IFRS 'non-vergence' and the CPA Exam: Calling the AICPA to account

All accountants, and certainly all CPAs, should be keenly interested in and concerned about the activities of the American Institute of CPAs. As the leading professional society for CPAs, it shapes both policy and perceptions for the entire profession, members and non-members alike.

Lately, we've grown disaffected with major moves that strike us as disconnected from the best interests of existing and future professionals. Last month, we examined the ongoing, ill-conceived push to create a new board for private company GAAP. This month, we're criticizing the irrational rush to adopt international standards and including that topic on this year's CPA Exam.

A CALL FOR ACCOUNTABILITY

We're calling the institute's management to account for pursuing a will-o'-the-wisp IFRS adoption scheme that never had a chance of fruition. If they didn't realize that non-vergence was a bad idea from the beginning, they should be embarrassed for not doing their homework. If they still don't realize it's a bad idea, they should be embarrassed for disregarding current events and situations.

Our question for the institute's executives, elected officers, and Council asks how they decided that supplanting GAAP and the Financial Accounting Standards Board with IFRS and the International Accounting Standards Board would be, first, a good thing, and second, even remotely possible. Near as we can tell, they made no sincere effort to identify what's wrong with GAAP and FASB to justify replacing them.

Sure, we heard vague generalities, mainly the patently false claims that, "Uniform standards will create comparability" and "Principles-based standards are better than rules-based standards," but not much else. We wonder whether anyone at the institute ever fully articulated what benefits adoption would provide for statement users, as opposed to CPAs.

We note these obstacles that those in charge apparently did not consider:

The complexity of the IASB's political process, which ensures that progress toward higher-quality reporting will be arduous and unproductive, and not likely to promote American interests.

The lack of widespread acceptance of the entire set of IFRS because of local "carve-outs," which means that the world is nowhere close to uniform standards. So much for the alleged but spurious uniformity benefit.

The lack of rigorous auditing standards and securities regulation and enforcement in other countries, which raises serious doubts about the reliability of financial reports' contents and the limited avenues of recourse for those who rely on misleading reports.

The Securities and Exchange Commission's vested interest in the existing standard-setting system, which means a commission decision to adopt IFRS (and the IASB's political process) would repudiate some 75 years of effort nurturing it into its present condition while protecting it against attacks. What advantages did the institute's overseers think could compel this awkward about-face?

The structural barriers in U.S. securities laws, which authorize the SEC and the Public

Company Accounting Oversight Board to designate a single standard-setter funded by involuntary fees from U.S. companies and subject to close oversight to ensure the integrity of its processes and output. Who would think the IASB could submit to those indignities? Alternatively, who would think Congress could be persuaded to abolish the SEC's statutory duty to establish accounting principles used in U.S. capital markets?

The pervasive interweaving of GAAP throughout the U.S. legal and economic systems, which means its requirements are present in such things as private company reporting, debt and other contracts, and definitions of federal- and state-taxable income. Did those who set institute policy think these Gordian knots could be untied by saying "abra-con-vergence?" And did they really believe Congress would embrace international definitions of income for our tax system?

The political impossibility that a Democrat administration would embrace a lame-duck Republican agenda item pushed through in late 2008, a simple truth that should have occurred to the institute's political advisors.

Despite these obvious obstacles (and others), the management, officers and Council plunged headlong into supporting the adoption of IFRS. What's more, they're still at it, near as we can tell.

WHAT DID THEY DO?

In concert with the largest accounting firms, the institute implemented a full-bore promotional campaign designed to frame the issue as how soon adoption would occur, instead of whether it should occur. They expounded their view incessantly, every chance they got. We also think they convinced many CPE instructors to spread this specious message, and we know at least some are still doing it.

As for the firms, they took dead aim at academicians, persuading them to buy into adoption, most notably by offering grants to instructors who would redesign their curriculum to embrace IFRS. Either greed or naiveté may have prevented the faculty from considering the obstacles.

