Archive for January, 2009

600px-united_states_securities_and_exchange_commissionsvgJust to ease your efforts, I’ve scanned through the 184 page SEC Proposed Roadmap to IFRS and have picked out the issues for which the SEC is requesting comment.  There are 66.  Comments due on or before February 19, 2009. Comments can be sent via e-mailto rule-comments@sec.gov.  Include “File Number 87-27-08” on the subject line.

Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers

1.  Do commenters agree that U.S. investors, U.S. issuers and U.S. markets would benefit from the development and use of a single set of globally accepted accounting standards? Why or why not? What are commenters’ views on the potential for IFRS as issued by the IASB as the single set of globally accepted accounting standards?

2. Do commenters agree that the milestones and considerations described in Section III.A. of this release (“Milestones to be Achieved Leading to the Use of IFRS by U.S. Issuers”) comprise a framework through which the Commission can effectively evaluate whether IFRS financial statements should be used by U.S. issuers in their filings with the Commission? Are any of the proposed milestones not relevant to the Commission’s evaluation? Are there any other milestones that the Commission should consider?

3. Do commenters agree with the timing presented by the milestones? Why or why not? In particular, do commenters agree that the Commission should make a determination in 2011 whether to require use of IFRS by U.S. issuers? Should the Commission make a determination earlier or later than 2011? Are there any other timing considerations that the Commission should take into account?

4. What are commenters’ views on the mandated use of IFRS by U.S. issuers beginning in 2014, on an either staged-transition or non-staged transition basis? Should the date for mandated use be earlier or later? If the Commission requires the use of IFRS, should it do so on a staged or sequenced basis? If a staged or sequenced basis would be appropriate, what are commenters’ views on the types of U.S. issuers that should first be subject to a requirement to file IFRS financial statements and those that should come later in time? Should any sequenced transition be based on the existing definitions of large accelerated filer and accelerated filer? Should the time period between stages be longer than one year, such as two or three years?

5. What do commenters believe would be the effect on convergence if the Commission were to follow the proposed Roadmap or allow certain U.S. issuers to use IFRS as proposed?

6. Is it appropriate to exclude investment companies and other regulated entities filing or furnishing reports with the Commission from the scope of this Roadmap? Should any Roadmap to move to IFRS include these entities within its scope? Should these considerations be a part of the Roadmap? Are there other classes of issuers that should be excluded from present consideration and be addressed separately?

7. Do commenters agree that these matters would affect market participants in the United States as described above? What other matters may affect market participants? Are there other market participants that would be affected by the use by U.S. issuers of IFRS in their Commission filings? If so, who are they and how would they be affected?

8. Would a requirement that U.S. issuers file financial statements prepared in accordance with IFRS have any affect on audit quality, the availability of audit services, or concentration of market share among certain audit firms (such as firms with existing international networks)? Would such a requirement affect the competitive position of some audit firms? If the competitiveness of some firms would be adversely affected, would these effects be disproportionately felt by firms other than the largest firms?

9. What are commenters’ views on the IASB’s and FASB’s joint work plan? Does the work plan serve to promote a single set of high-quality globally accepted accounting standards? Why or why not?

10. How will the Commission’s expectation of progress on the IASB’s and FASB’s joint work plan impact U.S. investors, U.S. issuers, and U.S. markets? What steps should be taken to promote further progress by the two standard setters?

11. The current phase of the IASB’s and FASB’s joint work plan is scheduled to end in 2011. How should the Commission measure the IASB’s and FASB’s progress on a going-forward basis? What factors should the Commission evaluate in assessing the IASB’s and the FASB’s work under the joint work plan?

12. What are investors’, U.S. issuers’, and other market participants’ views on the resolution of the IASB governance and funding issues identified in this release?

13. What steps should the Commission and others take in order to determine whether U.S. investors, U.S. issuers, and other market participants are ready to transition to IFRS? How should the Commission measure the progress of U.S. investors, U.S. issuers, and other market participants in this area? What specific factors should the Commission consider?

14. Are there any other significant issues the Commission should evaluate in assessing whether IFRS is sufficiently comprehensive?

15. Where a standard is absent under IFRS and management must develop and apply an accounting policy (such as described in IAS 8, for example) should the Commission require issuers to provide supplemental disclosures of the accounting policies they have elected and applied, to the extent such disclosures have not been included in the financial statements?


16. Do commenters agree that certain U.S. issuers should have the alternative to report using IFRS prior to 2011? What circumstances should the Commission evaluate in order to assess the effects of early adoption on comparability of industry financial reporting to investors?

17. Do commenters agree with the proposed criteria by which the comparability of an industry’s financial reporting would be assessed? If not, what should the criteria be?

