Global views.

• Author: Heffes, Ellen M.
• Position: Financial reporting - David McDonnell of Grant Thorton - Interview

Turmoil related to accounting and financial reporting is not just a U.S. phenomenon. Indeed, over the past two years, the problems affecting the global markets are not so different from those affecting the U.S. In an interview, Grant Thornton's London-based Chief Executive Worldwide, David McDonnell, cited some of the main issues concerning financial executives around the globe:

The generally flat economic climate, consisting of varying degrees of pessimism; the impact of various countries adopting accounting changes by 2005 (the International Financial Reporting Standards, or IFRS--formerly the International Accounting Standards, IAS); IFRS impact on reported earnings and, thus, capitalizing businesses; the U.S. accounting scandals impacting attitudes, regulations and more; the past few years' currency move to the euro; the erosion of trust in the U.S. auditing profession that has spread overseas; the U.S.'s Sarbanes-Oxley regulations, which could have some negative consequences for global firms, such as to stymie access to the U.S. capital markets as the U.S. Securities and Exchange Commission becomes more involved in regulating overseas markets. To mention just a few.

The U.S. accounting scandals have had a global impact, says McDonnell. He cites three reasons: They happened at extremely large multinational companies; they caused the demise of one of the biggest accounting firms in the world; and the U,S. economy is so big that if anything happens there, if affects others.

By far, the greatest impact is the erosion of trust in the auditing profession, he says. "If you ignore everything else, the auditing profession was clearly called into question, [and] that erosion of trust had a significant impact in Europe." He says it's recently been reversing somewhat, but he believes some long-term damage has been done. "The profession 'sells' one thing: confidence. We are the means by which the market is given confidence. If confidence is called into question, the whole thing is called into question."

The U.S. response--Sarbanes-Oxley, preventing auditors from providing certain services, rotating people involved in the audit and more--and similar regulations passed around the world represent a reaction to only a small part of the problem, the so-called "independence of the auditor," and is not the central problem. "It's very difficult to think of an example where an audit has failed because of lack of independence--whereas perceived lack of...