervision and only one set of rules.
How does EY ensure that IFRS is correctly applied? The number of countries applying IFRS is still growing. This means that the number of clients and thereby the number of people at EY that use IFRS is increasing. We created a good structure, in which we want the local problems to be solved locally as much as possible, so within the countries themselves. When it is becoming more complex it goes to the region, which is usually a cluster of countries. When it is very complicated, it comes to my team in London. If we have decided to interpret something in a certain way we communicate this to all other countries. In this way we hope to achieve consistency. However, when the standard leaves room for more than one interpretation, we will accept this too.
What is your vision on global accounting standards in the long run? I don’t see full harmonization of all companies in the world happening so fast, but I think that this is not really necessary. It is only important for those companies that need to be compared, especially listed companies. In the end we will switch to a standard among the listed companies. In the long term it will be difficult for America not to apply IFRS, but in the next five to seven years it will certainly not happen. This is because America wants to remain in control themselves and IFRS is a new standard. IFRS has to prove itself, America says; it exists not so long, comparing tot U.S. GAAP originated around 1930, so they are much older. Furthermore, the Americans fear that IFRS is not robust enough to be applied in an American environment. So in the short run I don’t see America transfer to IFRS. They will only proceed if certain parts are changed in IFRS.
The EU has been trying to harmonise national requirements for financial reporting since the 1960s. It was only around the turn of the century that the idea got momentum to take
Interview • 25
fsrforum • volume 16 • issue #1
Maatschappelijk Verantwoord Bankieren
K(r)anttekening | Drs. Joost Groeneveld RA RV1
Het is zondag 20 oktober 2013. Op internet lees ik dat vrijdagnacht JP Morgan heeft ingestemd met een schikking met het Amerikaanse Ministerie van Justitie voor het bedrag van $ 13 mrd (= € 9,5 mrd). Het intrigeert mij hoe zo’n bedrag wordt bedacht. Welke zijn de bepalende factoren? Welke argumentatie is tussen partijen uitgewisseld? Welke belangen worden in het oog gehouden? Is het naar draagkracht? Is het een percentage van de veroorzaakte schade? Moeilijkheden met de bewijslast? Waarom een schikking en niet gewoon een openbare rechtszaak? Worden de verantwoordelijke bestuurders van destijds nu door Morgan aangesproken? Of doet de openbare aanklager dat nog wel? Ik heb het allemaal niet op de voet gevolgd. Wie weet zitten ze al achter de tralies.
Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators). Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.
Op diezelfde vrijdag 18 oktober 2013 meldt NRC Handelsblad dat er “nooit meer een bonus” zal zijn “voor de Rabobank-top”. Je zult daar maar een topper zijn. “Alleen (ca. 200) specialisten krijgen nog een variabele beloning”. De toppers zijn dat laatste dus kennelijk niet. Hoe moet dat met hen nu verder? Voor hen te hopen zijn de vaste salarissen op een marktconform en concurrerend niveau gebracht om leegloop te vermijden. Maar nee, dat is op een teleurstelling uitgelopen: “De afschaffing van de bonussen wordt niet gecompenseerd met een verhoging van het vaste salaris”. Anderzijds: “De salarissen van de Rabo-top zijn geheim, maar behoren tot de top van de Nederlandse financiële sector. De zes bestuursleden verdienen samen 8,5 mln euro.” En wellicht krijgen ze als troost te zijner tijd toch een mooie vertrekpremie die dan geen bonus
Met dit besluit (nooit meer een bonus voor de top) geeft Rabobank “gehoor aan de kritiek. Het besluit is nadrukkelijk ingegeven door de jarenlange maatschappelijke kritiek op de hoge beloningen in de sector, zegt Rabo.” Nu lijkt me een gemiddeld salaris voor de top van € 1,4 mln per persoon per jaar niet echt een antwoord op die kritiek. Ex-PvdA-minister Bos moest zich voor een werkweek van 4 dagen tevreden stellen met € 4 ton per jaar. Zo doe je dat als je de buikriem wat moet aanhalen. En Gerrit Zalm doet het bij ABN voor € 750.000, maar die werkt dan ook 7 dagen per week. Omgerekend moet de Rabo-top dag en nacht doorwerken. Toch geeft het voldoening te zien dat 5 jaar na de start van de recessie in 2008 maatregelen worden getroffen. En eigenlijk kunnen al die bestuurders en managers er niets aan doen. Ze moesten wel. Vroeger – in 1864, en ik heb het alleen van horen zeggen – was het niet ongebruikelijk dat iemand zijn werk zo goed mogelijk deed. Daar werd hij voor betaald. Dat was eigenlijk vanzelfsprekend. Zelfs het tegendeel was waar. Als iemand zijn werk niet zo goed deed, werd hij eerst ernstig toegesproken, en als dat niet hielp, werd hij ontslagen, zonder vertrekpremie. Dus deed iedereen zijn best wel. Dat was de goede oude tijd. Dat is allemaal veranderd. Ik herinner me dat ik ergens in de jaren tachtig van de vorige eeuw voor het eerst van de agency-theorie hoorde. Deze theorie is gebaseerd op een belangentegenstelling tussen principaal en
En wellicht krijgen ze als troost te zijner tijd toch
een mooie vertrekpremie die dan geen bonus heet, maar deel is van de arbeidsovereenkomst. heet, maar deel is van de arbeidsovereenkomst. En zouden ze een optiepakket hebben dat nog iets waard kan worden zodra die 8.000 arbeidsplaatsen daadwerkelijk zijn geschrapt? Nee, die besparing komt natuurlijk ten goede aan de leden van de coöperatie, zoals de burgemeester van Heddesdorf dat in 1864 heeft bedoeld: aan de rekeninghouders. Hoe dat nu in 2013 precies werkt, zou toch nog eens moeten worden uitgelegd.
