The SEC requires that non-U.S. private issuers disclose substantially the same information as disclosed by U.S. domestic issuers. In substance, foreign issuers must recast financial statements in accordance with United States' accounting rules. The reconciliation from non-U.S. to U.S. accounting standards has been a major impediment to foreign companies listing their stock on U.S. exchanges. Recently, the SEC has taken steps to reduce issuers' financial reporting burden. This paper summarizes recent amendments to U.S. Securities and Exchange Commission's accounting and disclosure requirements for foreign firms, together with implications for foreign, as well as domestic issuers.
The last decade is marked by increasing crossborder investment. The United States' capital markets lead the world in attracting foreign securities listings. In the United States alone, 343 foreign issuers entered the United States market in the period from 1991 to 1994, increasing the total number of foreign issuers to 667, representing 43 countries. In the period from 1992 to 1994, 537 foreign offerings totalling $131 billion were registered with the United States Securities and Exchange Commission (SEC) (Carnall ). This paper summarizes recent amendments to United States' accounting and disclosure requirements for foreign firms listing securities in the United States, together with their implications for foreign, as well as domestic issuers.
The U.S. Securities and Exchange Commission
The United States SEC (SEC, or Commission) is charged with controlling access to, and regulation of, domestic and foreign companies listing on U.S. securities markets. Specifically, the SEC mandates financial reporting and disclosure rules. Many foreign firms find the SEC's disclosure and reporting rules too rigorous, demanding and costly with which to comply (Berton ). Furthermore, quantifying results using U.S. accounting rules can degrade earnings. As an example, the first German firm to file on the New York Stock Exchange, Daimler-Benz was forced to disclose hidden reserves of $2.82 billion as an extraordinary gain, only to show a net operating loss as a result of applying other U.S. accounting rules. For fiscal year 1994, DaimlerBenz reported a $100 million profit under German accounting rules, and a $1 billion loss after applying U.S. generally accepted accounting principles (GAAP) (Aeppel , Berton ). Considering costs to file, and the potential for deflated earnings, many nonU.S. firms eligible to list on major U.S. exchanges choose not to do so. Likewise, U.S. investors may miss opportunities to invest in the foreign firms who choose not to list.
SEC RULES PRIOR TO 1994
To protect U.S. market investors, the SEC requires that non-U.S. private issuers (defined as issuers incorporated under foreign law) disclose substantially the same information as disclosed by U.S. domestic issuers (SEC ).
In substance, foreign issuers must recast financial statements in accordance with United States' accounting rules. This requirement is significant, given that U.S. GAAP is known as the most detailed in the world (Choi and Mueller , p.121). Furthermore, the disclosures required by the SEC are numerous, and U.S. rules require more timely reports, as compared with many home jurisdictions.
The cost of registration, legal counsel, marketing, and other listing-related expenses are high. The SEC's Form 20-F, used by most foreign companies to satisfy the SEC's annual financial reporting requirement, carries an average completion time of 2100 hours (SEC ,p. 1).
In the past, the SEC has been hesitant to relax requirements for foreign firms. This resistance persists, despite lobbying efforts by major U.S. stock exchanges, potential foreign listers, and organizations such as the International Organization of Securities Commissions (IOSCO) (Berton ). …