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Posts Tagged ‘Mary Schapiro’

Mary Schapiro is the Chairman of the SEC. Richard Fuld is the ex-CEO of bankrupt Lehman Brothers

Classify this under speculative rumor, I suppose.  In a story by Jean Eaglesham and Lis Rappaport, “Lehman Probe Stalls; Chance of No Charges,” it is reported that SEC officials are considering dropping thoughts of filing charges against former Lehman Brothers executives.

The U.S. government’s investigation into the collapse of Lehman Brothers Holdings Inc. has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives, people familiar with the situation said.

In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels.

SEC officials also aren’t confident they could win any lawsuit …

Qué lástima! (What a pity!)  Qué pena! (What a shame!) Eso apesta! (That sucks!)

I don’t care if the case can’t be won.  Bringing them to trial for Repo 105 schenanigans is a symbolic act that will cheer investors.  Sometimes in war it is appropriate to fight to the death.

This is the porn viewing SEC, the Madoff enabling SEC.  Does it also want to be known as the federal agency that let Lehman Brothers off the hook?

Better go after Ernst & Young, a seemingly more winnable case.

Debit and credit – – David Albrecht

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Thanks to Rick Telberg at CPATrendlines, I am now aware of Mary Schapiro’s latest comments on accounting (to the CFA Institute 2010 Annual Conference in Boston, Mass.).  We now have proof that the spirit of Professor Philip Barbay is alive and well inside the beltway.  You don’t remember Professor Philip Barbay?  He was the fool to Thornton Melon (played by Rodney Dangerfield) in the 1986 classic, Back to School.  Here’s the scene I best remember:

  • Dr. Phillip Barbay: …now, not withstanding Mr. Mellon’s input. The next question for us is where to build our factory?
  • Thornton Melon: how ’bout fantasyland?

The Rodney Dangerfield (I don’t get no respect) character got no respect from Professor Barbay, and we in the accounting world get no respect from SEC Chair Mary Schapiro.

Let’s take a close look at Schapiro’s remarks.

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How well does the average person understand financial statement manipulation?  Sometimes the numbers are gimmicked up because of odd nonsensical transactions, ala Lehman Brothers.  Sometimes the numbers are out and out fictionalized.  Sometimes investor attention is simply distracted away.

Bob Jensen passed along a post over at the AECM listserv, in which he used a few Barbie dolls to make a point.  Sprucing it up just a bit, here’s the story. [Disclaimer: I do not support the “culture of thinness” promoted by Barbie Dolls.]

Lehman Brothers Balance Sheet “Before”

Lehman Brothers balance sheet bloated with too many financial liabilities

Lehman Brothers Balance Sheet “After”

The balance sheet after cash from Repo 105/108 has paid down financial liabilities

SEC’s Mary Schapiro Called to the Rescue

There were no pictures of Barbie as a white knight in shining armor


Switching the subject, just a bit.  Over the years, Mattel (producer of Barbie dolls) has used child actors to promote its toys.  Recently, it used two of the cutest to present a disclaimer that precedes an interactive edition of its annual report.  I can’t embed the video (as much as I’d like to), so click on the following link and press the start button.  In my opinion, this is inappropriate.  Financial reporting is serious business for serious people.  It shouldn’t be made light of.  And, after watching this “kid” disclaimer, I think the viewer is happy enough to cut Mattel some slack for whatever follows.

http://corporate.mattel.com


My apologies to the copyright owners of these images.  I’ve borrowed without permission.  If you come across this page, would you grant me permission to use these images?

Debit and credit – – David Albrecht

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A single set of global accounting standards, rules to be followed by any public company as it reports annual operating results, has become the  Holy Grail of Accounting.  In today’s world, these rules are embodied in International Financial Reporting Standards. Unfortunately for many good but unwitting people, advocating the U.S. adoption of IFRS is a fool’s errand.   To more fully understand the ramifications of this statement let’s turn to the dictionary for a basic frame of reference.

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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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Finally, some hard hitting rumor reported as news on Thursday, July 30.  According to Jesse Westbrook and Ian Katz of Bloomberg, Mary Schapiro has narrowed down Chief Accountant finalists to two:  James Kroeker (accounting firm candidate with ties to Clifford Cox and Robert Herz) and independent Jack Ciesielski.

I’ve talked with Westbrook before, and he has been following the chief accountant for many months. Westbrook also reported Niemeier’s candidacy.  I suspect that these rumors are fairly square on.

This is an interesting development from early June when I reported on leaks that there were five finalists.  On June 4, I supplied more information about each candidate in Thoughts About Candidates For Chief Accountant.

