Peeling away financial reporting issues one layer at a time

Which SEC Roadmap Comments Matter, and What They are Saying

A couple of commenters on the last post found fault with my assertion that the "low" response from issuers on the SEC's IFRS Roadmap proposal is pretty much a non-issue. For example, commenter Andy argues that self-selection bias may well exist because only "… those who feel strongly against or for, will make their views known."

I do agree with Andy in general, and there is strong empirical evidence to support that sort of tendency in some circumstances.* But, I don't agree that it is the phenomena that operates on issuer response rates to an SEC proposal such as the Roadmap.  I consider only the following four factors to affect the decision of an issuer's CEO to submit a comment letter: (1) one's stake in each potential outcome; (2) the subjective probabilities of each potential outcome; (3) the costs of commenting; and (4) the subjective probability that a comment letter can favorably influence the SEC's decision.

Thus, strong opinions are not enough – and perhaps irrelevant – to move a CEO to speak out on the Roadmap. The issuers who determined that investing in a comment letter was worthwhile did so.  For whatever reasons a lot didn't, but it is unlikely that it was systematically related to the 'strength' or substance of their opinion.

Moreover, the third and fourth factors, above, indicate that if the comment submission rate is judged insufficient, the Cox-lead SEC should bear some of the responsibility for that. For example, the cost of commenting is influenced by the ease of doing so. I, for one, wasted a full day out of my life to draft one, and then abandoned the project out of frustration. It took just too much effort to respond to all of the niggling questions, and I felt that anything that didn't fit the particular and numerous questions the SEC was asking would not even be classified, much less read.

With regard to the fourth factor, above, it certainly didn't help that the Cox SEC all but threw in the dust bin the strident and numerous criticisms of their proposal to eliminate the IFRS-to-GAAP reconciliation requirement. The saber rattling by the EU, and the relentless lobbying and PR by the Big Four doesn't help either, as they only lend credence to the proposition that bigger fish will have the ultimate say.

Moreover, issuer comments are in my view, a sideshow compared to investors.  If the SEC largely ignores them, that's how it should be. For example, let's take a look at an excerpt from Wal-Mart's response:

"For a global company like ours, [the benefits of IFRS adoption] include standardized reporting systems, efficiency in accounting training, and efficiency of financial statement review. However, these benefits are limited to the extent that various government and regulatory bodies in countries we operate in adopt IFRS as issued by the IASB for all oftheir reporting requirements. Failure to achieve this consistency in reporting standards minimizes or eliminatesany benefits. At the present time, we do not see any other significant benefits to offset the expected costs in adopting IFRS." [italics supplied]

Is Wal-Mart providing an honest assessment of the costs and benefits of IFRS, or do they have a hidden agenda? I haven't looked at Wal-Mart's financials in a few years, but in the years I did, I was amazed at how steady was their growth rate, and their profit margins were like a steady drum beat year after year. Wal-Mart, being in a very straightforward business with short cash cycles and tending to grow without a lot of M&A activity, probably doesn't face a lot of thorny accounting issues where GAAP and IFRS are significantly different. Except for one: asset impairment, where (as I have written here) IFRS can create more earnings volatility than GAAP. I suspect that avoiding the IFRS long-lived asset impairment standard could be their real agenda.

So, the long and short of it is that we can argue about whether the issuer response rate is low, but the SEC shouldn't be paying much attention to issuer comments anyway – except, perhaps, to help them divine what the costs of IFRS conversion to issuers might be. Evaluating the potential for IFRS to improve the quality of information provided to investors should be the purview of investors and others with financial reporting expertise, and who have no obvious axe to grind (academics, for instance).

And what of the auditors' strongly pro-IFRS comments?  I believe they actually have a role in the process, but not the one they have chosen.  I am reminded of a comment made by the irascible college basketball coach, Bob Knight. When asked about his position on a proposal to reduce the time on the 'shot clock' from 45 to 35 seconds, he said something like, "I don't care if you make it 5 seconds! We're good enough to play that game, too; and if somebody is dumb enough to thnk that the best basketball team will win that way, that's their problem."

