Peeling away financial reporting issues one layer at a time

IFRS Adoption by the US: Definitely Not in the “Public Interest”

It is my pleasure and privilege to provide you with an original essay from someone else besides yours truly. Michael Pakaluk received his A.B. and Ph.D. in philosophy from Harvard University, and has taught at Clark, Brown and CUA, among other places. Michael is currently Professor of Philosophy at Ave Maria University and Senior Consultant and Public Policy Analyst with IVES Group. The author of six books, he is an internationally recognized expert on Aristotle's ethics and the co-author of a leading text on accounting ethics, Understanding Accounting Ethics (third edition is forthcoming).

In July 2009, Michael led a seminar at the FASB on IFRS Convergence and Accounting Professionalism. This tightly written and logical essay is based on that seminar.  Unfortunately, nothing to emanate from the FASB subsequently indicates that anyone could have actually been listening; of all the arguments against IFRS adoption of which I am aware, this one is the deal breaker.

Loss of Sovereignty and Public Interest

Michael Pakaluk, PhD 

Besides the many accounting related objections to IFRS, there are two broadly "legal" objections. These involve the role and authority of the SEC as determined by Congress. The concern is that IFRS adoption would involve a "loss of sovereignty" for the SEC and a departure from its mission of acting "in the public interest".

NASBA [National Association of State Boards of Accountancy] has probably been the most effective critic raising the "loss of sovereignty" objection. Contemplating the SEC's proposed "oversight" of IASB solely through the mechanism of a proposed Monitoring Group, NASBA opines that:

such loss of regulatory authority would be, in effect, a de facto loss of sovereign power to have full authority to regulate securities in the U.S. and should not be a position acceptable to the Commission.

NASBA's language here and elsewhere is muted — NASBA says that this change "should not be acceptable", and that it will "negatively impact securities regulation"–but at bottom the concern is whether under the Securities Acts the SEC may appropriately subordinate its authority in this way. The entire, powerful NASBA argument may be found here.

But a coordinated objection involves the concept of "public interest". The concern is that there is what logicians call an "equivocation": two parties are using the same word but mean it in different senses. The similarity of the word cloaks the fact that there is a fundamental divergence of meaning and interest. In the case, the SEC and the IASB are both committed to promote "the public interest", and yet it seems that they must mean something different by this.

Accountants are familiar with "public interest", as this concept serves as a "principle" in the current AICPA Code: "Members should accept the obligation to act in a way that will serve the public interest." But what is the "public interest" in this sense? How is it defined?

The SEC is similarly charged with acting "in the public interest". This phrase gets a fairly precise meaning from the Securities Acts, where it is introduced. The 1934 Securities Exchange Act in Section 2 explains the necessity of that legislation in terms of the "national public interest", and it refers to the need to protect persons and institutions of the United States, including interstate commerce, the national credit, the Federal taxing power, the national banking system and Federal Reserve System, and U.S. markets. So clearly in the context the "public interest" means "in the national public interest," that is, for the common good of the United States. This makes sense, because the SEC is a government entity of the United States.

No doubt, the common good of a nation will typically coincide with what is good for nations in general. So in general a nation will best promote its national interest by promoting the good of nations in general. But in those unusual cases where there is a conflict, a governmental entity such as the SEC would apparently be bound to favor the "public interest", that is, "national interest", of the nation it serves.

But consider in contrast IASB. The IASC Foundation Constitution states that, "The members of the IASB shall be required to commit themselves formally to acting in the public interest in all matters." Obviously they do not act "in the public interest" in the same sense as the SEC, since they are not obliged in cases of conflict to prefer the common good of the United States over the good of nations generally.

Furthermore, the concept of the "public interest" which the SEC is charged with promoting is full and broad (involving also notions of efficiency and wealth creation), but that which IASB members pledge to advance is apparently narrow and technical. This is clear from the IASC Foundation's discussion of its Constitution:

the Trustees believe that the Constitution's emphasis on 'professional competence and practical experience' should remain paramount. Accordingly, IASB members must commit themselves formally to acting in the public interest by, among other things, continuing to put the objective of the IASB above individual philosophies and interests, thereby not acting as a representative of any geographical component with which they may be associated.( IASC Foundation, "Review of the Constitution," July 2008, n. 8)

This specification of the "public interest" first of all looks to be circular: IASB members must commit themselves to act in the public interest by putting the objectives of the IASB first, among which is to act in the public interest.

Moreover, it is merely negative: to act in the public interest is simply not to act in accordance with one's own "individual philosophy" or "interest". — Whatever that means. Is it possible for persons to separate themselves from their own philosophies? Would it be desirable for them to do so, if they could? Isn't the view that a person can and should separate himself from his own "philosophy" itself a particular philosophy?

So if there is an equivocation in the term "public interest," is the SEC even legally entitled to recognize the IASB as a standard-setter?

Recall the language of Sarbox 108: "In carrying out its authority under subsection (a) and under section 13(b) of the Securities Exchange Act of 1934, the Commission may recognize, as 'generally accepted' for purposes of the securities laws, any accounting principles established by a standard setting body … [which] has, for administrative and operational purposes, a board of trustees (or equivalent body) serving in the public interest …."

Much debate has focused on whether the IASB is constituted and funded in such a way that it is independent (another criterion stipulated by Section 108). But an equally pressing concern is whether the IASB is a board "serving in the public interest" in the sense meant by the Securities Acts or Sarbanes-Oxley.

It certainly doesn't look that way.





  1. Reply Mark Goldstein October 28, 2010

    This article is interesting, but I strongly disagree with the arguments made in it. You argue that it is not in the best interest of the American public for the U.S. to adopt IFRS due to the SEC having a duty to the United States before anything else and the IASB having a duty to the overall public interest… beyond any national interest. However, one needs to consider that when the SEC. was established, the U.S. was not engaged in a strong global economy. The fact of the matter is that from an economic standpoint, the the interests of U.S. investors are very similar to the interests of investors worldwide, and it is becoming increasingly imperative that a global standard becomes available to communicate financial information. Furthermore, I believe it is time that the SEC revises its definition of public interest to consider the fact that the very nature of our economy has changed considerably since the 1930s.

  2. Reply Warren Miller November 1, 2010

    “Increasingly imperative,” my foot. I can only conclude that Mr. Goldstein works for one of the Big Four accounting firms. THEY are the ones pushing so hard for this abrogation of U.S. sovereignty. It’s all about fees for them. They couldn’t care less about U.S. sovereignty or our standard of living. It’s about lining their pockets.
    The idea of “uniform international financial reporting standards” is the greatest hoax since “one size fits all.” IASB’s processes are opaque and covertly political. IASB’s website trumpets that over 100 countries have adopted IFRS. What IASB DOESN’T say, however, is that few of those countries have adopted IFRS completely. They’ve picked out what they liked and adopted that.
    So, on its face, IASB is lying. If that’s in the U.S. public interest, well, Barack Obama is Ronald Reagan.

Leave a Comment