UK Prof and USA Prof Against Global Accounting Rules

Shyam Sunder is James L. Frank Professor of Accounting, Economics, and Finance at Yale School of Management in New Haven, Connecticut.  He has long opposed a single set of global accounting standards.  So to has Stella Fearnley, professor of accounting at Bournemouth University, Bournemouth, United Kingdom.

Their recent op-ed piece, “Global Accounting Rules — An Unfeasible Aim,” appeared in the June 3, 2012 edition of the Financial Times.  I have asked for, and been granted, permission to republish it here.

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Global Accounting Rules
– An Unfeasible Aim

By Stella Fearnley and Shyam Sunder

The introduction of the euro and the adoption of International Financial Reporting Standards (IFRS) in the EU and other countries were promoted by aspirational rhetoric about gains from uniformity. Applying uniform process or rule in diverse societies does not yield uniform outcomes. Effective oversight and control of the process and rule-making can become impossible and unbalanced with so many players involved. Failure to recognise and manage the risks associated with uniformity has driven the European Monetary Union to a critical precipice. Similar risks apply to the efforts of the International Accounting Standards Board (IASB), the accountancy profession and some international regulators to bring about adoption of IFRS for global use.

The IASB and US Financial Accounting Standards Board have committed significant resources since 2002 trying to agree on common accounting standards. Despite their efforts, IFRS have not been approved by the Securities and Exchange Commission for US adoption. The SEC may never risk the political backlash from ceding control of its accounting to a non-US body. We can learn from the euro debacle and assess not only if the vision of one set of global accounting standards is achievable but also if it is desirable.

Accounting standards interact with law, commercial codes, and social norms in different countries in many ways. The IASB has pushed its agenda ahead taking no responsibility for recurrent unintended consequences. The disaster of some banks depleting their capital by paying bonuses and dividends out of false profits, generated under IFRS’s defective mark-to-market and loan-loss provision standards, is a good example.

Abandonment of judgmental true-and-fair standards in favour of written rules make accounting vulnerable to mis-statements through complexity beyond the grasp of users and directors.

China, Japan, and India have yet to be persuaded to adopt IFRS and watch from the sidelines. Within Europe, some countries view IFRS as an Anglo-American invention, and remain sceptical of its suitability for their own needs.

Complexity and interactivity of social systems and markets make it all but impossible for a group of experts to divine the “best” accounting solution that will serve divergent economies. Even if it were feasible, it can only be developed through bottom-up evolution of accounting and not through top-down imposition of a single method selected by a board of “experts” with limited accountability.

The IASB’s persistent denial that the procyclical and complex accounting model played a part in the banking crisis by inflating profits undermines trust in its competence and intent.

The euro debacle points to prudent wariness of Icarus-like overreaching ambition that is not underpinned in theory or experience. Common standards, such as common currency, may appear a good idea, particularly for international companies, regulators and audit firms. But what did we get? A Board that issues standards that can induce false profits in reports and drown users in complexity; that has not accepted responsibility for the dysfunctional consequences of its standards; and has no effective mechanisms for timely correction of defects.

Although the big players get economies of scale from applying IFRS across their international activities, shareholders and other stakeholders, particularly in the banking sector, have not been well served by the outcomes of IFRS standards.

We therefore urge the SEC not to proceed with IFRS in the US. Directors and auditors in the EU and other countries applying IFRS could lead by insisting on a true-and-fair override to cut complexity in IFRS based accounts.

We suggest the G20 drop its support for global accounting standards. Instead, they could recommend that accounting reports reflect the economic substance of businesses based on professional judgments and sound, prudent principles, and recognise that Anglo-American based accounting standards are not necessarily appropriate for the whole world.

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Debit and credit – – David Albrecht

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Another Great Selling Blog Post against IFRS

IFRS.  IFRS.  I do not like thee, IFRS.

U.S. GAAP or IFRS?

The debate over U.S. adoption of IFRS (International Financial Reporting Standards) has died down in recent months.  This is due to three reasons, I think.  First, the FASB and the IASB have declared that further progress toward convergence is no longer possible.  The respective board members simply see the world differently and have come to different conclusions about the composition of specific accounting rules.  In other words, no compromise is possible.

Second, many (including ProfAlbrecht) believe that upon the reelection of President Obama in November, 2012, the Securities and Exchange Commission will be directed to announce the abandonment of U.S. GAAP and the adoption of IFRS.

Third, Europe and America are side-tracked by the issue of possibly mandating auditor rotation.

Tom Selling.

