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.
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.
Bob’s value to the anti-IFRS argument is magnified because of his forum. AECM, with a world-wide membership of about 1,000, is the only effectively functioning e-mail listserv for accounting professors. Originally created to discuss issues combining accounting education and technology, it has evolved to a general listserv for all matters of interest to accounting professors. It is a fair representation to say that this is Bob’s list. On a daily basis, he posts summaries and links for three to five interesting articles appearing on the web. The only criterion is that that they seem to him to be related to being an accounting professor. When someone responds to an issue, he will converse with them via e-mail for all to read. Of course, there are others that will chime in. AECM is a primary professional news source for many and has proven to be a unifying force. AECM is popular because (1) it is intellectually stimulating and (2) what Bob says is usually judged to have value. Although some disagree with him on one issue or another, it is safe to say that Jensen is a contemporary thought leader amongst academic accountants.
Bob Jensen, now retired to the Vermont mountains, has a long and distinguished career as an accounting professor. Copied from his web site is this brief biographical sketch:
On August 15, 2002, Professor Jensen received the American Accounting Association’s Outstanding Accounting Educator Award from the American Accounting Association. In 2004, he received the AI/ET Section Outstanding Educator Award for 2002-2003 Year. The AI/ET Section is the Artificial Intelligence/Emerging Technologies Section of the American Accounting Association. He has been an invited speaker at over 350 colleges and universities. He has a Ph.D. in accounting from Stanford University (1966). On May 14, 2006 he retired as the Jesse H. Jones Distinguished Professor of Business Administration at Trinity University in San Antonio. He was formerly the Peat, Marwick, Mitchell & Co. Professor of Accounting and Department Chairman at The Florida State University (1978-82), the Nicholas M. Salgo Professor of Accounting at the University of Maine (1968-78), and Associate Professor at Michigan State University (1966-68). He also worked as a CPA for Ernst & Ernst in Denver, Colorado (1959-61). After stepping down as Department Chairman at Florida State University in 1982, he returned to full-time teaching and research at Trinity University. He has lectured extensively both inside and outside the United States.
He is a prolific web surfer and remains extremely up-to-date on professional issues. He is considered an expert in the accounting for derivatives, and is currently writing a book on it.
Dr. Bob Jensen’s Opposition to the U.S. Adoption of IFRS
Dr. Jensen has three recurring themes in his argument against the U.S. moving toward adoption of IFRS as the basis for corporate financial statements.
- The IFRS are a weaker set of financial standards than the GAAP promulgated by the FASB. This will result in corporate executives having a field day as they manipulate the results of operations as reported in their financial statements.
- The rapid push for IFRS adoption does not pass the “smell test.”
- Standard setting by the IASB will not be responsible to the needs of U.S. investors. Rather it will be as ineffective as the United Nations.
The IFRS are a weaker set of financial standards.
Dr. Jensen says, “The bottom line is that IFRS is a weaker set of equity capital market accounting standards than the present FASB standards in the United States.” This is because they lack the bright lines of U.S. GAAP. Bright lines are important because they set bounds on corporate executives when they choose what to report in financial statements. Although there is a great deal of game-playing and non-compliance with U.S. GAAP, rules generally shape reporting behavior (William Bratton 2004, “Rules, Principles, and the Accounting Crisis in the United States” European Business Organization Law Review). The bright lines of GAAP produce better accounting reports than what can be expected from corporate use of IFRS.
He then shows how the needs of American financial markets have led to creation of strong accounting standards. “The FASB standards [are] heavily rule-based due to the continual battles fought by the FASB in the trenches of U.S. firms seeking to manage earnings and keep debt of the balance sheet with ever-increasing contract complexities such as interest rate swaps invented in the 1980s, SPE ploys, securitization “sales,” synthetic leasing, etc.” Weaker accounting standards may be fine and good for Europe, but not for the United States. “Because European financial markets are different in many ways, Europe has accepted a weaker set of accounting rules.” They are weaker.
