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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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Don't get distracted, better keep all eyes on the bouncing ball of IFRS

Do not get distracted, better keep all eyes on the bouncing ball issue of IFRS

Oh sure, the sub-prime crisis and the federal bank bailout are all important, but let’s all keep our eyes on what is really, really important–the push to switch the U.S. from GAAP to IFRS.

I am somewhat frustrated that it is taking the SEC so long to get the proposed road map published.  Despite labeling the coming publication as a proposal, everything said about it seems to scream out that a commitment to IFRS has been made.  Do you recall the movie masterpiece Absolute Power?  In one scene the Laura Linney character said to the Clint Eastwood character, “Father, what have you done now?!”

I keep reading and rereading the wording of the SEC August 27, 2008 press release, SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. FOR IMMEDIATE RELEASE 2008-184, trying to make sense of it all.  “SEC, what have you done now?!

WSJ reporters Kara Scannell and Joanna Slater have a take on 8/27, the “SEC Moves to Pull Plug On U.S. Accounting Standards“.  Previously, the SEC announced its intention to pull the plug.  What’s next?  SEC finally pulls plug. Because the SEC is judge, jury and executioner on, we can conclude that GAAP is a dead man walking.

The move to IFRS in the United States is controversial.  On one hand, business execs and large audit firms are having orgasmic fits of anticipation of windfall profits if the move to IFRS goes through.  Investor groups, who will have to supply the windfall profits, are angry that the execs and the auditors have appropriated the investor pockets.  Accountants, who care about getting things right, cringe at the thought of having to implement the loose standards of IFRS.

Presidential candidate John McCain would have SEC Chairman Cox fired.

Presidential candidate John McCain would have SEC Chairman Cox fired.

But it does not seem controversial from the perspective of the SEC.  Why?  SEC Chairman Cox, a bull politico, has been let loose in the financial system china house with predictable results. It is very unusual for an SEC chairman to have done such a poor job that a presidential candidate can score points by saying he should be fired.

Back to the proposal.  Cox and SEC spokespersons attempt to deflect criticism by saying that this proposal does not commit the U.S. to IFRS.  However, to the chagrin of investors and accountants this proposal does not decommit the U.S. from IFRS.  An implicit assumption of eventual conversion to IFRS underpins the entirety of what the SEC is about.

The proposal is all about how to prepare for IFRS.  Shall we prepare for IFRS this  way, or that way?

I ask you.  Does it not seem reasonable to conclude that if the proposal set before us is how to plan and get ready for IFRS, then the decision to adopt IFRS is either a difficult to change bedrock, or it is a very done-deal?

Commissioner Elisse B. Walters (possibly the commissioner least inclined to accept IFRS) describes one of the milestones, “Education and training are crucial in readying the United States for the transition of U.S. issuers from U.S. GAAP to IFRS reporting.  Three years is not a very long time, and I believe that the Commission must do everything it can to educate investors and support the training of accountants, auditors, and others involved in preparing and using IFRS financial statements.”  I think this shows, more clearly than anything else, that the move to IFRS is a done-deal.  The process of educating (all) investors, (all) accountants, (all) auditors, (all) others, such as systems people is unnecessary and extremely wasteful unless IFRS is sure to be adopted.  What will this one milestone cost?  Undoubtedly a few hundred billion USD in opportunity cost!  It could be more, depending on the assumputions used in your calculations.  Does it make common sense that the SEC could call for the incurrence of a few hundred billion dollars while simultaneously saying the U.S. is not committed to IFRS?  Give me a break.

Another of the desired milestones is for a test group of approximately 120 large companies to generate IFRS-based financial statements during the three year period 2009-2011.  The CEO of British Petroleum announced that his company spent the equivalent of 100 million USD for the first year of IFRS reporting, with additional expense expected the second and third years.  Extrapolating to the test group, the road map calls for certain U.S. corporations to spend approximately $20 billion USD in total to experimentally convert to IFRS.  What would be the charge if all SEC reporting corporations were to convert to IFRS?  Just shy of $1 trillion USD.  Fortunately for my friends in the Big Four, almost all of this trillion goes into their pockets.  What a windfall for them!.  And, we haven’t even addressed the scientific fact that companies that report on IFRS instead of GAAP experience higher costs of capital and investors experience lower rates of return.  My point is that requiring this $30 billion expenditure by some U.S. corporations seems to include an implicit promise that their sacrifice won’t be made in vain

My main point is there should be no need at all to plan as if we are going to convert to IFRS unless there also is a basic, unchangeable bedrock assumption that the switch to IFRS will be made, no matter what.  Because the plan is being pitched so hard (and all commissioners are on public record as favoring going ahead with the plan), it seems obvious that even a blind man can see that an irreversible commitment to IFRS has been made.