26 • Maatschappelijk Verantwoord Bankieren
agent. De principaal wil iets gedaan krijgen, en de agent moet dat doen. Maar de agent heeft eigen belangen die zich zouden kunnen verzetten tegen een zo goed mogelijke uitvoering van de opdracht. Dat weet de principaal, en die gaat zich dus afvragen hoe hij het belang van de agent parallel kan laten lopen aan zijn eigen belang. Kortom, hoe heft hij de belangentegenstelling op?
Neem bijvoorbeeld een aandeelhouder (de principaal) die – sjablonematig - belang heeft bij zoveel mogelijk winst. Dan zal de aandeelhouder de directeur (de agent) een belang geven in die winst. En zo krijgt de directeur een winstdeel, een optiepakket, een bonus om het werk te doen dat hij toch zou moeten doen. En sterker nog: in tegenstelling tot de principaal houdt de agent er na een paar jaar mee op. Die wil geen dief zijn van zijn eigen portemonnee, en heeft dus een korte termijn belang dat strijdig kan zijn met het lange termijn belang van de aandeelhouder. De aandeelhouder begrijpt er niets meer van. Het financiële instrumentarium gaat hem boven de pet. De afspraakjes over LIBOR gaan buiten hem om. Er ontstaat een informatiekloof die ook door menig commissaris en accountant niet kan worden gedicht. En zo ontstaat
Nu lijkt me een gemiddeld salaris voor de top van E1,4 mln per persoon per jaar niet echt een antwoord op die kritiek. een crisis. We moeten dus maar weer eens af van de agency-theorie. We hoeven niemand om te kopen of af te kopen. We moeten gewoon maar weer eens naar eer en geweten ons best doen. Natuurlijk is er kritiek op buitensporige salarissen. Er zou een aan Balkenende parallelle norm kunnen zijn. Als vergoeding voor het ondernemersrisico dat een ondernemer loopt, zou die een ondernemerspremie kunnen verdienen die daar bovenuit gaat. Ik zie dat risico bij de banktoppers niet aanwezig. Zij krijgen net als alle andere werknemers keurig hun salarissen en hun onkostenvergoedingen betaald. Misschien is het een goed idee dat Rabo de eigen commercial – de pelgrimage naar het standbeeld van Raiffeisen – als bron van inspiratie neemt. Het ging Raiffeisen niet om het eigen voordeel. Of zoals pater Gerlacus van den Elsen zei, die aan de basis stond van een aantal lokale boerenleenbanken in het zuiden van Nederland: “Den woeker te weren, den landman in zijn nood bij te staan, maar ook de spaarzaamheid, naastenliefde, arbeidzaamheid en matigheid bevorderen.” Of moeten we die pelgrimage niet al te serieus nemen? Voorzitter Moerland heeft aangekondigd afscheid te willen nemen van het “aloude coöperatieve model.” Afscheid dus van Raiffeisen en van pater Van den Elsen. “De dienstverlening aan zakelijke en particuliere klanten wordt verbeterd; voor een belangrijk deel via verdere digitalisering van het bankieren …. Hij wil zich veel meer richten op bankieren via internet of mobiele telefoon. De consument vraagt daarom, zegt Moerland.” Ja, en de ondernemer vraagt om een bankier die hem kent en hem figuurlijk en zo mogelijk ook letterlijk krediet kan geven. Die bankier heeft een dienende functie waarbij een best behoorlijk salaris past. Is dat niet de kern van Maatschappelijk Verantwoord Bankieren?
