Archive for October, 2008

This is part six of an eight-part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues on regular posting dates, MWF.

Robert E. Jensen

Robert E. Jensen

In today’s essay, I review the anti-IFRS views of Robert E. Jensen, Ph.D., as summarized from his posts to the AECM listserv (Accounting Education Using Computers and and Multimedia) and on his web site page on accounting standard setting controversies.


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This is part five of an eight-part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues over the next two weeks on regular posting dates, MWF.

Tom Selling, retired professor now conducts private consulting practice.

Tom Selling, retired professor now conducts private consulting practice.

In today’s essay, I review the anti-IFRS views of Tom Selling, Ph.D., as summarized in his recent blog post, “Top Ten Reasons Why U.S. Adoption of IFRS is a Terrible Idea.”  I consider Selling’s argument to be top notch and an essential component to the IFRS opposition.  It is a must read.


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This is part four of an eight-part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues over the next two weeks on regular posting dates, MWF.

Professor at Penn State

Ed Ketz, professor at Penn State

In today’s essay, I review the work of J. Edward Ketz.  Ed writes an editorial column at AccountingWeb.com, called The Accounting Cycle.  I have read it regularly over the years, envying Ed for finding issues to write on, and for taking such interesting and principled stands.  I have so admired him that the first blog article I wrote was about him, Not Afraid to Call a Schumck a Schmuck.

It always seemed to me that Ed would oppose the U.S. push to adopt IFRS.  So, I asked him point blank if he favored the switch.  He responded “NO” in 80-point type.   As do all of the critics in this series, Ed brings a unique perspective to the IFRS opposition.  But first, a few biographical remarks.


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This is part three of an eight-part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues over the next two weeks on regular posting dates, MWF.

In today’s essay, I review Ray Ball’s very popular paper, “International Financial Reporting Standards (IFRS): Pros and Cons for Investor.”  His paper, based on the P D Leake Lecture delivered on September 8, 2005 at the Institute of Chartered Accountants in England and Wales, has since been published in a 2007 edition of Accounting & Business Research. A pre-publication version of the paper is available at SSRN.

Ray Ball, distinguished professor at Chicago.

Ray Ball, distinguished professor at University of Chicago.

Ray Ball’s opposition to IFRS gives instant intellectual respectability to the cause.  If one of the world’s smartest professors does not favor the SEC’s push to change accounting standards, then that should give the rest of us reason for doubt.


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This is part two of an eight part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues over the next two weeks on regular posting dates, MWF.

Charles Niemeier, member of PCAOB

It has now been 30 days since Mr. Niemeier’s really big splash.  The New York State Society of CPAs sponsors an annual conference featuring speakers from the Public Company Accounting Oversight Board (PCAOB).  On September 10, 2008, outgoing PCAOB member Charles Niemeier assailed the Securities and Exchange Commission (SEC) push to replace U.S. generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS).  In his strongest public comments (pdf version) to-date, Niemeier came out strongly in favor of retaining U.S. GAAP.  Two public accounts of his remarks quickly became available, along with two commentaries:

Before analyzing his speech, I’ll say a few words about his background.  (more…)

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This is part one of an eight part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues over the next two weeks on regular posting dates, MWF.

Please be aware that you will need more time than usual to read this on Shyam Sunder, a blog essay.  I’m reviewing three pieces of work by Shyam Sunder.  Instead of a normal blog post of 500-800 words, this checks in at 3,400.  Be assured that the read is very much worth it.

Shyam Sunder

Shyam Sunder, Yale professor

Shyam Sunder, Ph.D., is truly a heavy hitter of an accounting theorist.  He is a tenured, full professor at Yale and is one of the very biggest names in accounting academe.  I’ve read of his work for years (his resume lists six books and over 150 refereed articles in the most highly regarded journals), and I stand in awe of his ability to get so much more out of 24 hours per day and 30 days per month than do I.   He is well respected by other professors, having served as president of the American Accounting Association (national group of accounting professors).  His brief  bio is very revealing.  It is an understatement to say that he shines much, much, much brighter on the brilliancy scale than I.