James Kroeker, acting Chief Accountant, and Wayne Carnall, chief accountant of the SEC’s Division of Corporation Finance, are both in-house candidates and IFRS proponents, the issue of the day, year and decade.  That Kroeker remains as finalist is an endorsement of his performance as acting chief.   He seems to have done well in discussions with Congress as he defended fair value.  He was chief architect of an SEC report that concludes fair value accounting did not cause the recent financial mess.

Jack Ciesielski, candidate for SEC's chief accountant

Jack Ciesielski, candidate for SEC's chief accountant

Jack Ciesielski beat out Charles Niemeier as the anti-IFRS candidates (that is, U.S. should not adopt IFRS).  Both have impressed with the quality of their research on IFRS and other issues.   I suppose Jack’s ascendancy is not surprising given that Charley has been a lightening rod, but I still love Charley.  We owe him much gratitude for his 2008 speech that enticed hundreds of thousands of U.S. accountants to come out of the woodwork and declare their opposition views to IFRS.

Jack Ciesielski has written at length about the perils of U.S. adoption of IFRS, at least as currently formulated and with its current structure.  His Analyst’s Accounting Observer is a great resource.

Both remaining candidates are fair value proponents.

Who will win out?  I don’t really know Mary Schapiro, and it’s her call.  She faces a great deal of pressure from Barak Obama and Paul Volcker to appoint someone who will implement G-8 recommendations.  Kroeker is this person.  On the other hand, she seems to have an independent streak and a mind of her own.   Both qualities could lead her to support the anti-IFRS candidate.

The country does not need a big four Chief Accountant.  Kroecker would triumph the preparers of accounting information over the users.  He has ties to the foul Christopher Cox.    Foxy John Kroecker will eat us all hens for supper.

If Mary Schapiro is true to her stated prinicples, she will act to protect investors and appoint Jack Ciesielski.

Why has this taken so long?  Schapiro has been under intense pressure not to appoint an anti-IFRS person.  But, she has resisted, because the U.S. adoption of IFRS is clearly the wrong thing to do.  Had Kroeker not done such a fine job in the fair value defense, I suspect that Ciesielski would already have been appointed.

Over and out – – David Albrecht

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I’ve done a little research on the final candidates for Chief Accountant at the SEC.  Tom Selling of the Accounting Onion has handicapped the candidates in yesterday’s post, Handicapping the Chief Accountant Contest.  It is worth a look.  I lack enough inside contacts to be able to offer an opinion as to each candidate’s chances. However, I can rate each candidate on the major issue confronting U.S. accounting–whether or not to switch to IFRS.

Jane B. Adams, labeled the front runner by accounting pundant Tom Selling she is rated as having a 50% probability of being chosen), has some, but not a lot of, prior SEC experience.  She served as Deputy Chief Accountant in the U.S. Securities and Exchange Commission’s Office of the C hief Accountant from 1997 to 2000.  She was also Director of Accounting Standards at the AICPA from 1996 to 1997 and a Project Manager at the Financial Accounting Standards Board from 1987 to 1996. Recently, she has been a member of the user community as an analyst in equity research: 2 years in sell-side equity research at CSFB as Director of Accounting and Tax Policy and the last 6 years on the buy-side at Maverick Capital.  Maverick invests globally in liquid, primarily larger cap, equity securities based on in-depth fundamental research.  She was contributed less than $2,000 to President Obama’s campaign.

In a brief 2001 paper, Identical Companies, Different Financial Statements, she comments about a proposed accounting standard on derivitives, “Such changes do not improve the quality of earnings if they provide substantively different accounting results for the same instrument and exposure.”  From this statement, it is possible to project that because of IFRS flexibility in accounting standards she might oppose their adoption in the U.S.  However, she has made no public comments in the past eight years, so far as I can see.  Although I have no proof, my inclination is to rate her as IFRS friendly, given she has worked on analyzing global companies trading in numerous international markets.

Wayne Carnall, currently chief accountant of the SEC’s Division of Corporation Finance and a former partner at PricewaterhouseCoopers, is touted by Selling as having a 40% chance of being selected.  Carnall, given his lengthy association, is thought to be  big firm candidate.  He has been assigned on numerous occasions to explain the proposed SEC roadmap.   Supporting IFRS and moving toward a single global accounting language seems consistent with his background and public comments.

James Kroeker is acting SEC chief accountant and a former partner at Deloitte & Touche.  After reading numerous comments and reviews of his speeches, it seems clear to me that he is an IFRS advocate.  Although he seems to prefer a complete turnover to IFRS, he has suggested that adopting some, but not all, of IFRS would be a plausible first move.  Selling rates him as having an 8% chance of being named.

Jack Ciesielski and Charley Niemeier are definitely not IFRS proponents.  I cannot find evidence that either will support a single world standard, let alone a move to IFRS.  Both favor strong accounting standards, tight regulation and vigilent enforcement.