Notes 1 Directeur Wingman Business Valuators B.V., Breda
Maatschappelijk Verantwoord Bankieren • 27
www.werkenbijpwc.nl
Soms weet je precies wat je wilt
Soms sta je open voor suggesties Je hebt tijdens je studie alle mogelijke kennis opgedaan. En nu wil je aan de slag. Op een plek waar je al je ambities kwijt kunt. Waar de lat hoog ligt en waar je samenwerkt met professionals. Je start je carrière vliegend en gaat recht op je doel af. Dat is: het beste in jezelf naar boven halen.
Kom verder op werkenbijpwc.nl
Neem voor meer informatie contact op met een recruiter: 088 792 87 77 werkenbijpwc@nl.pwc.com www.werkenbijpwc.nl/contact Volg werkenbijpwc op Facebook en Twitter
Š 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.
www.werkenbijpwc.nl
Soms hou je alle opties open
Soms weet je direct waar je aan de slag wilt Kom verder op werkenbijpwc.nl
Tijdens je studie heb je een schat aan kennis opgedaan, je bent slim, sociaal en ambitieus en nu wil je aan de slag. Bij ons kun je al je kwaliteiten volop ontwikkelen.
Je ideeën zijn meer dan welkom
Ook wij zijn ambitieus. We werken in Nederland met 4.600 mensen in twaalf vestigingen op de gebieden Audit & Assurance, Tax & Human Resource Services, Advisory en Compliance Services. We willen de beste en meest innovatieve oplossingen bedenken voor de vraagstukken van onze klanten. Dat kan alleen als onze mensen vanuit allerlei oogpunten naar die vragen kijken. Dus maakt het minder uit wat je precies gestudeerd hebt. Het gaat om je ideeën.
Blijf je ontwikkelen
De lat ligt hoog, maar je staat er niet alleen voor. Je krijgt op dag één een coach die je begeleidt en ondersteunt bij je werk en bij het uitstippelen van je carrière. Je werkt samen in teams met inspirerende collega’s en volgt opleidingen om je vaktechnisch en persoonlijk te blijven ontwikkelen. Zo ontdek je al doende waar je kracht ligt. Je kunt switchen tussen sectoren. Begin je bijvoorbeeld bij beursgenoteerde ondernemingen, dan kun je altijd overstappen naar de overheid. En andersom. Je kunt ook van PwC-vestiging veranderen, binnen Nederland of over de grens.
Pak de ruimte die je krijgt
Je gaat bij ons aan de slag in een open kennisorganisatie. We werken met passie en een gezonde dosis lef; zijn open, integer en eerlijk; zeggen geen ja als het nee moet zijn. Het gaat er bij ons informeel aan toe. Je krijgt echt de ruimte. We staan open voor je initiatieven. Je start je carrière vliegend, ontwikkelt je volop en haalt het beste in jezelf naar boven. Want daar worden onze klanten, wij én jij beter van.
© 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.
fsrforum • volume 16 • issue #1
Word of the chairman
Gijs Romer
Dear members, This is the first edition of the FSR Forum of the academic year 2013-2014, as the XVIth board officially took place at the 5th of September. The alert reader has already noticed that this year is a festive year of the FSR. As determined on the General Members Assembly of the study association for finance Pecunia, the FSR was founded officially on March the 2nd, 1999 by the acquisition of Pecunia (finance) by Pacioli (accounting). That is why during this academic year we celebrate our 15th anniversary. We have made a great start this year with many new members and I am confident that we can make big steps for FSR this year. We are not only occupied with the events of this moment, we already have put great effort into the outlook for the rest of the year. You could say that many things are changing around us and we will choose our path deliberately, so the return for the FSR is the largest. As you might have noticed by the presentations and drink receptions with several investment bankers, our International Banking Cycle has come to an end. Ten investment banks came to Rotterdam and Amsterdam to give several workshops and interview sessions. We can look back on another success this year with satisfied companies and some even more satisfied students. I wish them all best of luck with their application trajectory. Furthermore the Big 4 Cycle took place in September and October where we have seen a great deal of interest from students. I am already proud to be the chairman of this FSR board thanks to the dedicated manner in which every board- and active member operates.
FSR News
Column Willemijn Hooimeijer
Column Anne Duindam
We have expanded the FSR 2013-2014 team with 23 active members during the summer interview session and at the beginning of the academic year. I already have seen many driven committee members in our room at the 14th floor that are fully engaged with their project. It is really energizing to see that each FSR member has a good sense of responsibility for the event they are organizing and puts a great deal of effort into the preparation. By empowering all our members within their committees, this sense of responsibility arises and makes the FSR a very efficient and enthusiastic team. I look forward to a great year with the FSR board and the active members, but also I would very much like to meet you at one of our events if you have any questions regarding the FSR.
International Banking Cycle
European Finance Tour
30 • FSR news
32 33 34 37
fsrforum • volume 16 • issue #1
Indian companies likely to shift to IFRS from April 2015 Most recent news update about the subject.
