Yesterday brought a very big piece of news. Mary Schapiro appeared before the U.S. Senate Committee on Banking, Housing and Urban Affairs. A video of the appearance is here. Here is my best attempt at transcripting the most relevant part of the hearing.
Senator Jack Reed (D-RI): Much of what you are going to do will have complications and consequences overseas as well as here in the United States, and one of the areas is IFRS road map. We have repeated written to Chairman Cox, who tried to determine and develop a very deliberate road map, and I think there’s a rush to judgment on this issue. In fact, I met witih the CEO of the Honeywell Corporation who has similar concerns over disparate treatment under international rules thata can be used to change income, that can be used to state R&D expenses differently. There’s a host of … an opportunity for arbitrage between the two systems that I think we have to avoid. Can you give us a notion of how you wish to proceed with this international accounting with recognition that eventually we’ll have that in a global economy and hopefully we will converge to a set of high level standards.
Mary Schapiro: Well, I would proceed with great caution so that we don’t have a race to the bottom. I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world. With that said, I have some concerns with the road map that has been published by the SEC and is out for comment now. I have some concerns about IFRS standards generally. They are not as detailed as the U.S. standards. There’s a lot left to interpretation. Even if adopted, there will still be a lack of consistency, I believe,around the world on how they are implemented and how they are enforced. The cost to switch from U.S. GAAP to IFRS is going to be extraordinary, and I’ve seen some estimates that range as high as $30 million for each U.S. company in order to do that. This is a time when I think we have to think carefully about whether we impose those sorts of costs on U.S. industry, really make sense. Perhaps my greatest concern is the independence of the International Accounting Standards Board and the ability to have oversight over their process as they make standards and the amount of rigor that exists in that process today. So, I will tell you that I will take a great big breath and look at this entire area again, carefully, and will not necessarily feel bound by the existing road map that is out there for comment.
First of all, I am so happily surprised that Mary Schapiro made these comments. They are more protective of U.S. GAAP than I ever imagined would come out of the Obama administration. I am grateful that the IFRS opposition apparently has been listened to, even though it has not been properly understood. Welcome aboard, Mary Schapiro. I hope that you frequently read The Summa for advice on how to handle the IFRS issue.
Her statement, coming during the confirmation process, is not binding. However, it does give U.S. based opponents of IFRS some hope. There seems to be an open mind in the Obama administration, that is very good news!
Her statements, however, cannot be considered binding for three reasons. First, it could simply be posturing in order to ease concern over her nomination so that she can gain confirmation. Is this a possibility? Of course. Paid $3 million per year to head the NYSE/NASDAQ self-relatory group, her FINRA investigated and failed to catch the $75 billion Madoff fraud. Moreover, several key national publications have come out against her confirmation. She will be confirmed, of course, because Republicans are going to fight a different nomination and not hers. Never-the-less, she could simply be posturing to gain votes for confirmation.
Second, I don’t think she will have the authority to make the final call over IFRS. IFRS adoption is an international political issue, and U.S. adoption will be negotiated at the international state level. It is very possible that the U.S. could bargain away GAAP in order to gain European help to relieve our troops in the Middle East. Under this scenario, investor protection in the U.S. simply is irrelevant. National security is the key, and with Obama promising to run up trillion dollar deficits, he will want to save money by bringing home the troops. Plus, one additional factor.
Third, as I’ve written before, Obama is relying on economists, such as Paul Volcker, for guidance on regulation-related matters, such as accounting standards. Volcker has been a member of the IASC parent organization for the IASB. He has been strongly in favor of the U.S. switching to IFRS, for a long time. He will do everything possible to bring about IFRS in the U.S. Of course Volcker is out of his depth here, having no background in accounting or finance, and really does not understand the nuances of the issue. But that isn’t going to stop him.
However, there is no use in saying the sky is falling. I’m going to take Mary Schapiro at her word and proceed as if the GAAP-IFRS issue is still open. I have a few comments about her specific words.
First, she says, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.” Well, we can’t, because I don’t, nor do others. One need only to read Shyam Sunder’s work to realize international differences in accounting standards are good. Countries have different interests, and it is simply ignorant thinking to presume that a single set of standards can satisfy the very different interests that are out there. For example, the U.S. places a high priority on protecting the investor, and this is reflected in the great amount of detail in our rules. However, not everyone agrees to that priority. Nor should they. Different priorities and national interests will lead naturally to different accounting standards. This is fundamental and we cannot trust Mary Schapiro to protect U.S. GAAP until she acknowledges it. No matter what else she says, if she doesn’t get this point then she her thinking is compatible with Paul Volcker, the IFRS champion.
Second, her additional comments sound pretty good. She seems to be well read. Don’t know if she’s only read Charley Niemeier, or whether she’s read the other six critics of IFRS. But at least she has comprehended some of the arguments. Never-the-less, everything here must be interpreted in the context that she believes a single set of world-wide accounting standards would be beneficial and is attainable. As I said before, it is not necessarily beneficial, and I’ve argued for a long time that it is unattainable. For her to continue down this road is simply wasted thinking.
Third, she expresses a desire for the SEC to have oversight with respect to the IASB accounting standard generating process. Well honey, every other country in the world is going to want to have the same oversight desires. It seems clear that you want some control over the process, but everyone else wants that also. Why, Europe has already exerted that control with respect to forcing certain changes to the fair value standard. Let’s get this straight–the SEC will never, ever, get the degree of oversight it desires with respect to IFRS. I believe that this should be sufficient to bury the IFRS issue forever. I don’t even know why you are going to spend time on it.
I’m still going to submit a comment to the SEC on Cox’s proposed road map. And I’m going to continue to write about the benefits for the U.S. to retain GAAP. If it weren’t for international politics, it would be a no brainer.
Debit and credit – - Dave Albrecht