18. Which eligible U.S. issuers have the incentive to avail themselves of the proposed amendments, if adopted? Are there reasons for which an issuer that is in a position to file IFRS financial statements under the proposed amendments would elect not to do so? If so, what are they?

19. Is limiting the proposal to the largest 20 competitors by market capitalization an appropriate criterion? Should it be higher or lower? Should additional U.S. issuers be eligible to elect to report in IFRS if some minimum threshold of U.S. issuers (based on the actual number or market capitalization of U.S. issuers choosing to report in IFRS) elects to report in IFRS under the eligibility requirements proposed? To the extent additional U.S. issuers are not permitted to report in IFRS even if such a minimum threshold is met, are such non-eligible U.S. issuers placed at a competitive disadvantage vis-à-vis U.S. issuers reporting in IFRS?

20. Would the use of different industry classification schemes as proposed be unclear or create confusion in determining whether an issuer is IFRS eligible? Should we require that all issuers use a single industry classification scheme? Why or why not?

21. What impact will the Commission’s determination to allow an industry to qualify as an “IFRS industry” without majority IFRS use have on the Commission’s objective of promoting comparability for U.S. investors? How will this impact U.S. investors, U.S. issuers, and U.S. markets? Is the use of IFRS more than any other set of financial reporting standards the right criterion? Should it be higher or lower?

22. Should the Commission permit additional industries to qualify as IFRS industries, and thus additional U.S. issuers to become early adopters, as more countries outside the U.S. adopt IFRS? Alternatively, should the group of potential industries and early adopters be limited to those that qualify at the time the Commission determines to permit early adoption?

23. Do commenters have any suggestions about the procedural aspects of the proposed eligibility requirements, e.g., the procedure for obtaining a letter of no objection from the Commission staff or the minimum contents of the required submission? Is such a procedure necessary? Do commenters agree that such a procedure would assist both issuers and investors? Should the procedural aspects of the proposed eligibility requirements be less formal? Should the procedure be similar to that in the no action letter process regarding shareholder proposals under Rule 14a-8 of the Exchange Act? Should the letter of no objection be advisory only? Should obtaining a letter of no objection be optional? Is the method for calculating eligibility clear and appropriate or are there alternative suggestions that should be considered? Should the Commission publish standards or criteria to guide the staff’s determination? What do commenters believe the respective role of the Commission and its staff should be in making these eligibility determinations? Should the Commission post on its Web site all submissions and responses, including those for which the staff does not issue a no-objection letter?

24. Currently, some public companies in the U.S. public capital market report in accordance with IFRS and others in accordance with U.S. GAAP. Today, however, this ability to report using IFRS exists only for foreign companies. What consequences, opportunities or challenges would be created, and for whom, of extending the option to use IFRS to a limited number of U.S. companies based on the criterion of improving the comparability of financial reporting for investors?

25. Do commenters agree that the criterion of enhanced comparability is the correct one? Are there other criteria that should be used? For example, should issuers be eligible based on their size or their global activities? If a size criterion were used to include the largest U.S issuers, what should the cut-off be? Should there be a criterion based on the absence of past violations of the federal securities laws111 or based on shareholder approval?

26. Do commenters agree that the proposed required disclosures are appropriate? If not, what disclosures should be provided?

27. What are commenters’ views on the accounting principles that should be used by those U.S. issuers that elect to file IFRS financial statements if the Commission decides not to mandate or permit other U.S. issuers to file IFRS financial statements in 2011? Should the Commission require these issuers to revert back to U.S. GAAP in that situation?

28. Is it appropriate to exclude investment companies, employee stock purchase, savings and similar plans and smaller reporting companies? Are there other classes of issuers or certain industries that should be excluded?

C. Transition

29. Should we limit the first filing available to an annual report on Form 10-K, as proposed? If not, why not? Is the proposed transition date of fiscal years ending on or after December 15, 2009 appropriate? Should it be earlier or later, and why? What factors should be considered in setting the date?

30. Are there any considerations that may make it difficult for an eligible U.S. issuer to file IFRS financial statements? Are there considerations about filing IFRS financial statements that would weigh differently for an eligible U.S. issuer than they would for a foreign private issuer that files IFRS financial statements?

31. What difficulties, if any, do U.S. issuers anticipate in applying the requirements of IFRS 1 on first-time adoption of IFRS, including the requirements for restatement of and reconciliation from previous years’ U.S. GAAP financial statements?