After the enactment of the Companies Act, 2013, the ministry of corporate affairs has now shifted its focus on rolling out international reporting standards for Indian companies which were to be implemented beginning April 1, 2011. According to the draft plan, the ministry wants to implement the international financial reporting standards (IFRS) beginning with companies that have a net worth of over 118 million euro from April 1, 2015, an official told The Indian Express. In the second phase, both listed and unlisted companies with a net worth of over 59 million euro but less than 118 million euro will have to converge with the international accounting standards from the financial year beginning April 1, 2016. IFRS had been put on the back burner by the government given issues raised by corporates, and unresolved taxation issues. Industry bodies had sought postponement arguing the industry needed more time to prepare. The IFRS-converged accounting standards deal with mark-to-market projections and valuation of financial assets among other things. The implementation is expected to cause some upheaval in companies' finances in the initial stage as the standards call for projecting assets' real value. Various sectors, including banking and real estate would be hit, experts have argued. "The Institute of Chartered Accountants of India (ICAI) has been asked to conduct a sector-wise study, elaborating on the impact the implementation will have on the sectors," the official said. As such, all Indian companies listed overseas or doing business on foreign land currently prepare financial statements as per the international standards. However, banking companies would be exempt from complying with the IFRS. In the third and fourth phase, beginning April 1, 2017, smaller companies would need to prepare their accounts as per the international standards. "Having put in so much of efforts into it, I think we should go ahead with it. The main sectors which are likely to be impacted include oil and gas, finance, telecom and infrastructure companies. However, on other industries, I don't see much impact," Amarjit Chopra, former ICAI president, said. Source: http://www.indianexpress.com/news/indian-companies-likely-to-shift-to-ifrs-from-april-2015/1184894/
FSR news • 31
fsrforum • volume 16 • issue #1
FSR Former board member
Willemijn Hooimeijer
At time of writing, I just returned from a sublime FSR Lustrum weekend. The event started with an FSR car rally; together with my VIIIth board-mates we found our way to the mystery location: Antwerp! A great evening followed! About 8 years ago, I was doing a similar assignment during the so-called ‘Beleidsweekend’. A weekend in which the current Board shares all their knowledge with the people who will run the FSR for the coming year. I had the honour to be the f.t. Commissioner Activities and was looking forward to an inspiring year. Although the weekend was a great experience already, I could not have expected that the FSR would bring me some of the key things in life; friends, love & career. Looking back I have such a long list of great memories. I like to share some of them with you. Right at start of the year I was responsible to organise the International Banking Cycle. Designing the booklet, setting up the promo, cooperating with the FSA, contacting participants and most importantly being the key contact for banks like JPMorgan, Lehman Brothers and Goldman Sachs were part of my tasks. I remember that the first workshop day already began quite exciting. Smog in London, all bankers were stuck at City Airport while the first participants were already coming in! We managed to reach the only banker that had arrived the day before. Fortunately he was able to come earlier than agreed to lead the session. Secondly, our drink location – apparently not familiar with student drinking style - ran out of beer after half an hour. I hurried to the cantine in the L-building and after a lot of talking I was able to arrange a trolley of beer cans. I definitely like to mention all the fun I had together with committee-members and my Board-mates in particular in (and outside) the FSR office. A lot of jokes had been set up on that 14th floor, several which I will never forget. Some things that flash through my mind; bumberball, 'het kratje', our MAEUR friends, fucked birthday presents, mayo, ‘dof is voor losers’, only 2 internet computers, ‘de postkamer’, ‘stickeren’, diners at Hoofdstuk II, ‘tourneedos’,’ oma-zuipen’, raymundo constanza, ‘de ... van Dan’, de Kubus, cheesefondue. Mario, pie when someone was late, champagne during our last Board meeting and a lot more.
