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Posts Tagged ‘Securities and Exchange Commission’

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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J. Edward Ketz is my round tuit.  ???  A round tuit is anything that unlocks your sense of inertia, allowing you to start working on some task that has been delayed far too long.

An example helps.  Have you, like me, ever been nailed for procrastinating?  All the time.  It probably followed this thought, “I’ll get a round tuit when there’s a free moment.”  But everything else doesn’t get done and there’s no free time, so you never get a round to it.

Ed is my round tuit.

On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Yesterday (March 29, 2010), Ed Ketz published his reaction, “The Iffiness of IFRS“.  It’s better than anything I can  write (anything Ed writes is always better than anything I can ever write, just take it for truth).  Better late than ever, here are my personal reactions.

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On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Today (March 29, 2010), Ed Ketz publishes his reaction, “The Iffiness of IFRS” at SmartPros.   It’s better than anything I can write (anything Ed writes is always going to be better than anything I can ever write, just take it for truth).  For those of you new to The Summa, Professor Ketz is a charter member of the group of IFRS critics.

For years, Ketz has railed (Merriam-Webster: to revile or scold in harsh, insolent, or abusive language) at the corporate practice of financial reporting.  He has repeatedly said that the number one problem is that corporations simply don’t follow the rules.  If ever they were all to be in a general state of compliance, then we could talk about about the structure of accounting standards.  But first, we need compliance.  Generally speaking, he favors specific accounting rules that permit no wiggle room.  Such rules make it easier to crack down on wrong-doers.

Professor Ketz’s latest editorial is “The Iffiness of IFRS.”  He responds to the SEC and suggests several issues that still need to be worked out before IFRS adoption.  Although the context for his remarks is opposing IFRS adoption, he believes the biggest problem with the proposed transition is:

… whether IFRS statements can be audited and what will happen in the courtroom after a firm experiences severe declines in its stock price.

Ketz concludes with:

… I again marvel at the rush to IFRS. The benefits do not appear to match or exceed the costs of the adoption.

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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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The U.S. government bears the societal responsibility for establishing accounting standards.  In its structure of economic regulation, the task for creating accounting standards is fixed on the Securities and Exchange Commission.  For seventy years the SEC has passed on its responsibilities, instead relying upon private U.S. organizations.   This has been called the Ostrich Syndrome (aka Head-in-Sand).  Now, the SEC proposes to rely upon a private international organization (IASB).  I call this the Some Sort of Ostrich Syndrome (aka Head-Where-It-Doesn’t-Need-to-Be).

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In yesterday’s Accountancy Age appeared an interesting piece by IFRS reporter-advocate Mario Christodoulou, “The long and winding roadmap”.  He does an adequate job, I think, even if he didn’t quote any of the many things I’ve said about U.S. adoption of or conversion with IFRS.

His quotation of fellow blogger Tom Selling statement of the differences between the GAAP and IFRS positions is priceless,

“Not only were Kroeker’s and Niemeier’s positions as different as black and white… Niemeier’s inspiration clearly sprang from a foundation of cited broad-based analyses produced by published rigorous, peer-reviewed, independent research.  The source of Kroeker’s remarks apparently came from nothing more than his own wishful thinking,” prominent blogger Tom Selling said in September last year.

I recall thinking at the time his statement was something that I very well might have written, had Tom not said it first.  There is every sound reason for the U.S. to retain its GAAP.  Reasons for switching to IFRS are specious, sophist all the way.

Christodoulou goes on to say that the push for IFRS has too much momentum for the U.S. to continue to buck the trend.  He might very well be right, but I’ll continue fighting it never-the-less.

Regardless, isn’t it time that someone came up with some good reasons for the U.S. to switch to IFRS?  No one has ever stated one.  Not that one is absolutely needed, because when governments decide to do something no good reason is needed.  I mean, didn’t Ben Bernanke say this week that the multi-billion USD bailout didn’t actually cost a single cent?  So, in government speak, Kroeker’s reason for moving to IFRS–for enhanced comparability–isn’t that bad.  Of course, it is a false reason and no on in the world truly believes it.  It is nonsensical.

And, governments frequently make bad decisions when it come time to regulate some aspect of society.  In deed, governments in North America are more likely to get something wrong than right.