SEC Chair Mary Schapiro certainly has choices.  On one end of the continuum would be Ciesielski and Niemeier, who favor tight regulation, U.S. tailored accounting standards and protection of investors.  On the other end are Kroker and Carnall, who have strong ties to the traditional big firm establishment.  They seem willing to promote the big firm party line on IFRS and other issues.  Adams seems to be the compromise candidate but is inexperienced.

Debit and credit – – David Albrecht

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It has taken an extremely long time for SEC Chair Mary Schapiro to decide on a Chief Accountant.  It is rumored that she is about to name her choice.   It has been passed along to me by a trusted source that the short list of candidates for SEC Chief Accountant includes:

  • Jane B. Adams, a former deputy chief accountant of the SEC and former longtime staff member of the Financial Accounting Standards Board, who worked until recently at Maverick Capital, New York.  Ms. Adams was a financial contributor to the Obama campaign.
  • Wayne Carnall, currently chief accountant of the SEC’s Division of Corporation Finance and a former partner at PricewaterhouseCoopers.
  • Jack Ciesielski, president of R.G. Associates, Baltimore, a current member of the Financial Accounting Standards Board’s Investors Technical Advisory Committee and veteran of several standard-setting panels, who also is publisher of Analyst’s Accounting Observer.
  • James Kroeker, acting SEC chief accountant and former partner at Deloitte & Touche, who joined the SEC staff in early 2007 as a deputy to former Chief Accountant Conrad Hewitt.
  • Charles Niemeier, a member of the Public Company Accounting Oversight Board and former chief accountant of the SEC’s Division of Enforcement.  Niemeier has chosen to remain completely independent from partisan politics.

ELVISThe accuracy of this list is not confirmed, and probably should be accorded no more credibility than rumors of an Elvis sighting.

It is my belief that Niemeier was an early front runner, but heavy lobbying prevented his naming.  Charlie McGreevey–European Union Treasury Minister– is rumored to have sent a personal envoy to Washington and an audience with SEC Chair Mary Schapiro to argue his case against Niemeier.  The large accounting firms and AICPA also lobbied strongly against him.   Niemeier caused strong opposition because of his September 10, 2008 speech against U.S. adoption of IFRS.  Schapiro is rumored to have said, “With so much opposition I simply can’t appoint him.”  It is precisely because of that opposition that he should have been appointed.

Tom Selling, consultant and author of The Accounting Onion, has conjectured about odds of appointment on AECM, the listserv for Accounting Professors:

  • Adams: 1:1 (even money)   The right background; may not have staked out a position on IFRS yet; would be the first woman chief accountant.
  • Carnall: 3:2   Perhaps the world’s most knowledgeable person on foreign private issuer matters. Nice guy, could be a very popular choice with the SEC Staff (just guessing on that).
  • Ciesielski: 99:1   Same political baggage as Niemeier (see below).
  • Kroeker: 23:2   Don’t know him. Association with the Cox/Hewitt era could be a plus (political compromise), or a minus (guilt by association).
  • Niemeier: 99:1  Much too candid, rigorous in approach, and independent-minded.

Who know if this is an accurate handicapping?

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.

It will be a real shame if Charley Niemeier is not appointed.

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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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 testifying before Senate Committee on Banking, Housing and Urban Affairs

Mary Schapiro testifying before Senate Committee on Banking, Housing and Urban Affairs

Yesterday brought a very big piece of news.  Mary Schapiro appeared before the U.S. Senate Committee on Banking, Housing and Urban Affairs.  A video of the appearance is here.    Here is my best attempt at transcripting the most relevant part of the hearing.

Senator Jack Reed (D-RI): Much of what you are going to do will have complications and consequences overseas as well as here in the United States, and one of the areas is IFRS road map.  We have repeated written to Chairman Cox, who tried to determine and develop a very deliberate road map, and I think there’s a rush to judgment on this issue.  In fact, I met witih the CEO of the Honeywell Corporation who has similar concerns over disparate treatment under international rules thata can be used to change income, that can be used to state R&D expenses differently.  There’s a host of … an opportunity for arbitrage between the two systems that I think we have to avoid.  Can you give us a notion of how you wish to proceed with this international accounting with recognition that eventually we’ll have that in a global economy and hopefully we will converge to a set of high level standards.

