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In the United States, today is election day.  In the last presidential election, the candidates were clearly divided on accounting issues.  But what about 2012?

In 2008, Barak Obama was solidly behind moving the U.S. to IFRS.  During his first term he was unsuccessful, and earlier this year the SEC waved the white flag on moving the country to IFRS.  So far in this campaign, Obama has not signaled his intentions with respect to future actions on the issue.

In 2008, John McCain emphatically endorsed American control of its own accounting standards.  However, this appeared to be a personal stance as opposed to a Republican political position.

I have not been able to uncover any statement by Mitt Romney revealing his position on global accounting standards.

Most Washington observers expect SEC Chair Mary Schapiro to step down shortly after today’s election.  The appointment of her successor (and we have had no clues) would say a lot about future U.S. government intentions on who is to set American accounting standards.

With respect to auditor rotation, both candidates are mum. Although it is true that several Democrats threatened legislation banning a PCAOB rule requiring auditor rotation, President Obama has not commented on the issue.  Mitt Romney is a client of PriceWaterhouseCoopers.  In 2008, the large auditing firms heavily favored Obama with political contributions.

There appears to be no desire from either candidate about changing the status quo on the position of audit firms in the American capital markets.  Sigh.

Both candidates have been active in discussing tax policy, but that is not the focus of The Summa.

Debit and credit – - David Albrecht

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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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Mary Schapiro testifying before Senate Committee on Banking, Housing and Urban Affairs

Mary Schapiro testifying before Senate Committee on Banking, Housing and Urban Affairs

Yesterday brought a very big piece of news.  Mary Schapiro appeared before the U.S. Senate Committee on Banking, Housing and Urban Affairs.  A video of the appearance is here.    Here is my best attempt at transcripting the most relevant part of the hearing.

Senator Jack Reed (D-RI): Much of what you are going to do will have complications and consequences overseas as well as here in the United States, and one of the areas is IFRS road map.  We have repeated written to Chairman Cox, who tried to determine and develop a very deliberate road map, and I think there’s a rush to judgment on this issue.  In fact, I met witih the CEO of the Honeywell Corporation who has similar concerns over disparate treatment under international rules thata can be used to change income, that can be used to state R&D expenses differently.  There’s a host of … an opportunity for arbitrage between the two systems that I think we have to avoid.  Can you give us a notion of how you wish to proceed with this international accounting with recognition that eventually we’ll have that in a global economy and hopefully we will converge to a set of high level standards.

Mary Schapiro: Well, I would proceed with great caution so that we don’t have a race to the bottom.  I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.   With that said, I have some concerns with the road map that has been published by the SEC and is out for comment now.  I have some concerns about IFRS standards generally.  They are not as detailed as the U.S. standards.  There’s a lot left to interpretation.  Even if adopted, there will still be a lack of consistency,  I believe,around the world on how they are implemented and how they are enforced.  The cost to switch from U.S. GAAP to IFRS is going to be extraordinary, and I’ve seen some estimates that range as high as $30 million for each U.S. company in order to do that.  This is a time when I think we have to think carefully about whether we impose those sorts of costs on U.S. industry, really make sense.  Perhaps my greatest concern is the independence of the International Accounting Standards Board and the ability to have oversight over their process as they make standards and the amount of rigor that exists in that process today.  So, I will tell you that I will take a great big breath and look at this entire area again, carefully, and will not necessarily feel bound by the existing road map that is out there for comment.

First of all, I am so happily surprised  that Mary Schapiro made these comments.  They are more protective of U.S. GAAP than I ever imagined would come out of the Obama administration.  I am grateful that the IFRS opposition apparently has been listened to, even though it has not been properly understood.  Welcome aboard, Mary Schapiro.  I hope that you frequently read The Summa for advice on how to handle the IFRS issue.

Her statement, coming during the confirmation process, is not binding.  However, it does give U.S. based opponents of IFRS some hope.  There seems to be an open mind in the Obama administration, that is very good news!

Her statements, however, cannot be considered binding  for three reasons.  First, it could simply be posturing in order to ease concern over her nomination so that she can gain confirmation.  Is this a possibility?  Of course.  Paid $3 million per year to head the NYSE/NASDAQ self-relatory group, her FINRA investigated and failed to catch the  $75 billion Madoff fraud.  Moreover, several key national publications have come out against her confirmation.  She will be confirmed, of course, because Republicans are going to fight a different nomination and not hers.  Never-the-less, she could simply be posturing to gain votes for confirmation.

Second, I don’t think she will have the authority to make the final call over IFRS.   IFRS adoption is an international political issue, and U.S. adoption will be negotiated at the international state level.  It is very possible that the U.S. could bargain away GAAP in order to gain European help to relieve our troops in the Middle East.  Under this scenario, investor protection in the U.S. simply is irrelevant.  National security is the key, and with Obama promising to run up trillion dollar deficits, he will want to save money by bringing home the troops.  Plus, one additional factor.

