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During her confirmation hearing, Mary Schapiro said, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would [enable] investors to compare companies around the world.”

I can understand why she would say this–she’s never had any graduate level eduction in financial accounting theory.  Had she any such study, she would recognize the absurdity of her statement.

I’ll give one reason today, then follow up later with more advanced treatments.

There should be no single world-wide accounting language (or sets of accounting standards) for the same reasons there should be no one world language.  Can you imagine the bruhaha that would follow President Obama saying during his inaugural speech that it would be beneficial for there to be one world language?  He could argue that  it would make it easier to communicate around the world.  Consequently, he had decided to move the United States to the world’s most spoken language:  Chinese.  Everyone in the U.S. would benefit from ease of international communications and there would be no downside.

Hah!  There would be so much disagreement with this proposal.  People would argue that the Chinese language evolved for a separate culture from what we have in the United States.  They would say that English works just fine to convey the thoughts, emotions and feelings that exist in our present American culture.  If we were to switch to Chinese, then communications here in the U.S. simply would not be as rich, we’d lose a lot of meaning.  There would be too much pain for negligible gain.

A language evolves to fit its culture.  Language is not static.  Moreover, there is no one best way for a language to be.  In the ancient Greek language, there are five words for the single English word of Love.  The words are:  Eros (ἔρως érōs), Philia (φιλία philía), Agapē (ἀγάπη agápē), Storge (στοργή storgē), and Thelema (θέλημα thélēma).  We don’t appreciate the need for so many words here and now.  But then, ancient Greeks would not appreciate being handcuffed with a single English word.

If President Obama were to order us to switch to Chinese, many would ask who is to gain the benefit from switching, everyone?  The answer would be–language teachers would benefit the most, and current United States residents who are native speakers of Chinese.  They could then always speak in their native language instead of using English.  Everyone else, which is most of the country, would suffer.

Really, there is no reason for the United States to switch from English to Chinese.  If Americans wish to speak to a person from Peking, they can get their communication translated.  The translation comes at a cost.  The benefit from avoiding this cost by switching would be much less than the huge opportunity costs of educating everyone in the U.S. to speak another language.  If we continued using English, then translation to Chinese would (and is) a trivial expense, and a minor inconvenience.

Similarly, there is no good reason for anyone to have the U.S. discontinue using its accounting language (GAAP) and switch over to IFRS.  Having multiple accounting languages in the world is a minor inconvenience and translation expenses are, in the grand scheme of things, trivial.  Moreover, GAAP seems to fit our culture, economy and system of financial markets.  For example, in the U.S. we generally hold that all investors should have equal access to the same information.  consequently we have standard accounting rules that don’t permit companies any flexibility in the preparation of their financial statements.  We then attempt to punish company executives if they attempt to circumvent the rules.  We would have major disruptions to our culture, economy and system of financial markets if we suddenly switched to IFRS because IFRS does not fit our mode of business.  Who would benefit if the U.S. switched to IFRS?  Certainly not investors, for the same rason that they would not benefit if the country moved immediately to Chinese.  The beneficiaries would be the accounting firms that would teach us the new IFRS, and company executives.

There should be no world-wide accounting language for the same reasons there should be no world-wide spoken/written language.  Anyone who touts the benefits of a single world-wide accounting language is simply ignorant.

Debit and credit – – David Albrecht

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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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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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This is part three 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 over the next two weeks on regular posting dates, MWF.

In today’s essay, I review Ray Ball’s very popular paper, “International Financial Reporting Standards (IFRS): Pros and Cons for Investor.”  His paper, based on the P D Leake Lecture delivered on September 8, 2005 at the Institute of Chartered Accountants in England and Wales, has since been published in a 2007 edition of Accounting & Business Research. A pre-publication version of the paper is available at SSRN.

Ray Ball, distinguished professor at Chicago.

Ray Ball, distinguished professor at University of Chicago.

Ray Ball’s opposition to IFRS gives instant intellectual respectability to the cause.  If one of the world’s smartest professors does not favor the SEC’s push to change accounting standards, then that should give the rest of us reason for doubt.

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SEC pitching GAAP in the trash

SEC pitches GAAP in the trash.

The Securities and Exchange Commission (SEC), charged with the responsibility to regulate all aspects of the American financial markets, has recently announced a tentative road map for the transition from requiring companies to prepare their financial statements under American generally accepted accounting principles (GAAP) to requiring the use of international financial reporting standards (IFRS).  Reactions range along a continuum from enthusiastic acceptance of the plan one end to the opposite end of rejection and shock over having beloved GAAP thrown in the proverbial trash can. Many have observed that the transition is like a frenzied rush.  There has been no opportunity for a consensus to develop that a move from GAAP to IFRS is the right thing to do.  The SEC simply announced its intention of making the switch.  There have been no answers provided to public questions. 

Why now?  Why so fast? Some have commented (I was one of the first) that SEC chairman Christopher Cox hopes to commit irrevocably the U.S. before President Bush leaves office and a new SEC chairman is appointed.  Recognizing the impact of partisan politics provides a reasonable rationale for the SEC push when there are no obvious economic benefits for the U.S. to make the switch.

