We don't know about the rest of you in the profession's rank and file, but we're feeling steamrollered over "convergence," a code word meaning hastily dumping the independent Financial Accounting Standards Board and embracing the vulnerable International Accounting Standards Board.
To be clear, we aren't opposed to international standards per se. In fact, we expect that there will one day be worldwide standards, and we hope they'll promote high-quality financial reporting, much higher than today. Until that quality is in place, though, we oppose the mad rush to International Financial Reporting Standards. Why? Because the current break-neck effort considers the "worldwide" part to be way more important than the "high-quality" part.
SUPPLY BEFORE DEMAND?
It's not like we're surprised. After all, the accounting profession has long used its political clout to focus on the supply side of financial reporting, meaning that standards are shaped to assuage preparers' and auditors' worries, instead of serving statement users' information needs. The current rush to IFRS is just another case in point.
Some may think convergence will streamline reporting for international companies and their auditors, but don't count on it, because not every member country endorses every standard. Even if these benefits were to be substantial, the unasked question is, what good would it do for financial statement users?
Not much, as far as we can tell, because we're not hearing of much demand from users. Consider what Elyse Douglas of The Hertz Corp. said recently in CFO Magazine: "In our opinion, there has been no groundswell of public opinion promoting a conversion to IFRS. In fact, we have never heard an investor in our company, any stock analyst covering Hertz, or any lender with which we do business suggest to us that they would prefer we report our results in IFRS."
For that matter, we don't see many of Elyse's cohorts in the corporate community buying into this rush to convergence either.
THE AICPA PILES ON
In early October, the American Institute of CPAs jumped on the steamroller by announcing that it will put IFRS questions on the CPA Examination in 2011. The press release referred to the "Content and Skill Specifications for the Uniform CPA Examination," in which we found this vague guidance for future CPAs and those who teach them: "Candidates will be expected to perform the following tasks: Identify and understand the differences between financial statements prepared on the basis of accounting principles generally accepted in the United States of America (U.S. GAAP) and International Financial Reporting Standards (IFRS)."
This move shows no sympathy for students who are soon to graduate or who recently graduated. Consider the plight of those who will graduate next May: While they may have heard about convergence and perhaps seen a few obscure examples of differences between GAAP and IFRS in their classes, they will not have a chance to build, much less demonstrate, real proficiency. After all, it's taken them multiple semesters to master GAAP, so how can they master IFRS in only one remaining semester? As for those 2011 candidates who graduated in 2009 or before, they're on their own.
Instead of wishing these future colleagues "good luck," the AICPA's managers are telling these young people "tough luck." This sacrifice of the graduates' futures is but one example of the collateral damage that rapid convergence will create, and it doesn't take much effort to find more.
ALL SUPPLY, NO DEMAND
Later that same day, we received another e-mail offering a 50 percent discount for an AICPA conference on IFRS in New York (how convenient!). The teaser included this disingenuous statement: "Recently, the G-20 called on our international accounting bodies to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June 2011. Recently, both SEC Chairman Mary Schapiro and Chief Accountant Jim Kroeker stated that the IFRS Roadmap will be the subject of renewed attention from the SEC. Also note, during the IFRS Roadmap comment period, comment letters showed a strong consensus that there should be a single set of global, high-quality accounting standards."
We analyze the G-20 statement in the next section. As for the Securities and Exchange Commission's "renewed attention," we suggest that the institute folks are creating a false sense of urgency by misconstruing a polite political comment. When the context is considered, it's clear that the commission is not wild about convergence, and we think the essence of the quote is like this: "We'll look at it, but don't expect much to happen." As for those "high-quality accounting standards," keep reading. And about those comment letters, did you notice that we weren't told who commented or who identified the consensus? We're not convinced.
Alas, what we see is the AICPA carrying water for audit firm chief executives who are showing their familiar disregard for demand that has its roots in their statutory monopoly. They're supremely confident that their protected status will allow them to shove their supply-side standards out to the capital markets. Users' interests in useful information are being crushed under the steamroller, such that they will continue to limp along with biased, incomplete, and otherwise useless statements.
BIG COSTS, MODEST BENEFITS
From our own examination of IFRS, we see them as different from but not notably better than GAAP with regard to providing users with useful information. Accordingly, we would characterize the proposed rapid and disruptive convergence as a costly but lateral move to a single global set of mediocre accounting standards.
