Even if the U.S. adopts IFRS, there is a chance that U.S. GAAP will survive and thrive.
If IFRS implementation is anything like SOX implementation, then there is a chance that U.S. GAAP will survive.
It is so obvious, not even Captain Obvious is talking about it. The rationale for my conclusion starts with a history lesson on SOX.
The Sarbanes Oxley Act of 2002 was passed in the immediate aftermath of (1) the dotcom burst bubble, (2) a huge recession, (3) the WTC terrorist attack, (4) dozens of accounting scandals such as WorldCom and Enron, and (5) Washington’s perceived need to save the country from itself through increased regulation. It is said that George H.W. Bush later so regretted his part in SOX’s passage, that he pushed IFRS as a way of making it up to corporate America (IFRS is a gift offering because of itse earnings management capabilities).
Here’s what corporate America thought of SOX.
All levels of corporate America initially objected to SOX and its requirements for CEO signing off on the accuracy of financial statements, implementation of internal controls and the consequent internal control audits. Early on, only the largest corporations were required to implement the internal control provisions. After the dust settled on 404 implementation and its hefty price tag (some reached $200 million), the largest corporations reasoned that SOX now worked to their advantage. After implementation, internal control maintenance costs for the early adopters were very low. However, any company that had not implemented SOX had a huge expenditure coming up. Realizing this, large corporations stopped fighting against SOX, hoping that they would benefit (in a relative sense) from the doom fast coming down on small and medium SEC registrants (SMEs). SMEs that early on had received repeated exemptions from the SEC, appealed to Congress to make permanent their exemption from internal control provisions. They appear to have succeeded. On the off chance that the legislative appeal will not work, there is a reasonable probability that the U.S. Supreme Court will declare SOX as unconstitional.
The lesson to be learned from all this is that no matter the benefits or desirability of SOX (and investors wanted SOX), the business and legal culture of the U.S. rejected it.
Now, let’s consider Bush’s peace offering–IFRS. Bush’s IFRS push was once thought dead, killed by (1) his lame duck status, and (2) the populist IFRS resistance (Ball, Niemeier, Sunder, Jensen, Ketz, Selling, Albrecht). As the 2008 presidential elections unfolded, it became clear that Obama was the IFRS candidate, and McCain was the U.S. GAAP candidate. Unfortunately, most of the U.S. electorate chose not to cast a vote based solely on this issue. After the election, Obama signaled his intention to move the U.S. to IFRS. This occurred in the aftermath of (1) the mortgage bubble burst and the sub-prime crisis, (2) a huge recession, (3) the front-page prominence of fair-value accounting, (4) additional accounting scandals, and (5) Washington’s perceived need to save the country from itself through regulatory reform.
Thanks to journalists Tammy Whitehouse (Panel to Forge Path for Private Company GAAP) and Edith Orenstein (Blue Ribbon Panel On Private Company Accounting Standards Formed), we are now aware of the beginning of a movement that eventually could culminate with American SME exemption from IFRS.
Why would SME’s resist IFRS? It is mostly because implementation costs for IFRS are much steeper for IFRS than for SOX 404, and SME’s reason it is easier to stay with U.S. GAAP than to move to anything else. However, we should not understate the impact of the American culture. IFRS is foreign, and will be rejected like a bad organ transplant.
What will SME’s seek as an alternative? The choices would be IFRS lite (the version of IFRS for SMEs) or continued use of U.S. GAAP. My prediction is that American SMEs will argue for continued use of U.S. GAAP based on familiarity and cost concerns. And that, dear readers, is the possibility I mentioned at the top of this essay.
Debit and credit – - David Albrecht