The Spirit of Accounting

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This column, which was drafted in early March, is the first of a two-part series that examines the Financial Accounting Foundation's perplexing January decision to "give" as much as $3 million to the IFRS Foundation, ostensibly to help complete the unfinished convergence projects that have been simmering for years.

This puzzling event immediately evoked bewildered reactions that were lingering when we were writing. For example, the otherwise unflappable Denny Beresford, a past chair of the Financial Accounting Standards Board, was quoted in a Bloomberg BNA article by Steve Burkholder as saying this gift is "six times more strange" than a $500,000 grant that the FAF awarded to the international foundation a couple years back.

Frankly, we have found it to be even more disturbing than Beresford did.

This first installment explains how this less-than-completely-voluntary contribution came about, and that it doesn't reflect well on some of those who were involved. However, as we will explain in next month's column, we think the gift has a silver lining in that it will promote the final demise of the political campaign to replace GAAP and FASB with IFRS and the International Accounting Standards Board.

Part of what makes the gift so baffling is the incomplete and inconsistent official disclosures provided by the FAF and the Securities and Exchange Commission. Neither was forthcoming in their press releases and they didn't even say the same thing. In addition, neither answered crucial questions that we submitted to them in hopes of learning more about what happened.

As a result, we have relied on the Burkholder article and other credible off-the-record communications to piece together a plausible description of this less-than-glorious moment in standard-setting history.



Our disappointing finding is that the FAF (and, indirectly, FASB) were undeserving targets of an effort by SEC Chair Mary Jo White to placate parties affiliated with the IASB who have whined for years about various things. To be more specific, sources familiar with the situation told us that White applied out-of-sight, unofficial pressure on the FAF to make the contribution because (like her predecessors) she herself was pressured by the IASB officials to make it, even though she is legally constrained against doing so.

In a sense, then, she and her chief accountant were also victims of political maneuvering instigated by the IASB. However, we think their first mistake was giving in to that pressure and their second was redirecting it onto the FAF. We also question the wisdom in White's effort to create the impression that she was only a bystander.

In summary, this exercise produced poor results because it was motivated by the wrong reasons and implemented by officials who may have misused their authority. Since we greatly respect the SEC, we wish in our hearts that it just hadn't happened.



The foundation for this column and the next is our assertion that everyone involved with financial reporting in the U.S. needs to comprehend that there is nothing to gain and much to lose in designating the IASB as our standard-setter and making IFRS our official standards.

Right now, we know this assertion is not universally embraced because we observe that some people (especially those with the greatest vested interests) continue to pine in public for the approval they think they want but haven't yet been granted.

Among the most prominent in this group are the chair of the IFRS Foundation, Michel Prada, and the chair of the IASB, Hans Hoogervorst. They are not alone, because many others in Europe and the U.S. still seem to think they should have their way on this issue. Next month's column will explain why we think they don't fully realize what they're asking for.

In the meantime, we'll point out why we believe these people don't have our country's best interests in mind. Their behavior appears to be self-serving, but that's nothing new in the politicized domain of securities market regulation. Perhaps they're no worse than some others, but we think they've made bigger mistakes than most.



Their error in this context was relentlessly pressuring White to make up what they characterize as a shortfall in the U.S. share of funding of the IASB's operations. To use an analogy, they were dunning her as if she hadn't paid her club dues.

Unlike former SEC Chair Mary Schapiro and her chief accountant, James Kroeker, who were also bullied but didn't yield, White and her chief, Paul Beswick, seem to have blinked.

A big missing piece in this puzzle is that it isn't at all clear just why they gave in. One possibility is that they are more personally inclined to sympathize with those who applied this pressure. Another possibility is that they were somehow less able to resist the pressure even though it was not being applied by legitimate SEC constituents. Either way, their decision doesn't reflect well on the commission.

The Burkholder article reported that Hoogervorst believed that White could be convinced to feel responsible to do something about the IASB's declining U.S.-based private financial support. Specifically, Burkholder said that Hoogervorst "identified a perceived lack of sufficient funding from the U.S. 'as our biggest funding problem.'" He also said that Hoogervorst "hoped that SEC Chairman Mary Jo White 'knows it is a big problem and that the United States needs to do something about it.'"

The attitude conveyed in these remarks reveals that Hoogervorst is remarkably unfamiliar with the way things work on our side of the Atlantic. First of all, the IFRS Foundation and the IASB do not receive any funding from the United States per se. Yes, they have received contributions from audit firms and corporations headquartered in this country, but that money did not come from the government.