In reviewing his stance on IFRS, I will be referring to these three works (listed chronologically):

Dr. Sunder does not support the SEC decision to move the U.S to IFRS.  His points are sophisticated and are mostly outside the norm of those typically found on Internet web sites and/or newspapers.  However, I have tried to explain his work in such a way that a typical undergraduate student can understand.  I don’t think there is any reason now to be unaware of his work.


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There’s a day for everything and everybody.  HolidayInsights.com maintains a nearly exhaustive list:   Coming up are:

  • Oct. 5 World Teacher’s Day
  • Oct. 6 Come and Take It Day
  • Oct. 6 Mad Hatter Day
  • Oct. 6 Physician Assistant Day
  • Oct. 7 Bald and Free Day
  • Oct. 8 World Smile Day
  • Oct. 8 American Touch Tag Day
  • Oct. 8 Emergency Nurses Day
  • Oct. 9 Moldy Cheese Day

Moldy Cheese Day?  Bald Day?  GMAB (give me a break)!

I see days related to vocation and profession.  When is Accountant’s Day?  It is not listed at HolidayInsights.com.  Rajesh over at All About Accounting would like to know.  I’ll tell you in a couple of paragraphs.


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A  series the arguments of seven prominent opponents to the U.S. adoption of IFRS.

Shyam Sunder–IFRS Critic (Yale professor)
Charles Niemeier–IFRS Critic (PCAOB member)
Ray Ball–IFRS Critic (Chicago professor)
Ed Ketz–IFRS Critic (Penn State professor)
Tom Selling–IFRS Critic (consultant, retired Thunderbird prof)
Bob Jensen–IFRS Critic (Trinity professor, emeritus)
David Albrecht–IFRS Critic (Concordia professor, was of Bowling Green)

Yet to write:  Comprehensive argument for IFRS in the USA

Yet to write:  Comprehensive argument against IFRS in the USA

Yet to write: Comparing and Evaluating Both Sides of the IFRS Issue

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Next week on The Summa

Another long week.  Currently, I’m grading a grand total of 1,016 exam questions offered up by 130 students (and only 20% complete), so all serious blog articles will be put off.   The next posts out will be from the following topics:

  1. “Accounting Professors Who Blog,”  In some academic areas, it is almost mandatory for professors to blog (i.e., Law).  Why is it then that there are only nine blogs by accounting professors, and only six of those are American.  I can’t get to all of the things I’d like to read about.
  2. A review of Niemeier’s keynote address to the NYSSCPA conference on PCAOB.  He was kind enough to send it to me.  Eventually, I’ll try to put together all points made by the six principal critics of IFRS in the USA.
  3. A review of two pieces by Cara Patterson of the NYSSCPA e-zine Trusted Professional,
  4. An article in which I examine the original dream of IFRS and the nightmare it has become.
  5. General thoughts on my job search.  If you have a need for an accounting professor, please e-mail me at albrecht@profalbrecht.com
  6. I have not even weighed in on Congress’s intent to have the final say on fair value accounting (and the implications of this for IFRS).  I can’t imagine any more devastating turn of events for IFRS than to have Congress get involved in tinkering with individual accounting rules.

If you would like for me to  consider additional topics, please e-mail me or leave a comment at the bottom of this post.

I appreciate that readership is up to about 150 on the days I add an article, and about 75 on the off days.  If you like this blog, then please pass the word.

Over and out – – David Albrecht

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Have you ever heard that a good accountant is a credit to the accounting profession?  I prefer to think that a good accountant is a debit to the accounting profession.

These images are for those needing a smile.   I’m using royalty free images from Broderbund and my own warped sense of humor.  My renditions are not in the public domain.

Over and out – – David Albrecht

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I am finding the IFRS v. GAAP thing to be absolutely fascinating.

