To: Commissioners Schapiro, Aguilar, Casey, Paredes and Walter; Chief Accountant Kroeker

From: Paul Miller and Paul Bahnson

Subject: The false allure of convergence

CC: Readers of Accounting Today

Thanks to all for your public service, which is especially vital now that the economy is weak, the capital markets shell-shocked, and the commission under attack for mistakes that occurred long before any of you got there.

Our goal is to clarify just what lies behind the "convergence" movement. We're certain the real issues are not on the table, and we want to express our thoughts on what is at stake and what needs to be done. We ask you to note that we're long-time observers of the political process for setting accounting standards. Importantly, the fact that neither of us stands to make a dime on how this debate turns out may help you trust us more than others who plead for convergence out of self-interest.

We have five points to cover briefly.


The mantras of the day hold that convergence is the sure route to "high-quality global standards," and that "global standards produce comparability."

First, we have long advocated high-quality accounting standards, although we see them, even at their best, as nothing more than bare minimum requirements. Our objection is the assumption that today's standards (GAAP and/or IFRS) are high-quality. We're convinced that many adherents of convergence are trying to freeze accounting practice at its current low quality by advocating a system that will make reform next to impossible. In fact, both U.S. GAAP and IFRS, which are not all that different, are in desperate need of revision to serve and protect 21st century capital markets.

Second, common standards do not necessarily produce comparability; rather, they create comparability if and only if they cause the truth to be reported. For example, consider research and development costs, which are treated virtually the same under GAAP and IFRS. Every company expenses these costs when incurred, whether successful or not. This accounting uniformity does not create comparability because successful efforts and unsuccessful cannot be distinguished in the financial statements.

A more fundamental source of noncomparability is cost-based measurement. Companies that purchase identical assets at different times and prices don't report them at the same amount, thus fogging users' ability to predict future cash flows.

What's needed is uniform, high-quality standards that lead to truth-telling. However, no such standards currently exist, and no one should imagine that they could be produced by a single international board that not only must try to please everyone, but lies well beyond your oversight.


We suspect that convergence supporters are intent on destroying the Financial Accounting Standards Board because they're afraid of its independence and competence.

That is, we believe that most auditors and managers feel threatened by the new, leaner and strongly independent FASB. The board's movement toward more complete and timely reporting based on fair values is surely giving them nightmares, as they fear leaving their longstanding safe havens of reporting past costs and artificially smooth earnings.

Rather than confront the vast opportunities inherent in more complete and more truthful financial reporting, they want to squelch the world's best hope for achieving progress. Of course, they aren't admitting to those fears.

Our point is that you can rightfully make the decision to abandon FASB in favor of the International Accounting Standards Board only if you're convinced that the latter can do more than the former to protect American investors and capital markets. We just don't see how that point can be sustained.


Don't be misled: It will take more than a magic wand to accomplish convergence, if it can be done at all.

The four largest CPA firms and now the American Institute of CPAs are trying to bring it about by scaring professors and putting IFRS questions on the CPA Exam. They seem to think that they can complete this task without you.

However, they're severely mistaken: Only the commission has statutory authority to establish reporting standards for public filings. For convenience, past commissions relied on the expertise of the auditing profession and then the private-sector FASB. The only way to justify delegating this task was and is by exercising careful oversight of the standard-setters, so the SEC can encourage and otherwise influence the process while protecting it against undue political pressure.

It has been feasible for the commission to delegate this task to FASB only because it is a domestic institution. This arrangement is even stronger and more legitimate now because Sarbanes-Oxley institutionalized your oversight by empowering the Public Company Accounting Oversight Board to provide 100 percent of the board's funding through fees imposed on public corporations. In addition, you know by experience that FASB members and staff are very interested in knowing what you're thinking, so they don't produce standards that you might reject. They are both responsible to you and responsive to your direction.

Now, imagine that you designate the IASB as the only standard-setter. Doing so would require the PCAOB to accommodate that designation, collect money from U.S. companies' shareholders, approve the IASB's budget, and then fully fund its revenues. You know as well as we do that the IASB would surely refuse this charity and the subservience implied by your oversight. Nevertheless, absent drastic amendments to the authorizing statutes, that is the only way you could delegate standard-setting to the IASB without asking Congress to change the laws. You would have no choice but to withhold that delegation if the IASB were to spurn the PCAOB's funding and SEC oversight, and we think it surely would do so.

Make no mistake about it: Neither the CPA firms' managers nor you can shut down FASB and endorse the IASB without first conquering huge structural obstacles. Further, you could pull it off only after convincing Congress and the public that a new system beyond your control or influence would somehow create more protection for American investors and capital markets. We don't think you'll want to waste any effort on that impossible task.


When we scan the convergence landscape, we feel like kids trying to find Waldo. Specifically, we see almost daily statements that convergence is essential and a foregone conclusion. The train has already left, if you believe the accounting firms and the AICPA.

But as much as we search, we've yet to detect a clear mandate from your most important constituency - financial statement users - the very party that needs your protection from misleading information. We would be listening carefully if there were a legitimate huge groundswell from the CFA Institute demanding that FASB be dismantled and that GAAP be replaced by today's IFRS, while expressing full faith and trust in the IASB's ability to produce the high-quality standards these financial analysts need. That hasn't happened yet, near as we can tell.

We trust you'll hold hearings. If so, we'll wager the big auditing firms will be first in line to sing praises. You need to look past their facile statements to their unspoken but not-so-obscure motives, and see whether financial analysts and other users tell you that they can't live without IFRS. If you don't hear support from them, and we don't think you will, we think the most that could be said for the CPAs is that they would have made the most noise.


Obviously, we're opposed to convergence if it means getting rid of FASB or if it means converging on mediocre reporting standards that don't lead to much greater amounts of more useful information being delivered to capital markets more often. The status quo standards simply must be replaced. If so, then what is needed?

The answer lies in two strategies.

The first is short term, and it is simply to stay the course. FASB has served previous SEC commissioners well, just as it has the capital markets and investors all over the world. It is now in its best position ever to achieve desperately needed reforms. It seems to us that your decision is straightforward: Demonstrate that you are not simply refusing to change as a matter of stubborn American pride, but through totally justified confidence that the FASB-based system is not merely reliable but much more supportive of your mission than one that depends on the IASB, with its vulnerability to political pressures because of its funding issues and divided loyalties.

The longer-term strategy is to keep FASB and the IASB working together producing common standards. If FASB starts to waver from serving your needs, let them know you will not support the outcome. If the two boards cannot produce a satisfactory solution together, then FASB will need to serve you and the IASB will have to go its own way. Above all, you must avoid assuming that just any new standards are automatically good for financial statement users.

Yet another strategy is well beyond current thinking, but worth considering. We think it would be good if the SEC and its counterparts in other countries encouraged developing additional competent standard-setting bodies. In fact, we wouldn't mind if there were five or 10, because the ensuing competition would promote coming up with the best standards. Wise managers would implement the best to fully inform the markets and thereby achieve lower capital costs and higher stock prices. Unwise managers would flock to lower-quality standards and suffer from higher capital costs and lower stock prices. Although we're optimists, we don't think this approach will become a reality anytime soon.

In summary, despite the apparent complexity of the convergence issue, the solution is simple: Leave the system intact and declare your continuing support for FASB. We have no problem with FASB's cooperation with the IASB, but you must not let real quality and reform be co-opted.

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 authorsr FASB. We have no problem with FASB's cooperation with the IASB, but you must not let real

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