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Posts Tagged ‘Christopher Cox’

Robert Herz has resigned as Chair of the Financial Accounting Standards Board (FASB), effective October 1.   Concurrently, the FASB is returning to seven members from the current five.  The official announcement is posted here.  This development is sudden and unexpected.

A process has been initiated to search for a new chair and two new board members.

Why now? Herz is under no pressure to leave, and there are several professional reasons for him to stay.  It is my guess that this is motivated solely by personal concerns, possibly health related.   I wish the very best for the Herz family.

What are the implications for the convergence of U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS)? There are three major possibilities:

  1. Convergence time table and Securities and Exchange Commission (SEC) Roadmap are pushed back one year. This is because the search process will take five or six months and three new members could need up to six months to get up to speed.   Probability:  65%.
  2. Convergence ends, and the SEC votes in 2011 to adopt IFRS.  Probability:  30%.
  3. The SEC votes to retain US GAAP instead of moving to IFRS. Lip service is paid to continuing the convergence process, but it is not a high priority.   Probability:  5%.

What is Herz’s legacy? Herz has been a strong advocate for converting American financial reporting from the U.S. GAAP basis to the IFRS basis.  An accurate generalization is that Herz has been focused on changing the accounting standards instead of improving the accounting standards already in place for American companies.  The conversion process has essentially been one of compromise between existing GAAP and IFRS standards.   Although the two boards pay lip service to improvement, there really hasn’t been much.

History remembers the names of those who help bring about profound change, so long as it benefits future generations. Not much chance of that here.

Robert Herz and Christopher Cox led the IFRS Railroading Express

In 2007-2008, there was considerable dissatisfaction with the way that SEC Chair Christopher Cox and Herz were pushing IFRS.  Bob Jensen (emeritus accounting professor) labeled this the Cox-Herz Railroading Express.

What about the increase from five to seven board members? Earlier today on AECM, Bob Jensen wondered if the 2008 decrease in board members from seven to five was to get rid of two that might have delayed convergence.   It’s clear Herz wanted only five that he could work with.   However, convergence is a lot of work and two more board members might be needed now to get the work done.

Debit and credit – – David Albrecht

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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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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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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.

Robert E. Jensen

Robert E. Jensen

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.

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Does SEC chairman Christopher Cox have his bare feet packed in snow and ice?

Does SEC chairman Christopher Cox have his bare feet packed in snow and ice?

Professor Lawrence A. Cunningham, of George Washiington University Law School, last night suggested in “Where’s the SEC?” that there is something substantial to be read into the SEC failing to open up the 60 day comment period on its proposed road map to IFRS.  Mr. Cunningham suggests that SEC chairman Christopher Cox has cold feet!

The SEC formally announced its road map to IFRS on August 27, 2008.  29 days later, we are still waiting for it.

If Cunningham is correct, this is exceedingly good news for American investors.  I am saying now in print for the first time that American investors stand to lose trillions if the U.S. switches corporate financial reporting from following U.S. GAAP to instead following IFRS.  Large CPA firms will take a huge chunk of this vast sum (Jensen), but the major part of it goes to Europe in a massive wealth transfer.

Getting back to Cunnigham, how could the Cox delay be?  Cunningham says:

First, Mr. Cox may have decided now is not the best time for the SEC to issue a Release that would be largely deregulatory and elevate managerial and auditor interests over those of investors and other users of financial reports. Second, Mr. Cox may believe that he should have unanimous Commission support for such a controversial Release. This may be more difficult now that he must work with a full slate of Commissioners, compared to earlier this year when vacancies existed. Some current Commissioners may side with investors and oppose the Release.

More important is Cunningham’s closing paragraph, in which he essentially says that the emperor has no clothes.  His words are (emphasis mine):

Despite the SEC’s earlier exuberance, there no longer appear to be reasons for Mr. Cox to continue a quixotic campaign to move the US from its own to international accounting standards. For Mr. Cox, the consequence is being deprived of a legacy he sought. For investors, that would be a good thing too.

Well said.  Very well said.  There ought to be an award for such well-said remarks.

Of course, all of this is pure speculation.  I wrote earlier that Mr. Cox has all the power here.  Never-the-less, Republican presidential candidate John McCain’s threat to can his rear end may have taken some of his power away.  Good for us.

Over and out – – David Albrecht


1 p.m. reality check.  A friend just e-mailed to remind, “Resistance if futile!”  He is correct, of course.  The delay is undoubtedly meaningless.

Another friend, extremely well-connected, just e-mailed to say, “I understand that it’s likely the SEC proposal on IFRS will be released sometime next week.  Of course, I heard that same thing about three weeks ago.”


5 p.m.  CFO reporter Alix Stuart just got an article up, “IFRS Timetable Not on Time.”  He has been in further communication with Cunningham.  After reviewing comments of a few critics (including Niemeier), Stuart says:

Regardless of what has created the delay in publishing the timetable proposal, consensus is building that it may come too late for the timetable to unfold in its current form. “Even those who say a release is likely appreciate that there’d be a 60-day comment period, so it’s unlikely the SEC could turn around and do much,” no matter whether Cox finishes his term or resigns early, Cunningham said in an e-mail to CFO.com.