32. What would affect a company’s willingness to use IFRS if it were eligible to do so? For example, some market indices, such as the S&P 500, currently only include issuers that report in U.S. GAAP. Are there other investment instruments or indices that would affect companies that would be eligible to use IFRS under the proposed criteria? Would the ability to be included in the S&P 500, or other instrument or index affect whether an eligible U.S. issuer decides to use IFRS? Would these indices be prepared to accept IFRS, and, if so, how long would it take for them to change their criteria? Would more issuers be likely to use IFRS after they do? Should these considerations influence our decision on whether or when to permit or require U.S. issuers to use IFRS in their Commission filings?

33. To facilitate the transition to IFRS, should we add an instruction to Form 10-K and Form 10-Q under which an issuer could file two years, rather than three years, of IFRS financial statements in its first annual report containing IFRS financial statements as long as it also filed in that annual report three years of U.S. GAAP financial statements? Under such an approach, an issuer could, during its third year after beginning its IFRS accounting, choose to file a Form10-K/A with IFRS financial statements covering the previous two fiscal years. For the current (third) fiscal year, the issuer could then file quarterly reports on Form 10-Q using IFRS financial statements. For example, a calendar-year issuer that began its IFRS accounting for the 2010 fiscal year would use U.S. GAAP to prepare its Forms 10-Q and Forms 10-K for the 2010 and 2011 fiscal years. In 2012, that issuer would have the option of filing a Form 10-K or a Form 10-K/A with IFRS financial statements for 2010 and 2011, which would allow it to use IFRS in its quarterly reports during 2012, or continuing to use U.S. GAAP. In either case, the Form 10-K covering the 2012 fiscal year would include three years of IFRS financial statements.

D. Alternative Proposals for U.S. GAAP Information

34. What are commenters’ views on Proposals A and B relating to U.S. GAAP reconciling information? Which Proposal would be most useful for investors? Is there a need for the supplemental information provided by Proposal B? Would the requirement under Proposal B have an effect on whether eligible U.S. companies elect to file IFRS financial statements? To what extent might market discipline (i.e., investor demand for reconciliation information) encourage early adopters to reconcile to U.S. GAAP even in the absence of a reconciliation requirement?

35. What role does keeping a set of books in accordance with U.S. GAAP play in the transition of U.S. issuers to IFRS? What impact will keeping U.S. GAAP books have on U.S. investors, U.S. issuers, and market participants?

36. How valuable is reconciliation to U.S. investors, U.S. issuers, and market participants? How valuable is reconciliation to global market participants? Are there some financial statements (such as the statement of comprehensive income) which should not be required to be reconciled to U.S. GAAP?

37. Under either Proposal, would investors find the U.S. GAAP information helpful in their education about IFRS or in being able to continue to make financial statement comparisons with U.S. (and non-U.S.) issuers that continue to prepare U.S. GAAP financial statements? Would one alternative be more helpful to U.S. investors, regulators, or others in understanding information prepared under IFRS or to continue to make comparisons with issuers who prepare U.S. GAAP financial statements?

38. Should we be concerned about the ability of U.S. issuers that elect the early use of IFRS to revert to U.S. GAAP? Would either Proposal be preferred to facilitate such a reversion, should that be appropriate or required as described above?

39. Under Proposal B, should the proposed U.S. GAAP financial information be audited? Is the proposed role of the auditor appropriate? Should the proposed U.S. GAAP financial information be filed as an exhibit to the Form 10-K annual report, instead of as part of the body of the report? Is the proposed treatment of the information appropriate? For example, should the information be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act? Should we require that the supplemental U.S. GAAP information be contained in the annual report that is prepared pursuant to Exchange Act Rule 14a-3(b)? Should the supplemental U.S. GAAP information appear as a note to the financial statements? Is the proposed role of the auditor appropriate?

40. Under either Proposal, should we provide more guidance as to the form and content of the information called for? Under either Proposal, should we require that additional information be provided, such as a “full reconciliation” as is required under Item 18 of Form 20-F? Is there an intermediate position between the reconciliation under Proposal B and the reconciliation under Item 18 of Form 20-F?

41. Under either Proposal, should we require that the issuer’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” prepared under Item 303 of Regulation S-K contain a discussion of the reconciliation and the differences between IFRS as issued by the IASB and U.S. GAAP?

42 Should we require supplemental U.S. GAAP information, such as that in Proposal B, for all quarterly periods covered by IFRS financial statements?

43. Should the option to report under IFRS, whether under Proposal A or Proposal B, automatically terminate as of a date certain? If so, should that date be a set period of time? For example, should it be three years following the effective date of an adopting release? Should it be a longer or shorter time period? Should it be measured from another date (e.g., the first permissible compliance date or the date of the first letter of no ofction issued)? What considerations should be part of our decision as to the date or duration?

44. Under Proposal B, does providing U.S. GAAP information require issuers electing to file IFRS financial statements to maintain sufficient information, records and controls in order to revert back to U.S. GAAP? If not, what additional information, records or controls must be maintained?