But that hasn’t stopped my good friend Tom Selling of the Accounting Onion from continuing the good fight. On April 2, 2012, Selling posted an insightful and well researched piece, “Ten Claims in Support of IFRS Adoption by the SEC – and Why They are False.” So impressed with this essay, I am tempted to copy it, strike out Selling’s name and replace it with mine, and submit it to two or three leading journals.

Selling is eminently qualified to write this essay.  One of the seven experts on IFRS summarized in The Summa, there is no financial accounting author more widely respected today.

You should read Selling’s masterpiece.  But if you don’t want to take the time (it a pretty long essay), here is my summarization of the major points in “Ten Claims in Support of IFRS Adoption by the SEC — and Why They are False.”

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When IFRS?

In December, 2011, Leslie Seidman (FASB), and Hans Hoogervorst (IASB) declared convergence between U.S. GAAP and IFRS to be at an impasse.  Chief Accountant James Kroeker said the SEC would need further study on the issue.  Since then, much has been written about the prospects for the U.S. adopting IFRS at this time.

Here is my thinking on the issue, but I really don’t know why I’m bothering.  I’ve played this prediction game before, and have failed miserably.  I don’t have inside contacts at the SEC, so there is no flow of inside information.

I doubt the SEC will make any decisions on IFRS until after the first Tuesday in November (election day) and the results have been certified.

The rationale is fairly simple.  IFRS is unpopular with many American rank and file accountants, small and medium business executives, and smaller investors.  Because observers expect a close presidential election between Democratic incumbent Barak Obama and the Republican challenger, President Obama will not risk alienating voters by adopting IFRS.  There will be time for that afterward if Obama wins the election.  If he doesn’t, then IFRS will wait for the next president.

Debit and credit – – David Albrecht

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Just a Little More Time

James Kroeker, the SEC’s chief accountant, spoke to the AICPA on Monday.  He said,

We remain committed to completion of a final comprehensive report on [IFRS] … the staff will need … a few additional months time to produce a final report. At the same time, the staff is in the process of developing an approach for Commission consideration.

I’m shocked.  What is the SEC waiting for?  President Obama has already promised the G-20 to move the U.S. to complete IFRS adoption.  The SEC is on record as committed to moving the U.S. to global accounting standards.  And Kroeker probably dreams of getting an IFRS tattoo.

Message consistently delivered by current and former IASB chairs.

I know Tom Selling at Accounting Onion keeps writing that there is still hope for derailing the IFRS Express, but I doubt it.  The reason for doubt is SUMMArized in the image to the right —->

Kroeker also said the SEC should, “Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards.”

Yeah, right.  I know what Hans, Ian, and the IASB have to say about that.  Can’t print it here, though.

Did you notice that the FASB and the FAF escaped mention?  They are already an afterthought.  In the new world of accounting standard setting, it will be the SEC calling the American shots.

I sense a power struggle going on between the SEC and the IASB, and I suspect it is the only reason why the SEC is asking us for “just a little more time.”

Meanwhile, I remain committed to defeating the movement to adopt IFRS in the USA.  IFRS has the worst set of rules imaginable for the US.  I hope we never have to use them.

Debit and credit – – David Albrecht

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Miscellany

Miscellany — interesting items that caught my eye during the week.

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Jonathan Weil shows why he is one of the premier journalists writing about accounting in, “Goldman Sachs Envy Gains New Meaning at Big Four.”  Weil shows several examples of the revolving door between the large accounting firms and their regulators on the PCAOB.  There are stinky conflicts of interest.

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Adam Jones, accountancy correspondent for the Financial Times, writes about new KPMG International chairman Michael Andrew in “KPMG vows to remain a multi-disciplinary firm.”  In this interview, Andrew ridicules all non-Big 4 accounting firms,

He also lashed out at a Commission proposal to force the Big Four to share some audits with smaller rivals. “Can you imagine a second-tier firm auditing a global bank at a time when there is already a lack of confidence in the marketplace?”

He added: “They simply don’t have the skills or the market expertise.”

He also accused some smaller rivals of being “quite lazy” about investing in their businesses.

Mr. Andrew is a jerk.  But Steve Martin was funnier at it.

Jones has another story on the issue, “Auditing has moved into the realms of sitcom.”  It’s worth a read.

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Stephanie Sammons, of Social Media Examiner, writes about, “5 Simple Steps for Improving Your LinkedIn Visibility.”  Read it.  Do it.

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Tom Selling is terrific when he writes about IFRS adoption issues, as he does in, “Will the SEC Sneak IFRS in Through the Back Door?”  Selling is sounding more pessimistic about how the nefarious SEC might sneak in IFRS, despite all reason and common sense (as well as almost every accountant and investor) being against it.

