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Robert Herz

I have confirmed with Professor Emeritus Daniel L. Jensen, Chair of the Accounting Hall of Fame Committee, that Robert H. Herz has been selected for induction into the Accounting Hall of Fame.

Robert Herz was chair of the Financial Accounting Standards Board (FASB) from 2002-2010.  Prior to that he served part-time on the International Accounting Standards Committee (IASC), and was a partner at PriceWaterhouseCoopers (PWC).

The induction probably will take place in Washington, D.C., in August at the annual meeting of the American Accounting Association.

An official press release is forthcoming later this week.  I have asked Mr. Herz for a comment.

Dennis R. Beresford, former Chair of the FASB and current professor at U of Georgia Terry School of Business, has this to say:

Bob Herz is the first person who has served on both the IASB and FASB. He served with great distinction as FASB Chairman for over eight years during some very challenging times for the Board. Probably his greatest contribution was his untiring work to converge accounting standards worldwide while not sacrificing the high quality of U.S. standards in the bargain. Bob continues to serve the profession as an Executive in Residence at Columbia University, a member of the board of directors and audit committee of Fannie Mae, a member of the PCAOB Standing Advisory Group, and in many other capacities. And he continues to speak to numerous academic and other audiences on important accounting issues of the day. In short, I think he’s clearly a terrific choice for the Accounting Hall of Fame!

Stay tuned.

Debit and credit – – David Albrecht


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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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In a lawsuit against the Financial Accounting Standards Board (FASB) and the Financial Accounting Foundation (FAF) filed Wednesday, May 5, 2010, Silicon Economics, Inc., charges that that the FASB has illegally appropriated its intellectual property:  a proposed set of alternative accounting standards.  At stake are the accounting rules that could be used by over one million business and non-profit organizations that are not designated as SEC reporting companies (about 9,500).

SEI’s complaint seems reasonable, and I hope it prevails.

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Last week, two individuals with corporate backgrounds were named to the IASB. According to a news release, the new members are Dr. Elke König, a former member of the executive board and CFO of the reinsurance company Hannover Re Group in Germany, and Darrel Scott, CFO of the FirstRand Banking Group of South Africa.

Historically, investors have infrequently secured representation on the IASB and its predecessor organizations. Typically, IASB members have a large audit firm background, but a large minority of members have corporate accounting backgrounds. Of the current 15 member group, only two or three members can be said to have primarily an investment background.  It is most definitely true that the numbers are stacked against investors!

This is a significant event, with serious ramifications. Although accounting standard setters claim that they are after “the best” accounting rules, in practice no such thing is possible. The reason being that accounting rules have economic consequences. The major competing interests–corporations against investors–have decidedly different information needs. Corporations prefer flexible accounting rules so that similar transactions can be accounted for differently by companies or even by a single company. Investors prefer more rigid accounting rules so that transactions are accounted for in a uniform manner.

Corporations and auditors claim that flexible accounting will provide more informative disclosures. Investors are skeptical, referring to the many incentives in place to cause corporate executives to provide falsified financial reports, and incentives in place to prevent audit firms from forcing proper accounting.

Investors in the United States should be made aware of the difference in focus between accounting rules under FASB and IASB. In the United States, the purpose of financial accounting is widely viewed as providing information to investors so they can make the best investment decisions. In contrast, the purpose of financial accounting under the IASB is to help companies raise capital. In practice, accounting rules can differ markedly under the two emphases.

Despite the regulated state of the American capital markets system, accounting scandals are fairly common in the United States.  It is widely thought that investors stand little chance of receiving unbiased information under IFRS.

Debit and credit – – David Albrecht

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[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.

The SEC's sophistry is a crying shame! (edited)

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

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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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One of the courses I teach is Intermediate Accounting 2. This semester’s paper assignment is to take a position on whether the U.S. should adopt IFRS or retain its GAAP. To improve the quality of papers I receive, I instituted a system of peer review, requiring each paper to go though two rounds of double non-blind review. The end result was 51 pretty good papers (39 for GAAP, 11 for IFRS, 1 for both). I’ll be posting the four best. This paper is by by R. J. Segovia, a senior in business with a concentration in accounting.

Missing The Target:

Convergence Replaces Improvement

by R. J. Segovia

“The appraisers are still in the old world,” (Aflalo, 2008) remarked Rozanski, Chief Executive Officer (CEO) of Delek Real Estate. Apparently the “old world” is anything except for the International Financial Reporting Standards (IFRS); which includes United States (US) Generally Accepted Accounting Principles (GAAP).  So it seems now that the “Old World” is in the “new world” and the “New World,” or at least the US financial sector of the “New World,” is in the “old world.”  While many would state that the US should not retain GAAP but instead switch to IFRS in efforts to join this new world, I completely disagree with this stance.  The US should retain GAAP and not switch to IFRS because the lack of acknowledgment that IFRS and GAAP are more different than similar will negatively affect companies immediately.   It is well known that US GAAP has extensive guidance and this is exactly what US companies need.  The recent focus and push for convergence rather than the improvement of accounting standards departs from moral and ethical logic (which has faded away and been forgotten) while inferior financial reporting standards are creeping their way into the US financial system.  The analysis of such statements must be thorough so that CEOs in the US are not found repeating the words of Mr. Rozanski who said, “we do not know what the company’s [net] profits are” (Aflalo, 2008).

