The Spirit of Accounting
Last month's column revealed how senior officials from the IFRS Foundation and the International Accounting Standards Board badgered Securities and Exchange Commission Chair Mary Jo White to find funding from someone, anyone, affiliated with the United States. Unlike her predecessor, Mary Schapiro, White relented and, we think, ill-advisedly redirected pressure onto the Financial Accounting Foundation, eventually extracting a $3 million contribution in January. In our view, this action amounts to an avoidable and regrettable breach in the commission's duty to preserve and protect the Financial Accounting Standards Board's independence and due process.
We also suspect that diehard proponents of International Financial Reporting Standards misinterpreted this gift as breathing new life into their moribund hope that the IASB can replace FASB as the designated standard-setter for the United States.
We're writing this month to demonstrate with total finality that the IASB cannot ever assume this role and that there never was a good reason to believe it could.
We direct our thoughts to four parties:
- The IASB establishment that must accept that its misguided ambition has come to naught;
- The SEC that now needs to officially and permanently dispatch 2008's ill-conceived "roadmap" proposal;
- The FAF and FASB that should not feel diminished by this episode; and,
- The rest of the reporting community that can rest assured this idea is dead.
The prime advantage touted for uniform global standards is that they would produce comparable financial statements all around the world. This claim is patently superficial.
One more time, we explain: Uniformity can produce comparability if and only if the uniform standards produce fully truthful and complete information. Because today's standards, both GAAP and IFRS, fall well short of that accomplishment, real comparability can be achieved only with entirely new standards developed by an entirely new board and embraced by an entirely new management corps that fully understands the value of truth-telling.
EFFICIENT GLOBAL MARKETS? NO!
The IASB's proponents grandiosely overpromised that international standards would promote global market efficiency.
This effect is enormously exaggerated because efficient markets can exist only in the context of many other complex conditions, including cultural norms that honor truth-telling and fair trading, stable and strong free-market economies and political systems, sound banking systems, empowered and effective securities market regulation, trustworthy and efficient justice systems, intense competition among investors, dependable and timely communications, accurate and reliable trading infrastructures, and adequately distributed wealth. Thus, the IFRS supporters' promise is hopelessly delusional.
HIGH COSTS? YES!
It's indisputable that replacing GAAP with IFRS would produce untold detriments, including diminution of our profession's accumulated expertise and astronomical costs from rewriting millions of laws and contracts.
With these high costs and no tangible benefits, the idea of switching from FASB to the IASB was a nonstarter. How, then, did it gain so much traction?
Unfortunately, we suspect that the IASB establishment was beguiled by the prospect of boosting their power and prestige by winning the SEC's official designation. Others tagged along to enhance their own revenues, while many jumped on the bandwagon without sufficient analysis. Whatever their reasons, the proponents intensely lobbied the SEC, including the recent pressures applied to White.
THE SEC CAN'T DELIVER
The IASB advocates' scheme is completely derailed by the fact there will never be enough political power to grant the IASB the status of being the SEC's designated standard-setter because of the insurmountable obstacles inherent in the commission's statutes, due process and political context.
To be specific, Section 108 of Sarbanes-Oxley states that the designated board must have "the capacity to assist the commission in fulfilling the requirements of ... Section 13(b) of the Securities Exchange Act of 1934, because, at a minimum, the standard-setting body is capable of improving the accuracy and effectiveness of financial reporting and the protection of investors under the securities laws." Section 108 also explains that the board serves only at the SEC's pleasure: "Nothing in this act ... shall be construed to impair or limit the authority of the commission to establish accounting principles or standards for purposes of enforcement of the securities laws."
Thus, the designated body must always be ready to "assist" the SEC and otherwise submit to its oversight authority. Further, the commission cannot default any of its own responsibility to that board.
Contrary to these facts, the IASB's supporters seem to have fantasized that their board could easily supplant FASB and then do whatever it wanted. Perhaps they observed that the initial designation process was nearly painless and thought that's all it would take. Of course, that step can't be easily repeated for the IASB because the law's provisions were tailor-made for FASB.
In short, merely gaining a sympathetic ear or nod from the SEC chair would be a microscopic step up an extremely steep and high mountain of obstacles.