I have little faith.  The commissioners of the SEC are political appointees, and Mary Schapiro has been a willing accomplice to Obama administration policy.  She has her marching orders to install IFRS, and she is loyal to the hand that feeds her.

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Mark Schaefer of {Grow} has another post out on Klout, “Kould Kare Less.”

His Klout score is high, but he doesn’t care.  Mine isn’t, and I don’t care either.  Yet, many do.

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Debit and credit – – David Albrecht

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Convergence Delayed

Michael Cohn of Accounting Today on Tuesday, September 20, in “FASB Convergence Timeline Moves to Next Year,” reported, “Financial Accounting Standards Board chair Leslie Seidman said that many of the priority projects slated for convergence with the International Accounting Standards Board probably will not be settled until next year at the earliest.”

Unfortunately, Seidman says that progress is being made.

American accounting rules, once the best in the world, have been set on a course to converge with business-friendly European accounting rules.  European accounting rules also are known as IFRS (International Financial Reporting Rules).  Business-friendly make it easier for corporations to fudge the numbers, while providing insufficient information to investors to make informed decisions (see “Investors Say IFRS ‘Unfit for Purpose‘ “), it is my opinion that the United States should drop the convergence project and roll back recent rule changes made simply for convergence purposes.

I am not the only critic of IFRS.  Tom Selling has never stopped beating the drum against IFRS.  His most recent blog post on IFRS, “I’m Not the Only One Dissing the SEC’s IFRS Fixation,”  identifies recent anti-IFRS comments by notables Lynn Turner, Jack Ciesielski, Ed Ketz, Tony Catanach and Floyd Norris.  Go team go!

Debit and credit – – David Albrecht

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Hans Hoogervorst’s China Speech

Hans Hoogervorst

Tom Selling’s latest on Accounting Onion is about Hans Hoogervorst, leader of the International Accounting Standards Board (the organization responsible for IFRS).  “The Hans Hoogervorst IFRS Sales Pitch Hits the Road.”  Selling’s post further cements his reputation as the premier commentator on financial reporting and accounting standard setting politics.

I do not like Hans.  Hans is a career politician.  As such, we should remember the typical politician’s propensity to be willing to say anything at any time to further his agenda.

Until just less than three years ago, he knew little more than “transparency is good,” and “global accounting standards are a must.”

Now, Hans is travelling the world, trying to get all countries to unconditionally accept IFRS.  He has made recent speeches about a United States switchover.  Hans, why not start with Europe?  Europe uses a customized version of IFRS.  The reason, of course, is that to Hans, it matters not what accounting rules are in place as long as they are branded IFRS.  During a recent speech in China, Hans admitted that he decided he wanted to chair the IASB before he became interested in accounting for accounting’s sake:  “These experiences triggered a personal interest in accounting … my desire to lead the IASB as it adapts to become the global accounting standard-setter.”

Selling says it well:

For a standards setter, Hans Hoogervorst, the new IASB chairman, doesn’t know much about accounting. By his own frank admission, he wasn’t even very interested in the subject until after the financial crisis hit in 2008, and he seems almost proud to disavow a command of the details of IFRS.

Consequently, his role on the IASB is obvious: to sell IFRS to as many countries as possible. Why anyone should expect someone with his background to do that with any sort of credibility is beyond me, but his selection seems to reflect a conscious strategy on the part of the IFRS Foundation: to promote the sizzle instead of the steak.

Recently, Hans has turned his attention to China, asking it to unconditionally adopt IFRS.  During his speech, Hans said,

[W]hile Chinese GAAP is not word-for-word IFRSs, I understand that analysis by the Chinese regulator shows that for companies with dual listings in Shanghai (using Chinese GAAP) and Hong Kong (using IFRSs) the average difference in reported profit is 0.6%. The difference in term of net assets is even as smaller as around 0.2%.

Hans, that companies can report the same results under Chinese GAAP and IFRS is not an argument for why the country should switch to IFRS (Selling agrees).  Actually, that there is little difference in reported financial results is a condemnation of both sets of accounting standards.  IFRS is notorious for allowing corporate flexibility in reporting results.  Chinese GAAP is much less exacting than IFRS.  It is entirely reasonable to expect that a company can look at financial recordings and be able to paint the sky any color it wants, either chartreuse or polka dotted.  Application of general accounting rules depends upon assumptions, and assumptions depend upon intention.  If a company wants to paint the sky a particular color, it can do so under either IFRS or Chinese GAAP.  The paintings will be similar because it is only one corporate painter.

Debit and credit – – David Albrecht

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Is IFRS for Criminals?

Lost sight of in the SEC push to adopt IFRS is the primary reason for adopting it.  In “IFRS Is for Criminals,” Ed Ketz and Anthony Catanach of Grumpy Old Accountants remind us.

