[Postscript: a well placed observer has questioned the wisdom of my claiming that certain SEC commissioners are ignorant. Upon glancing through transcripts of the commissioners’ remarks (released after the publication of this essay), I can understand now how “ignorant” was a poor choice of wording, and I apologize to the Commissioners for that word usage. At the time I wrote the essay, I was grasping for some reason why certain commissioners continue to spout sophistry (false reasoning). I chalked it up to ignorance. I now realize that I might never know the reason for the sophistry, as the SEC principals refuse to discuss the assumptions and conceptual foundations of their sophistry. Never-the-less, sophistry it is, and that’s what I was reacting to. Were I to write the article today, I would title it either: SEC Sophistry To Lead to Folly, or, SEC Errant Views To Lead to Folly. Profalbrecht, 11/27/09]
Yesterday, a third Commissioner of the Securities and Exchange Commission spoke out, (1) decrying the politicization of the accounting standard setting process, and (2) advocating the need for a single set of global accounting standards. By so speaking she aired her ignorance for all to see. [Sentence removed 11/27/09]
As reported in a Reuters update, “SEC’s Casey: Accounting Convergence Must Continue,” Kathleen Casey “warned against the over politicization of accounting rules, or attempts to pressure accounting rule makers to write rules that would favor a specific goal sought by a particular industry.” Earlier this week, another SEC Commissioner, Elisse Walter, said the same thing. SEC chair Mary Schapiro has been saying it since her confirmation hearings Not to be left in the cold, FASB Chair Robert Herz chimed in with a similar sentiment. Of course, they all chant the mantra of global accounting standards.
They are wrong. I hope everyone in the world knows it. [Sentence deleted 11/27/09]
Here’s why they are wrong.
There is no such thing as universal accounting truth. Accounting rules spring from the reason of human beings. The rules and principles that guide today’s capital markets are recent inventions. The most cherished accounting axiom–assets equal liabilities plus owners equity–has been around less than six hundred years. Before that there was simply no need for it, therefore it wasn’t yet invented. Here’s a news flash: that accounting axiom is obsolete and no longer works in today’s world (we’ve piled so much on it, it no longer balances).
Accounting rules that govern the formation of corporate financial statements all have economic consequences. It has always been this way. Every rule puts some interest group at an advantage over another. From the start, investors have clamored for more disclosure than the executives running corporations have wanted to supply. This tension is natural. There is no right or wrong in an absolute accounting sense, God has no such commandment.
It is any (or every) government’s domain is to adjudicate between competing economic interests. That is what government does. For example, governments are good at levying and collecting taxes. This has been going on since the beginning of human history. And what is tax but one group being forced to transfer it’s money to another group.
How does a government decide between competing interests? By politics.
It is foolish for anyone to abdicate his/her right to seek a political solution to any political, economic, social or military issue. Why would anyone want to do that? It is tantamount to denying the person’s free will, “No, I’m too stupid to decide for myself, you do it for me. Really, I insist.”
We have not always realized the political nature of standard setting in the U.S. However, since the formation of the FASB every potential accounting standard has had to go through a political process: discussion memorandum, then exposure draft. And the SEC always has the ability to override (which it has upon occasion).
Why then, are these people decrying the current politicization of accounting standards? It is because they don’t want to get trumped by someone else’s politics.
They are using a time-tested tactic: state a fallacy long enough and long enough and pretty soon it is accepted as verdad!
Please realize that no SEC commissioner has taken advanced education in accounting. Nor has the chief accountant. Nor has the current chair of the FASB. [Sentence removed 11/27] I put forth the notion that possibly, just possibly, they have missed out on something that the rest of us have known for a long time. It is the way of human beings that accounting standard setting is a political process.
If you can buy into that, then here’s the rest of the truth. Political factors, and the governmental processes that adjudicate between them, are not the same all over the world. They are different in parts of Europe and Asia than they are in the U.S. As a result, the League of Nations could not function as envisioned, neither could the United Nations.
Similar political processes affect accounting standard setting. Surprise! How reasonable is it to think that global accounting standard setters are going to be responsive to economic interests in your part of the world? France is already discovering that the IASB’s IFRS are not responsive to certain French economic interests. So France is balking. As it should. Ceding control of French economic interests over to the IASB was a stupid thing to do. It was incredibly stupid. And so it will be if the U.S. does likewise.
Unfortunately, the SEC commissioners are ignorant of all things accounting. It’s ignorance is leading it to adopt IFRS. And that, my friends, is pure folly. do not understand that they are sophist in the ways of accounting, Sophistry acted on is folly. [remarks edited 11/27/09] A folly that will cost of us trillions.
As has been chronicled in this blog, the smartest and wisest accounting professors (the nerds who study accounting for a living) have carefully explained why there should be no single set of global accounting standards. The SEC, though, is ignorant. That, or its commissioners are not educated enough to understand.sophist [edited 11/27/09]. Sob, that’s a crying shame.
Debit and credit – – David Albrecht