45. Under Proposal A, what additional information, records or controls would be necessary for U.S. issuers electing to file IFRS financial statements to maintain so that they could revert back to U.S. GAAP?

V. DISCUSSION OF PROPOSED AMENDMENTS A. The Use of IFRS Financial Statements in Commission Filings by Eligible Issuers 1. Proposed Amendments to Rule 4-01 of Regulation S-X 2. Proposed Definition of “IFRS Issuer”

46. Are the criteria for issuers eligible to file financial statements in accordance with IFRS as issued by the IASB clear from the proposed definition of “IFRS issuer?” If not, in what way is the definition unclear, and what revisions would be necessary to eliminate any lack of clarity?

47. Is there any ambiguity in the proposed amendments regarding the reasons for the distinction between “IFRS issuer” and foreign private issuer, and the application of the rules to each? If so, what is the nature of the ambiguity and what would be necessary to provide clarity?

48. Is the application of Regulation S-X and Regulation S-K to financial statements prepared in accordance with IFRS as issued by the IASB clear from the proposed amendments, or are there other items within those regulations that should be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as issued by the IASB? If so, how would the application of Regulation S-X and Regulation S-K be unclear if there were no changes to those other than those proposed? What changes would be suggested in order to make them clear?

B. Application 1. Article 13 of Regulation S-X

49. Is there any reason why an issuer would be unable to assert compliance with IFRS as issued by the IASB and obtain the necessary opinion from its independent auditor?

50. Is the application of Articles 1 through 12 of Regulation S-X to IFRS financial statements clear from the proposed Rule 13-02? If not, what further clarification is necessary? Are there other rules contained in Articles 1 through 12 that do not, or may not, apply to financial statements prepared in accordance with IFRS as issued by the IASB and that are not addressed in proposed Rule 13-02? If so, what are they and how should they be addressed?

51. A U.S. issuer engaged in oil and gas producing activities that has followed the successful efforts method and carries forward that practice under IFRS will have consistent reserves disclosure under FAS 19, FAS 69 and Industry Guide 2. If that issuer were to apply another method accounting permitted under IFRS, it may lead to inconsistencies between Industry Guide disclosure, FAS 69 disclosure, and the financial statements. Would such potential inconsistencies create ambiguity for users of that information or otherwise be a cause for concern? If so, what would be an appropriate means of addressing the inconsistencies?

2. Proposed Clarifying Amendments with Respect to References to IFRS as Issued by the IASB

52. With regard to specific references to U.S. GAAP in our regulations, should we amend the references to U.S. GAAP pronouncements to also reference appropriate IFRS guidance, and, if so, what should the references refer to? Would issuers be able to apply the proposed broad approach to U.S. GAAP pronouncements and would this approach elicit appropriate information for investors? Should we retain the U.S. GAAP references for definitional purposes?

53. With regard to general references to U.S. GAAP, is our proposed approach appropriate and sufficiently clear? If not, how should these matters be addressed differently and why?

54. Is our proposed approach sufficiently clear on how to address general caption data, segment data and schedule information outside the financial statements? If not, what changes should we make? Are there other places in our regulations that need to be addressed?

C. Proposed Amendments to Item 10(e) of Regulation S-K and Regulation G D. Related Disclosure and Financial 1. Selected Financial Data

55. Will three years of selected financial data based on IFRS be sufficient for investors, or should IFRS issuers be required to disclose in their selected financial data previously published information based on U.S. GAAP with respect to previous financial years or interim periods?

2. Market-Risk and the Safe Harbor Provisions

56. Should the Commission address the implications of forward-looking disclosure contained in a footnote to the financial statements in accordance with IFRS 7? For example, would some kind of safe harbor provision or other relief or statement be appropriate?

3. Disclosure of First-Time Adoption of IFRS in Form 10-K

57. Is the proposed disclosure in Form 10-K sufficient in prominence and content to indicate to investors that the issuer has changed its basis of financial reporting from that used in previous filings? If not, what further disclosure should be provided, and where? Should we require that an issuer disclose the criteria under which it is eligible to file IFRS financial statements? Should issuers be required to reference the letter of no objection in their first IFRS filing?

58. Should we amend Form 8-K to require “forward-looking” disclosure relating to an issuer’s consideration of whether it will file IFRS financial statements in the future? If so, what type of information should be disclosed, and at what point in time prior to the issuer actually filing IFRS financial statements? Would a requirement to make such forward-looking disclosure have any impact on an issuer’s decision to adopt IFRS? If so, what would the effect be?