The coming turnover in the White House is likely to push out IFRS implementation far beyond the “date certain” that seemed so close in August. The next SEC chair will likely revise the proposal and call for “more detail, study and evaluation, which will take much more time,” says Cunningham.

So there you have it.  It seems possible, but not conclusively so, to conclude that the transition to GAAP has been delayed a bit.  However, I’ve promised to remind myself 1,000 times over, “Resistance is futile” before I get too enthused again.

We are IFRS, resistance is futile

We are IFRS, resistance is futile

Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile. Resistance is futile …

Over and out – – David Albrecht

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A little rebellion now and then…is a medicine necessary
for the sound health of government.

Thomas Jefferson (1743 – 1826), Letter to James Madison, 1787

The spirit of resistance to government is so valuable on certain
occasions that I wish it to be always kept alive.

Thomas Jefferson (1743 – 1826)

Tim Reason, editorial director at CFO.com and no relation to either Thomas Jefferson or Marquis de Lafayette as far as I can tell, has twice asked if there is a resistance movement to IFRS coming to America.  His first query was “Is There an IFRS Resistance Movement?“,  The second was “Vive la Résistance (to IFRS)? “.

I’m here to announce there is!  Vive la résistance!  Sharpen your numbers.  Get your ledgers in order.  Stockpile debits and credits for throwing at the enemy.  Men an women  to the battlements.  Rally ’round the flag.  The war is about to begin.

Wait a second.  What?  There is no flag?  There should be.  I think this will work, check it out!

Vive la résistance!

Vive la résistance!

Yes, we are at war or revolution or resistance, call it what you may.  Make no doubt about it, this is a major war.  The SEC has proposed switching from American generally accepted accounting principles (GAAP) as the basis for corporate financial reports to International Financial Reporting Standards (IFRS).

And it’s one, two, three,
What are we fighting for?
Don’t ask me, I don’t give a damn,
Next stop is Vietnam I-FeRS;
And it’s five, six, seven,
Open up the pearly gates,
Well there ain’t no time to wonder why,
Whoopee! we’re all gonna die.

We all know that to the victor go the spoils, so what is at stake in this war?  Trillions and trillions of dollars.  Enough money to make the devastation caused by the sub-prime, banking and mortgage crises pale in comparison.

In the near future, I will present my argument about the how immense is the potential wealth transfer away from the US if the invading IFRS breach the mainland by becoming mandated for American companies.  There are other arguments, and these will be analyzed as well.  So will be the strengths and weaknesses of the mighty IFRS.

The clouds of war have been gathering for a couple of years.  IFRS scouting units are about to land on US soil, as foreign companies that list in the US will be able to use IFRS instead of the current requirement to reconcile their results to GAAP.  The forces of IFRS set sail for the US mainland on August 27, when the SEC formally proposed a road map for transitioning to GAAP from IFRS.

In the near future, the SEC will open a 60 day comment period on its road map.  This is shaping up as a major battle.  At stake are the financial beaches of mainland USA  There will be other battles, to be sure, but the chances of winning them will be severely diminished if IFRS is allowed to invade unopposed,  It would be a shame not to even contest it.

Conceivably, a victory by the patriotic resistance in this battle would mean that the IFRS issue in the US would be either rejected or delayed for years.  I don’t think rejection of IFRS is going to occur as a result of this battle.  Deferring the transition for large test corporations is a possibility, and what we should be fighting for.

Uncle Sam wants you to join in.

Uncle Sam wants you to join in.

When will this battle begin?  Soon and very soon, but the exact date is any one’s guess.  In late August when the SEC announced the road map, many thought that the 60 day comment period would start quickly.  It hasn’t.  But then, the SEC has had other issues on its plate.  The big bank bailout is incredibly significant, to be sure.  But so is presidential candidate John McCain’s shot that SEC chairman Christopher Cox should be fired.  What a distraction!

I hope that all of you will prepare with me for the upcoming battle.  Visit the Summa frequently for all the supplies you need as you get ready to comment to the IFRS about its road map.

Over and out – – David Albrecht

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In politics you must always keep running with the pack.  The moment that you falter and they sense that you are injured, the rest will turn on you like wolves.
R. A. Butler (1902 – 1982)

Politics, n. Strife of interests masquerading as a contest of principles.
Ambrose Bierce (1842 – 1914), The Devil’s Dictionary

Yesterday’s big news–a splash into the cesspool of self-interested politics over accounting standards.

Charles Niemeier, member of PCAOB

The New York State Society of CPAs sponsors an annual conference featuring speakers from the Public Company Accounting Oversight Board (PCAOB).  Yesterday, outgoing PCAOB member Charles Niemeier assaulted the SEC push to replace U.S. GAAP with International Financial Reporting Standards (IFRS).  In his strongest public comments to-date, Niemeier came out strongly in favor of retaining U.S. GAAP.  Two public accounts of his remarks quickly became available

In my opinion, these two accounts are worth a serious read.

Before I became an accounting professor, I received a B.A. in Political Science.  This has always given me a different perspective when reading accounting regulation news.  Upon first reading about the speech, my first reaction (shared with the accounting professors at AECM) was, “I’m curious as to whether Niemeier’s career as a regulator is over.”

Little did I know that Niemeier’s career has already ended.
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