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One of the courses I teach is Intermediate Accounting 2.  This semester’s paper assignment is to take a position on whether the U.S. should adopt IFRS or retain its GAAP.   To improve the quality of papers I receive, I instituted a system of peer review, requiring each paper to go though two rounds of double non-blind review.  The end result was 51 pretty good papers (39 for GAAP, 11 for IFRS, 1 for both).  I’ll be posting the four best.  This paper is by Amber Soldenwagner, a senior in business with a concentration in accounting.

IFRS:  Not Right for the U.S.

by Amber Soldenwagner

Introduction

The replacement of Generally Accepted Accounting Principles (GAAP) with that of International Financial Reporting Standards (IFRS) has recently been a significant topic of discussion.  There are two sides to this discussion:  those that support the switch to IFRS and those that instead support the retention of GAAP in the U.S.  Those who support switching from GAAP to IFRS argue that IFRS will provide a common reporting language, making financial reporting more meaningful across borders and provide consistent financial reporting for companies with global operations.  Supporters also believe that one common reporting system will reduce costs for companies and make it easier for investors to compare the financial statements of companies from different countries (Diamond and Herrmann, August 2008).

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One of the courses I teach is Intermediate Accounting 2.  This semester’s paper assignment is to take a position on whether the U.S. should adopt IFRS or retain its GAAP.   To improve the quality of papers I receive, I instituted a system of peer review, requiring each paper to go though two rounds of double non-blind review.  The end result was 51 pretty good papers (39 for GAAP, 11 for IFRS, 1 for both).  I’ll be posting the four best.  This paper is by Marquita Jennings, a senior in business with a concentration in accounting.

Why Switch to IFRS from GAAP?

By: Marquita Jennings

The Securities and Exchange Commission (SEC) announced it plans to switch U.S. companies from generally accepted accounting principles (GAAPs) to international financial reporting standards (IFRSs) based on a recent release of a roadmap. The proposed switch has caused much controversy from professors to accountants, but the switch probably will still occur regardless of what the majority may believe. This paper will discuss the background and roadmap of the transition to the IFRSs, the European success of transition to IFRS, along with the benefits of the United States converting, and an argument against the disputers of the proposed United States switch to IFRS.

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One of the courses I teach is Intermediate Accounting 2.  This semester’s paper assignment is to take a position on whether the U.S. should adopt IFRS or retain its GAAP.   To improve the quality of papers I receive, I instituted a system of peer review, requiring each paper to go though two rounds of double non-blind review.  The end result was 51 pretty good papers (39 for GAAP, 11 for IFRS, 1 for both).  I’ll be posting the four best.  This paper is by Brandon Mills, a senior in business with a concentration in accounting.

IFRS: Not the Change We Need

by Brandon Mills

With the economy and the world getting “smaller” because of advancements in technology and companies being geographically and operationally located in several countries and jurisdictions, it is only a matter of time until the “one world” mentality spreads completely into accounting rules and regulations. Also with investors and businesses increasing their examination of foreign investment options, it would be in their best interest to be comparing apples to apples and not apples to oranges. Over the past few years, there has been a strong emphasis on the convergence between Accounting Principles Generally Accepted in the United States (U.S. GAAP) and International Financial Accounting Standards (IFRS), which are currently the two most commonly used accounting standards in the world. With that mind set the International Accounting Standards Board (IASB) has been working closely with the Financial Accounting Standards Board (FASB) in the United States to level the playing field and eliminate the ambiguity between these two standards (Johnson). This movement is generally perceived to be a step in the right direction to be able to properly compare companies that operate within other countries and report to regulatory agencies other than the Securities and Exchange Commission (SEC) (Rappeport).

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Note:  this is the final version of this essay.

This is part seven of an eight-part series in which I review the seven International Financial Reporting Standards (IFRS) critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues on regular posting dates, MWF.

In today’s essay, I review the anti-IFRS views of myself, David Albrecht, Ph.D.  An accounting professor at Bowling Green State University in Ohio, I have been a vocal opponent of the proposed switchover in accounting standards for quite a while.  Until starting this blog two months ago, my primary forum was via posts to AECM, the e-mail listserv for accounting professors.

I am opposed to IFRS for the U.S. because (1) the politics of the decision are unwarranted, (2)  I believe it will be bad for the country, and (3) it will not aid the world in creating an integrated financial system. (more…)

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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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