4. Other Considerations Relating to IFRS and U.S. GAAP Guidance

59. Are there issues on which further guidance for IFRS issuers would be necessary and appropriate?

E. Financial Statements of Other Entities under Regulation S-X F. Pro Forma Financial Statements Provided under Article 11

60. Is the application of the proposed rules to the preparation of financial statements and financial information described in Sections V.D and V.E above sufficiently clear? If not, what areas need to be clarified? Are any further changes needed for issuers that prepare their financial statements using IFRS as issued by the IASB?

61. Under the proposed rules, an IFRS issuer or foreign private issuer may file financial statements of an entity under Rule 3-05, 3-09 or 3-14 prepared in accordance with IFRS as issued by the IASB even though the entity does not meet the definition of “IFRS issuer.” Should we also accept financial statements required under Rule 3-05, 3-09 or 3-14 prepared in accordance with IFRS as issued by the IASB without regard to the status of the issuer as an IFRS issuer or foreign private issuer? Should our acceptance depend on characteristics of the entity whose financial statements are being provided, such as that the entity already prepares IFRS financial statements or the entity principally operates outside the United States?

62. Are there other rules in Regulation S-X that should be specifically amended to accommodate our proposal? If so, how would the application of those rules be unclear if there were no changes to those rules, and what changes would be suggested in order to make them clear?

G. Industry Specific Matters 1. Disclosure Pursuant to Industry Guides

63. Should an IFRS issuer be required to continue to comply with the disclosure requirements of FAS 69? What alternatives may be available to elicit the same or substantially the same disclosure? Proposed Rule 13-03(d) of Regulation S-X is modeled on an instruction relating to FAS 69 in Item 18 of Form 20-F. Does this proposed rule need to be modified in any way to more clearly require filers to provide information required by FAS 69?

H. Application of the Proposed Amendments to Other Forms, Rules and Schedules 1. Application of Proposed Amendments to Exempt Offerings 3. Application of IFRS to Tender Offer and Going-Private Rules

64. Is the guidance in this proposal sufficient to avoid any ambiguity about the use of IFRS financial statements in exempt offerings? If not, what additional clarification is needed? Is any revision to forms or rules necessary?

65. Are there other rules or forms under the Securities Act or the Exchange Act that should be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as issued by the IASB? If so, how would the rules or forms be unclear if there were no changes to those forms, and what changes would be suggested in order to make them clear?


66. Are there other considerations in addition to those discussed in this release that the Commission should consider as part of the proposed amendments to permit the limited use of IFRS or its future decision regarding the use of IFRS by U.S. issuers?

Over and out – – David Albrecht

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In a move that should have sent tremors throughout the accounting world, the European Commission (executive branch of the European Union) on Monday, January 26, proposed funding the operations of the IASB (International Accounting Standards Board) and its parent organization IASCF (International Accounting Standards Committee Foundation).  The proposed level of funding is €15 million Euros ($19.7 million USD) annually for a three year period.

The $19.7 million USD is nearly as much as the SEC $23.7 million USD annual contribution to the Financial Accounting Foundation, parent to both the FASB and the GASB.  The FASB consumes $31 million USD of the FAF’s $41 million USD budget.  If the IASB accepts the funding, it could greatly expand its operations.leasheddog1

This is a clear attempt by the EU to buy the IASB.  “Will you be my b*tch?”

According to Kate Burgess (Accountancy Age), the IASB then could be held more accountable by the EU.  According to Hew Jones (Guardian), “The EU has long sought to increase its influence over the accounting standards bodies, which [currently] receive no direct EU funding. ”  Kevin Reed (Accountancy Age) reports of UK ASB’s Ian Mackintosh:

The IASB must resist extreme pressure against a European carve-out from its standards around fair value
accounting, and push towards convergence with the US or face going out of existence, deathorglorywarned Accounting Standards Board chairman Ian Mackintosh. ‘These pressures bring about threat or opportunity. It’s death or glory.’


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Mary Schapiro Shows Pluck

pluck (noun)
the trait of showing courage and determination
in spite of possible loss or injury

Mary Schapiro has President Obama's backing

Mary Schapiro has President Obama's backing

Mary Schapiro, recently confirmed chair of the SEC, responded to written questions posed by Senator Carl Levin (D-Michigan).  Her comments show considerable insight into the workings of government regulation.  Some are controversial.  I believe they reveal a seasoned regulator who pretty much has things correctly figured out.  I’m posting parts of her response that deal with accounting (after all, that’s all I care about).  Very briefly, she discloses:

  1. She’s satisfied with the current relationship between the SEC and the FASB–that is, the FASB should continue to make rules free of political interference, even from Congress.
  2. She does not believe fair value accounting was a significant factor in the recent financial crisis.  In other words, the accounting rule did not cause the crisis.
  3. She is not ready, at the current time, to delegate U.S. standard setting to the IASB.
  4. She believes that the series of annual exemptions should cease and that SOX 404 internal control requirements should be applied to small publicly reporting companies.
  5. She does not believe that inspection and regulation of foreign auditing firms should be delegated to foreign government regulators.