What's the alternative to this headlong dash to mediocrity? How about letting the IASB and FASB continue working (as they have for years) at reducing the differences in their standards, and thus converging in the real sense? We've seen reports that the boards expect to have the job done by 2015. Even if the converged standards aren't better than today's, at least the process will have been appropriately pensive, instead of unduly hasty.
G-20 LEADERS' STATEMENT
We now analyze the G-20 statement, which you should note is way down (14th) in its list of priorities:
"14. We call on our international accounting bodies to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June 2011. The International Accounting Standards Board's (IASB) institutional framework should further enhance the involvement of various stakeholders."
Despite their sophistication, the G-20 have no idea what they're calling for.
In the first place, standard-setting bodies cannot converge because all they have is authority to issue standards, not reconfigure themselves. That political reform must not be accomplished by accountants who focus on supply instead of demand.
Second, they are missing the Democrat SEC's reluctance to move ahead with a Republican proposal.
Third, the G-20's naiveté is revealed in its assumption that existing accounting standards are already high-quality.
The facts are quite different.
Both GAAP and IFRS are replete with incredibly long-lived political compromises. For example, the treasury stock standard dates back to the 1930s; the same is true for classifying current and noncurrent items. Inventory accounting and depreciation standards in the U.S. both date to 1946. Even the earliest FASB standards are over 30 years old. Pension standards are abominable under both systems. Finally, today's mandatory quarterly reporting frequency dates back nearly 50 years, when major corporations had less computing capability than a modern smartphone. Finally, both systems are still held back by historical cost and matching, even though both boards have supported fair values in their proposed joint Conceptual Framework.
With this huge chasm between what exists and what is needed, genuine high-quality standards cannot be produced overnight, especially not by the IASB in its current configuration.
THE IASB ISN'T UP TO IT
The IASB has neither the political strength nor sufficient independence for the role being thrust upon it. Importantly, it depends on corporate contributions. FASB escaped that tyranny under the Sarbanes-Oxley Act of 2002, which specifically requires the Public Company Accounting Oversight Board to fully fund its designated accounting standards-setting agency. If the steamroller plan wins, the IASB would have to be 100 percent funded by mandatory fees collected from U.S. companies.
Consider the politics behind this cockeyed scenario: The IASB would meekly accept gifts from the United States while Congress would have to force U.S. managers to hand over their shareholders' money to an international body well beyond the SEC's reach. It's just not likely that Congress would be foolhardy enough to undertake amending Sarbanes-Oxley in the present environment, especially if it meant giving up control over accounting.
The SEC originally justified naming FASB as the sole source of GAAP only by retaining strong oversight. Would Congress pass new legislation amending the Securities Acts in order to allow the SEC to grant rule-making authority to the IASB? There would have to be overwhelming evidence that this drastic move would provide more protection to American investors. Even if Congress would do so, we don't see how other countries would allow the IASB to be dominated by the SEC.
In addition, the G-20 doesn't reflect the September 22 report by the IASC Foundation's Monitoring Board, including SEC Chair Mary Schapiro. The MB says that high-quality reporting standards should produce relevant and reliable statements (not exactly the status quo), and that the standard-setting process must be independent and transparent. They don't believe that the IASB is there yet, because they told the banking industry to quit badgering the board to create standards to make their problems appear to go away.
POLITICS AS USUAL?
In summary, the moves by auditing firm CEOs, AICPA management, and the G-20 ministers are poorly conceived political actions that would benefit those who supply audited statements, while doing nothing good for those who use them. Rather than a steamroller rush to preserve outdated, inefficient and ineffective standards, the U.S. and global capital markets would be far better served by a whole new fresh start aimed at producing truly high-quality financial statements for the 21st century, instead of preserving obsolete 20th century standards in political formaldehyde. In our view, totally independent standard-setters funded by fees on security transactions would spur that development far more effectively.
In closing, we suspect that people are beginning to see that the accounting firms and the institute are putting their own self-serving interests way out in front of the public's interests as they lead the charge for a quick switch to IFRS. That behavior is contemptible for professionals who claim to serve the public.
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 by
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