In their essay, the grumpies let it all hang out:

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SEC Roundtable on IFRS, Live Blog

Keep refreshing this page to see latest updates.

This is a live blogging exercise.  If a coma sets in, as I expect, then this will be a dead blogging experience by 4:00 ET.

10:15  First, a round of opening statements.

Neri Bukspan, Executive Managing Director, Standard and Poor’s.  S&P  wants everyone, including US, on IFRS.

Gregory Jonas, Managing Director, Morgan Stanley.  Supports condorsement.

Mark LaMonte, Managing Director, Moody’s Investors Service.  In order to rate 5,000 companies around the world, needs one set of global accounting standards.

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Using IFRS to Distort Financial Statements?

In a classic example of the pot calling the kettle black, Rose Orlik of Accountancy Age (UK) reports on a British member of Parliament (MP) accusing the Royal Bank of Scotland of distorting financial position by 50%.  Her story, “MPs attack RBS’s ‘distorted’ IFRS accounting,” appeared earlier today.

Surely Steve Baker MP is incorrect in his assertion.  The primary reasons for the push for IFRS is (1) accounting fraud will disappear under IFRS principles because corporate execs really want to live up to IFRS’s higher expectations, and (2) corporate execs will use their carte blanche to use judgment in reporting numbers will only do so to paint a truer picture of corporate financial position.

Since the Royal Bank of Scotland is using IFRS, it must living up to it’s higher calling.  If this wasn’t so, why would it have clean audit opinions?   But then, who would impugn the honesty of a respected politician.  Honestly, sometimes I just don’t know what to believe.

In the US, we refer to IFRS as “Report Any Numbers You Want.”

Debit and credit – – David Albrecht

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IFRS, Whither Art Thou?

Whither is an “ever so slightly antiquated term.”  In modern English, where is used.

Is IFRS an ever so slightly antiquated means of implementing global accounting standards?  Could be.

There are two fascinating articles out today:

• “Critics unearth ‘second thoughts’ over IFRS,” by Rose Orlik of Accountancy Age
• “IFRS Adoption is Dead (I Think),” by Tom Selling of Accounting Onion

Orlik details developments in the UK, Italy and France where there may very well be financial reporting in parallel.  That means dual financial reporting under both IFRS and national GAAP.  She writes, “One expert told Accountancy Age that these cases show the international model “is beginning to fall apart”, arguing that post-crisis, the cracks in IFRS are starting to appear.”  Of course, it might not mean anything.

Selling states in his blog post that, “… precious few countries have fully adopted IFRS and given up their sovereignty over accounting standards.”  In the U.S., the political winds seem to be coming from several directions:

The political hold on global accounting standards seems to emanate from the G-20, which (for its own political purposes) has called for converged accounting standards to happen post haste. The notion of outright IFRS adoption may have become passé, especially as it has become widely known and acknowledged that so few countries are actually doing it; but the Obama administration, perhaps with good reason, does not want to be seen as the dissenter on this issue, particularly if it is relying on cooperation on other issues that could be more important to the U.S.

IFRS, IFRS, whither are thou?  Art thou the coming of a single set of global accounting standards?  Or art thou languishing in a coffin, relegated to the dustbin of history?

Debit and credit – – David Albrecht

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First Thoughts on Preventing the Next Crisis

The last two days have been busy, fielding calls from reporters.  One called asking my thoughts on convergence, the other asked about my thoughts on whether accounting can forestall the next financial crisis.

Long time readers know what I said.

Convergence of accounting standards is a bad idea.  The academic theory is that market participants benefit from detailed information tailored to that specific market.  Given that capital markets are local (but are linked around the world) it makes sense that local accounting standards (that force companies to disclose as much detail as possible) would provide the greatest value.

What is the impact of accounting rules and auditors on the next financial crisis?  Because auditors don’t do the job that investors wish they would do, the accounting rules hardly matter.  The academic theory is that if companies are not required to secure an audit opinion, then the act of hiring an auditor signals a company’s intention to obey the accounting rules.  However, if companies are required by law to secure an audit opinion, there is no theory that these audits provide value.  There is a theory paying more signals intent to follow the accounting rules, but then paying more might mean that the company wants to get away with more.  Therefore we are in uncharted waters.  There is no theory to suggest that audit opinions will be trustworthy.  If audit opinions aren’t trustworthy, then there is no effective check on the numbers reported by companies in their financial statemeents.

The two work together.  If converged accounting standards are company friendly, and auditors are paid to be company friendly, then it is likely that accounting and auditors will not delay, by even a day, the next financial crisis.

I hope the reporters heard my message.

Debit and credit – – David Albrecht

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