OK, all of this sounds great.  It’s good enough to gain the benefit of the doubt.


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Mary Schapiro replaces Christopher Cox at the SEC

Mary Schapiro replaces Christopher Cox at the SEC

Christopher Cox’s resignation took effect on Tuesday.  An interim was appointed.  But the interim will be short serving.  Mary Schapiro was approved unanimously by the U.S. Senate yesterday.  Her term officially begins very soon.

I find her choice and approval to be very interesting.  Some major newspapers came out strongly against her appointment, such as the Wall Street Journal, New York Times and Washington Post.  Nobody came out in favor. According to the critics, it is feared that she will not make a good chair because she prefers principles and not rules for regulating market participants.  She seems to believe that rules create fraud, that market participants will behave better when not forced.  She has a history of desiring arbitration in disputes between investors and corporations, which has not resulted in stiff penalties for corporate wrong-doers or much protection for investors.

The rap on her is that she is neither a strong, independent investor advocate nor a pro-business shill.  Rather, she is a regulatory lifer who prefers to avoid confrontations. She isn’t into making waves. A softer, gentler approach to regulation, if you will.

The people aware enough to comment on her selection generally think that after the most recent period of corporate excess and an artificial boom-bust, the country needs a strong investor advocate who will tip the scales away from corporate executives.

Never-the-less, she has received unanimous confirmation.

I’ve opposed her appointment for several reasons.

First, she is committed to moving to a single set of world-wide accounting standards.  Second, she does not seem to have grasped the notion that corporate executives, as a group, can be generally described as myopic and self-serving.  Third, she doesn’t seem opposed to the idea that markets are completely (or mostly) efficient with respect to all information.

A picture of the new administration’s view towards markets and regulation is starting to emerge.  Market participants will act ethically in ways consistent with the greater good if there are fewer rules against bad behaviors.  Because markets are efficient, markets can see through specific rules and fairly value securities.  Fraudulent, criminal activity is less common than thought.   The United States has a preeminent position amongst the world’s capital markets, and the world will follow United States leadership.

I see problems under the new economic regime.  The traditional thought is that in the world of business, corporate managers are motivated only by financial factors, and these factors can be manipulated to achieve rational desired behavior.   I believe corporate managers can be motivated by other factors.  Never-the-less, ethical behavior is rare because business people simply factor in penalties against bad behavior as another cost that must be recovered.  Therefore, myopic, self-serving behavior in the world of business is much more common than in other parts of society.   The absence of a natural sense of ethics means, to me, that self-serving behavior by executives can be controlled only if there are rules against it and if penalties are strong and stiff.  A new push to rely on principles and ethics is doomed, and will result in an era of flourishing corporate excess.

Mary Schapiro’s appointment is not the end of the world, but I don’t think she will help make the world a better place.  Fortunately, we won’t have Christopher Cox around any more.

Debit and credit – – David Alrecht

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During her confirmation hearing, Mary Schapiro said, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would [enable] investors to compare companies around the world.”

I can understand why she would say this–she’s never had any graduate level eduction in financial accounting theory.  Had she any such study, she would recognize the absurdity of her statement.

I’ll give one reason today, then follow up later with more advanced treatments.

There should be no single world-wide accounting language (or sets of accounting standards) for the same reasons there should be no one world language.  Can you imagine the bruhaha that would follow President Obama saying during his inaugural speech that it would be beneficial for there to be one world language?  He could argue that  it would make it easier to communicate around the world.  Consequently, he had decided to move the United States to the world’s most spoken language:  Chinese.  Everyone in the U.S. would benefit from ease of international communications and there would be no downside.

Hah!  There would be so much disagreement with this proposal.  People would argue that the Chinese language evolved for a separate culture from what we have in the United States.  They would say that English works just fine to convey the thoughts, emotions and feelings that exist in our present American culture.  If we were to switch to Chinese, then communications here in the U.S. simply would not be as rich, we’d lose a lot of meaning.  There would be too much pain for negligible gain.

A language evolves to fit its culture.  Language is not static.  Moreover, there is no one best way for a language to be.  In the ancient Greek language, there are five words for the single English word of Love.  The words are:  Eros (ἔρως érōs), Philia (φιλία philía), Agapē (ἀγάπη agápē), Storge (στοργή storgē), and Thelema (θέλημα thélēma).  We don’t appreciate the need for so many words here and now.  But then, ancient Greeks would not appreciate being handcuffed with a single English word.

