First there was the South Asian financial crisis of 1997, which started in Thailand and swept across the region.
Then there was the Daimler crisis when Daimler-Benz AG optimistically acquired Chrysler Corp. and later sold it at a tremendous loss. Finally, the world watched the collapse of Enron Corp., the energy company, and WorldCom, the long-distance phone company.
According to Robert P. Garnett, these crises revealed that “financial reporting was only a veneer over the economics of the underlying businesses.” The accounting profession had to do something about the gap between the audits and reality.
Mr. Garnett, who recently spoke to attorneys and accountants at the office of the Baker, Donelson, Bearman, Caldwell & Berkowitz PC law firm in Buckhead, chairs a committee of international accountants overseeing the development of the principles governing the new international standards, known as the International Financial Reporting Standards, or IFRS (which is pronounced “Eye Forest”).
A former executive vice president for Johannesburg-based Anglo American plc, one of the world’s largest mining companies, Mr. Garnett joined the International Accounting Standards Board in 2001.
The IASB is the standard-setting body of the board’s foundation, an independent private organization committed to developing a single set of global accounting standards. The international standards are to provide transparent and comparable information in general purpose financial statements.
While the accounting profession has been mulling over the development of international standards for decades, Mr. Garnett indicated that the tide is finally going his way, primarily due to the spreading of market capitalizations around the world and the internationalization of business.
When the market value of U.S. companies and U.S. exchanges dominated the world, the Generally Accepted Accounting Principles used in the U.S. were the baseline for many countries, which developed their own national guidelines.
But convergence, he said, appears on the horizon and the IASB has gone so far as to indicate that the process is to be completed by 2015.
Already the IFRS principles are used in many parts of the world, including Hong Kong, Australia, Malaysia, Pakistan, South Africa, Singapore, Turkey and members of the Gulf Cooperation Council as well as the European Union.
Canada, India, Japan and Russia are set to adopt the international standards in 2011.
The course, however, is not all easy sailing for Mr. Garnett.
He said the international standards have even been blamed for causing the current “great recession” because they accurately revealed the fair value of the instruments being traded in the debt markets, which suddenly lost value.
Worldwide adoption of the international standards would do a lot to expose the real value of such instruments on a broader basis as well as provide better insights into the assets of companies, he said.
Companies operating internationally would benefit additionally, he said, because they would not have to hire overseas accountants and auditors conversant with the different standards.
The GAAP standards also have gotten overly complex, he said, with more than 30,000 rules and regulations that have to be followed.
“By explaining the concepts more clearly, IFRS will make them more transportable,” he said. “Good principles will endure a long time,” he added, citing the Lord’s Prayer and the U.S. Declaration of Independence as examples.
Currently Mr. Garnett is in discussions with the Securities and Exchange Commission. Calling himself an optimist, he said that he thinks the 2015 goal is realistic.
For more information about the IFRS principles, go to www.ifrs.org