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Influential accounting news and commentary blog, Going Concern, is airing a series of interviews with key figures in the IFRS debate.  The second installment of the series, published April 1, 2010, features me.  Click on, “Professor David Albrecht: IFRS Will Make Financial Statement Comparison an Impossibility,” to read the interview.

Many thanks to the team at Going Concern (Caleb Newquist, managing editor) for thinking of me, and to ace reporter Adrienne Gonzalez (aka Junior Deputy Accountant) for the fine write-up.

Debit and credit – – David Albrecht

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Occasionally, I’ve been sending e-mails over to AECM about rising European discontent with respect to IFRS.  I’ve been regularly poo-pooed as a result.  After all, I’m an anti-IFRS guy and am thought to be creating rumors of imaginary IFRS difficulties in an attempt to delay American adoption of IFRS.  But I simply read a lot (especially European publications Accountancy Age and Financial Times).  There have several stories quoting EU and member-state politician concerns over the IASB’s IFRS.

WSJWell, the bad news has jumped the pond, to be reported in the venerable Wall Street Journal.  I refer specifically to three stories by Simon Nixon in the Heard on the Street column:

Similar stories appear in European newspapers.  If accurately reporting reality, it all leads one to conclude that there is a reasonable possibility that the EU will back away from IFRS to either (1) modified IFRS, or (2) unique European GAAP.  If either were to happen, wouldn’t it have an impact on IFRS consideration in the U.S.? I would hope so.

In Paris Mounts the Barricades, Nixon concludes, “French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland on Friday (Nov. 6?) to accept greater political control of the standard-setting process.”  Later in the article, Nixon says:

Paris’s real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde’s objective is a greater role for national governments.

Consistent with Shyam Sunder’s brilliant analysis, such an objective is rational, natural and to be expected.

Nixon concludes with, “Instead of tighter convergence on accounting, that would lead to fragmentation, which is in nobody’s interest.”  Mr. Nixon, you are wrong. It  is in France’s national interest to manage its own economy and be responsive to its own citizens.  You see, having accounting standards that promote national interests is important to every country in the world.

In New Proposals … Meet Resistance, Nixon describes new a new IASB standard on financial instrument valuation as an improvement, but only partly effective.  He says,

But before further progress can be made, the IASB must overcome a bigger obstacle:  French resistance to the current watered-down standard. …  Demands for political control of standard-setting appear to be gathering support in Europe.

He concludes with:

“This is worrying.  Standard-setting must be independent if it is to command investor confidence.  Global convergence is too important a goal to let slip.”

Mr. Simon, I wish you knew something about accounting and international finance.  It has been shown, time and time again, that global convergence of accounting standards leads to a grossly sub-optimal economic result.  You see, capital markets are mostly local or national.  Let’s say that an American company with $100 million in sales were to float its IPO.  Its costs to raise capital are much less if it only markets its securities to American investors.  Marketing its stock to European investors would incur prohibitively huge transaction costs and be exposed to currency fluctuation losses.  Moreover, international investors would largely be reluctant to participate in the offering, fearing that any potential investment returns would be wiped out by foreign currency fluctuations.

Finally, in EU’s Go-Alone Approach, you report (or more accurately, your analysis leads you to conclude):

The decision to appoint a low-key Belgian as president, the European Union’s newly created top job, and an obscure unelected British official as foreign-policy chief is a blow for the 27-member bloc’s global ambitions. … France and Germany now look free to decide Europe’s two top economic jobs, which become vacant in January.  The European commissioners for competition and the single market have real power to shape Europe’s economic destiny.  …

If French and German nominees end up holding these economic posts, investors should brace for a shift in EU policy. Important dossiers await the new commissioners, including financial-system overhaul, sensitive state-aid decisions on banks and auto makers, and a revamp of bank-accounting rules. France, for example, wants greater political control of accounting standards, threatening to undermine the Group of 20 industrial and developing nations’ goal of convergence.

European developments should have us all jumping for joy.

Many European observers agree with you.  This gives me reason to jump for joy, and it should for you too.

All of this isn’t too surprising.  Why?  Ten months ago the European Union offered to completely fund all future IASB operations.  As discussed in E.U. Bids to Buy IASB, this was attempted because the E.U. (and your respected Charlie McGreevy) desired to own the IASB, lock stock and barrel.  After being rebuffed, it isn’t surprising for me to hear that the E.U. wants to go it alone.  I’ve been predicting it.

