Peeling away financial reporting issues one layer at a time

The Comments on the SEC Roadmap are Clear: Make a U-Turn

There are some definite signs that Mary Schapiro is getting closer to naming her Chief Accountant. For example, I received an email from Denny Beresford, former FASB chair, who was left with the impression from a reporter that an announcement would be coming this week. Indeed, because of recent events I'll be discussing in this post, I'm inclined to believe that it will indeed come to pass.

The Chief Accountant appointment will clearly be setting the tone for the debate on the IFRS Roadmap proposal. But I am also getting strong vibes that, this time around, the many negative comment letters in response to the proposal will be a significant factor in the SEC's deliberations —as opposed to Christopher Cox's tone deaf handling of the elimination of the IFRS-to-GAAP reconciliation requirement. Because of that, the IFRS supporters are spinning the comment letters like crazy.

Most recently, reported on remarks emanating from Wayne Carnall, Chief Accountant of the SEC's Division of Corporation Finance. He is generally seen to be an IFRS adoption proponent, and rumored to be a candidate for the Chief Accountant in the Office of the Chief Accountant — yes, I know it's confusing, because he is already a 'chief accountant.' There are, to the best of my knowledge at least four positions at the SEC bearing the title of Chief Accountant. There's one each in the functional divisions of enforcement, corporation finance, investment management; plus the"Chief Accountant to the Commission" with one's own staff to serve the Commission as its principal advisor on accounting and auditing matters. That's the seat of power that everyone covets, and it's the one that has lacked a permanent possessor since Mary Schapiro took over from Cox's gang.

Anyways, Wayne is reported to have expressed his disappointment that so few public companies have even bothered to express their views on the Roadmap proposal:

"A total of 240 letters were received, about half of them from registrants. Cornall [sic] called that level of response 'disappointing.'

'Only about 1% of the companies in the United States that would be impacted by this change, if we were to adopt it, decided to comment. I thought that was a surprisingly low number,' he said.

He noted that a pair of FASB staff positions issued in March on what he called a 'relatively small, narrow item' — valuing assets in illiquid markets — got 700 comments in a 15-day comment period. 'Yet on a proposal to change the reporting framework in the United States we got 120 comments" from public companies during a 120-day comment period."

Wayne seems to be implying that nothing of significance can be inferred from such a low (in his judgment) response rate. He might have a point if the responses were equivocal, but that's simply not the case.

I read only a few of the comment letters, but I know of at least one person who read them all. That would be Gaylen Hansen, a partner in a Colorado CPA firm, and self-described detractor of IFRS adoption in the U.S. Among other high profile national service positions that Gaylen holds, he is chair of the Strategic Initiatives Committee of the National Association of State Boards of Accountancy (NASBA). The data on roadmap proposal comments displayed here is straight from his presentation at recent NASBA regional meetings (video, here):*

The problem for Wayne and other IFRS supporters is that the data is so darn unequivocal against the IFRS Roadmap proposal that any errors due to small sample size would have to be tsunami-sized in order to reverse the results. Public companies disfavor the Roadmap by a margin of exactly 2:1; and the public companies that express "strong" opposition to the Roadmap proposal outnumber all supporters, however strong, by exactly 1.5:1. Perhaps even more damning to the Roadmap proposal is that not a single investor group expresses "strong" support, and the overwhelming majority want to tear it up.

Not even the AICPA, an IFRS adoption cheerleader for years, can spin a very positive message out of the comment letters, but eschewing all references to actual data, spin fast and furiously they did with something they call an "analysis":

"While many expressed support for the goal of high-quality globally accepted accounting standards, the request for comments produced numerous critics of the SEC's proposed roadmap.  Commentators had serious concerns about the cost of adoption, the benefits of adoption compared to convergence, and whether IFRS were in fact as good as or better than U.S. GAAP. ….

While in the minority, some U.S. registrants generally supported the roadmap and mandatory adoption in the near term. [i.e., the majority voted "nay"] These organizations noted the benefits of global comparability, increased transparency, decreased cost of global financial reporting and the belief that converged standards would fall short of the benefits accruing from use of one global set of accounting standards. …

Responses from investor groups were mixed." [emphasis supplied]—

"Mixed"? While they were relatively few in number, it's safe to say that the major U.S. investor groups one normally expects to weigh in on accounting standards did so here. I suppose one would be technically accurate to state that investors were not unanimous in their strong opposition to the Roadmap proposal, but saying that 'most were strongly opposed' could only be an understatement. (Sometimes, I wonder if the AICPA outsources its communications department to the National Rifle Association.)

