Thanks to Rick Telberg at CPATrendlines, I am now aware of Mary Schapiro’s latest comments on accounting (to the CFA Institute 2010 Annual Conference in Boston, Mass.). We now have proof that the spirit of Professor Philip Barbay is alive and well inside the beltway. You don’t remember Professor Philip Barbay? He was the fool to Thornton Melon (played by Rodney Dangerfield) in the 1986 classic, Back to School. Here’s the scene I best remember:
- Dr. Phillip Barbay: …now, not withstanding Mr. Mellon’s input. The next question for us is where to build our factory?
- Thornton Melon: how ’bout fantasyland?
The Rodney Dangerfield (I don’t get no respect) character got no respect from Professor Barbay, and we in the accounting world get no respect from SEC Chair Mary Schapiro.
Let’s take a close look at Schapiro’s remarks.
Her third sentence is, “And I especially wanted to re-affirm our dedication to developing a single set of high-quality, globally-accepted accounting standards which will benefit U.S. investors and investors around the world, as part of our commitment to better visibility and information.“
For what seems like years, real professors (not the Hollywood caricature Professor Barbay) have been teaching that accounting information is most useful to investors when it is sensitive to cultural, legal, economic, regulatory and political contexts. Different countries need and deserve different sets of accounting rules. The 0nly place this doesn’t hold true is in Professor Barbay’s class Chair Schapiro’s SEC.
For as long as I can remember, I have been asking for, no, pleading for, no, begging for a sensible justification for this ridiculous goal. None has been forthcoming. At some point in time, I hope the SEC can let us know why we should do something (single set of global accounting standards) that sound reason tells us is a fool’s errand.
She later says, “In the early part of the last decade, shares of several companies soared to extraordinary heights on the backs of falsified books — and then fell hard.“ True enough, several American companies willfully chose not to follow GAAP accounting rules, so they could report more favorable numbers and dupe investors. They did this with the full knowledge of their Big 4 audit firms, in many cases. Sounds to me like the rules were pretty good and we need to enforce those rules.
She continues with her three step solution:
- “We’re protecting investors from accounting fraud” (yes, and I sleep better at night because you catch people like Bernie Madoff before he can do any real damage) “and overseeing both FASB and the PCAOB“ (hope it’s done better than protecting investors from accounting fraud).
- “We’re working to see that reporting standards are consistent with current accounting practices“ (are these the same current accounting practices that enabled share prices to soar to extraordinary heights? Wouldn’t it be better to make sure that reporting standards are consistent with investor/creditor information needs?).
- “And, in one of our most important and large-scale efforts, we are overseeing FASB’s convergence efforts to facilitate a single set of high-quality international accounting standards, as we prepare for possible incorporation of international standards into the U.S. reporting structure for U.S. issuers.“
The defining characteristic of IFRS is that they permit company execs to exercise their judgment and any sort of rationalizations to produce fantasy-land accounting. In the early part of the decade (2001 and 2002) we saw many companies such as WorldCom and Enron) use fantasy-land accounting. You think that changing from unacceptable (to corporations) GAAP accounting rules to IFRS fantasy-land accounting will produce better information for investors and creditors?
Elsewhere in her speech, Schapiro reiterates that accounting standard setting and the resulting accounting standards should be neutral. (Neutrality means free from any bias. In the accounting world, means accounting rules that communicate truth. Neutral standard setting is free from considering the impact of economic consequences.) How naive and out of touch. Don’t you realize that favoring investor interests over company or auditor interests is a bias, and is inconsistent with neutrality?
I believe that accounting standard setting is heavily biased toward companies and auditor interests. Accounting standard setting is performed by people with accounting backgrounds. These are people who have prepared financial statements for companies or who have been paid by companies to audit. Accounting standard setters, by their background, are predisposed to favor corporate interests over those of investors/creditors. To pine for their continued work is to cloak these standard setters with a respectability they don’t deserve.
It does not accomplish anything worthwhile and is potentially misleading (to the naive) to keep saying that the SEC is serving investor interests.
Ms. Schapiro, I think you live in Professor Barbay’s school of business.
Debit and credit – - David Albrecht