Mary Schapiro: Well, I would proceed with great caution so that we don’t have a race to the bottom.  I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.   With that said, I have some concerns with the road map that has been published by the SEC and is out for comment now.  I have some concerns about IFRS standards generally.  They are not as detailed as the U.S. standards.  There’s a lot left to interpretation.  Even if adopted, there will still be a lack of consistency,  I believe,around the world on how they are implemented and how they are enforced.  The cost to switch from U.S. GAAP to IFRS is going to be extraordinary, and I’ve seen some estimates that range as high as $30 million for each U.S. company in order to do that.  This is a time when I think we have to think carefully about whether we impose those sorts of costs on U.S. industry, really make sense.  Perhaps my greatest concern is the independence of the International Accounting Standards Board and the ability to have oversight over their process as they make standards and the amount of rigor that exists in that process today.  So, I will tell you that I will take a great big breath and look at this entire area again, carefully, and will not necessarily feel bound by the existing road map that is out there for comment.

First of all, I am so happily surprised  that Mary Schapiro made these comments.  They are more protective of U.S. GAAP than I ever imagined would come out of the Obama administration.  I am grateful that the IFRS opposition apparently has been listened to, even though it has not been properly understood.  Welcome aboard, Mary Schapiro.  I hope that you frequently read The Summa for advice on how to handle the IFRS issue.

Her statement, coming during the confirmation process, is not binding.  However, it does give U.S. based opponents of IFRS some hope.  There seems to be an open mind in the Obama administration, that is very good news!

Her statements, however, cannot be considered binding  for three reasons.  First, it could simply be posturing in order to ease concern over her nomination so that she can gain confirmation.  Is this a possibility?  Of course.  Paid $3 million per year to head the NYSE/NASDAQ self-relatory group, her FINRA investigated and failed to catch the  $75 billion Madoff fraud.  Moreover, several key national publications have come out against her confirmation.  She will be confirmed, of course, because Republicans are going to fight a different nomination and not hers.  Never-the-less, she could simply be posturing to gain votes for confirmation.

Second, I don’t think she will have the authority to make the final call over IFRS.   IFRS adoption is an international political issue, and U.S. adoption will be negotiated at the international state level.  It is very possible that the U.S. could bargain away GAAP in order to gain European help to relieve our troops in the Middle East.  Under this scenario, investor protection in the U.S. simply is irrelevant.  National security is the key, and with Obama promising to run up trillion dollar deficits, he will want to save money by bringing home the troops.  Plus, one additional factor.

Third, as I’ve written before, Obama is relying on economists, such as Paul Volcker, for guidance on regulation-related matters, such as accounting standards.  Volcker has been a member of the IASC parent organization for the IASB.  He has been strongly in favor of the U.S. switching to IFRS, for a long time.  He will do everything possible to bring about IFRS in the U.S.  Of course Volcker is out of his depth here, having no background in accounting or finance, and really does not understand the nuances of the issue.  But that isn’t going to stop him.

However, there is no use in saying the sky is falling.  I’m going to take Mary Schapiro at her word and proceed as if the GAAP-IFRS issue is still open.  I have a few comments about her specific words.

First, she says, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.”  Well, we can’t, because I don’t, nor do others.  One need only to read Shyam Sunder’s work to realize international differences in accounting standards are good.  Countries have different interests, and it is simply ignorant thinking to presume that a single set of standards can satisfy the very different interests that are out there.  For example, the U.S. places a high priority on protecting the investor, and this is reflected in the great amount of detail in our rules.  However, not everyone agrees to that priority.  Nor should they.  Different priorities and national interests will lead naturally to different accounting standards.  This is fundamental and we cannot trust Mary Schapiro to protect U.S. GAAP until she acknowledges it.  No matter what else she says, if she doesn’t get this point then she her thinking is compatible with Paul Volcker, the IFRS champion.

Second, her additional comments sound pretty good.  She seems to be well read.  Don’t know if she’s only read Charley Niemeier, or whether she’s read the other six critics of IFRS.  But at least she has comprehended some of the arguments.  Never-the-less, everything here must be interpreted in the context that she believes a single set of world-wide accounting standards would be beneficial and is attainable.  As I said before, it is not necessarily beneficial, and I’ve argued for a long time that it is unattainable.  For her to continue down this road is simply wasted thinking.

Third, she expresses a desire for the SEC to have oversight with respect to the IASB accounting standard generating process.  Well honey, every other country in the world is going to want to have the same oversight desires.  It seems clear that you want some control over the process, but everyone else wants that also.  Why, Europe has already exerted that control with respect to forcing certain changes to the fair value standard.  Let’s get this straight–the SEC will never, ever, get the degree of oversight it desires with respect to IFRS.  I believe that this should be sufficient to bury the IFRS issue forever.  I don’t even know why you are going to spend time on it.

I’m still going to submit a comment to the SEC on Cox’s proposed road map. And I’m going to continue to write about the benefits for the U.S. to retain GAAP.  If it weren’t for international politics, it would be a no brainer.

Debit and credit – – Dave Albrecht

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