October's Accounting Today presented Paul Pacter's passionate plea in his opinion piece, "A global standards advocate answers Miller & Bahnson," in which he responded to our August column, "Global standards advocates need to understand the problems."

We've known Paul for ages and respect him a great deal, but he has been and still is too close to the International Accounting Standards Board to see things objectively.

What's wrong with his take? Simply put, it's a perfect specimen of the classic syndrome known as the "means-ends inversion" that arises when people take their eyes off the goal and focus on the process for reaching it. Although this occurs in many settings, it's common in political situations, like the IASB's, where those in charge fixate on building their own power and influence. It's especially tempting when the objective is abstract but the process has achievable milestones.



We think it's clear that Paul and others at the IASB have concentrated so much on extending their reach around the globe that they've neglected their single most important goal of promoting efficient capital markets in which security prices converge on real intrinsic values. This outcome is worthy because it will lead to more prosperity, economic growth, and otherwise enhanced living standards. In turn, that will contribute to greater interdependence and more peaceful relations. Reaching for that goal means ensuring that their standards produce high-quality financial statements that fully inform markets.

We note that our August column excerpted only a fraction of the analysis in our book (The FASB: The People, the Process and the Politics, Sigel Press) of the difficulties in establishing efficient global capital markets, including the many factors that must be aligned to meet that goal. Standards are only one of those factors, and not the most important.

Thus, Paul's inversion of means and ends is starkly evident when he proclaims, "Uniform, high-quality reporting standards is not a political slogan, as Professors†Miller and Bahnson suggest. It is a goal."

To the contrary, creating standards is only a means of helping attain efficient markets, not an end in itself.



The IASB's actions show that far more energy has gone to gaining IFRS adoptions than to improving reported information's usefulness. The evidence is found in its slow pace and tendency to merely tweak existing standards without accomplishing significant reform.

Their worst mistake is their unshakeable delusion that today's IFRS are exactly what's needed and that the IASB deserves to have unchallenged control over the standard-setting process. In their minds, their ceaseless self-adulation about the number of countries that have adopted IFRS is well-justified. Further, their fear of failure is revealed by their incessant whining about their slow-witted American colleagues who just won't adopt.

Paul again uncloaks his personal inversion when he twists our words (emphasis added), "International accounting standards are both undesirable and infeasible," to become "IFRS is 'both undesirable and infeasible.'" Because he equates IFRS to genuinely useful international standards, virtually all of his commentary is irrelevant.

Unfortunately for him, his inverted perspective keeps him from seeing that the world's present chaotic situation makes a pipe dream out of his claim that his board has already issued high-quality standards and produced efficient markets.



As we mentioned, our August column explained the incontrovertible fact that uniform global standards can play at most a minor part in creating efficient markets because the other complex factors are unlikely to fall into place during the lifetime of anyone alive today, even those born this morning. That point is best understood in the context of our book's overall thesis that producing high-quality standards requires much more than hammering out consensuses among mostly like-minded individuals.

In contrast, the IASB's means-ends inversion fabricates the falsehood that the act of producing any standard is an achieved goal, even if it doesn't lead to useful statements. To the contrary, praising mediocre standards only leads to issuing others, thus ensuring that market efficiency is not improved.

In other words, any high fives about IFRS at the IASB are premature.



Another inconvenient fact is that there isn't much difference between GAAP and IFRS in terms of their ability to produce more useful financial statements. After all, the latter is mostly a slightly revised version of the former and they both stay deeply committed to reporting past costs and allocations based on assumptions instead of empirical observations of current conditions.

When we rate financial statement quality on a scale from 0 (useless) to 10 (completely useful), both GAAP and IFRS fall somewhere around 0.5. Hence, we don't attribute credibility to claims that either is significantly better than the other.



If there isn't much difference, then everyone should ask why the IASB hasn't moved practice significantly closer to where it should be.

From its beginning, the IASB has been a political entity with members, patrons and constituents who have been far more intent on preventing reform than creating it. It's unlikely that its large and diverse membership can agree on innovative changes. More important, the board depends on discretionary donations from corporations, audit firms and governments, all of whom never give gifts without expecting something in return.

It's a tribute to the IASB's public relations efforts that it appears to be progressive even though it actually suppresses real reform. Contrary to its image, though, it fails to live up to its self-proclaimed responsibilities and exaggerated achievements.



In contrast to Paul's elevation of IFRS, we consider those standards to be baby steps because they're less than a weak start with little resemblance to the fully high-quality international financial reporting standards that will exist after a couple of centuries of concerted effort.

We also see the IASB as a rudimentary prototype, merely the first in a series of more capable future organizations that will genuinely reform financial reporting in a world far different from today's. It's pretentious to believe otherwise.



Therefore, Paul's claims of accomplishment, which echo the board's speeches and press releases, are misplaced. Unwittingly, they reveal that the organization values the means well ahead of the ends when they trumpet how many countries have adopted IFRS and boast about having better standards.

Because its people focus so much on themselves and their efforts, they're firmly convinced they have all the right answers.

Actually, we don't think they're asking the right questions.



Because of their inflated self-perceptions, the IASB and its advocates cannot understand why folks in the United States are not falling all over themselves to join the popular kids' club by adopting IFRS.

Paul condescendingly said, "Some in the U.S. argue†that U.S. GAAP should be retained, while†most of the rest of the world really doesn't understand what all the fuss is about and believes†that the U.S. should just get on and do it." This statement is just wasted words, like those he squandered trying to show that IFRS is better than GAAP.

By doing so, he declared that he and his board think adoption hinges on this question: "Which set of standards is better?" However, as we have explained countless times, that's the wrong question.

For one thing, the fact that both GAAP and IFRS are woefully inadequate means it doesn't matter which is better. For another, the decision is political and complex, such that the crucial issue asks which standard-setting body will do the best job in the future.

In contrast to the simplistic "IFRS vs. GAAP" issue, here's our version: Which kind of organization should be responsible for creating accounting standards that promote U.S. capital markets' efficiency: a fiscally independent body of U.S. experts, sensitive to the needs of U.S. users of public and private company financials, working alongside and under the oversight of the Securities and Exchange Commission; or a donation-dependent body composed of international experts with little or no knowledge of or concern for the needs of U.S. statement users and to whom the SEC would be only one among 140 or more somewhat powerless market-regulating agencies?

The first option is the obvious right answer, except to those who aim to dominate standard-setting instead of achieving the real goal. That group includes Paul and others who just don't get it that the U.S. must choose the most helpful standard-setter without paying attention to today's existing standards.



Blunders by the IASB and SEC chairs in pressing the Financial Accounting Foundation to donate millions to the international board triggered our April and May 2014 columns in which we observed that the IASB's people don't fully comprehend all that would be demanded from them if they were to be the SEC's designated standard-setter.

Because Sarbanes-Oxley's mandates are too onerous for anyone but the Financial Accounting Standards Board, the IASB not only couldn't fulfill those responsibilities but shouldn't even want to try.



We close by stating we hope Paul will see that he didn't bring the right arguments to the debate.

When we get optimistic, we hope to convince the politicians who run the IASB and its foundation that they have nothing to gain by continuing to cajole the U.S. to adopt IFRS. When we go way up on the optimism scale, we hope they'll actually pursue their overlooked mission of making the world a better place two hundred years or so from now by creating innovative new practices.

Thanks, Paul, for the opportunity to say these things again. 

Paul B. W. Miller is an emeritus 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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