32 • FSR news
Besides hard working and joking, everyone cared for each other as well. My hairy bag had been given the name ‘hondje’ and the boys even prepared a dogbasket for him. But also, at one time when I arrived late at the office, my Board-mates set up an entire search to make sure I was ok. I can honestly say I had the best Board-mates I could wish for. We still see each other on a very regular basis during drinks, diners, FSR events and not to forget our annual weekend away and the 'FSR VIII ouder-dag'! Stef, Geert, Rob, An, Tych, Marijn thanks for all! After my Board-year I participated in the International Research Project to Seoul. It was a fantastic trip with great company visits. After two weeks of research I met Anna who was bag packing in Asia. Together we traveled through the rest of the country, a great memory! And not to forget of course, IRP has great participants…, I am actually living together with one of them for several years now. Surprisingly, FSR can even bring you love! During several FSR activities I got in contact with PwC and they offered me an internship at their Deals practice. This was a great way to get familiar with the company culture and the type of work they do. When graduated I started working as a consultant at the Strategy team within Deals. Strategy helps corporate and PE clients to develop or appraise strategic business plans in both deal and non-deal related situations through in-depth analysis of the business’ market environment, competitive landscape and internal capabilities. I have never regretted my decision to start a career at PwC. Over the last 5 years I have gained a lot of knowledge and have been able to build up a great level of experience. I got in contact with key clients such as Heineken and a variety of international PE firms, worked abroad on several assignments, met great colleagues and enjoyed a lot of social events. Given all of the above, I would highly recommend all of you to become an active FSR member and to join FSR activities. It's a great experience to be responsible – together with a team of fellow students - for one of the FSR activities or even for the association itself. It will not only provide you with a strong base of personal skills and a large network of potential employers - there is also a great chance that you will meet friends for life!
Passport Name Willemijn Hooimeijer Age 31 years Residence Rotterdam, The Netherlands Employed at PwC Current position Senior Consultant Which FSR Board VIIIth Board 2005-06 Board function Commissioner Activities Study Financial Economics Year of graduation 2008 Which car do you drive Mini What do you drink on a Friday night Chardonnay Life motto Enjoy life!
fsrforum • volume 16 • issue #1
FSR Member
Anne Duindam
Passport Name Anne Duindam Age 22 Residence Rotterdam Study MSc in Accounting, Auditing & Control, currently post-doc RA FSR committee International Officer of the International Research Project 2013 Job at Deloitte Accountants Department of job Audit Life motto Always be a first-rate version of yourself, instead of a second-rate version of somebody else.
During the third year of my Bachelor in Economics and Business Economics I felt it was time to go abroad and I applied for an exchange to Canada. In August I traveled to London (Ontario) and have never enjoyed my study time as much as I did there. I met so many kind people, visited a lot of amazing places and participated in many events and associations. After I came back in January in the third year of my Bachelor study I felt kind of disillusioned and bored at the Erasmus University. I also wanted to create such great memories here, wanted to meet new people and contribute to an event… Then I got acquainted with the FSR. When I was (finally) kind of settled in the lectures I heard about the FSR and their events. Unfortunately it was not possible to join a committee for only a few months and therefore I firstly participated in the Bachelor Accountancy Day. During the year I met some (board) members and felt very welcome at this association. When the International Research Project came to my attention I knew this was the committee I wanted to be involved in, besides studying for my Masters’. Luckily this came true and as the international officer I had the opportunity to get in touch with a lot of international companies and expats in China. But of course there was a lot of work to do until we could finally depart to China in May 2013.The language barrier and the totally different culture made it a challenging and unforgettable period. The impressive list of companies we visited and all the good memories with the committee and the participants made it all worthwhile. The friendships that have been built during this time are very valuable to me. I am sure I will never forget the amazing month we had in China. Since the end of my study neared I also had to think about my future career. The in-house days we organized were a good starting point to see a lot of companies and to experience different company cultures. The Big-Four accountancy firms always attracted me but, as most of the accountancy students feel, it is quite difficult to make a final decision. I decided to apply for the business course of Deloitte. After the selection day they called me and told me that I was one of the 16 selected students to join them to Istanbul.
visits and the trip to China, we had an unforgettable time in China, I wrote my master thesis at Deloitte, and now I already work for two months at the Core Audit department in Rotterdam… I still can’t really believe it! Every week is a new adventure and beforehand I don’t know what a week will bring me. During the Interim period, we look at the different business processes at a company and their internal controls. Therefore we have to interview employees in the organizations, we audit and need to get a deep understanding of the business processes. During the visits I get to know the companies and their business quite well, meet many employees and it gives me insight in the important risks at organizations. I feel I can learn a lot from visiting these companies and besides that Deloitte offers us many trainings to personally grow and to develop yourself further. I also already participated in some recruiting events. Quite funny thinking that I was at the other side of the table just a few months ago. Besides working I also started with the Post-Doc for Register Accountant and you can thus find me at the university every Friday. For me this works really well, because I still feel a bit a student (at least for one day a week) and can slowly get used to a real workweek. There is a strong link with what you discuss during these lectures and what you’ll see in practice, making it an interesting study. I hope you all get the most out of your studies, travel a lot, participate in events and committees and for accountancy students in particular I can recommend all of you to orientate yourself well, to apply for business courses and other events that are organized for you. This helped me in finding the company where I enjoy working with my colleagues and were I feel valuable. Thinking back to this year I can say that I am glad being part of the FSR, this definitely contributed to my time as a student and finding the company that suits me well. To wrap up: Don’t feel sorry for the things you did, but for the things you never did.