Second, Hoogervorst and Prada have acted as if they are oblivious to the fact that the commission's jurisdiction is limited to the U.S. and that it has no authority to give money to the IASB. If that action were to be attempted, the press (including us) and the Congress would descend on the chair in a flash with no soft words.

They also acted unconcerned about the obvious constraint that the SEC's role as a securities market regulator means that an egregious abuse of power would occur if its chair (or any official) ever were to hint to audit firms and managers of public companies that they should do the commission a favor, such as helping fund the IASB.

In addition, the SEC chair cannot divert any of the accounting support fee to any organization other than FASB because the Sarbanes-Oxley Act requires this funding to go only to the designated standard-setting body.

Even if funding the IASB were a good idea, which it isn't, White is officially powerless to do what they were pressuring her to do. As we see it, she should have just said "no" and then suggested that the IASB officials solicit direct contributions from U.S. corporations and audit firms on their own. After all, the funding problem is theirs, not hers.

In addition, it would be wrong for White to enlist someone else to do what she cannot do. To their detriment, and to our bewilderment, that's exactly what she did when she approached the FAF trustees, as we describe next.



Burkholder's article illuminates the scenario by saying that, "Information gleaned from Bloomberg BNA interviews suggests that top officials at the SEC ... were the source of the recent FAF funding idea." He also reported that, "Senior officials at the SEC played a substantial role in arriving at the ultimate arrangement whereby the FAF agreed to help fund the work of the IASB through a contribution to the International Financial Reporting Standards Foundation," and that, "SEC officials made it clear to FAF trustees, in the first half of 2013, that they wanted the U.S. to provide some funding to the IFRS Foundation, and they asked the FAF to make the contribution, said one of the accounting sources with knowledge of the funding-related events."

We learned that Beswick began to encourage FAF trustees and officers to consider contributing to the IASB while Elisse Walter was serving as the SEC chair in the first months of 2013, and continued those contacts after White was confirmed in April of that year. When they declined, we understand more requests followed but never, thank goodness, any that amounted to overt threats.

We were informed that the FAF's initial reluctant response to a request for $6 million was a $1 million offer that was turned down as too small. We were also told that the trustees' subsequent $3 million offer prompted a $4 million counteroffer that they rejected.

We suggest that this tactic was equivalent to or even worse than going after auditors and managers because the SEC has the dual roles of funding the FASB through the accounting support fee while also protecting it against improper pressure from its constituents. Therefore, the FAF trustees would have good reason to feel not just resentment at being asked to contribute, but also vulnerable to some negative consequence if they didn't.

We simply cannot explain why these points weren't obvious to White and her senior advisors. If we've missed something, we'll be happy to learn what it is.



White compounded the confusion by releasing a terse January 29 official statement that said, in its entirety, "I am gratified by the Financial Accounting Foundation's announcement that the FAF will provide a substantial contribution to the IFRS Foundation." Literally, that's all she wrote.

We believe this sentence was crafted to imply that she was not significantly involved with the gift. However, that message was immediately unconvincing because the FAF's announcement from the day before had said, "The FAF Board of Trustees made the decision in consultation with senior officials of the Securities and Exchange Commission."

Alas, we fear that White's effort to appear uninvolved actually adds to suspicions that she was behind the contribution -- but we can't be sure, because the SEC declined to respond to our request for clarification



So, here's the whole picture: To achieve an unsound goal, IASB officials pressured the U.S.'s chief securities market regulator to grant funding that she could not rightfully provide. Despite her role as the FAF's patron and protector, White chose to apply her own pressure on the trustees to get them to do what they didn't want to do.

We invite our readers to make their own assessment by contrasting the SEC's behavior with the following two principles contained in the recently released draft of its Strategic Plan for 2014-2018:

"In overseeing the Financial Accounting Standards Board, the SEC will strengthen and support the FASB's independence and maintain the focus of financial reporting on the needs of investors." (page 8)

"Integrity: As the SEC is the independent federal agency entrusted with regulating and conducting enforcement for the U.S. securities markets, each member of the commission's workforce has a responsibility to demonstrate the highest ethical standards to inspire confidence and trust." (page 1)

You decide: Did the commission and its leaders who participated in this effort or merely concurred in its execution actually live up to these ideals? If not, has their behavior reduced the securities markets' trust and confidence in the commission and those leaders?"

Next month, we'll describe what we're sure needs to happen next.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions or Accounting Today. Reach them at paulandpaul@qfr.biz.

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