Even so, the AICPA's spin is not nearly as blatantly disingenuous as PwC's recent press release:

"Despite uncertainty about timing of the move to International Financial Reporting Standards (IFRS) in the United States, PricewaterhouseCoopers (PwC) maintains that the adoption of IFRS in the U.S. is inevitable [emphasis supplied], and that there is still overwhelming support for a single set of global accounting standards.

We expect steadily increasing convergence activity followed by eventual conversion to IFRS. …

Additionally, all U.S. businesses will face an unprecedented wave of U.S. GAAP changes, influenced by – and, in many instances, conforming to IFRS – over the next several years."

Having to make an explicit choice between the Big Four, and now, practically everyone else, is a scenario that a new SEC chair would certainly like to avoid so fresh out of the box. But, so far, Mary Schapiro appears to be handling it brilliantly: by waiting for IFRS to self-destruct.

"Inevitable"?  Not even close to that anymore.  'Implosion' more aptly describes what is now occuring, with almost shocking rapidity. On the overseas front, Charlie McGreevy of the EU and the European Federation of Accountants (FEE) have been applying countervailing pressure on the IASB to de-link itself from U.S. GAAP — else the EU is threatening to part company with the IASB. It's a highly credible threat, and it would leave the IASB with little more than the Asian powers, Australia and a gaggle of third worlders no capital markets of their own to speak of.

On the embattled U.S. front, the FASB, without a breath of mention of convergence, has announced its intention to require that all financial assets, including loans, would have to be presented at fair value on the balance sheet. To abandon McCreevy's beloved 'amortized cost' accounting for loans investments in debt instruments would certainly be a bridge too far for EU regulators; and most encouraging to moí, the FASB by this action may finally be tacitly admitting that convergence is holding them back from making urgently needed changes to accounting standards that have contributed to the recent bout of financial havoc.

So, at this rate, the long-awaited appointment of a Chief Accountant may turn out to be an anti-climax – which is just the way Mary Schapiro would like it.


* Gaylen's tabulation of the Roadmap comment letters excludes the Big Four, AICPA and others with an obvious pecuniary interest, foreign companies, foreign accountancy groups, foreign companies currently using IFRS, students and responses that defied classification.


  1. Reply Andy July 21, 2009

    Regarding your comments on the letters sent to the SEC about IFRS adoption:
    Your analysis of the comments goes to show that a multi-disciplinary framework for thinking about problems is a major need, even for the smartest specialists. What I mean is that a cursory knowledge of psychology will show the flaw in your argument that because most of the comment letters were negative, then most of the public companies in the US are against IFRS adoption.
    The flaw is the existence of a self-selection bias. Most companies may simply not care much about IFRS, or see it as an inevitability, or only favor it slightly. However, those who feel strongly against or for, will make their views known. So, all that we can reasonably see from the results is that more companies are fanatical in their resistance to IFRS than are fanatical in their agreement with IFRS.

  2. Reply Raza July 21, 2009

    Excellent post, Tom. Keeping the fingures crossed here. Hat tip to Mary Schapiro -)

  3. Reply Carlomagno July 21, 2009

    I’d go one step further than commenter Andy above, since we know that Tom Selling knows perfectly what self-selection biais is.
    Compare the relevant paragraph from the current post to the following comment: ‘Let’s agree that the population of interest, audit committee members of public companies, number very approximately 10,000. Only 253 of them volunteered in response to invitations to participate. Given the low participation level, it is highly likely for non-respondents to have significantly different opinions than the self-selected volunteers. If anything was done to test that proposition (yes, academics routinely apply techniques for doing so), CAQ did not report it.’
    The latter was written by Tom Selling on 6 April 2008 in a post entitled “Low Quality Stats from Center for Audit Quality” (
    I estimate that there are very approximately 10,000 public companies in the US (the order of magnitude is the only thing I’m interested in). There were 240 comment letters about the SEC’s roadmap, of which about half were from public companies. Yet, in contrast to Tom’s criticism of the CAQ’s suvery quoted above, in this case we are supposed to believe that self-selection is just not an issue and that the respondents to the SEC’s public consultation are necessarily (mathematically) representative of the overall population.
    Remember, last time self-selection was “highly likely” due to the small sample size but this time “any errors due to small sample size would have to be tsunami-sized in order to reverse the results” – even though the sample size and overall population size are essentially the same in both cases.
    One of these claims must be wrong. Which one is it, Mr. Selling?

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