Mr. Nixon, your stories are too biased, promoting one side of a very controversial issue.  Unless placed on the editorial page, readers expect stories to have more meat and less opinion.  Please tone it down.

Debit and credit –  – David Albrecht

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A letter from three former SEC chairmen, printed in today’s Wall Street Journal, is today’s big news.   I am referring to:   “Don’t Let Banks Hide Bad Assets:   In times of distress, there’s always pressure to change accounting standards,” by Roderick M. Hills, Harvey L. Pitt, and David S. Ruder,”  The Wall Street Journal, November 19, 2009.

Independent accounting standards have helped make American capital markets the best in the world. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accounting standards established by the independent Financial Accounting Standards Board (FASB). That board is supervised by the Securities and Exchange Commission (SEC).

Now, the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets.

Although there may be good reasons for establishing different regulatory capital standards for financial services firms, those reasons cannot justify dispensing with the FASB’s accounting standards. Acting in accord with powers given to it by the Sarbanes-Oxley Act, the SEC has formally recognized the FASB as the definitive standard-setting body, capable of “improving the accuracy and effectiveness of financial reporting and the protection of investors.”

The SEC treats accounting standards adopted by the board as authoritative. If the SEC has concerns about, or disagrees with, accounting standards promulgated by the FASB, it can refuse to give them deference.

As I blogged yesterday, it is a fact of life that accounting standards frequently have economic consequences.  It is government’s responsibility to adjudicate between competing economic interests.

Banks are currently trying to use the political arena and the Congressional branch of government to influence accounting rules.  Specifically, I am referring to an amendment sponsored by Representative Ed Perlmutter (D-CO) to the Financial Stability Improvement Act, currently being considered by the House Financial Services Committee.

Although I do not favor the bank position on fair value accounting, I applaud their attempt to use Congress to influence accounting standards.

Why?  The SEC has two relevant policies. First, any country adopting IFRS should use them lock-stock-and barrel. Second, it endorses the notion of one universal set of global accounting standards, and is poised to announce the adoption of IFRS for U.S. reporting.

It seems to me that the SEC is about to abdicate its responsibility and role, in oversight of accounting standards. If the SEC continues along its intended path, there will be no U.S. governmental control over accounting standards. Oh, there is the hope that the SEC can influence the IASB. Europe has that same hope. Last week we saw that several countries in Europe have concerns over the lack of European control over the IASB, and continued use of IFRS in Europe is a little doubtful.

Well, if the SEC is anxious to get out of the business of overseeing accounting standards (and adjudicating competing economic interests), then it seems reasonable to me that it is in the self-interest of concerned economic interests in the U.S. to preserve a governmental solution to oversight of accounting standards. As I blogged yesterday, any nation that cedes control over some aspect of its economy to an extra-national body is incredibly stupid. Today I add that it is brainless, dazed, deficient, dense, dim, doltish, dopey, dull, dumb, foolish, futile, gullible, half-baked, half-witted, idiotic, ill-advised, imbecilic, inane, indiscreet, insensate, irrelevant, laughable, ludicrous, meaningless, mindless, moronic, naive, nonsensical, obtuse, out to lunch, pointless, puerile, rash, senseless, shortsighted, simple, simpleminded, slow, sluggish, stolid, stupefied, thick, thick-headed, trivial, unintelligent, unthinking, and witless (synonyms supplied by thesaurus.com).

Consequently, I do not think it a bad thing the banks are appealing to Congress.

Now we have three previous Chairmen of the SEC speak out on the issue.   Their position is that the SEC role in determining accounting standards should not be overridden. They cite the pre-eminence of U.S. capital markets and attribute it in part to American accounting standards.   At first glance, this seems like a defense of continuing the status quo of FASB-SEC working partnership. I mean, if it isn’t broken, why fix it?

But that isn’t what they mean. There is no more vocal proponent of IFRS than Harvey Pitt, now writing for Compliance Week. Ruder has been interested in the U.S. adopting IFRS for decades.

What these three previous chairmen of the SEC mean is that the Perlmutter proposal upsets the applecart of the inexorable march toward IFRS in the United States.  The SEC has no intention of letting anything get in the way of that.

