Oh sure, the sub-prime crisis and the federal bank bailout are all important, but let’s all keep our eyes on what is really, really important–the push to switch the U.S. from GAAP to IFRS.
I am somewhat frustrated that it is taking the SEC so long to get the proposed road map published. Despite labeling the coming publication as a proposal, everything said about it seems to scream out that a commitment to IFRS has been made. Do you recall the movie masterpiece Absolute Power? In one scene the Laura Linney character said to the Clint Eastwood character, “Father, what have you done now?!”
I keep reading and rereading the wording of the SEC August 27, 2008 press release, SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. FOR IMMEDIATE RELEASE 2008-184, trying to make sense of it all. “SEC, what have you done now?!“
WSJ reporters Kara Scannell and Joanna Slater have a take on 8/27, the “SEC Moves to Pull Plug On U.S. Accounting Standards“. Previously, the SEC announced its intention to pull the plug. What’s next? SEC finally pulls plug. Because the SEC is judge, jury and executioner on, we can conclude that GAAP is a dead man walking.
The move to IFRS in the United States is controversial. On one hand, business execs and large audit firms are having orgasmic fits of anticipation of windfall profits if the move to IFRS goes through. Investor groups, who will have to supply the windfall profits, are angry that the execs and the auditors have appropriated the investor pockets. Accountants, who care about getting things right, cringe at the thought of having to implement the loose standards of IFRS.
But it does not seem controversial from the perspective of the SEC. Why? SEC Chairman Cox, a bull politico, has been let loose in the financial system china house with predictable results. It is very unusual for an SEC chairman to have done such a poor job that a presidential candidate can score points by saying he should be fired.
Back to the proposal. Cox and SEC spokespersons attempt to deflect criticism by saying that this proposal does not commit the U.S. to IFRS. However, to the chagrin of investors and accountants this proposal does not decommit the U.S. from IFRS. An implicit assumption of eventual conversion to IFRS underpins the entirety of what the SEC is about.
The proposal is all about how to prepare for IFRS. Shall we prepare for IFRS this way, or that way?
I ask you. Does it not seem reasonable to conclude that if the proposal set before us is how to plan and get ready for IFRS, then the decision to adopt IFRS is either a difficult to change bedrock, or it is a very done-deal?
Commissioner Elisse B. Walters (possibly the commissioner least inclined to accept IFRS) describes one of the milestones, “Education and training are crucial in readying the United States for the transition of U.S. issuers from U.S. GAAP to IFRS reporting. Three years is not a very long time, and I believe that the Commission must do everything it can to educate investors and support the training of accountants, auditors, and others involved in preparing and using IFRS financial statements.” I think this shows, more clearly than anything else, that the move to IFRS is a done-deal. The process of educating (all) investors, (all) accountants, (all) auditors, (all) others, such as systems people is unnecessary and extremely wasteful unless IFRS is sure to be adopted. What will this one milestone cost? Undoubtedly a few hundred billion USD in opportunity cost! It could be more, depending on the assumputions used in your calculations. Does it make common sense that the SEC could call for the incurrence of a few hundred billion dollars while simultaneously saying the U.S. is not committed to IFRS? Give me a break.
Another of the desired milestones is for a test group of approximately 120 large companies to generate IFRS-based financial statements during the three year period 2009-2011. The CEO of British Petroleum announced that his company spent the equivalent of 100 million USD for the first year of IFRS reporting, with additional expense expected the second and third years. Extrapolating to the test group, the road map calls for certain U.S. corporations to spend approximately $20 billion USD in total to experimentally convert to IFRS. What would be the charge if all SEC reporting corporations were to convert to IFRS? Just shy of $1 trillion USD. Fortunately for my friends in the Big Four, almost all of this trillion goes into their pockets. What a windfall for them!. And, we haven’t even addressed the scientific fact that companies that report on IFRS instead of GAAP experience higher costs of capital and investors experience lower rates of return. My point is that requiring this $30 billion expenditure by some U.S. corporations seems to include an implicit promise that their sacrifice won’t be made in vain
My main point is there should be no need at all to plan as if we are going to convert to IFRS unless there also is a basic, unchangeable bedrock assumption that the switch to IFRS will be made, no matter what. Because the plan is being pitched so hard (and all commissioners are on public record as favoring going ahead with the plan), it seems obvious that even a blind man can see that an irreversible commitment to IFRS has been made.
How can SEC representatives stand before us with a straight face and say the U.S. is not committed to IFRS. It doesn’t ring true. As a good friend and trusted colleague would say, there’s something stinky to this story.
I would feel better if the proposal was about whether or not we should plan for the conversion to IFRS. I’d definitely feel much better if the proposal was about whether or not we should switch to IFRS at all. Unfortunately, the proposal certainly seems is about whether or not to adopt this one particular way to get ready for IFRS.
The logical order for the series of voiced questions is: (1) should we adopt IFRS, (2) if yes, is now the best time to start planning for it, (3) if yes, then is this the best plan to get ready for IFRS. However, the SEC has chosen to ask the questions in a different order: (1) is this the best plan to get ready for IFRS, (2) if yes or no, then no question, we’re going to start planning now, (3) if we have completed planning and preparation for the conversion, is the conversion something we really want to do after all?
Give me a break! Of course they have already decided to make the conversion. The IFRS decision is as irreversible as a 1913 decision to levy a federal income tax in the United States.
Every intelligent person I know tells me not to get worked up to fight the adoption of IFRS, because it simply will be a waste of time. They say, no use beating a dead horse, or no use beating your head against a brick wall, or no use beating your head against a dead horse. My reasoning brain agrees with them It will be a waste of time and utterly useless to attempt to fight the adoption of IFRS in the U.S. That fight took place a long time ago. It was very hush-hush. Then never told us about it when it happened. They won, we lost.
Never-the-less, I believe that there should be hope. Isn’t there always hope? No matter how dark the night, we can hope in a bright new dawn I refuse to give up hope that saner heads will arrive to intercede and justice will prevail.
Just because President Bush and the SEC are out to favor business executives and public auditing firms at the expense of investors and the general public, it does not mean that we have to accept it without a fight I hope that everyone reading this article will make a commitment to write in during the 60 day comment period with anti-IFRS sentiments. The exercise has only a snowball’s chance of survival in hell, but I feel life is most worth living when the fight is for good to triumph over bad.
Over and out – - David Albrecht