Peeling away financial reporting issues one layer at a time

Speaking Out Against IFRS Adoption? Welcome to the “Loud Minority”

As I mentioned in a previous post, PCAOB member Charles Niemeier delivered a tour de force critique of U.S. efforts to adopt IFRS, at a recent New York State Society of CPAs (NYSSCPA) educational event. To its credit, the NYSSCPA’s e-zine covered Niemeier’s remarks a few days later. On the other hand, the PCAOB sure took its sweet time (weeks) to post the text of his speech on its website.

Perhaps one reason the PCAOB appears to have dragged its feet is that Niemeier was equally critical, if not more so, of two other “global initiatives” in the financial reporting arena: “reliance on non-U.S. regimes for auditor oversight, and converging U.S. auditing standards to those developed by the International Federation of Accountants.” These thoughts were completely overlooked in the NYSSCPA’s coverage, and given short shrift by almost everyone else it seems. Evidently, few care whether the PCAOB willingly gores its own ox; but opposing “inevitable” IFRS adoption is like standing between hungry pigs and their troughs.

IASC to Niemeier: You’re Loud and We’re Right (‘Cuz We Said So)

With respect to IFRS adoption, NYSSCPAs’ coverage of Niemeier was fair, and gets kudos from me for reporting this key reaction:

“‘The impression I got and the reaction from the audience was: it’s about time somebody said something about this,’ said conference Chair George I. Victor, who is also immediate past chair of the NYSSCPA’s Accounting and Auditing Oversight Committee. ‘It’s David and Goliath and David stood up to Goliath here. Just about everybody in the room agreed with most if not all, of what he said.’” [emphasis supplied]

You can bet that a Goliath would want the last word, and preferably with no David to contend with. So, the NYSSCPA accommodated Goliath a week later in the person of Philip Laskawy, vice-chairman of the International Accounting Standards Committee Foundation (IASCF), new chairman of Fannie Mae, and former head of Ernst & Young (1994 – 2001). Not all of the questions posed to Laskawy were softballs; however, there can be no denying that numerous disingenuous answers were allowed to prevail with nary a token of protest.

If a straight-shooting David were present, maybe the encounter would have gone something like this:

NYSSCPA: The 22 trustees of the IASCF are responsible for the governance, oversight and funding of IASB and the rigorous application of International Financial Reporting Standards (IFRS). Philip A. Laskawy retired as the chairman and CEO of Ernst & Young in 2001, a position he had held since 1994. In addition to his service as a trustee, he currently serves on the boards of several U.S. and foreign-based companies and non-profits.

David: Another pertinent fact, which may affect your assessment of Mr. Laskawy’s credibility, is that he presided over E&Y during a time when, as evidenced by unprecedented sanctions, E&Y committed some of the most blatant independence violations by an international firm since the enactment of the federal securities laws:

[In 2004, an] SEC administrative law judge fined E&Y $2.164 million (including $1.7 million disgorgement) and bars the firm from accepting any new clients in the U.S. for six months, after finding that the firm acted improperly by auditing PeopleSoft Inc. — a company with which it had a profitable business relationship. … According to The New York Times, the administrative law judge said the firm “committed repeated violations of its auditor independence standards by conduct that was reckless, highly unreasonable and negligent.” (Floyd Norris, “Big Auditing Firm Gets 6-Month Ban on New Business,” April 17, 2004) … The SEC alleged that E&Y violated the auditor independence requirements in connection with E&Y’s audits of PeopleSoft Inc.’s financial statements from 1994 through 2000. … [Available at http://www.crocodyl.org/wiki/ernst_young; emphasis supplied]

NYSSCPA: More than one study has reported that companies show higher earnings under IFRS versus GAAP. Can anything be done to smooth the contradictory data investors will be relying upon as IFRS is phased in for more companies in the years ahead?

Goliath: I have no basis of knowing whether any of those studies are right or wrong. Anyway, that gets adjusted in the market place, but more importantly you’ll be able to compare two companies from different countries who are in the same business to see how they’re doing.

David: It sounds like you’re not even interested in knowing the answer to these questions. Evidently, the numerous studies cited by Niemeier, and by Professor Teri Yohn in her testimony to Congress amount to an inconvenient truth you would prefer to ignore. Yes, I know you’re Goliath, so I’ll humor you and pretend that the totality of research on this topic is actually inconclusive. How can you say on the one hand that the market adjusts for differences in accounting, rendering differences between IFRS and GAAP inconsequential; and then say on the other hand that market participants will benefit from enhanced comparability! You seem to be saying that accounting doesn’t matter now, but it will when everyone adopts IFRS.

NYSSCPA: Are you concerned that comparability across companies will decrease if the U.S. conducts a phased-in transition to IFRS?

Goliath: Nope. U.S. companies aren’t comparable anyway, because GAAP changes so darn much. And, I don’t think there have been any examples where it’s been that impactful on stock prices. Even today, investors are not using GAAP earnings necessarily as a way of determining their recommendations on companies.

