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When it comes to international accounting standards, US authorities have long resembled Dr. Jekyll and Mr. Hyde. When the ordinary, well-adjusted Dr. Jekyll has been in control, the Securities and Exchange Commission has worked toward a convergence of US and international standards, even speaking optimistically about adopting the latter someday. By contrast, Mr. Hyde, the deranged alter ego, has tended to see international standards as a Trojan horse for undesirable foreign practices that would corrupt America’s “gold-standard” generally accepted accounting principles (GAAP).
Under President Donald Trump’s second administration, Mr. Hyde has been in the ascendancy, with potentially damaging consequences for international financial reporting. The new SEC chairman, Paul Atkins, has threatened to require foreign companies listed in the United States to reconcile their international-standards-based reporting with US GAAP – a costly process that might cause some to delist, striking a blow against globally integrated financial markets.
To understand the source of this latest contretemps requires a little historical background. When the International Accounting Standards Committee was first convened in 1973, it was because standard-setters in many countries, including the US, believed that increasingly integrated capital markets needed to speak a common accounting language.
But through the 1980s and 1990s, adoption of common standards was patchy and limited to a few smaller countries. The US, the United Kingdom, and Japan stuck to their own rules. But starting in 2001, there was a greater effort to spread international accounting standards to the larger jurisdictions, whose governance was duly reformed. The committee became the International Accounting Standards Board (IASB), established under the International Financial Reporting Standards Foundation, which was initially chaired by former US Federal Reserve Chair Paul Volcker.
The hope was that such a widely respected mandarin of US financial governance would be able to sell the change to the SEC, and the gambit worked – up to a point. The European Union adopted international accounting standards in 2005, and 140 jurisdictions globally now use them. While the US remained a holdout, it did embark on a lengthy process of so-called convergence following the 2002 Norwalk Agreement between the US Financial Accounting Standards Board and the IASB. For a time, it seemed like the prize of SEC adoption might be won. But by 2012, the commission had gone cold on the idea.
One important agreement was reached in the meantime, however. In 2007, the SEC accepted that compliant foreign companies listing on US exchanges would not need to produce reconciliations of their financial statements with US GAAP. This accommodation has greatly facilitated raising capital in the US, because the reconciliation process was costly and time-consuming, especially for smaller issuers.
Why is this convenient workaround now under threat? The answer lies in a 2021 decision by the International Financial Reporting Standards Board to set up a parallel institution to the IASB: the International Sustainability Standards Board (ISSB). The logic was compelling (full disclosure: I was part of a working group that recommended that the IFRS proceed). After all, many initiatives had been launched (in Europe and elsewhere) to encourage companies to report on their environmental impact, and companies themselves were demanding to know exactly what data they should be publishing.
The ISSB has been successful in producing a common approach – again, up to a point. It has focused on the financial impact of climate change on companies, rather than on a comprehensive suite of environmental reporting benchmarks. So far, 36 jurisdictions – including the UK and Canada, but not the EU or the US – have committed to adopting the standards.
Herein lies the root of today’s problems. The EU has implemented two directives, the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. Delving into the details of these might sap one’s will to live. Suffice it to say that the salient difference between the EU approach and the ISSB standards is the so-called double materiality rule requiring companies to report on both their own environmental impact and on the impact of sustainability measures on their future financial performance.
For its part, the US firmly rejects double materiality, which Atkins has described as a “specious” climate standard that is “chasing political fads.” His view is that securities regulators are “not here to be environmental or social police.” So, the ISSB finds itself trying to square an impossible circle between EU and US attitudes toward climate reporting. Charting a way past this impasse will require its chairman, Emmanuel Faber, to bring all his diplomatic skills to bear.
But why should this arcane dispute threaten the use of international accounting standards, which do not themselves offend US sensitivities on climate change? Atkins’s argument here is a subtle one. He maintains that the IFRS’s support of the ISSB has threatened its own financial stability. One of the bases of the 2007 SEC decision to allow international accounting standards in the US without reconciliation to US GAAP (a decision that Atkins, then a commissioner, supported) was that the IASB would have the financial resources to sustain high-quality standards. But Atkins says there is reason to doubt this assumption.
Should we take this argument at face value? The IASB does not appear to be under financial threat at present. Although it did run a deficit of about 2% of income in 2024, it had a similarly sized surplus in 2023, and its reserves are close to £50 million ($67 million) – about two-thirds of its annual expenditure. The board does depend on voluntary contributions for part of its income, but it doesn’t look to be on the verge of bankruptcy, and it is well able to support standards development.
So, this looks like a warning shot rather than a near-term threat. But who knows? The SEC has withdrawn from some ISSB working groups, and the mood in Washington is running strongly against all overseas entanglements in the financial arena. It would be unfortunate if the baby of financial comparability were to be drowned in the bath water of sustainability reporting. We must hope that Dr. Jekyll returns.
