John White, Director of the SECs Division of Corporation Finance, gave a speech at Financial Executives International Global Financial Reporting Convergence Conference last week (June 5, 2008). In no uncertain terms (and with apologies in advance for the bad pun), it was a whitewash for the benefit of the members of the club. I am writing this post, with the objective of waking up at least some investors to the realization that their interests are being trampled upon by the auditors they pay for, their very own executives, financial intermediaries, and sad to say, the SEC.
So, peeling back the camouflage, here is the bare bones of White’s speech — at least as I see it.
Good morning. Let’s skip the formalities and get right to the point. I truly believe that the endpoint of global accounting convergence will be U.S. issuers using IFRS and that it is time to move in this direction. Even though I can’t mention the real reasons in public, here are the five darn good ones we’re currently pitching.
First, the SEC will have less influence over accounting standards. That’s a good thing, isn’t it? Even though other regulators don’t ask the tough accounting questions like we do, we are going to work with them and pretend we agree. Remember Societe General? We don’t, and that’s what I’m talking about. Even though the U.S. representation on the IASB will shrink, I know we can count on the Chinese and Europeans to come up with reasonable answers on technical issues like disclosing related party transactions, securitizations, hedging, contingent liabilities, business combinations, and about the twenty other things that really aren’t so good about IFRS — and I don’t want to discuss today. Especially not business combinations: the IASB sure screwed up IFRS 3 after we improved FAS 141R, but that probably won’t happen again. And sure, the IASB has some governance issues, but we’ll be able to fix that with our single seat on a committee of securities regulators from all over the world that will oversee the IASB’s activities. I’m sure we’ll all get along just fine, and everyone will listen to us because we are from the USA.
Second, IFRS leaves a lot more room for management judgment. That’s a good thing, isn’t it? We believe that investors most want management to have more tools at its disposal to help them manage earnings. That will go a long way to eliminating outright fraud, because management won’t have to risk going to jail to make their numbers. And besides, if management’s judgment is really, really unreasonable, auditors will be there to fix things, right? (Uneasy laughter from the audience.) Don’t laugh! Investors aren’t the only group the SEC protects. The feelings and needs of issuers who report financial results must be considered; that’s why I haven’t mentioned the needs of investors without also mentioning the needs of issuers.
Third, and speaking of auditors, it is going to cost billions of dollars to implement IFRS in the U.S., and auditors, one of our favorite charities, will be raking in a big chunk of that. Despite overwhelming evidence from rigorous academic studies that these costs will provide little or no benefit to investors — and even that U.S. GAAP is associated with better information and lower cost of capital — we have to come up with some way to employ the next wave of accounting students, especially since our last full-employment initiative — SOX 404 work — is drying up.
Fourth, assessing a company’s financial results should not depend on what country a company is from. Differences in corporate governance, laws, business norms and culture do not matter to investors, so accounting rules can be the same, and will be interpreted the same whether we’re applying them to companies in China or the United States. After all, IFRS is principles-based, isnt it? (More laughs from the audience.)
Fifth, global capital markets have been growing by leaps and bounds for decades, apparently unhindered by the polyglot of accounting standards in use throughout the world. But, having a single set of accounting standards is going to become really, really important; trust me on this one.
I want to conclude by explaining what I mean by “truly believe.” I’m just a politician … whoops, I mean lawyer … who really doesn’t know much about what all you CFOs have to go through to make your numbers. Frankly, the details of the differences between IFRS and U.S. GAAP don’t concern me much. I just threw in “truly” to impress upon you that I am on your side — kind of like “no kiddng,” or “I swear.” In other words, even though I don’t have a single good answer to any of the questions I have raised today, don’t worry, because we’re going through with this anyway. I truly believe that if IFRS is good for you, it’s good for the SEC; and it must be good for everyone.
Thank you and good night.