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Archive for June, 2009

In a report issued Wednesday, June 17, the Obama administration touched on its vision for regulation of financial reporting in the U.S.  Not yet possessing statutory authority, Financial Regulatory Reform is more a statement of strategy and intention with respect to regulation of banks and all matters related to financial markets in the U.S.

muddyfootprints2It has Paul Volcker’s muddy footprints all over it.  Shame.

I see two provisions affecting accounting.  The first, from page 11:

The accounting standard setters (the FASB, the IASB, and the SEC) should review accounting standards to determine how financial firms should be required to employ more forward-looking loan loss provisioning practices that incorporate a broader range of available credit information. Fair value accounting rules also should be reviewed with the goal of identifying changes that could provide users of financial reports with both fair value informationand greater transparency regarding the cash flows management expects to receive by holding investments.

Quite simply put, fair value reporting by banks of financial assets is reaffirmed.  However, bank desires to avoid recognizing losses in declines in value should also be accommodated. Nice work if you can get it (and you can get it if you try).

The kicker is on pages 19-20 (with more detail provided on pages 86-87):

J. Improve Accounting Standards

1.  We recommend that the accounting standard setters clarify and make consistent the application of fair value accounting standards, including the impairment of financial instruments, by the end of 2009.

2.  We recommend that the accounting standard setters improve accounting standards for loan loss provisioning by the end of 2009 that would make it more forward looking, as long as the transparency of financial statements is not compromised.

3.  We recommend that the accounting standard setters make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.

The G-20 Leaders agreed that the accounting standard setters should make substantial progress toward a single set of high quality global accounting standards by the end of 2009. The IASB and FASB have engaged in extensive efforts to converge IFRS and U.S. Generally Accepted Accounting Principles (GAAP) to minimize or eliminate differences in the two sets of accounting standards. Last year, the IASB and FASB reiterated their objective of achieving broad convergence of IFRS and U.S. GAAP by the end of 2010, which is a necessary precondition under the SEC’s proposed roadmap to adopt IFRS. Currently, the SEC is considering comments submitted on its proposed roadmap that sets forth several milestones that could lead to the eventual use of IFRS by all U.S. issuers.

Does Paul Volcker want the U.S. to move to IFRS?   Why yes, bears shit in the woods.  Obama and Volcker wishing it, however, does not mean that it will happen.  I hope someone in the Obama administration finds a brain.  And soon.

Debit and credit – – David Albrecht

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I don’t know how much credibility to attach to the following reports from the UK’s GAAPweb.

The first, dated Monday, June 8, claims that sources close to EU politicians are suggesting that the EU have its own standard setting body.  The second, has a brief recap of a meeting between Tweedie and Council of the EU, in which McGreevy claims that some EU politicians question if the IASB is out of touch.

In my opinion, in these reports, reporters are just message carriers.  They reflect real political concern in Europe about the IASB.  Since I’m not over there talking with politicians myself, I can’t judge how much juice these rumors have.  There is enough smoke, however, to make me conclude that the EU dropping IFRS is a reasonable possibility.  It is way too early to tell if it is probable.

The major factor working against the IASB is its independence.  The EU wants the IASB to be independent of everyone but Europe.  The EU wants the  IASB to be subservient to Europe’s wishes. European politicians just have to be getting tired of lobbying in the financial press for certain provisions in IFRS.  It would be much easier if Europe had a standard setting body that answered directly to Charlie McGreevy, Finance Minister.  The result would be more acceptable standards and less debate in the public spotlight.

There have been other interesting things that have come out.  Tom Selling has a very interesting blog post today, in To Catch a Chief Accountant, in which he confirms my suspicion that the tide has turned against IFRS in the US.  If so, Charley Niemeier and Jack Ciesielski are more likely candidates than previously thought.  I wonder, though, if Jane Adams is still the favorite. She doesn’t have the Big-4 ties, although she does have AICPA work.  Her view on IFRS is completely unknown, as she has not spoken publicly about it.

The controversy over IFRS has both sides pushing with everything they have.  The final decision will be political.  I think it likely that the flexibility of IFRS principles/guidelines will largely be lost as a result of all the politics.  Accounting standards will inevitably become more like hard and fast rules, the result of hard fought political compromises. Both sides (national GAAP vs. IFRS) will argue for clearly defined rules, to limit gains from the other side.

Debit and crecit – – David Albrecht

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I’ve done a little research on the final candidates for Chief Accountant at the SEC.  Tom Selling of the Accounting Onion has handicapped the candidates in yesterday’s post, Handicapping the Chief Accountant Contest.  It is worth a look.  I lack enough inside contacts to be able to offer an opinion as to each candidate’s chances. However, I can rate each candidate on the major issue confronting U.S. accounting–whether or not to switch to IFRS.

Jane B. Adams, labeled the front runner by accounting pundant Tom Selling she is rated as having a 50% probability of being chosen), has some, but not a lot of, prior SEC experience.  She served as Deputy Chief Accountant in the U.S. Securities and Exchange Commission’s Office of the C hief Accountant from 1997 to 2000.  She was also Director of Accounting Standards at the AICPA from 1996 to 1997 and a Project Manager at the Financial Accounting Standards Board from 1987 to 1996. Recently, she has been a member of the user community as an analyst in equity research: 2 years in sell-side equity research at CSFB as Director of Accounting and Tax Policy and the last 6 years on the buy-side at Maverick Capital.  Maverick invests globally in liquid, primarily larger cap, equity securities based on in-depth fundamental research.  She was contributed less than $2,000 to President Obama’s campaign.