David: Once again, the evidence contradicts your wishful thinking. Those same folks I just mentioned cite evidence that investors do prefer GAAP, and GAAP is more closely associated with stock prices – i.e., investors putting their money where their mouth is.

Besides, lack of comparability due to changes in GAAP is way overstated; all significant changes to GAAP require retroactive restatements to assure comparability over earlier periods. Also, are you actually saying that once the U.S. takes the plunge on IFRS, there will be the equivalent of world peace, and for the first time since the days of the Old Testament, accounting standards won’t change? Unless that’s what you are saying, then IFRS won’t result in comparability either; you have just thrown  comparability, your biggest selling point for global accounting convergence, under the bus.

NYSSCPA: If the transition goes as expected, the U.S. will be basically giving up control of financial standards to an international body by 2016. We’re surprised more people haven’t been talking about it.

Goliath: You really would have to ask them.

David: “You really would have to ask them” is exactly what the IASCF and SEC should be doing more often and more better – if the goal of U.S. adoption of IFRS is to make a change that investors actually want and can benefit from. Instead of blatantly shilling for IFRS, Goliaths should be spending their time looking for real answers. For example, figure out how to encourage broad-based investor feedback so that rigorous studies by impartial investigators can provide reliable answers to high-stakes questions.

NYSSCPA: We’re also surprised that you haven’t gotten more comment letters on the constitution review from stakeholders who would want to weigh in on the oversight of IASB. What’s your opinion on that? Do you think all the stakeholders are really paying attention at this point, or maybe it’s too far off?

Goliath: With most things in life there’s a very loud minority, and Charles Niemeier truly is part of that minority—very small—who make a lot of noise, but the vast silent majority just goes about and does its thing, and I think that’s what’s happening here. And by the way, I don’t think the presidential election is going to affect the transition to IFRS.

David: I don’t know which insult makes me want to shoot you with my slingshot more: your arrogant disrespect of a man of obvious intelligence and integrity; or channeling Richard Nixon and Spiro Agnew with their infamous Vietnam-era “silent majority” (“vast,” no less) schtick. Either way, there can be no denying Niemeier is in the company of some other very smart people: among them, Ed Trott, former FASB member is now speaking out about the questionable political agendas motivating the SEC’s proposed roadmap and the EU’s adoption of IFRS; Floyd Norris of the New York Times doing pretty much the same; and Shyam Sunder of Yale, who believes that U.S. adoption of IFRS would lead to a mandated monopoly, thereby creating more chaos than order to accounting standards. And, don’t forget the reaction of Niemeier’s audience at the NYSSCPA program: it sounds like he is the one preaching to the majority choir.

As to “loud,” that better describes the Big Four et. al., and the AICPA with their unabashed promotion of their own self-interest. Now that current events are forcing the SEC to refocus on investor protection, the long-awaited document proposing a “roadmap” to IFRS seems to have disappeared (along with my 401(k) account). That seems to have had no effect on your rhetoric – or that of your former firm. I received an invitation from E&Y to watch a webcast on IFRS 2 (share-based payment) with the following come on:

“International Financial Reporting Standards (IFRS) is becoming the dominant language of financial reporting worldwide. With the pending release of the SEC’s proposed IFRS Roadmap, IFRS adoption in the US is almost official. The question now remains a matter of when will adoption be required and how will companies make the transition. For many, the key will be early preparation and these businesses are developing their transition plans now.” [bold and italics in original; underline is mine]

Given recent events, that sounds awfully loud to me! Other work prevented me from watching the webcast, but I’m betting that there was more of the same hyperbole: probably some useful tips designed to lead to fees for assisting management should they desire to re-engineer their own compensation schemes to get the most out of IFRS in their financial statements. But wait. I forgot that, according to you, the “market adjusts” for these things. I’m also betting that a lot of investors’ money will be headed out the window when management figures out how to manage its compensation under IFRS.

As to the outcome of the elections, don’t be surprised if “loud minority” leader Niemeier becomes the next SEC chair! Even though he is a Republican, and Barack Obama is the likely victor, Niemeier has the integrity, experience and profile that the SEC desperately needs at this critical juncture. With three Democrats and a Republican chair who owes nothing to his party, IFRS adoption in the U.S. will be history.

The bottom line, Goliath, is that the footnotes to Niemeier’s speech by themselves were more compelling and interesting than what essentially boils down to your blind eye, blind faith or vested interest responses for the sole objective of selling IFRS. My father taught me to watch out for people, like you and the SEC’s John White, who weave “truly” into pompous rhetoric like “loud minority” and “vast silent majority.” The reliability of such utterances are usually anything but.

And by the way, I’m sure you’re going to do a truly great job for me at Fannie Mae.

1 Comment

  1. Reply Independent Accountant October 27, 2008

    I oppose the adoption of IFRS. I wish Niemeier luck. The SEC looks hopelessly compromised on this.

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