When I came back from the trip to Istanbul, it all went very fast. Deloitte offered me a job, we worked hard to arrange the
FSR news • 33
fsrforum • volume 16 • issue #1
International Banking Cycle
Nomura, Lazard, Morgan Stanley, JPMorgan, Deutsche Bank, Barclays, UBS, ING and Bank of America Merrill Lynch, all great investment banks and all part of the International Banking Cycle 2013 (IBC). Each of the investment banks has their own day in which they had given a workshop, a presentation and a social drink. During those days they recruit for interns and full time employees (for London and Amsterdam offices). Students from various universities and different backgrounds have applied for the IBC to take part in the workshops. By uploading their CV, cover letter and company specific motivation letter, students enrolled in a selection procedure of which a group of 20-25 students per workshop would get the change to take part. In the workshops, selected students have been working out a real life case, which is developed and presented by an Investment Bank. It was the perfect opportunity for students to get acquainted with the dynamic world of Investment Banking. The workshop consists of a Mergers and Acquisitions or a Sales and Trading case study. Most of the M&A cases focused on valuating companies and the bid price for a takeover. During the Sales and Trading cases students analyzed portfolio restructuring and forecasting market movements. At the workshops the investment bankers could see if you have the skills to become one yourself. During the presentation you could find out anything you need to know about the bank and their recruitment program. They discussed their different divisions within the bank and the different opportunities for the students. The 10 investment banks have got different internship programs. You can check their recruitment website for more information if you are interested. At the end of every day there was a drink reception. The drink reception was meant to get in touch with each other and to extend your network in Investment Banking. All the students could ask any additional question to the investment bankers. It was open for everyone who was interested. This year’s edition of the International Banking Cycle was again a great success! Thanks to all participating students and the other students who were interested. Also many thanks to the Investment Banks for their inspiring days.
34 • FSR news
fsrforum • volume 16 • issue #1
Big 4 Cycle
For students that are interested in Accounting and want to work at a big four firm, the Big 4 Cycle is an excellent opportunity to get familiar with the companies, their cultures and most importantly their career opportunities. The selected students visited the headquarters in Rotterdam of Deloitte, KPMG, PwC and EY. The day started with an exclusive lunch at the offices of the companies. Where the students had the opportunity to ask questions and to get to know the employees better. After the lunch the companies presented their specific career opportunities for graduate students and told something about the firm itself. During the afternoon the students made a case in small groups that was accounting related. The cases offered the students challenging problems they could solve with their theoretical knowledge and teamwork. Topics that were discussed during the case were fraud, valuation of property and other accounting risks of fictive firms. Each team presented their findings and discussed them with the other teams. By doing these cases, students could get a good impression of what an accountant does in their working hours. After the case there was an opportunity to get to know the companies in a more informal way. The students had a nice dinner with the employees (including all levels of management) and could get a good impression of the fim’s culture. One company organized a cooking workshop, where the students and employees could show off their cooking skills. The other companies organized a dinner at an exclusive restaurant in the heart of Rotterdam. The Accountancy committee hopes that we have succeeded in helping the students to get to know the big 4 companies better, and we are proud that the Big 4 Cycle has once again been a successful event for both students and firms.
FSR news • 35
fsrforum • volume 16 • issue #1
New Committees 2013-2014
Accountancy Committee Their first event, the Big 4 Cycle, took place in the beginning of the year. During this cycle, students had the chance to meet KPMG, Deloitte, PwC and EY. With the case during the in- house days the students got a peek into the life of an accountant. The informal diner at the end of the day gave the students the chance to get to know the company and their employees from a total different angle. The other event of this committee, The Audit, is more focused on the smaller companies and during this day you will meet BDO, Grant Thornton, Mazars and Baker Tilly Berk. These events together will give students a better picture of the accountancy world and show that accountants are not boring!
Diederik Vis, Christa van der Wiel, Karen Wiersma, Martine Nieuwenhuijzen Kruseman
CleanTech Challenge The CleanTech Challenge Committee will work closely together with Yes!Delft Students, Energy Club and ESE students. These committees will bring students together who come up with new innovative ideas to stimulate clean technology. In several rounds they will present their ideas and develop them further with the help of interesting companies. The winner will be off to London and will compete with other countries. Our committee will support them and try to be the worldwide winner, just like last year!
Gert-Jan Breukink, Wouter van Rooijen
Forum Committee The editorial committee for the academic year 2013-2014 will be led by Martine Nieuwenhuijzen Kruseman, Myrna Baadjou and Lisanne Frijling. Our drive for this year is to set a milestone for the FSR Forum by providing our readers with the depth of knowledge and inspiration. There will be four forums published this year, with four different themes, each enriched with articles, columns and interviews from industry professionals. The combination of financial and accounting view will together enhance the content so that our reader gets a complete package. Moreover, the FSR Forum will also provide more information on the FSR activities. On behalf of FSR, we wish you a pleasant time when reading our FSR Forum.