If President Obama were to order us to switch to Chinese, many would ask who is to gain the benefit from switching, everyone?  The answer would be–language teachers would benefit the most, and current United States residents who are native speakers of Chinese.  They could then always speak in their native language instead of using English.  Everyone else, which is most of the country, would suffer.

Really, there is no reason for the United States to switch from English to Chinese.  If Americans wish to speak to a person from Peking, they can get their communication translated.  The translation comes at a cost.  The benefit from avoiding this cost by switching would be much less than the huge opportunity costs of educating everyone in the U.S. to speak another language.  If we continued using English, then translation to Chinese would (and is) a trivial expense, and a minor inconvenience.

Similarly, there is no good reason for anyone to have the U.S. discontinue using its accounting language (GAAP) and switch over to IFRS.  Having multiple accounting languages in the world is a minor inconvenience and translation expenses are, in the grand scheme of things, trivial.  Moreover, GAAP seems to fit our culture, economy and system of financial markets.  For example, in the U.S. we generally hold that all investors should have equal access to the same information.  consequently we have standard accounting rules that don’t permit companies any flexibility in the preparation of their financial statements.  We then attempt to punish company executives if they attempt to circumvent the rules.  We would have major disruptions to our culture, economy and system of financial markets if we suddenly switched to IFRS because IFRS does not fit our mode of business.  Who would benefit if the U.S. switched to IFRS?  Certainly not investors, for the same rason that they would not benefit if the country moved immediately to Chinese.  The beneficiaries would be the accounting firms that would teach us the new IFRS, and company executives.

There should be no world-wide accounting language for the same reasons there should be no world-wide spoken/written language.  Anyone who touts the benefits of a single world-wide accounting language is simply ignorant.

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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Harold Rosenbaum, Chartered Accountant Extreme

Harold Rosenbaum, Chartered Accountant Extreme

I came across the funniest, cleverest and most interesting contribution to Accounting and the Popular Culture.  It is:  Harold Rosenbaum, Chartered Accountant Extreme, or HR for short.  HR may have been viewed by kids, mostly, but the story, wit and satire are sharp enough to please the most discriminating adult.

HR is about a chartered accountant who uses his accounting skills to solve crimes and put the bad guys behind bars.  I love it that when a bad guy threatens, Harold pulls out a pencil and sharpens it up.  The featured characters are:  Harold Rosenbaum, Jenny Florence, Ledger Lad, The X of Evil, Red Mackerel, and The Commissioner.

HR was created by Nelvana Limited for licensed viewing on YTV, the Canadian youth television network.  The animated cartoon shorts (all five minutes long, aired in 2005 and 2006).  They are available on Youtube, and are linked to from The Summa.

HR is the creation of Matt Ferguson (director and writer), with the creative assistance of artists Dani Strijleva, James Robertson and Nick Sun.   The cartoons were edited by Marcus Moore and the music is by Paul Intson.  Voices are by:  Peter Keleghan (Harold Rosenbaum), Leah Pinsent (Jenny Florence), Julie Lemieux (Ledger Lad), Tom McCamus (The X of Evil), Paul Soles (The Commissioner).

The five episodes in the series are:

  1. Audit Of Evil (aired December 22, 2005)
  2. Depreciation To Death (aired December 29, 2005)
  3. The Taxable Trap (aired January 5, 2006)
  4. Ledger Lad Liquidation (aired January 12, 2006)
  5. Dam: It’s Exploding (aired January 19, 2006)

Audit Of Evil (2005)

Synopsis: The episode opens with Harold and Jenny tied up, awaiting their death on top of a dam.  How did their predicament come about?  Harold explains that two days previously he had finished his last tax return of the season and now he was headed out on vacation to Tijuana.  Ledger Lad shows up and hopes for an opportunity to work on a balance sheet or some asset depreciation schedules.  In pops a new client, a once-upon-a-time chartered accountant (identified by his secret decoder ring) who has gone over to the dark side of accounting for tax evaders and organized crime.  He turns over a company coded file for Harold to decode, a file sure to reveal the sinister plans of The X of Evil.  Just as the client hands over the file, three thugs appear.  They shoot the bad accountant with a blow gun dart (putting him into a coma) and attack Harold and Jenny.  A fist fight ensues.  A thug pushes Harold out of an upper story window and Harold is falling when the episode ends.