STUDENT HOSTAGES

Somewhat clumsily, PricewaterhouseCoopers e-mailed an announcement to university-level instructors that it would henceforth recruit new staff members only from schools that could demonstrate that they suitably taught IFRS. In effect, they took students as hostages to coerce faculty into doing what they wanted.

The institute took more hostages when its visionaries decided that knowledge of IFRS had so clearly moved into the mainstream of everyday practice and expertise that it would be tested on the CPA Exam starting in January 2011. So, IFRS testing is now here, unfairly inflicting harm and distress on exam candidates and students all over the country.

WHAT SHOULD BE TESTED?

Near as we can tell, the CPA Exam's purpose is to determine whether candidates have sufficiently mastered the existing body of knowledge to become fledgling professionals. Thus, tested content rightfully lags behind cutting-edge practice, instead of leading it. For example, the exam covers published standards, instead of future standards that might be published. However, we find in this case that institute officials imprudently used the exam as another lever in their campaign to push adoption. In effect, this policy treats today's candidates as expendable pawns in a much bigger game.

Furthermore, based on what we've learned, this decision was foisted on state boards, many of which are definitely uncomfortable with and skeptical about the propriety and/or usefulness of making IFRS part of the tested knowledge when those standards are not now in use and probably won't be anytime soon, if at all. Their current position is an uneasy resignation to "wait and see" whether these test items negatively impact exam success. This situation is just plain wrong.

GUIDANCE, WHAT GUIDANCE?

In light of growing evidence that adoption is a dead-end idea that isn't going to happen anytime soon (or later, for that matter), fairness demands providing candidates with specific guidance on what they need to know to succeed on the test.

Unfortunately, the AICPA is not sending them helpful messages. To wit, the January 2011 Content Specification Outline offers only this vague advice: "Candidates will be expected to ... identify and understand the differences between financial statements prepared on the basis of accounting principles generally accepted in the United States of America and International Financial Reporting Standards." Elsewhere, candidates are directed to a May 2010 newsletter that offers these fuzzy and unhelpful words: "Questions on international standards will begin to be integrated gradually."

Summing up, the AICPA is essentially warning candidates that anything about IFRS is fair game for the exam, so they should learn everything but expect only a few questions. In other words, these innocent victims are supposed to spend hours and hours mastering material that will only slightly be tested.

That treatment is inexcusable. We fully expect appeals and protests, and wonder whether the institute and the state boards will be open to litigation from those who fail the test because they missed IFRS questions.

SO, WHY CONTINUE PUSHING IFRS?

According to all we know, the non-vergence pipedream is still alive at the institute. For example, we understand Council members at the October 2010 meeting heard more of the same line that adoption is inevitable and good for accountants.

We've done our part by publishing a lot about the futility of adoption and have personally administered reverse indoctrinations to many academic and professional colleagues. We're trying now to extend our reach to others who haven't yet seen through the misleading messages.

But, more than that, we're writing to confront those in the institute's high offices with the fact that they picked the wrong issue and that it's time to put it down and back away from it quickly.

As a nail in the coffin, those attending the SEC/PCAOB/AICPA conference in December 2010 heard SEC chair Mary Schapiro explain that there is no easy road to adopting IFRS and that the transition period would be "a minimum of four years" after the commission's decision to adopt, if that choice is ever made. Of course, four years is a political lifetime to those in the federal government. The institute's managers need to realize adoption isn't going to occur for a long time, if at all.

WILL THEY QUIT?

Part of us hopes that reason and integrity will win out. We urge AICPA management to publicly acknowledge its mistake and move on to more worthy efforts, notably helping the profession gain the position of higher trust that Schapiro challenged us to achieve (that's another column coming soon). The most visible action would be to immediately rescind the decision to put IFRS on the CPA Exam. Failing that, the scope of the testing should be drastically limited. Either move would take innocent lambs off the sacrificial altar. They didn't deserve to be put there in the first place, and there is no valid justification for leaving them exposed to near-certain failure.

On the other hand, another part of us realizes that those in the high offices may not want to publicly admit they made mistakes. If that's the case, pity the out-of-luck new accounting professionals that the AICPA management has thrown under the bus.

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. Reach them at paulandpaul@qfr.biz.