J. Edward Ketz is my round tuit. ??? A round tuit is anything that unlocks your sense of inertia, allowing you to start working on some task that has been delayed far too long.
An example helps. Have you, like me, ever been nailed for procrastinating? All the time. It probably followed this thought, “I’ll get a round tuit when there’s a free moment.” But everything else doesn’t get done and there’s no free time, so you never get a round to it.
Ed is my round tuit.
On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.
I never got around to reacting. Yesterday (March 29, 2010), Ed Ketz published his reaction, “The Iffiness of IFRS“. It’s better than anything I can write (anything Ed writes is always better than anything I can ever write, just take it for truth). Better late than ever, here are my personal reactions.
The SEC starts its statement by referring back to 1988 (when the SEC was chaired by David Ruder) when it established, amongst a lot of other things, a policy of working toward a single set of global accounting standards [Regulation of the International Securities Markets, Release No. 33-6807 (November 14, 1988) [53 FR 46963 (November 21, 1988)]]. I’ve written about this before. At one time it was thought that American interests could be advanced by exporting its stock market system (sometimes called the system of capital markets) to the world. It would make it easier to harvest foreign capital and bring it to the U.S., where it ought to be so that Americans could benefit. This goal, the colonization of foreign capital markets in the name of the USA, explains why U.S. stock exchanges purchased foreign stock exchanges, and why the SEC tried for years to get Europe to adopt American GAAP.
It absolutely astounds me that the SEC is clinging to this 22 years later. It is one thing to be of firm resolve, but it quite another thing to have your stubbornness transcend into its fourth decade (80s, 90s, 00s, 10s). Hey, Mary Schapiro and James Kroeker and Paul Volcker, conditions have changed since 1988, and a single set of global accounting standards has been proven to be sophistry. You three are very smart people. Please update your thinking.
Then, the SEC repeats a list of supposed benefits that would accrue (presumably to the USA) from a universally adopted set of global accounting standards:
- greater comparability for investors across firms and industries on a global basis;
- reduced listing costs for companies with multiple listings;
- increased competition among exchanges;
- better global resource allocation and capital formation;
- lowered cost of capital; and
- a higher global economic growth rate.
The world’s leading accounting theorists have dealt with these. Because IFRS permits professional judgments and alternatives, corporations have great flexibility in choosing what numbers to report and how to report them. There’s about as much honesty in IFRS-generated financial statements as in President Clinton’s denial about having sex with that intern. IFRS financial statements make for less comparability instead of more. Fuzzier financial statements make for a higher (not lower) cost of capital because investors have more trouble in figuring out what they mean. A higher cost of capital makes for both worse global resource allocation and a lower global economic growth rate. It is patently false to say that if the U.S. moves to IFRS, then American companies will experience reduced listing costs. U.S. companies are permitted to use GAAP-based financial statements everywhere for listing purposes.
The SEC follows up with the statement, “There was widespread support across all commenters for a single set of high-quality globally accepted accounting standards.” This statement is true only if you ignore all the opponents, of which there are many. If IFRS opponents, and their words, don’t count, then the SEC can make such a statement. Let me repeat myself. There is no theoretical justification for a single set of global accounting standards. Sound reason and common sense produces a conclusion that it’s just stupid. The country’s leading accounting professors have weighed in on this, and the SEC continues to deny the existence of countervailing arguments.
The original request for comments was not a vote. There are lots of reasons why there weren’t 10 million votes against a single set of global accounting standards. First, a vote wasn’t asked for. Second, the SEC never requested comments about a single set of global accounting standards (and if you don’t ask for it, you won’t get it). Third, the SEC request for comments about the Roadmap was 184 pages long and contained at least 66 specific questions (most “questions” contained multiple questions). The length of the request and the number of questions was intimidating. I suspect that intimidation was one of the reasons for issuing the Roadmap comment request in that format. I didn’t have time to answer all 66 questions, so I didn’t send in any. The very form of the request for comment made it unlikely that few comments would be tended.
The SEC gives no indication that there is any possibility it will rethink its policy of moving toward a single set of global accounting standards. Actually, it gives every indication that its policy is chiseled in stone and not open for debate. This is unfortunate. Unfortunately, the SEC and the large accounting firms have been spewing half-truths for so long that many well-intentioned people now accept global accounting standards as natural law. It isn’t.
The accounting professors who research on this are of one mind: we are decades (at least) away from having world-wide conditions that would be conducive to global accounting standards. Adopting global accounting standards in the absence of appropriate conditions is sub-optimal to the tune of trillions and trillions of dollars.
The push for convergence creates accounting standards that benefit no one.
Please, SEC, we need a free and open debate as to the merits of global accounting standards.
Debit and credit – – David Albrecht