Why can’t these guys say what they mean?  Oh, they’re politicians.

It could very well be that the Perlmutter proposal is the last opportunity to derail IFRS adoption in the U.S.  Defeat of his proposal would clear the way for an SEC announcement that the U.S. has adopted IFRS.

To be continued.

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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thinkingThere are several controversies in financial reporting.   These are all either or, with no compromise available.   Here are a few just off the top of my head:

  • Which group is the primary beneficiary of financial reporting?  Investors or companies
  • How complex is financial reporting for either investors or companies?   Too complex or not too complex
  • Should there be one set of global accounting standards?  Yes or no
  • What about the U.S. and GAAP?  Retain its GAAP or switch to IFRS

I’ll write more about each in following days.  But for now …

Should the primary beneficial of financial reporting be investors or companies?   In the grand scheme of things, there is no correct answer.  The United States believes that the investor should be primary.  Consequently, companies do not comply with the accounting rules.  Plain and simple.  The European Union believes that financial statements should help companies raise capital.  Consequently there are no accounting scandals.

In the U.S., accounting rules are complex.  There is a cycle, where accounting rules are devised, then companies–using armies of lawyers–circumvent the rules, then stricter accounting rules are devised, then companies circumvent these rules, then even stricter rules are devised.  Good pitching beats good hitting, except when good hitting.  There are complex rules that I don’t understand, but I like it that way.

Should there be one set of global accounting standards?  This one is easy.  NO.  NO.  NO.  NO.  There is compelling theory to explain why one set of global accounting standards is not good.  There is no theory, not even a single plausible reason, why there should be.  But why ask professors and theorists who delve deeper into issues?  However, if you stand to make billions or trillions then you’d want one set of global accounting standards, too.  Can you spell self-interest?

Should the U.S. retain its GAAP?  Probably.  There is no down side to retaining it.  All major capital markets in the world accept financial statement prepared according to U.S. GAAP.  Moreover, analysts and investors around the world are fluent in U.S. GAAP.  There is considerable downside to the U.S. adopting IFRS.

In succeeding days, I’ll discuss each of these controversies.

Debit and credit – – David Albrecht

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Chairman Mary Schapiro
SEC
100 F Street NE
Washington DC 20549

Dear Chairman Mary Schapiro,

With this letter I indicate my support for Charles Niemeier for Chief Accountant of the Securities and Exchange Commission.

I am accounting professor and a self-described accounting theorist.  I have closely followed the Securities and Exchange Commission, the Financial Accounting Standards Board, the Public Companies Accounting Oversight Board and the International Accounting Standards Board for some time.  As a result, I became aware of the extraordinary qualifications of Mr. Niemeier.

The Chief Accountant, America’s First Accountant, establishes and maintains U.S. government policy with respect to the FASB, PCAOB and IASB.  Charles Niemeier is uniquely positioned as having prior experience with the SEC and PCAOB, and having worked with the FASB and IASB.  An appointment as Chief Accountant will serve to help him leverage all aspects of his past to move the U.S. forward in very difficult and perilous times.  There is no person today in government accounting regulation/standard setting in whom I have as much trust and respect as Charles Niemeier.  He is the person best qualified to move the U.S. forward with respect to accounting.

I believe that his primary qualification is his great mind that enables him to think in terms of a very broad world view.  His ability to discern trends and understand difficult issues, integrate them, and then correctly reason through to necessary remedies and actions is very special indeed.  In the past 15-20 years, the only other great accounting mind (outside of academia) that comes to mind is Dennis Beresford, former chair of the FASB and now accounting professor at the University of Georgia.   Niemeier’s speeches are well-researched and very insightful.  Some are required reading for my accounting majors.

Not to be overlooked is his dedication to the American investor. There is not even the hint of a suggestion that he has ever acted to advantage corporate interests over those of investors.  Moreover, he is as pro-regulation as anyone I’ve ever come across.  His September 18, 2007 speech to a NYSSCPA conference is the best defense I’ve seen about how strong regulation enhances the U.S. cost of capital advantage in world corporate markets (http://www.pcaobus.org/News_and_Events/Events/2007/Speech/09-18_Niemeier.aspx).