First, the chair has but one vote out of five and a decision as momentous as this one would be legitimate only if it were unanimous. Second, the vote would come only after a prolonged public due process in which opponents would thoroughly hammer the proposition. Third, the issue would draw attention from members of Congress, thus presenting the SEC with the impossible task of proving that the public's interest in the U.S. securities markets would be best protected and promoted by ceding its 80-year long dominion over accounting standards to an international board that would be severely conflicted with other allegiances.
Mark our words: It can't happen!
NOBODY WANTS IT
The IASB's proponents have appeared oblivious to the fact that the SEC's jurisdiction includes only public companies. For IFRS to be fully acceptable, 55 public accountancy boards would have to reject FASB in favor of the IASB, even though it would be well beyond their influence and completely out of touch with their constituents' concerns.
Ironically, the IASB establishment has pushed its agenda without offering persuasive evidence of demand for its standards. While the big audit firms and the American Institute of CPAs think they would gain market share and revenue, U.S. managers don't want to retool their accounting systems or lose their impact on FASB's due process. Most importantly, users have showed little, if any, support for this change.
Obviously, no single person or agency can simply wave a wand over IFRS and proclaim, "I dub thee acceptable."
WOULD THE IASB EVEN WANT IT?
We believe that the IASB's advocates have not fully comprehended the onerous duties that it would take on if it wrested power away from FASB. Here are four reasons why assuming those responsibilities would demolish the board's claim to be the global standard-setter.
First, Sarbanes-Oxley would oblige the IASB to operate under the SEC's authority to review its annual budgets.
Second, the IASB's reliance on the legally mandated accounting support fee would overshadow funding from other sources around the world.
Third, working under the SEC's close oversight to help implement U.S. federal law would obligate the IASB to be at the commission's beck and call.
Fourth, the many other duties assigned to the U.S. standard-setter (such as the Emerging Issues Task Force) would surely bog down the IASB so much that it couldn't fulfill its global mission.
For the life of us, we cannot imagine why the IASB's proponents, especially IFRS Foundation Chairman Michel Prada and IASB Chairman Hans Hoogervorst, haven't grasped that their board would have to bend its knee before the SEC.
When these negatives are considered, it's obvious that the IASB should stop aspiring to be the U.S. standard-setter and focus entirely on its already daunting responsibility to help the rest of the world. Clearly, it already has enough issues to keep it occupied for a couple of centuries without diving into the shark-infested political waters that FASB swims in every day.
TO THE SEC
As for the SEC, White and her chief accountant, Paul Beswick, need to initiate some old-fashioned fence-mending. Specifically, we suspect that their actions have weakened the commission's working relationship with FASB that is crucial to the success of the whole financial reporting system. We won't suggest exactly what steps they should take, but they have to repair the damage immediately, not later.
It's equally important that the SEC promptly declare the official demise of the idea that it can designate the IASB or even consider making IFRS an option. Although former Chair Mary Schapiro obliquely communicated that message, she never provided an explicit statement. Unfortunately, the lack of a direct declaration that the issue was dead encouraged IFRS zealots to keep chasing their impossible fantasy.
Simply put, White and the other four commissioners must clearly state that the commission's position for now and forever is, "No IFRS in the U.S."
TO THE FAF AND FASB
On their part, the FAF trustees and FASB have to take the long view and set aside any lingering bad feelings over being pressured, which means doing what's needed to re-establish their mutually beneficial relationship with the SEC and restore their shared dedication to common purposes.
We also find it essential that FASB explicitly redefine its relationship with the IASB to acknowledge the futility of trying to finish convergence projects where the boards have no clear consensus. A first step in this direction was taken in February when FASB decided to go its own way with the insurance project. We expect the same thing to happen for leases.
We concur with FASB Chairman Russ Golden's optimistic vision that the boards can benefit from each other's research, insights and conclusions without seeking agreement as they go their separate ways to satisfy their very different responsibilities to their very different constituencies.
TO EVERYONE ELSE
To all who have fretted about the outcome of the campaign to replace FASB with the IASB, we proclaim that it's time to relegate that poorly conceived idea to history's dustbin.
We believe it doesn't make sense to consolidate all authority in only one body because the probability of developing high-quality standards will increase when two (or even more) unrelated bodies are at work.
On the other hand, we don't object to revisiting the single global board idea, but only after a couple hundred years, and only if the whole world shares a peaceful and prosperous culture that fully endorses truthfulness as essential.
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 or Accounting Today. Reach them at email@example.com.