Martine Nieuwenhuijzen Kruseman, Myrna Baadjou, Lisanne Frijling
36 • FSR news
Corporate Finance Committee The first event of the Corporate Finance Committee is the Corporate Finance Competition. You will meet different potential employers from the financial sector. Each of the companies will challenge the students with a case during the day which they have to solve in teams and a final winner will be announced afterwards. With these cases you will meet different facets of the financial world, but the main focus will be on M&A. You definitely will have the opportunity to show your talent. After these cases you will have a diner with the companies while you get to know them in an informal way and can impress them with your knowledge. The committee will work closely together with these companies to make this 3-days event an unforgettable experience! The second event consist of a valuation event of two days in which you will be taught how to bring valuation theory into practice. Prior to the workshops, Training the Street will organize a valuation training. You will be taught the fundamentals of popular corporate valuation techniques used by investment banking practitioners. Training The Street is the world’s leader in providing instructor-led courses in financial modeling and corporate valuation. These courses are offered at Investment Banks, business schools and universities around the world, for example Harvard, INSEAD and New York University. As Corporate Finance Committee, you have close contact with the partners of The Valuation and you are responsible for the success of this event. Furthermore you will able to join the valuation training, which is a great experience for your corporate finance skills.
Xander Diederen, Savannah Hasselo, Justin Toet, Martine Nieuwenhuijzen Kruseman (not on this picture Xander Diederen)
European Finance Tour Committee One of the committees with an international character is the European Finance Tour Committee. This committee will organize one week full of financial activities in both countries. Every year, a European city will be visited. This year we will visit Frankfurt, a prominent city in the world of finance. During this week (12-16 May) students will get to know leading companies through in-house days and presentations. Off course there will be informal activities as well to get to know the city. Before the start of this week the students will be prepared with visits of several outstanding companies in the Netherlands. The committee will organize this whole trip from begin till end and promise to give you an amazing week! Gert-Jan Breukink, Els de Koeijer, Yung-Long Hu, Matthijs Carpay
FAN Committee The FAN Committee will organize events together with the study associations of other universities who are members of the Financial Association Netherlands (FAN). The Traders Trophy will give students a glimpse of the trading world and the Multinational Battle will focus on the leading multinationals. Through different rounds you will compete with other teams from universities and under the guidance of multinationals.
Gijs Romer, Philippe van den Bergh, Robin Touw
FSR news • 37
fsrforum • volume 16 • issue #1
Female Business Tour Committee As the name already says, this committee is for women only. The ladies of this committee will organize a two day event where the female participants will meet 3 different companies. This year we will visit PWC, APG and ING. Each company has a challenging case where the ladies can show their skills and the company can show his opportunities for women. At the end of the first day there will be a dinner with all three companies, and afterwards the night will be spent in a nice hotel. After this event the participants will know how to find their way to the top!
Karen Wiersma, Iris Kooiker, Sylvia Freelink (not on this picture Sylvia Freelink)
Finance Committee The biggest event of this committee is the Financial Business Cycle. This year there will be two bankers, two consultants, two traders, a multinational and an insurance company that will organize in-house days for the Erasmus students. These in-house days are a great opportunity to see the width of the financial sector from the inside out. They will organize the Traders Masterclass. This is a masterclass for students that want to gain knowledge about investing on the stock market. This masterclass will be organized in cooperation with Alex Vermogensbank. Beside these two events they organize different company dinners as well.
Max van Keulen, Gert-Jan Breukink, Sebastiaan van Hövell tot Westerflier
International Banking Cycle Committee The International Banking Cycle gives students a clear view on the operational practices and possible career opportunities at major international Investment Banks. Ten prominent banks will give workshops with a real life case focused on Mergers & Acquisitions and in addition some will give a case on Sales & Trading. After these workshops are presentations and informal drinks where you can meet and talk to the employers. The committee acquainted hundreds of students with this challenging and rapidly changing investment world.
Matthijs Carpay, Rodian van Druten, Jelle den Hollander, Gert-Jan Breukink
38 • FSR news
International Research Project Committee Each year, the International Research Project provides students with the opportunity to use their theoretical knowledge in academic research and travel to an international location. This year we will visit the growing metropolis Mumbai & Delhi! For the second time, the IRP will cooperate with the charity organization Child Helpline International. The 20 selected Finance and Accountancy students will have several in-house days in the Netherlands starting in January till April. The students will have a two-week visit to Mumbai & Delhi to do field research including company visits and interviews, in the beginning of May 2014. Afterwards, students have the possibility to continue traveling for an additional two weeks. The committee is working on a nice balance between formal and informal activities to give you an unforgettable experience! Ibrahim Karatas, Martine Nieuwenhuijzen Kruseman, Thijs van Engelen, Stef van Toor, Sahar Taryakchi
Asset Management Tour Committee As the name already shows, this committee will organize the second edition of the Asset ÂManagement Tour in May. This event is organized in collaboration with the FSA. An exclusive group of students will get an in-depth view in the world of Asset Management. During three days students will visit various big players in the Asset Management sector. During the year the committee is busy organizing and planning the event to make it a succes again.