My oft-repeated illustration is the “principle” that drivers should not speed when driving by a school. Without some bright line, how do you arrest someone reducing speed from 55 mph to 40 mph in a school zone? For this reason, we post a bright line saying that speeding is anything above 20 mph in a school zone. Then most drivers consistently do not exceed 20 mph in a school zone, and those that go 40 mph are subject to arrest.
Dr. Jensen also reasons that U.S. auditing firms have not been successful in getting companies to follow accounting rules over the years. He says that Sarbanes Oxley saved the auditing profession, giving it credibility that it had squandered from awful auditing in the 1980s and 1990s. Sarbanes Oxley also gives auditing firms backbone to stand up to corporate executives when they attempt to circumvent the bright lines of GAAP. Jensen fears that when the bright lines are removed, auditing firms will be ineffective in getting corporate execs to exercise the good professional judgment that IFRS calls for. As a result of all this, executives will have a field day under IFRS and be able to report just about any number they please in the financial statements. “Don’t you smell just a bit of train smoke on this very important watering down of U.S. GAAP?”
In my opinion, Dr. Jensen has nailed this one. He has been arguing this position for at least a couple of years, and his position is unassailable. He is an expert in several of the most complex accounting standards in both U.S. and IFRS versions. If he has concluded that IFRS are a weaker set of standards, then they are precisely that. Case closed.
Moreover, his logic is without fault in predicting dire consequences if corporate America is to use IFRS. It is consistent with the past century’s history of financial reporting and auditing. The only way that IFRS will operate as intended in the U.S. is if human nature somehow miraculously changes. And that isn’t about to happen.
The rapid push for IFRS adoption does not pass the “smell test.”
Bob Jensen defines IFRS as “International Fleecing of Responsible Standards.” Jensen notes two developments that trouble him greatly. On one hand the large CPA firms are lobbying hard for IFRS adoption in the U.S. On the other hand, SEC chairman Clifford Cox, in partnership with FASB chair Robert Herz, are recklessly rushing the U.S. to GAAP. Speaking to the CPA firm push for IFRS:
This begs the question of why the large auditing firms are lobbying so hard for IFRS standards to replace FASB standards? There are legitimate reasons given the complexity of auditing international firms having operations subject to varying domestic and international accounting standards. And there may be less litigation risk when bright line rules are replaced by principles-based standards that give auditors and clients much more flexibility in accounting for transactions.
But for me there are also smell test concerns here. Auditing firms love the soaring revenues from SOX, but they will love even more the soaring revenues from clients having to transition from FASB standards to IFRS international standards. Firstly, auditing firm clients will not understand IFRS such that auditing firms will make fortunes educating and training each of their clients about IFRS. Secondly, accounting systems, including enormous databases and software systems, will have to be overhauled. For example, all the firms in the U.S. who use LIFO inventory valuation will have to be changed to something else since IFRS does not allow LIFO. Walla — the consulting service revenue surge becomes remindful of the Roaring 1990s.
The added auditing firm revenue from the IFRS transition may be as much or more than the added revenue from SOX. … But to me this whole IFRS transition in the U.S. and the race to lock it in place just does not pass the smell test.
Jensen considers Cox to be a shill for big business and large CPA firm interests, “Chairman Cox is fervently trying to set the commitment for IFRS in stone before President Bush leaves office — perhaps in fear that a stronger Democratic Party Executive Branch and Legislative Branch may not be so inclined to drop the strong FASB standards.” He is also tough on FASB chair Herz for pretty much folding up shop in anticipation of IFRS adoption, and refers to the railroading job as the Cox-Herz express. In a later post he adds:
The large international accounting firms, the AICPA officials, and the SEC closed ranks in the U.S. and did not give all stakeholders (small CPA firms, companies, educators, legislators, etc.) any voice in the decision to wipe out U.S. GAAP in favor of IFRS by 2011. This was railroaded in favor of the self-serving large international accounting firms and Chris Cox abusing his power as head of the SEC. The best use of this train would be to ride Chris Cox out of town. McCain promises to rid us of Cox. I think Obama will do the same thing. But, but, but, Democrats and Republicans missed all sorts of opportunities for responsible government including attacking infectious greed from Main Street to Wall Street. Instead we’ve had repeated scandals in part due to a biased choice for Chair of the SEC with a hidden agenda bent on imposing principles-based standards where auditors and clients will be given vast flexibility to account for some transactions (like synthetic leases) any way they so choose.
