Once again, we're writing about convergence. But this time it's not about whether IFRS should replace GAAP or whether the IASB should replace FASB. Rather, we're writing an open letter to Mary Schapiro and the other SEC commissioners, as well as Chief Accountant Jim Kroeker, about the passel of standards on the front burner at the two boards.


In 2002, FASB and the IASB agreed in the "Norwalk Accord" to produce convergent standards. It was a shrewd effort to produce a single set of standards without raising the political and institutional issues associated with merging the two boards into one entity.

The accord was followed a few years later with a "Memorandum of Understanding," now called the "MoU," that identified specific major projects that the boards would aim to finish by specified deadlines. At the time, those deadlines must have seemed a long way off.

Now, like college students who stay busy but don't check the calendar until their term project's due date looms, the boards' members and staffs seem to be scrambling to get everything done at the last minute. It's our experience, both as former students and as present professors, that the results of all-nighter efforts are seldom good, and are often dreadful.

We're writing to encourage the SEC to work with FASB and the IASB to put the brakes on this runaway train. We think it's wise, even essential, to reconsider the timetable, because the commission's most important responsibility is protecting the integrity of accounting standards and the credibility of financial reporting. This situation carries sufficiently high stakes to justify unusual intervention.


Standards normally emerge through a systematic and deliberate "due" process that ensures that issues are carefully identified, framed, analyzed, debated, and then resolved. For FASB, this involves initial deliberation, adding a project to the agenda, thorough analysis, a preliminary publication that solicits input, more deliberations, an exposure draft, more deliberations, and then a standard.

In most cases, that whole cycle takes multiple years to complete. Is that too long? It's hard to say, but that suggestion has been often raised in the past. But can the process be too short? That certainly seems to be a huge risk for the MoU projects.


If you want to see what we're talking about, look at FASB's technical plan at www.fasb.org/. In early February 2010, it described these ambitious goals: 13 exposure drafts by the end of the third quarter of 2010, 13 final statements and three discussion papers by year-end 2010, followed by six more final statements in 2011.

The board isn't working on narrow projects, either. Five of the documents involve the Conceptual Framework. The others are related to such complex and crucial projects as comprehensive income statements, financial instruments, discontinued operations, fair value measurement, consolidations policy and procedures, instruments with equity characteristics, financial statement presentation, leases (both sides), revenue recognition, and insurance contracts. We also note that this push has sidelined three other projects where reform is desperately needed, specifically earnings per share, income taxes, and the long-delayed Phase 2 of pensions and OPEB that was first promised a speedy finish some four years ago.

Compared to the usual pace, this lengthy and pressing "to do" list should take your breath away. More important, in light of the time needed to give each project its due process with intelligent commentary and careful analysis, this plan should encourage the SEC and the rest of us to put up a huge "Slow - Danger Ahead" sign to ensure that this mad scramble produces worthwhile results.

We don't object to this ambitious menu merely because it's out of character. Rather, we think the process may be spinning out of control. It's made us think of the classic ending of Silver Streak, the Gene Wilder and Richard Pryor movie, when the locomotive plows into the lobby of a Chicago train station. It's funny in the movie, but a real catastrophe awaits if this runaway accounting train crashes into the capital markets.


We surmise that the boards are rushing to meet the arbitrary deadline set years ago. Of course, we're sure they think the new standards will be giant steps forward. Perhaps so - but four major risks make us skeptical.

First, the sheer physical, intellectual and even emotional effort will drain board members and staff on both sides of the Atlantic. Standard-setting is arduous work, even in the best of circumstances. We worry that the large load will cause some board members to acquiesce on issues because they're either exhausted or simply can't find the time to get up to speed on all of them. If they're overwhelmed, as seems likely, we're not going to get the best policies. And if that happens, financial statements will lack credibility for users, who will then demand a higher return and discount securities' market values.

Second, when so many complex major projects are dealt with concurrently, compromises will surely occur across standards, especially because both boards are working toward issuing separate but virtually identical documents. We wonder whether there is enough discipline to keep the boards' members from slipping into Potomac-quality politics such that they will give up something in some standards to get something in others. If they can't muster a firm resolve, lots of highly compromised standards will be issued.

Third, because history shows that standards endure for decades, great care (and very strong oversight from the SEC) should be exercised to ensure that this trainload of rules is up to the important task of creating more useful financial statements for the long term. If they aren't, the statements will not be fully informative and it will be a generation or two before anyone will get another crack at fixing them.

Fourth, implementing this many standards will require a staggering effort by management, auditors and statement users, not to mention educators. While we normally think complaints about implementation costs are greatly exaggerated and even irrelevant, this many significant new standards will be overwhelming. Again, the effort can be justified if and only if the standards produce useful results. We have great uncertainty on this point.

All in all, we don't see how rushing to resolve all these incredibly important issues is a good strategy, when the likely outcome is saddling financial reporting with compromised and inferior standards for the next 20, 30 or 40 years.


Our first recommendation is that the SEC chair and chief accountant immediately convene a joint meeting with FASB so they can have a long and frank discussion of the advantages and disadvantages of sticking with the MoU's timetable. The goal would be an immediate slowing and a new prioritization to get all the standards up to high quality while focusing on getting the most important standards finished first, including those that are sitting on the sideline.

If this deal cannot be struck, the next step would be to assemble the SEC, FASB and the IASB with the goal of re-establishing that the prime objective is setting standards that put relevant and reliable information in financial statements, with the clear point that there is no redeeming value in a hasty process.

Finally, if these friendly negotiations don't slow down the Silver Streak of accounting, the commission should just deny generally accepted status to all the standards while remanding them back for further discussion. In effect, the SEC's message would be that it's far better to produce the best possible answers, instead of the fastest.


We realize two things about this column. First, it presents some harsh criticism of 20 or so board members (and innumerable staff) who we highly respect and to whom we are very grateful for their sacrifice in engaging in public service. Nonetheless, we think that speeding down this track is totally inadvisable. Second, we have presented our arguments in the abstract without referring to the boards' tentative conclusions for specific standards. What we intend to do in future columns is dissect some projects to question their ability to get useful information into the markets.

The first one we'll scrutinize is the leases project. We'll warn you now that the tentative conclusions on lessor accounting are a train wreck in the making.

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.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access