There is something stinky to the SEC claim that the U.S. is not committed to IFRS

There is something stinky to the SEC claim that the U.S. is not committed to IFRS.

How can SEC representatives stand before us with a straight face and say the U.S. is not committed to IFRS.  It doesn’t ring true.  As a good friend and trusted colleague would say, there’s something stinky to this story.

I would feel better if the proposal was about whether or not we should plan for the conversion to IFRS.  I’d definitely feel much better if the proposal was about whether or not we should switch to IFRS at all.  Unfortunately, the proposal certainly seems is about whether or not to adopt this one particular way to get ready for IFRS.

The logical order for the series of voiced questions is: (1) should we adopt IFRS, (2) if yes, is now the best time to start planning for it, (3) if yes, then is this the best plan to get ready for IFRS.  However, the SEC has chosen to ask the questions in a different order:  (1) is this the best plan to get ready for IFRS, (2) if yes or no, then no question, we’re going to start planning now, (3) if we have completed planning and preparation for the conversion, is the conversion something we really want to do after all?

Give me a break!  Of course they have already decided to make the conversion.  The IFRS decision is as irreversible as a 1913 decision to levy a federal income tax in the United States.

Every intelligent person I know tells me not to get worked up to fight the adoption of IFRS, because it simply will be a waste of time.  They say, no use beating a dead horse, or no use beating your head against a brick wall, or no use beating your head against a dead horse.  My reasoning brain agrees with them  It will be a waste of time and utterly useless to attempt to fight the adoption of IFRS in the U.S.  That fight took place a long time ago.   It was very hush-hush.  Then never told us about it when it happened. They won, we lost.

Never-the-less, I believe that there should be hope.  Isn’t there always hope?  No matter how dark the night, we can hope in a bright new dawn  I refuse to give up hope that saner heads will arrive to intercede and justice will prevail.

Just because President Bush and the SEC are out to favor business executives and public auditing firms at the expense of investors and the general public, it does not mean that we have to accept it without a fight  I hope that everyone reading this article will make a commitment to write in during the 60 day comment period with anti-IFRS sentiments.  The exercise has only a snowball’s chance of survival in hell, but I feel life is most worth living when the fight is for good to triumph over bad.

Over and out – – David Albrecht

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I got off the phone with Kevin Callahan of the SEC press office at 6 p.m. ET on Friday.  He seems very sincere.  After communicating a couple of times via e-mail, I have no doubt about his belief in the things he said.

He said that there is no science as to how long it takes from a Commission vote of approval to when it is ready for publication in the Federal Register.  He said that it might take just a bit more than a week, or it could take a couple of months.   It all depends on the complexity of the issue and the number of SEC departments that are involved.

Although he did not have a copy of a draft of the proposal in front of him, he kept directing me to the first paragraph of the August 27 press release that announces the proposal:  SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily.  FOR IMMEDIATE RELEASE  2008-184

Washington, D.C., Aug. 27, 2008 – The Securities and Exchange Commission today voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014. Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission.

So, there are two things to keep separate.  There is a proposed developmental journey (what the SEC terms the road map) to take place 2008-2011, and an eventual final decision to be made in 2011.

He said that all the Commission has approved at this point is putting the proposed road map up for public comment.  They have not approved the events of the next three years, but proposed milestones for between now and 2011 to prepare for Commission’s ultimate decision on IFRS.  He said that the specific issues for which public comment is being elicited, as well as to the uses of these comments, would be detailed in the published proposal.  He said in general that public input is being elicited on the road map and on the decision in the long run (2011).

Since I’m a professor reputedly good at explaining things, this is how I understand his comments.  I think he means that what the Commission has approved at this point is pretty limited.  They have not approved setting in motion any processes that could lead to realizing milestones.  But they have approved the set of milestones (or important developments) they want or prefer to see in the future, upon which they believe future decisions will hinge.   I think he implied that there definitely is to be a road map, but the particulars could depend on the public comments, but perhaps I’m wrong on this.  I’m sure it will all be made cleaer in the published proposal.

He was quite clear that neither contemporary events nor political issues speculated upon in recent on-line articles (CFO, ConcurringOpinions, The Summa, etc.) are having any influence on what I called the “apparent delay.”   He emphasized that there is no delay, it is simply a matter of getting the report ready for publication.

He concluded by saying that its publication could be expected within three weeks.

I think this trumps my earlier journey into fantasy land– “Cold Feet, Mr. Cox?

Over and out – – David Albrecht

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

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

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

Thomas Jefferson (1743 – 1826)

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

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

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

Vive la résistance!

Vive la résistance!

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

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

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

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

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

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

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

Uncle Sam wants you to join in.

Uncle Sam wants you to join in.

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

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

Over and out – – David Albrecht

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