Before getting to the meat of today’s post (reviewing important remarks by Robert E. Jensen), let me provide some background to this regulatory issue. The U.S. financial system is based on the bedrock principle that investors can make the best decisions and are best protected if all have equal access to accurate financial disclosures.  The result of applying this principle has been the creation of financial markets that are the unbridled envy of the world.  Compared to financial markets in other parts of the world (i.e., Europe), U.S. investors experience the highest rates of return and U.S. companies incur the lowest costs of raising capital.  A key reason for such success is GAAP.  The U.S.  has made and continues to make expensive investments in the creation of its GAAP.  It has evolved over time to a set of uniform rules with embedded bright lines.  Why so?  Precise rules are needed by the legal system as regulators seek to enforce corporate obedience to disclosure requirements. IFRS, created by the International Accounting Standards Board, differs from GAAP in several important regards.  First, IFRS is created to make it easier for companies to raise capital across national lines.  IFRS is not intended to assist investors in making decisions, it is intended to assist companies in raising capital.  Second, IFRS permit companies to use judgment in reporting results from operations.  Investors are not secure in knowing that all companies followed IFRS in the same manner.  Third, much less money has been invested in the creation of IFRS.  There is an adage that reminds, you get what you pay for

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Robert E. Jensen

Robert E. Jensen

Enter Robert E. Jensen, Trinity University emeritus professor and American Accounting Association 2002 Outstanding Accounting Educator.  A prolific commentator on financial reporting and its regulation, derivatives and all matters related to accounting professors, Bob has been a leading critic not only of the S.E.C.-led rush to adopt IFRS, but also of adopting IFRS in at all.  Retirement to a New Hampshire mountain does not seem to have slowed him.

Does this issue pass the smell test?

It doesn't for Robert E. Jensen.

In a landmark post to AECM (the international listserv for accounting professors) on Monday, September 14, Jensen states clearly and unequivacably, “For me the IFRS transition just does not pass the smell test.” Jensen starts his post with a poignant history of the U.S. audit industry.  He summarizes;

The poor [quality of] services of auditing firms became a focal point in the U.S. Congress when equity markets appeared of the verge of collapse due to fear and distrust of the financial reporting of corporations dependent upon equity markets for capital. The Roaring 1990s burned and crashed. In a desperation move Congress passed the Sarbanes-Oxley Act (SOX) of 2002.

SOX was a shot in the arm for the auditing industry.  SOX forced the auditing industry to upgrade services with SOX legal backing that doubled or even tripled or quadrupled fees for such services. Clients continue to grumble about the soaring costs of audits, but in my opinion SOX was a small price to pay for saving our equity capital markets.

He then introduces a new development:

In 2007 and 2008, the international auditing firms commenced to lobby intensively for worldwide adoption of the “IFRS” international accounting standards of the International Accounting Standards Board (IASB).

Jensen convincingly explains that IFRS cover the same topics as GAAP, but leave out many of the “bright line” rules.  Hence [IFRS] generated a reputation for principles-based standards instead of rules-based standards”.  He then points out:

Many of the nations, especially in Europe, that adopted IFRS do not have strong equity capital markets given their historic traditions of raising corporate capital via banks instead of individual investors buying and selling shares of common stock.  Protection of investors has not had the same priorities for these nations as it has in the U.S. where faith in equity capital market integrity is vital to our market-based capitalism.

The bottom line is that IFRS is a weaker set of equity capital market accounting standards than the present FASB standards in the United States.

To summarize.  Jensen started with a history that leads to a conclusion that the large U.S. auditing firms have a poor track record of influencing corporations in the United States to make honest financial disclosures.  This explanable in part because there was more financial reward for providing consulting services than auditing.  So auditing was deemphasized.  He then contrasts how the needs of American financial markets have led to creation of strong accounting standards.  Because European financial markets are different in many ways, Europe has accepted a weaker set of accounting rules. He then observes that the large auditing firms are strongly in favor of moving the U.S. toward weaker accounting standards and have a willing accomplice in SEC chairman Christopher Cox.

This begs the question of why the large auditing firms are lobbying so hard for IFRS standards to replace FASB standards? There are legitimate reasons given the complexity of auditing international firms having operations subject to varying domestic and international accounting standards.  And there may be less litigation risk when bright line rules are replaced by principles-based standards that give auditors and clients much more flexibility in accounting for transactions.

But for me there are also smell test concerns here.  Auditing firms love the soaring revenues from SOX, but they will love even more the soaring revenues from clients having to transition from FASB standards to IFRS international standards.  Firstly, auditing firm clients will not understand IFRS such that auditing firms will make fortunes educating and training each of their clients about IFRS.  Secondly, accounting systems, including enormous databases and software systems, will have to be overhauled.  For example, all the firms in the U.S. who use LIFO inventory valuation will have to be changed to something else since IFRS does not allow LIFO. Walla — the consulting service revenue surge becomes remindful of the Roaring 1990s.

The added auditing firm revenue from the IFRS transition may be as much or more than the added revenue from SOX.  … But to me this whole IFRS transition in the U.S. and the race to lock it in place just does not pass the smell test.

So there you have it.  The entire issue of transitioning to IFRS is about money.  Great, big, heaping, towering mountains and mountains of money. Eventually the large firms will donate a fraction of this wealth to university accounting programs, and I will be much less than thrilled. Coincidentally, Floyd Norris has blogged that the Big Four are intensely lobbying Christopher Cox to appoint a Big Four accountant to replace Charlie Niemeier on the PCAOB.  No decision has yet been made, but for some reason I’m worried about what it will be.  I leave you with an image that expresses my concern.

Over and out – – David Albrecht


Just in–Tom Selling published a post on the top 10 reasons not to adopt IFRS in the U.S.  It is well written and compelling.

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