Third, as I’ve written before, Obama is relying on economists, such as Paul Volcker, for guidance on regulation-related matters, such as accounting standards.  Volcker has been a member of the IASC parent organization for the IASB.  He has been strongly in favor of the U.S. switching to IFRS, for a long time.  He will do everything possible to bring about IFRS in the U.S.  Of course Volcker is out of his depth here, having no background in accounting or finance, and really does not understand the nuances of the issue.  But that isn’t going to stop him.

However, there is no use in saying the sky is falling.  I’m going to take Mary Schapiro at her word and proceed as if the GAAP-IFRS issue is still open.  I have a few comments about her specific words.

First, she says, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.”  Well, we can’t, because I don’t, nor do others.  One need only to read Shyam Sunder’s work to realize international differences in accounting standards are good.  Countries have different interests, and it is simply ignorant thinking to presume that a single set of standards can satisfy the very different interests that are out there.  For example, the U.S. places a high priority on protecting the investor, and this is reflected in the great amount of detail in our rules.  However, not everyone agrees to that priority.  Nor should they.  Different priorities and national interests will lead naturally to different accounting standards.  This is fundamental and we cannot trust Mary Schapiro to protect U.S. GAAP until she acknowledges it.  No matter what else she says, if she doesn’t get this point then she her thinking is compatible with Paul Volcker, the IFRS champion.

Second, her additional comments sound pretty good.  She seems to be well read.  Don’t know if she’s only read Charley Niemeier, or whether she’s read the other six critics of IFRS.  But at least she has comprehended some of the arguments.  Never-the-less, everything here must be interpreted in the context that she believes a single set of world-wide accounting standards would be beneficial and is attainable.  As I said before, it is not necessarily beneficial, and I’ve argued for a long time that it is unattainable.  For her to continue down this road is simply wasted thinking.

Third, she expresses a desire for the SEC to have oversight with respect to the IASB accounting standard generating process.  Well honey, every other country in the world is going to want to have the same oversight desires.  It seems clear that you want some control over the process, but everyone else wants that also.  Why, Europe has already exerted that control with respect to forcing certain changes to the fair value standard.  Let’s get this straight–the SEC will never, ever, get the degree of oversight it desires with respect to IFRS.  I believe that this should be sufficient to bury the IFRS issue forever.  I don’t even know why you are going to spend time on it.

I’m still going to submit a comment to the SEC on Cox’s proposed road map. And I’m going to continue to write about the benefits for the U.S. to retain GAAP.  If it weren’t for international politics, it would be a no brainer.

Debit and credit – - Dave Albrecht

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Mary Schapiro, Obama's choice to head SEC

Mary Schapiro, Obama's choice to head SEC

The two issues everyone is talking about this week are (1) financial market regulation and what President-elect intends to do about it, and (2) editorials from the Washington Post and the New York Times opposing Obama’s intention to nominate Mary Schapiro as next Chairman of the Securities and Exchange Commission.  There is a third related issue that no one is talking about:  Barak Obama’s reliance on economists and shunning of finance/accounting types for advice.

This matters a great deal.  Our system of financial markets can be likened to a fragile china shop chock full with expensive dishes and figurines displayed in the most unpredictable manner.  A blind person wandering about is sure to bump a display and cause a dish or figurine to crash to the floor, irreparably broken and lost for eternity.  President-elect Barak Obama is that blind person.  He lacks any formal education in business or the economy or even in regulatory law.  Nor does he have experience  Thus he does not have the world view needed to govern the U.S. world of business.   Consequently, there are a lot of highly educated people who are extremely fearful for the china shop.

My own take is that we’re heading for a disaster of unimaginable magnitude.  This is how I get to that conclusion.

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Very interesting, indeed.

obamalobbiedtosupportifrsPrior to election day, there was little conjecture as to the impact it would have on accounting.  Oh, some things were clear.  McCain had made his opposition to fair value accounting a campaign issue, even during the prmaries.   But what about the biggie:  U.S. GAAP or IFRS.   Would the multi-trillion dollar have an impact on the election?

I reasoned that McCain eventually would support GAAP because of the fair value issue.  He would be reluctant to support IFRS because of the IASB’s commitment to fair value.  He would value retention of American accounting standards if for no other reason.

I reasoned that Obama eventually would support IFRS.  He would support IFRS because (1) his economic advisors have little respect for the value of accounting nuances and in the past had come out strongly for IFRS, and (2) he would outsource certain American practices to European allies, practices unpopular on the world stage.  If he supported downsizing the military and withdrawing from unpopular (from a world perspective) Middle East entanglements, then would he support outsourcing American standard setting because American practices are unpopular internationally?   I said yes.

Throughout the election, I looked for clues.  I queried the campaigns, receiving insults from Obama and silence from McCain.  Nothing definitive.

So, on AECM prior to the election, I predicted that that Obama would support IFRS when elected.  Since the election, Obama has not disappointed on the IFRS front, naming an IFRS-friendly SEC chair and making promises to radically modify regulation of securities markets.

Of course, I’ve written extensively on how the big accounting firms support IFRS because they stand to profit so obscenely.  Could there possibly be a link between Obama and big monied interests on the issue of accounting standards?   Sadly, it seems the answer is yes.

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