Question

What motivated the New York Stock Exchange to seek the development of accounting principles?

Answer 1

The New York Stock Exchange

The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is the largest equities-based exchange in the world, based on the total market capitalization of its listed securities. Formerly run as a private organization, the NYSE became a public entity on March 8, 2006, following the acquisition of electronic trading exchange Archipelago.1 In 2007, a merger with Euronext, the largest stock exchange in Europe, led to the creation of NYSE Euronext, which was later acquired by Intercontinental Exchange, the current parent of the New York Stock Exchange.

The New York Stock Exchange (NYSE) is one of the largest stock markets in the world. Being so influential, it greatly contributes to the growth of the American economy. As of 2003, Americans held $12 trillion of both domestic and non-U.S. equities. This amounts to approximately 38% of all the market capital of the world's major exchanges (Thain, 2004b). With listings of 474 non-US companies from 51 different countries (Stuckey, 2003), numerous concerns for the NYSE's future success exist when dealing with the controversy of appropriate accounting standards requirements.The combined global market capitalization of the NYSE is approximately $4.3 trillion (Stuckey, 2003). John A. Thain (2004b), CEO of the New York Stock Exchange, brings forth an important point that many Americans seem to loose sight of and forget. The United States' capital markets are the most liquid in the world. Although the United States is the engine of global capitalism, "no birthright dictates that we (the U.S.) will remain so" (Thain, q[ 3). Due to its worldwide popularity and international use, strict standards have been put into place to make listing and investing opportunities easier and more informative. Current Securities and Exchange Commission (SEC) regulations require any company listing their shares on the NYSE to abide by the United States' financial laws. In its

Listed Company Manual (2002), the NYSE clearly explainsthe requirements necessary in annual reports in Section 203.01. The manual states, "The Exchange requires that companies publish at least once a year and distribute to shareholders an annual report containing financial statements of the company and its consolidated subsidiaries prepared in conformity with generally accepted accounting principles" (q[ 1). The number of days the annual report must be reported after the close of each fiscal year varies for both domestic and non-US companies (New York Stock Exchange, 2002).

Companies have two options to fulfill this requirement. An annual report can be distributed to their shareholders or the Form 10-K (Form 20-F for non-US issuers) that is filed with the Securities and Exchange Commission can be distributed to shareholders.

Whichever option is chosen, two copies of that document, along with the date the documents were sent to shareholders, must be sent to the NYSE (New York Stock Exchange, 2002).With the various sets of accounting standards that exist, it is no wonder that most foreign countries do not abide by a set of standards equivalent to those of the United States. For any foreign companies choosing to perform business operations and transactions within the United States economy, having to comply with possibly two different sets of standards is oftentimes very time consuming and costly. Not only must foreign companies wanting to do business in the United States pay people to format and report their financial information in compliance with their home country's regulations, they must also report that same information in compliance with American laws.

It is also not a surprise that the number of new listings of foreign companies on the United States' financial markets have decreased rather than increased in the past few years. The New York Stock Exchange has suffered inunensely from this sharp decline.

Between 1996 and 2000, an average of 50 non-U.S. companies listed on the NYSE per year. However, from 2002 to 2004, that number has decreased to half, dropping to only 25 a year. The European equities, with 19 companies listed on the NYSE in 2002, contributed to this decline the most. After withdrawing their companies' listings from the NYSE, the number of European countries remaining was only six. Along with these statistics, in 2004, only one new European country listed with the NYSE (Thain, 2004b). The number of both domestic and foreign listings with the U.S. markets tells quite a lot about the concern of both local and foreign investors. As Thain (2004b) states,

"Listings are an important barometer of foreign interest in the U.S. economy" (CJI 8). Along with the growth that comes with every listing, more prospective jobs open and individuals have more chances for U.S.-directed investment (Thain, 2004b).

Not only is the New York Stock Exchange suffering from a decrease in the number of foreign investors, but many small U.S. companies are choosing to list with foreign stock markets. American businesses are attracted to outside securities markets for a number of reasons: "Often, potential issuers are lured by what they see as more t1exible regulatory regimes. But foreign markets also appeal to some companies because their customer bases might be abroad or foreign investors have a greater interest in its particular industry" (Shaw, 2005, q[ 2).

Foreign markets see their opportunity to gain from this attraction. For instance, within the last year, the Toronto Stock Exchange greeted five new U.S. companies. Also, at least two new markets catering to small companies have opened. The Irish Stock Exchange introduced the Irish Enterprise Exchange (IEX) in April 2005. In only four months, the IEX experienced growth, listing eight Irish companies. Alternext, created by Euronext, is now open for international issuers, including U.S. companies. The Alternative Investment Market (AIM) opened on the London Stock Exchange in 1995, and has listed approximately 1300 companies. Of these businesses, eighteen are American based, and eleven of these have joined in the last two years (Shaw, 2005).

XL TechGroup, based out of Melbourne, Florida, chose to list on the AIM in October 2004. According to Harold Gubnitsky, the Senior Vice President and Chief Relationship Officer, XL TechGroup decided to go public to raise money in order to continue operations. The company considered various methods of doing this, including listing on a u.S. market, and in under a year, the company had a market cap of $300 million. However, listing on an American market was not the best decision for the company: "The company chose not to list in the United States because its business model.would cause it to incorrectly be viewed as a regulated investment corporation. Under the Investment Company Act of 1940, that would trigger different reporting requirements" (Shaw, 2005, q[ 6).

Of course, the main reason the company chose AIM instead of a U.S. market was the strenuous rules and regulations of the Sarbanes-Oxley Act and the Securities and Exchange Act. The requirements of AIM and the United Kingdom (U.K.) federal government were not as "all-encompassing and detailed" as those of the United States.

According to Shaw (2005), the U.K. did not "require for admission a minimum market cap, a trading record, minimum shares in public hands, or prior shareholder approval for transactions" (q[ 11). Rather than the burdensome quarterly and annual filings required for a U.S. listing, AIM only requires ongoing disclosures semi-annually (Shaw, 2005).

Due to the large growth of international business transactions and the number of international companies, acceptable accounting principles and guidelines are among the most controversial issues being debated in the business area.