In a brief 2001 paper, Identical Companies, Different Financial Statements, she comments about a proposed accounting standard on derivitives, “Such changes do not improve the quality of earnings if they provide substantively different accounting results for the same instrument and exposure.”  From this statement, it is possible to project that because of IFRS flexibility in accounting standards she might oppose their adoption in the U.S.  However, she has made no public comments in the past eight years, so far as I can see.  Although I have no proof, my inclination is to rate her as IFRS friendly, given she has worked on analyzing global companies trading in numerous international markets.

Wayne Carnall, currently chief accountant of the SEC’s Division of Corporation Finance and a former partner at PricewaterhouseCoopers, is touted by Selling as having a 40% chance of being selected.  Carnall, given his lengthy association, is thought to be  big firm candidate.  He has been assigned on numerous occasions to explain the proposed SEC roadmap.   Supporting IFRS and moving toward a single global accounting language seems consistent with his background and public comments.

James Kroeker is acting SEC chief accountant and a former partner at Deloitte & Touche.  After reading numerous comments and reviews of his speeches, it seems clear to me that he is an IFRS advocate.  Although he seems to prefer a complete turnover to IFRS, he has suggested that adopting some, but not all, of IFRS would be a plausible first move.  Selling rates him as having an 8% chance of being named.

Jack Ciesielski and Charley Niemeier are definitely not IFRS proponents.  I cannot find evidence that either will support a single world standard, let alone a move to IFRS.  Both favor strong accounting standards, tight regulation and vigilent enforcement.

SEC Chair Mary Schapiro certainly has choices.  On one end of the continuum would be Ciesielski and Niemeier, who favor tight regulation, U.S. tailored accounting standards and protection of investors.  On the other end are Kroker and Carnall, who have strong ties to the traditional big firm establishment.  They seem willing to promote the big firm party line on IFRS and other issues.  Adams seems to be the compromise candidate but is inexperienced.

Debit and credit – – David Albrecht

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It has taken an extremely long time for SEC Chair Mary Schapiro to decide on a Chief Accountant.  It is rumored that she is about to name her choice.   It has been passed along to me by a trusted source that the short list of candidates for SEC Chief Accountant includes:

  • Jane B. Adams, a former deputy chief accountant of the SEC and former longtime staff member of the Financial Accounting Standards Board, who worked until recently at Maverick Capital, New York.  Ms. Adams was a financial contributor to the Obama campaign.
  • Wayne Carnall, currently chief accountant of the SEC’s Division of Corporation Finance and a former partner at PricewaterhouseCoopers.
  • Jack Ciesielski, president of R.G. Associates, Baltimore, a current member of the Financial Accounting Standards Board’s Investors Technical Advisory Committee and veteran of several standard-setting panels, who also is publisher of Analyst’s Accounting Observer.
  • James Kroeker, acting SEC chief accountant and former partner at Deloitte & Touche, who joined the SEC staff in early 2007 as a deputy to former Chief Accountant Conrad Hewitt.
  • Charles Niemeier, a member of the Public Company Accounting Oversight Board and former chief accountant of the SEC’s Division of Enforcement.  Niemeier has chosen to remain completely independent from partisan politics.

ELVISThe accuracy of this list is not confirmed, and probably should be accorded no more credibility than rumors of an Elvis sighting.

It is my belief that Niemeier was an early front runner, but heavy lobbying prevented his naming.  Charlie McGreevey–European Union Treasury Minister– is rumored to have sent a personal envoy to Washington and an audience with SEC Chair Mary Schapiro to argue his case against Niemeier.  The large accounting firms and AICPA also lobbied strongly against him.   Niemeier caused strong opposition because of his September 10, 2008 speech against U.S. adoption of IFRS.  Schapiro is rumored to have said, “With so much opposition I simply can’t appoint him.”  It is precisely because of that opposition that he should have been appointed.

Tom Selling, consultant and author of The Accounting Onion, has conjectured about odds of appointment on AECM, the listserv for Accounting Professors:

  • Adams: 1:1 (even money)   The right background; may not have staked out a position on IFRS yet; would be the first woman chief accountant.
  • Carnall: 3:2   Perhaps the world’s most knowledgeable person on foreign private issuer matters. Nice guy, could be a very popular choice with the SEC Staff (just guessing on that).
  • Ciesielski: 99:1   Same political baggage as Niemeier (see below).
  • Kroeker: 23:2   Don’t know him. Association with the Cox/Hewitt era could be a plus (political compromise), or a minus (guilt by association).
  • Niemeier: 99:1  Much too candid, rigorous in approach, and independent-minded.

Who know if this is an accurate handicapping?

The Chief Accountant of the SEC has a tremendous influence on accounting policy in the U.S. In essence, the Chief Accountant is responsible for the strategic directions of all matters related to accounting and auditing. In essence, he is the First Accountant of the United States. He is at the center of the accounting universe. Specifically, the Chief Accountant is responsible for:

  1. Oversight of the FASB as it develops and maintains U.S. GAAP.
  2. Oversight of the PCAOB is it regulates auditors and develops and maintains audit/auditor standards.
  3. Coordinating U.S. relations and communications with international organizations that have an impact on accounting standards and practices.

It will be a real shame if Charley Niemeier is not appointed.

Debit and credit – – David Albrecht

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