Another qualification he possesses is the respect and admiration of the U.S. world of accountants.  His September 10, 2008 speech to NYSSCPA  (http://www.pcaobus.org/News_and_Events/Events/2008/Speech/09-10_Niemeier.aspx) generated headlines around the world, literally.  It generated dozens of comments by conference attendees as the best defense of U.S. GAAP ever heard.  Quite honestly, it is this national respect that makes him such a serious candidate for Chief Accountant.

He has the respect and love of his staff.

It has been mentioned in the press that he is the anti-IFRS candidate for Chief Accountant.  Given his background, I think it better to say that he would work toward accounting convergence as long as the convergence did not disadvantage American investors in any way.  Some have suggested that your predecessor along with the FASB chair sold out U.S. accounting far too cheaply.  This will never happen under Charles Niemeier.  An additional factor is that many of his views are similar to yours.  For example, he favors U.S. inspection of foreign auditors that serve U.S. companies, just as you do.  I’m sure that the two of you will form a great, great team.

I’ve read every word you’ve spoken and written during the confirmation process and after.  I am becoming convinced that you will be an outstanding Chairman of the SEC.  If you are serious about making accounting the best it can possibly be in the U.S., then I’m sure you should appoint Charles Niemeier as Chief Accountant.

Sincerely,

David Albrecht, Ph.D., CPA
Associate Professor of Accounting
Bowling Green State University
https://profalbrecht.wordpress.com
albrecht@profalbrecht.com

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Four news sources are reporting that Charles Niemeier is being considered for Chief Accountant of the Securities and Exchange Commission.   This is outstanding good news!

First, what is being reported:

I am surprised, however, that CFO Magazine doesn’t have it.  In my opinion, CFO has the best reporting on current events in accounting (Accountancy Age has the best reporting in Europe).   Tim Reason (CFO editorial director) is first rate.  He has impeccable journalist credentials.  If he’s not reporting it yet, then it isn’t definite yet.  Also to weigh in is Floyd Norris, the most highly respected journalist from the New York Times.

The Chief Accountant of the SEC has a tremendous influence on accounting policy in the U.S.   In essence, the Chief Accountant is responsible for the strategic directions of all matters related to accounting and auditing.   In essence, he is the First Accountant of the United States.  He is at the center of the accounting universe.  Specifically, the Chief Accountant is responsible for:

  1. Oversight of the FASB as it develops and maintains U.S. GAAP.
  2. Oversight of the PCAOB is it regulates auditors and develops and maintains audit/auditor standards.
  3. Coordinating U.S. relations and communications with international organizations that have an impact on accounting standards and practices.

Charles Niemeier, new Chief Accountant?

Charley Niemeier was my choice for SEC chair.  President Obama gave it to Mary Schapiro, instead.   This may work out to everyone’s advantage.  A Schapiro/Niemeier team is, in my opinion, very strong. Mary Schapiro has acquitted herself very well in her public appearances immediately before and after her confirmation.   Her trying to invigorate the SEC with new blood is playing well in the press.

Niemeier’s appointment seems to be Mary Schapiro’s way of making a statement about (1) integrity, and (2) IFRS.  During her confirmation hearing testimony, she testified that she was not sold that IFRS is the way to go.  She followed this up with some written comments that were more negative towards IFRS.   Niemeier is on record as a strong critic of IFRS, at least so far as currently constituted.

If Charley Niemeier is appointed as Chief Accountant of the SEC, then it is a master stroke by Mary Schapiro.  There is no better person to head up accounting policy at this (or any) time.  Niemeier is that good! Charley Niemeier will excel as Chief Accountant because he has such a great mind, the best mind in the government field of accounting regulation.  He has a grasp of the big picture, an absolute necessity for Chief Accountant.

I will sleep much better tonight after hearing of this possibility.  If he actually receives the appointment, I will sleep much better for the next few years.

I believe this is Charley Niemeier’s best career move to create a lasting legacy in the regulatory field.  It is no secret that he has had numerous opportunities floated his way as he winds down his final days on the PCAOB.   I need to go over the SEC chair history again, but I don’t think that an accountant has ever been appointed chair of the SEC.

Mary Schapiro, I beg of you.  Please name Charles Niemeier as the Chief Accountant of the SEC.

Over and out – – David Albrecht

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