But as I say, isn’t it about time that we had some real reasons for moving the U.S. to IFRS (convergence accomplishes pretty much the same thing as a switch-over)?  I have studied this topic for a few years.  Researching government regulation of accounting and auditing is what I do.  So far, I know of two reasons for the U.S. to switch to IFRS:

  1. Large audit firms hope to realize in excess of $100 billion in fees from services related to the switch over.  This represents a wealth transfer from stockholders.
  2. Europe hopes that when investors can compare U.S. and European companies using IFRS-generated statements, they will decide to move upwards of a couple trillion USD from the U.S. to Europe.

I am aware of no other benefits to any other identifiable party for the U.S. switching from GAAP to IFRS.  Shouldn’t there be some high-minded benefits from putting out so many millions of Americans and taxing the U.S. economy by a couple trillion dollars?  I just don’t think that putting money in audit-partner pockets so they can buy luxury goods, or whatever, is a good enough reason.

So come on, all of you pro-IFRS folks.  Kroeker has never come up with a reason for why the U.S. can make a change.  Please leave a comment and help us all out.  A good reason, or two, would make us all feel better.

Debit and credit –  – David Albrecht

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The push for IFRS continues on, unrelenting, like the steady flow of the Mississippi River.  We have all noticed it.  Switching the United States from U.S. GAAP to IFRS is desired in the U.S. only by large audit firms, CEOs of large multinationals, and SEC regulators and their staffs.  Investors, rank and file accountants and accounting professors oppose the move.  Audit firm principals and corporate executives stand to profit, one way or another, by billions and billions and billions and billions of U.S. dollars.  It is self-debasing greed.  It is avarice of the corrupted soul.

It reminds me of things mentioned in a speech by Arthur R. Wyatt on August 3, 2003 to attendees of the American Accounting Association national convention:  Accounting Professionalism–They Just Don’t Get it.  Wyatt had an impressive resume:  accounting professor, Arthur Andersen partner, FASB member, IASC member.  He spoke to the annual conference as to why things got so bad that one of the Big 5 went kaput, and it was just happenstance that it did not happen to any of the four survivors.

I think Wyatt considered Arthur Andersen’s fate to be deserved, as he described an historical evolution that resulted in Andersen abandoning its responsibility.  I’m quoting a long passage from his speech that contains his conclusion:

Just as greed appears to have been the driving force at many of the companies that have failed or had significant restructurings, greed became a force to contend with in the accounting firms.  In essence, the cultures of the firms had gradually changed from a central emphasis on delivering professional services in a professional manner to an emphasis on growing revenues and profitability.  …

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Stop!  Don’t move in inch!  Stop!  Hold the presses!

Even if the U.S. adopts IFRS, there is a chance that U.S. GAAP will survive and thrive.

Come again?

If IFRS implementation is anything like SOX implementation, then there is a chance that U.S. GAAP will survive.

It is so obvious, not even Captain Obvious is talking about it.  The rationale for my conclusion starts with a history lesson on SOX.
The Sarbanes Oxley Act of 2002 was passed in the immediate aftermath of (1) the dotcom burst bubble, (2) a huge recession, (3) the WTC terrorist attack, (4) dozens of  accounting scandals such as WorldCom and Enron, and (5) Washington’s perceived need to save the country from itself through increased regulation.  It is said that George H.W. Bush later so regretted his part in SOX’s passage, that he pushed IFRS as a way of making it up to corporate America (IFRS is a gift offering because of itse earnings management capabilities).

Here’s what corporate America thought of SOX.

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Edith Orenstein, in her exceedingly well done FEI Blog, quotes SEC Chief Accountant James Kroeker as saying:

Kroeker outlined six general areas that the SEC would have to “carefully consider … fully understand and address” regarding the potential use of IFRS by U.S. companies.  He added that this list is not all-inclusive. The six areas are:

  1. U.S. Investor understanding of and perspectives on IFRS;
  2. The development and application of IFRS for use as the single set of globally accepted accounting standards for U.S. issuers;
  3. The impact on the U.S. regulatory environment;
  4. Preparer considerations, including, among other matters: changes to accounting systems, changes to contractual agreements, corporate governance considerations, and litigation contingencies;
  5. Human capital readiness; and
  6. The role of the FASB in achieving the goal of a single global standard.

Kroeker noted, “I expect that you will hear more from us on this topic in the near term.”

James Kroeker

It is so depressing to hear James Kroeker speak of #2 and #6, as it reveals the SEC’s continued fixation on a single global set of accounting standards.

A global accounting standard is both unwise and misguided.  I’ve explained why many times.  However, just in case today is the day Mr. Kroeker checks out my blog, I’ll explain it again.

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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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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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