Floris Mathol en Mike Hooymans
FSR news • 39
fsrforum • volume 16 • issue #1
Active Member Afternoon & Master Kick-off Day
Active Member Afternoon On Friday 4 October the first event with our new active members took place. We happily surprised all active members with the FSR sports bag before we headed to the afternoon activity. After the acquaintance among all the new committees we went to the other side of the campus where Mrs. Van der Kroft teached us her ‘Etiquette à la carte’ to give us an idea of what real business etiquette looks like. Lots of fun facts and useful tips later, we were all prepared for the company visits that lay ahead of us. This training is also important for a successful relationship with all the partners and members of the FSR. After two hours of training our social business skills, we went to the ‘Studentenpaviljoen’ for a drink and a bitterbal. Because most of us spent this week studying this was the perfect way to start our weekend. Moreover, this was the perfect first opportunity to get in touch with each other. Afterwards we had our FSR constitution drink with other student associations and our members. Looking back as the board we are satisfied with the first active member activity and have a lot of confidence in the group of active members for upcoming year. With these people we will be able to organize our high standing events. We would like to thank all the active members for a successful afternoon and we are glad that this group is so close.
Master Kick-off Day Always at the very first day of the academic year the master kick-off day takes place, where every first master lecture is given. Moreover, this is the perfect opportunity for the FSR to make the new master students aware of the advantage that is to be gain at the FSR. The kick-off took place at Monday 2 September, where we took the opportunity to inform all finance and accounting master students at the ESE as well as the RSM. We presented the FSR at the masters Financial Economics, Accounting, Auditing & Control and Quantitative Finance at the ESE, while this year we also were able to reach the students at Finance & Investments and Accounting & Financial Management. We can see by the growth of our number of members that the students are using the advantage being a member with the FSR more each year again. Reaching every student within every master education of finance and accounting during the master kick-off for the first time is a great confirmation that the FSR succeeds. Furthermore this was a great way to enthuse our current active members to apply for the committee they are part of right now. There were several presentations by the FSR and a social event in collaboration with the master Accounting, Auditing & Control. At the end of the day all students of Financial Economics that are interested in the FSR and lecturers were able to meet each other and the FSR board at the Faculty Club with a few drinks.
40 • FSR news
fsrforum • volume 16 • issue #1
FSR Activity Agenda 2013-2014
November Traders Trophy
March Banking Dinner
Can you handle the pressure?
Get acquainted with the world of banking
The Audit
Multinational Battle
Interested in Accountancy and do you want to meet four leading medium-sized firms?
Four multinationals, five battling cities, are you part of it?
Finance Day Want to know what finance is all about…
April The Valuation One day theory, one day practice
December Financial Business Cycle Explore the financial opportunities
January Ladies only Masterclass
Multinational Dinner Get in touch with the multinationals
May International Research Project Using your intellect for a charity!
Career making for women
Bachelor Accountancy Day
Traders Masterclass
Will you choose for a career in accounting?
Beat the Bear, be the Bull
Asset Management Tour
Female Business Tour
What’s your investment strategy?
It might be a men’s world but it would be nothing without women
European Finance Tour Exploring European financial world
Corporate Finance Competition Discover everything about Corporate Finance
February CleanTech Challenge Grow your green ideas!
FSR news • 41
Ernst & Young will now be known as... Ernst & Young wordt al in heel veel landen als EY uitgesproken. Maar een organisatie die, als enige ter wereld, mondiaal volledig is geintegreerd dient ook wereldwijd dezelfde naam en uitstraling te hebben. Vanaf 1 juli is dat het geval. En heten we niet alleen EY, maar introduceren wij gelijktijdig onze nieuwe missie “Building a better working world�. Want in de snel veranderde wereld is het verkrijgen en behouden van vertrouwen
belangrijker dan ooit. Dat vertrouwen kan alleen worden waargemaakt door een constant streven naar het best mogelijke advies. Door uitmuntende teams. Altijd en overal. Die ambitie motiveert en inspireert ons. Dat is weliswaar niet de eenvoudigste weg, maar wel de route die wij gekozen hebben. Meer informatie over onze bijdrage aan een beter functionerende wereld kunt u vinden op www.ey.nl.