Depreciation To Death (2005)


Synopsis: At the start of the episode, it is revealed that a thug had fallen out the window, not Harold.  The other two thugs flee.  Harold does not give chase, saying there are bigger fish to fry.  Newspaper headlines show the public to be worried.  In The Commissioner’s office, Harold says he doesn’t know who’s behind the plot, he just does the numbers.  Jenny, who trained as a cultural anthropologist, says that the dart came from Bora Bora.  The Commissioner says intelligence has reported that the mysterious X of Evil has been doing business in the South Pacific, and only wants to inflict terror on the city.  Harold turns to leave.  The Commissioner tells Harold to work with Red Mackerel, a G man, who will do all the dirty work, Harold only has to figure out the numbers.  Red Mackeral seems ominous, and suggests that Harold, Jenny and Ledger Lad meet with him 30 minutes later in an abandoned harpoon factory.  Elsewhere, The X instructs to thugs to return and take back the file before Harold figures out X’s plans to build a massive weapon that can destroy the city dam with sound waves.  X tells the thugs to destroy Harold.  At the factory, Harold starts to work through the file.  Harpoons are fired at Harold and Jenny.  The scene ends with several harpoons flying from all directions towards Harold.

The Taxable Trap (2006)


Synopsis: The harpoons all fall short of Harold.  Ledger Lad throws a net over the thugs and captures them all.  Red Mackerel arrives and accidentally lets the thugs escape.  Harold returns to work on decoding the file.  He discovers that X has purchased a three ton radio transmitter, 50 feet of copper wire and a pulse modulator, with which he intends to create a gigantic weapon that harnesses the power of sound waves.  He needs only one more ingredient–pattonite–the hardest substance known.  Harold sets a trap at the only store that sells pattonite.  An alarm is to be triggered by the assessment of sales tax on the purchase.  The thugs come in to purchase the pattonite.  When the purchase is rung up on the register and sales tax is added, the alarm is triggered and Harold and Jenny come out.  A fist fight with the thugs ensues.  The thugs grab Ledger Lad and flee the scene.  A car chase follows.  A thug spills a slick substance over the road, and Harold’s car flies over the edge of a cliff as the scene ends.

Ledger Lad Liquidation (2006)


Synopsis: Harold and Jenny jump out of the car before it goes over the edge of the cliff.  Back at the office, Harold examines the file for the clue to where Ledger Lad is being held, to no avail.  Red Mackerel arrives containing a video ransom request from X.  X demands one pound of pattonite, the final ingredient for the sound wave weapon.  Harold is to deliver it to the north wall of the city dam.  Harold returns to work on the file.  Jenny suggests a plan.   Disguised as Harold, she will deliver the pattonite to the dam.  Harold will arrive by small plane and get the drop on the thugs.  Harold agrees to the plan.  Jenny delivers the pattonite as planned.  As Harold arrives in his plane, he is attacked by The X of Evil in his plane.  X throws a razor sharp boomerang at Harold’s plane, and Harold’s plane crashes at the base of the dam as the episode ends.

Dam: It’s Exploding (2006)


Synopsis: The episode begins with Harold parachuting down to the base of the dam.  The three thugs attack him.  Harold reaches for his his adding machine, also dropping in by parachute.  Jenny drives up and Harold jumps into the car.  As they drive away to safety, Harold decides to return to the dam and save Ledger Lad.  Jenny fist fights with the thugs as Harold audits the file.  The thugs prevail and with rope tie up Harold and Jenny.  On top of the Dam, X (on a platform supported by one support) threatens Harold and Jenny with the sound wave weapon.  Harold stops the countdown by telling X that the stolen pattonite should have been accounted for as income.  If the accounting is not fixed, the books will be unbalanced.  Ledger Lad picks up on the hint, and moves to the edge of the platform.  The platform tilts, and The X of Evil falls into the dammed up water, thereby ending the threat. But the X swims out of the water and is revealed to be the paperboy.  The threat to the city was revealed to be a ruse to sell more papers.  The episode ends with the paper boy readying to fire the weapon at Harold and Jenny, so he could sell more papers with the best headline yet.

All in all, this is a veryfunny and entertaining cartoon video series.  Oh, the plot seems thin, but what do you expect from a cartoon. Ending episode five with a cliff hanger makes me wonder if more episodes had been planned but not created.

Please view these videos and let me know what you think.

Over and out – – David Albrecht

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Earlier this week I posted a video essay (Bailout and Poular Culture) about how citizens view the bailout in humor and mostly song.  The video essay contained links to Youtube videos.  All were good, some were very very good.  One thing they all have in common is that they are honest expresssions of how disagreement and disgust with what has happened to the country and the government response.

I took another trip to YouTube and found some more.  These are entertaining as well as sobering.  First, the headliners:  four songs and three skits/commentaries.    Then, the others.

Monster Crash

http://www.youtube.com/watch?v=28I0JK0byLU (November 14, 2008)

Headlining this collection of videos is Monster Crash, a slick and professional musical commentary on the economic crash.


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