Is accounting convergence dead?
I surely hope so.
Robert Herz just announced a delay. Here’s how I got it. Bob Herz (current Chair, FASB) sent Denny Beresford (former Chair, FASB) an e-mail. Denny sent it to Bob Jensen (retired faculty, Trinity University). Bob sent it to me:
From: Robert Herz <rhherz@fasb.org>
Date: Wed, 2 Jun 2010 07:54:42 -0400
To: dberesford@terry.uga.edu; Norman.Strauss@baruch.cuny.edu
Subject: FW: Reuters Update
Hi Denny and Norm . In case you haven’t already seen this . I will elaborate a bit more in my opening remarks tomorrow . See ya then .
Accounting rulemakers to delay convergence
Emily Chasan
NEW YORK
Tue Jun 1, 2010 3:23pm EDT
NEW YORK (Reuters) – The head of the Financial Accounting Standards Board, which sets U.S. accounting rules, said on Tuesday he does not expect FASB to meet a June 30, 2011 deadline for convergence with international accounting rules, requested by the G20 group of industrial and emerging countries.
The Norwalk, Connecticut-based FASB and the London-based International Accounting Standards Board expect to announce changes to their convergence work plan in the next week or so that would delay the completion date by about six months and allow for greater public comment on the boards’ proposals, FASB Chairman Robert Herz said in an interview with Reuters. …
And, Michael Rapoport (Columnist, Dow Jones Newswires) just called me. Here’s what I told him.
Accounting convergence could still happen. The creation of a single global set of accounting standards is a political solution. World leaders can decide to do just about anything, and they could decide that there should be only one set of accounting standards world-wide. They’ve talked about this (G20 and all that), but politicians are spin masters and past commitments are not always binding.
Accounting convergence efforts should never have started in the first place. That’s because there is no such thing as a neutral accounting standard, or even one set of “the very best possible” accounting standards. All accounting professors have always taught the opposite. Accounting standards all have economic consequences and many affected parties. They will never agree because best for one is worst for another.
Worth inserting (but unsaid during interview): The G20 adopted goal of a single global set of accounting standards is based on an economic assumption that markets are efficient and will be able to see through any accounting disclosure to discern the true economic impact of accounting reports. This is ludicrous. Apparently Paul Volcker has been able to convince a lot of people this is true, but it is false, false, false, false, false, false, false.
Convergence could take place if politicians force it. Politicians do lots of stupid things, and mandating accounting convergence would be only one more in the world’s longest list.
Worth inserting (but unsaid during interview): If convergence is mandated, financial disclosures and auditing will be so messed up that the value of financial statements will be much less than the value of the pdf files they are printed on.
It is impossible for me to fathom how the pieces can ever fit together to produce convergence that makes even a small amount of sense.
The IASB will always cater to European interests in the political process to create accounting standards. American interests will be ignored once the USA adopts IFRS.
Mary Schapiro must feel like she’s on a small boat in the middle of a large ocean, and she must now figure out which way to steer. Like a good political appointee, she pushed convergence when so instructed by the Obama administration. Now the world’s politicians can’t agree on the details of banking regulation, and that has effectively undercut her political support.
Worth inserting (but unsaid during interview): The primary result of the convergence project has been to take a set of perfectly mediocre accounting standards (U.S. GAAP) and messed them all up.
I wonder if he’ll use anything I said.
Debit and credit – – David Albrecht
Thanks for the reply. I get the point about markets not being efficient with the information they already get. That’s the rub, isn’t it? I’ve been reading Gillian Tett’s *Fool’s Gold,* which I highly recommend. It shows that there were, in fact, a number of market participants that saw and tried to avoid the crisis. It’s just that they were overwhelmed by the lemmings’ addiction to easy money.
But I wish you would say more about why corporate execs will never comply with an accounting rule against off-balance sheet entities. What makes that impossible? Is it that there is no way to define a clear rule against it? Or is it that whatever clear rule is defined will be gamed until it is ignored de facto. (Like options backdating.)
From my naive perspective, I can’t understand why it’s impossible to convince people that all assets and liabilities for a entity ought to appear and be reported on a single set of books.
David,
You would probably find this post interesting:
http://radar.oreilly.com/2010/06/what-is-data-science.html
See especially the subhead “Making data tell its story”
I think I agree with your argument about convergence, but I also think that there is a need for a more uniform approach to how financial data is reported. In other words, it’s fine to have a few different sets of rules, but why not standardize how the processed data generated by the different rules is presented visually.
For example, why not report balance sheet accounts as cash-flows in real-time with a set of graphs, with adjustments overlaid at the end of periods?
More generally, I see off-balance sheet accounting as a recurring problem, especially for the financial industry. First we had SPVs with Enron. Now we have SIVs and Lehman and Bear. Is there a legitimate need for off-balance sheet accounting that cannot be met through some alternative that would require only a single set of books (for reporting to the SEC) for the entire organization?
Michael, thanks for writing.
Disclosures in financial statements are not data, but information that results from processing. Calling a numeric disclosure by the same name around the world could be misleading, as the numbers most likely were generated from dissimilar processes.
Moreover, people around the world can’t even agree on the order of the presentation. Americans place great value in the term “operating income”, but this term isn’t permitted (or doesn’t fit) under IFRS.
Is there a legitimate need for off-balance sheet financing? Whoa Nellie! The market does not efficiently incorporate info from notes into stock prices. The market is just inefficient in general. Corporate execs have always persistently engaged in placement accounting, even though accounting professors used to make fun of them for doing so. If off-balance sheet financing is permitted, then the level of investor awareness goes down. On the other hand, corporate execs rely heavily on off-balance sheet financing.
Eliminating off-balance sheet financing would be great, but corporate execs will never comply with that accounting rule.