After a lot of study, I have come to think of it as four separate topics.

(1)     There are substantial advantages to the world if IFRS becomes the lingua franca of financial statements.  Despite David Tweedie’s attempts to hawk IFRS to the world, this is the aspect of IFRS that I never see any really good articles on.  Do they exist?  This is not the same as are there any substantial advantages to the U.S. if it swtiches to GAAP.  This is treated under topic two.

(2)     There are some substantial disadvantages to the U.S. if IFRS become the new GAAP for SEC reporting purposes.  These receive most of the ink.  The principals here are Jensen, Selling, Niemeier, Ball and Sunder.  To be honest, the arguments are compelling and their substance has never been addressed by IFRS defenders.

(3)     The national politics of this is absolutely fascinating, sort of like a bad horror film.  Jensen has done the most here, saying that the political motivation for Cox simply does not pass the smell test.

(4)     There are many twists and turns of interest to academics who study the process of standard setting, either from a political science perspective or an historical perspective.

I think that any of these represent serious issues for academic study.

For my part, I’ve been blogging.  It is difficult becaue there are four somewhat distinct areas with considerable overlap an with real-time events occurring in untidy sequence.  Moreover, I like blogging about these issues because, as an academic, one aspect of the job description is to reflect on what is happening in my neck of the woods.  One of the true key advantages of blogging is that it benefits the writer to organize and develop his/her thoughts on a topic.

Over the past few months, there have anti-IFRS arguments:  Bob Jensen, Tom Selling, Charles Niemeier (PCAOB member)  (my take on the politics behind his revelations remains my most popular blog piece), Shyam Sunder, Ray Ball.

I’ve had a lot to say about IFRS, but it has largely just been talk.  Each of the above 5 has something unique and special to say about why IFRS is not a good idea for the U.S.

A few months ago on AECM, I suggested that for IFRS to realize its dreams of leading the way to an international financial system, it needed an International infrastucure.  On Friday, I applied this to the anti-IFRS in the U.S. thread.  My argument is at:  Why IFRS Won’t Work in the United States.

Now, I wonder if irony is the correct term to apply to apparently irreconcilable notions:  (1) the world will benefit if IFRS is adopted by everyone in the world, and (2) the U.S. will incur significant costs if it adopts IFRS.

Today, I’ll add my second original piece to the anti-IFRS argument with an analysis of the incremental benefits and incremental costs to the U.S. if IFRS is to be adopted.  This second essay is titled:  Benefits and Costs to U.S. Adoption of IFRS.

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In this essay, I apply a well known accounting framework to the issue of whether or not to adopt IFRS as a basis for U.S. corporations to use when preparing financial statements.  The conclusion I draw is that adopting IFRS costs trillions of U.S. dollars to the American investment community.

In the course Managerial Accounting the primary topic is the inclusion of accounting information for making decisions.  The framework we use is called incremental analysis.  Essentially, the benefits from taking the proposed course of action should exceed the costs of taking the proposed course of action.  Not profound in any way, it is plain common sense.  The incremental analysis is shown in the following chart:

Incremental analysis framework to be applied to IFRS issue.

Incremental analysis framework to be applied to IFRS issue.

When performing an incremental analysis, it is absolutely essential to tie down the party that is receiving the benefits and incurring the cost.  Here, it is easy.  The SEC states:

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.  As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.

So in this analysis, the identified group for whom the incremental analysis is performed is most definitely U.S. investors.  It is likely that if another group were identified, such as corporate executives or partners of large auditing firms, then the incremental analysis would lead to different results.  Never-the-less, the Securities and Exchange Commission was created to bring order to U.S. securities markets and to protect investors.  Therefore, investors is the group that matters today.

The two key characteristics of the current system of financial markets related to companies following U.S. GAAP, pertain to the corporate cost of capital and investor return.  First, companies seeking capital in the U.S. incur the lowest cost of capital in the world.  Second, U.S. investors reap the highest expected returns on their investment when compared to any other world financial markets.

