[I have removed the name of the Tweeter to whom I responded in this blog post. He has indicated his displeasure for being named. Mr. XX, sorry to have mentioned your name in the first place, despite the fact that you are a public persona.]
A fellow with a Twitter account directed some derogatory-GAAP toward me (@profalbrecht). He did not accept my return comments, so I’m going to blog a response here. If he had made public his e-mail, I would have responded privately.
Now the issue is, should the U.S. adopt IFRS (or even converge to something close to IFRS). We are not considering whether Europe should adopt IFRS (it shouldn’t), or whether Nigeria should adopt IFRS (it should), or whether China should adopt IFRS (hart to justify either way). It is whether the U.S. should adopt IFRS. Accounting theoreticians (including some of the world’s smartest accounting professors) and American accountants, and American investors say no.
Mr. XX says “Most in world believe principles-based IFRS superior to shut-your-eyes-and-obey-the-rules of US GAAP.” What I love about IFRS guys is that they pop off with these broad platitudes with absolutely no logic to back them up. At one time, I said that “No knowledgeable person believes that IFRS is superior for the U.S. than is U.S. GAAP.” Perhaps I should say that no one has yet justified publicly (or to me) their belief in IFRS superiority for the U.S. Remember the question is not whether IFRS is superior in general (it isn’t) or if IFRS is superior for Europe (it isn’t), or if it is superior for Nigeria (it is). [And IFRS is no more principles-based than U.S. GAAP. To say otherwise is to spout ignorance.]
OK, one more time. In the U.S. there is a culture of corporate executives taking liberties when it comes to putting out financial statements. How much liberty? Well, three times as many business students cheat during college as students of any other discipline, and when they grow up they become corporate executives, large audit firm auditors, and business professors. And they aren’t any more honest or ethical when grown up (it’s a slippery slope, and people usually go down, not up). American business executives determine how much is the potential penalty for not following accounting rules (and reporting whatever else they want), and if benefits from not following accounting rules exceed costs (the penalty for not obeying rules–usually civil but in rare occasions criminal), they they go ahead and non-comply (i.e., manipulate earnings).
The only hope of routinely getting reasonably accurate financial statements is (1) to have rules, (2) then check to see if corporate financial statements are in compliance with the rules, and (3) levy large penalties if they are in non-compliance. If auditors do not force proper accounting, then investors (or the SEC) can file suit (the ultimate check on financial reporting). Now, Mr. XX, in a culture where corporate executives will manipulate financial statements, will it be preferable for the U.S. to do away with rules and turn instead to IFRS which permits corporate accountants to apply professional judgment (aka do whatever the hell they want)? If so, why? I’ll wait for your response.
Moreover, in the U.S. we have a tradition of the large audit firms letting corporations get away with earnings management. The PCAOB has some hope of pressuring audit firms to do the right thing if it can be shown that auditors gave clean audit opinions to corporations not following the rules. In the United States, we don’t wish to supply audit firms with a defense that they permitted manipulated earnings because it was not their place to overrule corporate professional judgment. If you have any doubts about the intentions of large audit firms in the U.S., please read my previous blog post, “They Still Don’t Get It.” Bluntly speaking, audit firms have taken enough hits to their reputation that they are not universally viewed as credible. Deloitte just published that its litigation costs, as a percentage of revenue, are 15%. At other times, it is estimated that litigation costs for large audit firms have exceeded 20%. The public is supposed to trust the professional judgment (of the large audit firms) in the application of IFRS?
Moreover, we don’t wish to make it easier for corporations to avoid their day in court. In the U.S., if there isn’t a law or rule against something, then it is permissible. People use this to justify some abominable actions. That’s why we have so many rules and laws trying to force certain behavior. Our court system simply will not work when lawsuits get brought against financial statement manipulating corporations and corporations can use judgment as a defense. Usually at this point, IFRS fanatics say that the U.S. will simply need to change its legal system so it can use IFRS. To which I, and 300 million other Americans say, “Are you nuts?” We may have a lousy legal system, but it’s our legal system. It was much easier to adapt our accounting rules than our legal system. Besides, we need our legal system to deal with matters such as MURDER, RAPE, ROBBERY, etc.
Now, why do you insist that IFRS will be superior in the U.S. than the GAAP we already have? What is there about flexible IFRS accounting standards that will produce good accounting in the U.S.? Before you answer, please recall that we tried flexible accounting standards with alternatives in the U.S., and we did not like the results. That’s why we changed to rules with bright lines. What is is it about 2010 that will lead to better accounting under principles than when we tried it in the 1950s?
I wish someone would answer these questions. No one has ever tried (and I’ve performed exhaustive searches trying to find their attempts).
Mr. XX says, “US GAAP can and does lead to some ‘in accordance w/GAAP’ but not true/fair financials.” I’ve dealt with this one before. There is no such thing as true and fair financial statements anywhere except someone’s dreams. There simply isn’t. Heaven does not exist on earth. Nor does pie in the sky. What does exist is competing economic interests, and accounting rules set the bar between them for acceptable accounting. Advocating for true and fair financial statements is a lot like saying that you believe in the desirability of neutral accounting rules. I’ve never heard anyone supply a good argument in defense of accounting neutrality, either. You are making some very naive (i.e., simplistic) statements here.
Mr. XX says, “If you follow the rules of US GAAP, you are safe from using common sense and judgment.” What a garbage statement. Are you mocking me? Careful, I have more education on this issue than you.
Mr. XX, the GAAP-IFRS is a serious issue for serious people. If you have something worthwhile to say, please say it in an intelligent manner. I think it is shameful to use the Internet to spout half-truths, mis-truths and no-truths. Somebody might believe you. If you want to engage in a serious discussion, then do so seriously. I am willing to dialog with any IFRS supporter if they will agree to justify what it is they say. To speak using only undefended platitudes is not intelligent discourse.
Debit and credit – - David Albrecht