It takes courage to call out government officials, AICPA leadership and large CPA firm executives for their self-serving actions, actions that defy the public interest. Given Jensen’s courageous lead in this area, others have started speaking up also. By any arm’s length evaluation of events, the push for push for IFRS in the U.S. is premature, by at least two decades according to Jensen. The push for IFRS stinks to high heaven. I believe that the motivations of the principals are so suspect that it is sufficient reason alone to reject IFRS adoption in the U.S.
Standard setting by the IASB will not be responsible to the needs of U.S. investors.
Jensen believes that (1) the IASB is woefully underfunded and lacks the institutional structure to effectively create accounting standards, and (2) the IASB will not be responsive to any national issues as it will need to create “world-wide” standards. He says:
People on the Cox-Herz Express just do not realize how dependent the IASB has been on FASB research, illustrations, and implementation guidelines of FASB rules. Without the FASB, the IASB does not have the infrastructure and the money to deal with the Taliban-like financial contract writers in the United States (where 80% if the lawyers in the world reside). The problem is that the IASB lacks the research staff, funding, and intense full-time effort of Board members to give us anywhere near the guidance of how to apply principles in many complicated specific instances. IFRS may allow the best accounting on the planet but there’s no roadmap (not even decent illustrations) on how to deal with complex contracts. The IASB may get better if it gets more money for research and hires specialists who really understand derivatives, structured financings, valuation complexities of interest rate swaps, deficiencies in regression testing of hedge effectiveness (like how can regressions look so great when the changes in value are so ineffective for hedging?), etc.
The FASB has been the IASB’s crutch. For the last two decades the IASB has had the pleasure to lean on the considerable research of the FASB and to lean the illustrations and implementation guidance generated by the FASB. Where would it have been today without the FASB’s research and guidance?
More frightening is where IFRS be when the FASB is dead and gone. The IASB is like a babe in the woods when it comes to the creative complexity U.S. firms have in writing contracts to manage earnings and keep debt off the balance sheet. These contract writers are like the Taliban and just keep coming back from their caves (on Wall Street we call them cubicles) again and again and again. They lose more than they win, but they never quit.
The [push to adopt IFRS] in the U.S. should be sidetracked until the IASB corrects more of its glaring weaknesses in standards, structure, research support, lack of illustrations, and implementation guidelines? You seem to be saying that global standards are becoming more in sight on the horizon, but that we aren’t there yet!
Jensen believes that all nations will ask for membership on the IASB so as to advance their own national interests. He says, “It may not be long until IASB member nations clamor for 192 board members. Welcome to the United Nations of Accounting Standard Setters (UNASS).” He says that the IASB is certain to be ineffective (as the United Nations) with large membership. “Would you like the United Nations to rewrite the U.S. Uniform Commercial Code?“
How do you propose that the IASB, after national standard setters like the FASB have been eliminated, deal with any nation’s financial reporting problems that are linked primarily to that nation for some reason such as interlinking with that nation’s tax code? …
It is one thing to want global standards for all financial reporting. It is quite another to deal with problems unique to each country. …
My point is that global standards are a lofty dream divorced from reality … In reality nations across the board have uniquely national issues that the IASB presently is ill-equipped to tackle. Why the rush if the needed IASB global standards are not in place and the IASB infrastructure and budget are not yet in place to become the monopoly standard setter for the planet earth? Granted the IASB has made progress, but it is nowhere near where it needs to be to dictate the financial reporting of the planet.
Bob is batting 1.000 with this theme. This, I believe, is the most telling argument against the SEC push for IFRS. The IASB simply isn’t ready. It may never be. So why not wait to make the change until a later time when it makes more sense?
Dr. Jensen has three important themes in his argument against the U.S. adopting IFRS at this time. If his concerns are not addressed, then any action taken by the SEC is unjustifiable.
Unfortunately, Jensen concludes that “Efforts to derail or at least postpone the Cox-Herz IFRS Express Train are utterly futile.” I certainly hope that isn’t so.