Many believe that having good accounting rules is a fundamental reason for why it works so well.  That we have good rules (better than any other set ever created) results from a process that has evolved over the years.  Essentially, many U.S. executives that run corporations will bend/break/disregard any rule that gets in the way of reporting numbers the executives want reported.  U.S. auditors have had little success over the years in getting companies to report good faith, honest numbers.  There have been cycles of prosecutors taking company execs to court, courts requiring more specific rules for convictions, and then rule makers tightening the rules.  It is frequently said that American accounting rules now have many “bright lines” that companies must absolutely follow when they prepare financial statements.  The entire system of compliance and jurisprudence has resulted in the U.S. making very expensive investments in creating the accounting rules.

IFRS rules, while a step up for many (or even most) of the countries that have adopted them, actually represent a step backwards for the U.S., at least in the bright line department.  Supporters of IFRS say the bright lines are not needed because company execs are supposed to do what is right.  Sure.  What universe do they live in?  Certainly not mine.  Certainly not the good ole U.S. of A. There are exceptions, such as the reporting for contingencies, but for the most part it is U.S. GAAP that has bright lines and IFRS that doesn’t.  Consequently, companies that use IFRS get to massage their numbers, and reported earnings are at least 10-15% higher on average under IFRS than GAAP.  All of this is indisputable scientific fact.

To make a long story very short, if the U.S. switches from GAAP to IFRS, the market values for stocks and bonds are going to go down.  The amount of decline is one of the additional costs to put into the benefit/cost frame work.  How much?  I tried to build a contraption or model, but it contained so many assumptions it was indefensible.  But we need a numbers, so I’ll say approximately $3 trillion USD, could be more or a lot more.

$3 trillion, when U.S. market capitalization is somewhere in the range of $15 trillion to $18 trillion, is very very significant.  To get it I take the $1.5 trillion USD market decline from Monday’s defeat of the bail-out and double it.  It is a nice round number and probably conservative (I might have chosen to triple or quadruple it).

Other costs?  The CEO of British Petroleum said that the conversion for his company in the first year was $100 million USD.  Second and third year costs could expand the total to $150 million USD.  Apply this to 10,000 SEC reporting companies, and then add in several thousand privately held companies, hospitals, universities, etc. and the number is easily $1 trillion USD.

Investors and accountants need education and training, so they can learn to read and interpret IFRS-based financial statements.  How much is this worth?  There is absolutely no way of knowing.  How much did itc ost when President Clinton shut down LAX for three hours so he could get a haircut on Air Force One?  He only inconvenienced at least 100,000 people, costing them three hours or more of productivity.  WRT IFRS, we’re talking about more than a million accountants and 50 million investors.  The number is huge.  But we need a number.  Let’s say another trillion.

OK, now for the benefits.  Except for reduced audit fees in previous years (auditors will have to take corporate numbers at face value), there are none.  Reduced audit fees will amount to $100 billion over time and present valued.  Stock market returns are lower, not higher, and are already factored in.

There are no other benefits, at least to U.S. investors.  The U.S. switching to IFRS does not save investors any money for interpreting the statements of foreign companies, because those statements already need to be interpreted.  What U.S. companies do has no impact on the effort U.S. investors expend to review company financials from of the parts of the world.  The SEC and IASB talk about benefits from switching to IFRS, but the benefits accrue to U.S. corporate execs, U.S. auditors, and European investors, not U.S. investors.

Updating our chart, we get:

The cost of IFRS to U.S. investors will be about $5 trillion USD.

The cost of IFRS to U.S. investors will be about $5 trillion USD.

So, it will cost five trillion USD if the U.S. switches to IFRS from GAAP.  This is such a huge number that it boggles the mind.  It shows that moving to IFRS is not in the national interest of the United States of America, and it is the reason why I oppose switching from GAAP to IFRS.

Over and out – – David Albrecht

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