What I mean to say is that the only thing I want to know from the auditors is akin to Bob Knight's shot clock response.  In switching from IFRS to GAAP will auditing practices and the reliability of an auditor's report be affected?   The Big Four never features (or perhaps even deigns to answer) those kinds of questions, because they are self-evident and non-self-serving: auditing procedures should not change very much, but the reliability of the auditor's report will decline due to greater reliance on management's judgment.

I'll readily admit that everyone is supposed to have a hidden agenda (except me), but with that caveat, I'll close with a selection of what I believe are some of the more revealing comments on the Roadmap proposal by a few of the organizations which, one might say, should hold 'super votes.'**

In summary, while the FAF and the FASB continue to support strongly the ultimate goal of a single set of high‐quality global accounting standards as part of a global financial reporting system, in our view, additional study is needed to better identify, understand, and evaluate the strengths, weaknesses, costs, and benefits of possible approaches the U.S. should take in moving toward that goal. – FASB

Until a single set of standards that produce such a result [high quality standards] exists, with a demonstrated record of compliance andenforcement, we believe it is premature and unwise to move away from U.S. GAAP… [W]e have seriousdoubts as to whether the proposed roadmap, as currently envisioned, will tangibly benefit investors' interests…In our view, the proposal fails to provide sufficient support as to why it presents a better course of action than the current on‐going convergence efforts… – Investors Technical Advisory Committee, FASB

[L]ittle existing research directly addresses whether U.S. investors, issuers, and markets would benefit fromimplementation of IFRS in the U.S. … We recommend further analysis of the costs and benefits of a mandated transition to IFRS for U.S.issuers, investors, and markets. – American Accounting Association, International Accounting Section

In our opinion, converting to IFRS is a solution without an underlying problem. In fact, we have never heard aninvestor in our company, any stock analyst covering Marriott, or any lender with which we do business in theUnited States or abroad suggest to us that they would prefer we report our results in IFRS. Marriott

We believe that the costs to convert to IFRS will be extraordinary. The total cost to convert to IFRS is extremelychallenging to capture since it involves both quantifiable cash costs, as well as the cost that the distraction andreallocation of resources will cause to businesses. – McDonald's



*See, for example, Richard J. Cebula, "Strong Presidential Approval or Disapproval Influencing the Expected Benefits of Voting and the Voter Participation Rate," Atlantic Economic Journal, (2005)33:159-167.

**Extracted from a document of excerpts presented to members of NASBA


  1. Reply Edith Orenstein July 29, 2009

    I found this post and your earlier post very informative. You may want to add to your roundup of issuer comments on the SEC’s proposed IFRS roadmap:
    – the joint comment letter filed by FEI’s Committee on Corporate Reporting (CCR) and Committee on Taxation (COT) , and
    – the comment letter filed by the Corporate Roundtable on International Financial Reporting (CRIFR), of which FEI is one member

  2. Reply Independent Accountant July 29, 2009

    I agree with you.

  3. Reply Raza July 29, 2009

    I couldn’t AGREE with you more on this Tom. Excellent, thoughtful, and thought provoking post.

  4. Reply Carlomagno August 19, 2009

    I believe that I was one of the commenters you refer to. Two points, which I already made in an email exchange with you but that deserve repeating in light of your follow-up post – which I only saw now as I am on holiday trail hiking:
    1. you argue that “the SEC shouldn’t be paying much attention to issuer comments anyway”. The only reason I picked on that category is that you specifically used it to illustrate your argument in your original post (“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.”) Why do you use an example that you consider irrelevant to illustrate your argument?
    2. “Evaluating the potential for IFRS to improve the quality of information provided to investors should be the purview of investors […].” How many investors responded? 6! How can you possibly regard that as statistically significant, whether in raw numbers or in terms of assets under management?

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