Peeling away financial reporting issues one layer at a time

No News from the SEC on its IFRS Roundtable is Bad News

I'm looking forward to the SEC's July 7th IFRS Roundtable like surgery without anesthetic. Perhaps the SEC feels much the same, as notification was only posted to its public calendar of upcoming events within the last day or two – absent an agenda and list of participants.

In an attempt to fill in the blanks before writing this post, I called Christopher White in the Office of the Chief Accountant for more information. His voicemail was extremely friendly, but equally unhelpful. It turns out that even though there are only three more working days between now and the Roundatable (announced 10 weeks ago), the agenda is still a work in progress and the panelist roster has yet to be finalized even.

The Fix Must Be In

All of the past SEC actions, spins, jumps and procrastinations are consistent with my expectation that the Roundtable is being carefully orchestrated to achieve one specific end: to yield a message that will justify the deals and commitments already consummated out of the public view. The only remaining question is whether the Roundtable can shroud these arrangements with some modicum of legitimacy; or at the very least a large dose of white noise.

The white noise outcome may be the best the SEC can hope for since, try as they have, not a shred of empirical support for further association with IFRS in any shape or form, has been marshaled. Most poignantly, the SEC staff's first (and last) progress report fully eight months ago said almost nothing, except for sheepishly admitting that glowing reports of hook-line-and-sinker IFRS adoption is not nearly so widespread as the IASB's propaganda would have us believe. Moreover, the subsequent departure of India and Japan from the IFRS Adoption Express only further confirm a more sobering reality on the ground.

Since the staff's progress report, the SEC staff has hardly uttered a peep, despite solemn pledges of in-depth investigation on an impossibly wide range of controversial topics. Perhaps the Commission is hoping that hyping the Roundtable will cover over the absence for public scrutiny of hard work and hard thinking from its staff.

Starting from the time when the SEC tried to be dismissive of the overwhelmingly negative feedback, from even large issuers, on the initial IFRS adoption proposal, it has become ever clearer with time that the one thing the SEC does not care to receive from the Roundtable event is real feedback on the core strategic propositions. Even if the panelists selected* turn out to be slightly more open-minded and honest than the shills I expect them to be, I am concerned that they won't have more than a glimmer of a chance to respond to strategic questions like, "Why should we do this?"

Count on, instead, a numbing series of tactical questions like, "How should we do this?" That's the only way that I can think of for the SEC to divert attention from the fact that benefits from adopting IFRS are mere speculation without empirical or theoretical foundation. If, for example, you think the debate is still about 'principles' versus 'rules' in accounting, you need to think again. For an effective debunking of this tired old nonsense, you should read George Washington law professor Lawrence Cunningham's 82-page paper, "A Prescription to Retire the Rhetoric of "Principles-Based Systems in Corporate Law, Securities Regulation, and Accounting." Please.

Trying my best not to gag as I write this, these are the types of questions of the panelists that I expect will dominate the as-yet-to-be-published agenda:

  • How would IFRS adoption affect your organization?
  • How is GAAP used in your industry?
  • What is the impact that a change in accounting standards will have on your industry? (If you don't know, then make something up!)
  • How should (i.e., not if) the transition to IFRS take place?

 

The Hard Questions that Won't be Asked

Sovereignty – If the IASB is allowed to set the agenda and take first crack at writing a standard under an "endorsement" strategy for continued association with IFRS, what are the risks? In particular does the U.S. risk a race to lowest-common-denominator accounting standards? Why wouldn't investors be better protected by a competitive standard-setting strategy instead of a merely cooperative strategy with the ultimate goal of producing a monopoly?

My favorite case study is India and its accounting for the foreign exchange effects on foreign-currency denominated debt. They are adamant that foreign exchange losses on freestanding debt denominated in a foreign currency should be eligible for deferral. For U.S. issuers, that approach harkens back to the stone ages of pre-FASB financial reporting. With that in mind, how could the U.S. take IASB rule-making seriously should it deign to make some sort of concession to India? This is not a hypothetical: India has every expectation that the IASB will take up that case once U.S. GAAP considerations are at long last moved off center stage.

What is there to converge with, anyway? – The hyperbole about IFRS adoption throughout the world has been intense and unrelenting. Yet, the SEC staff admits that very few countries have adopted IFRS as issued by IASB. Ironically, U.S. GAAP is probably closer to IFRS than the versions in use by the majority of those countries which have already adopted to some degree or another.

Also, the SEC's staff ad lib proposal from just a few weeks ago would provide for US carve-outs with an "endorsement" approach. They are saying that the differences would be few and far-between, sort of like the SEC's involvement with the FASB. However, in reality the SEC really meddles a great deal with the FASB. It has issued hundreds of Staff Accounting Bulletins and Financial Reporting Releases, and a huge Financial Reporting Manual (351 pages); and importantly, it retains veto authority over private sector standards setters. Will the FASB have that same power with IFRS? The only that happens is if we adopt a US version of IFRS and not as issued by IASB. Linking agendas in this manner could further bog down improvement agendas and will do more to constrain, rather than advance, development of timely and high quality financial reporting developments

Will Comparability and Cost Savings Really Occur? – The attraction of IFRS adoption for investors was supposed to be worldwide comparability; and to that end the SEC originally stuck to its guns and demanded pure IFRS in accordance with IASB in exchange for removing the reconciliation requirement a few years ago for foreign private issuers. Yet, hypocritically, the SEC now purports to prefer a US-flavor of IFRS for domestic filers (while foreign private issuers will continue to file pure IFRS financial statements. This is because the SEC cannot transfer the authority to set accounting standards to anyone else. In effect then, we have come full circle back to a lack of comparability due to multiple versions of standards. Heretofore, it had been possible to state that all U.S. listed companies were 'comparable' at least insofar that all of them reported income as per U.S. GAAP. That is no longer happening, and will never happen again if any of the paths currently being contemplated is taken.

Public Confidence in IFRS – I received a request just this morning from a reporter, from one of the premier business publications, who is trying to investigate how IFRS adoption would affect smaller public companies. He asked me for names of sources he could contact, because he couldn't come up with any himself. The problem has been that the issue he wants to report on has barely been considered:

"[Sources are] nearly impossible to find. There's been almost no public opposition to IFRS from small companies that I've been able to find. The groups that might be representing small businesses' interests here, like the US Chamber of Commerce and the National Federation of Independent Businesses, haven't done anything. … And there have been virtually no comment letters from small companies on convergence and IFRS.

The sentiment I'm getting is that this issue just isn't on small companies' radar screens as yet – they've got enough to do just to keep their heads above water financially, deal with the impact of Dodd-Frank, etc. I suspect, though, that this is very much going to be an issue for small companies – we just haven't seen it yet." [italics supplied]

Here we are on the cusp of a momentus decision, and the impact on smaller reporting companies remains a mystery. Isn't that one of the things the SEC has supposed to have been looking at this year? (Where is that darn progress report from the SEC staff!?)

There is also a huge issue with trust because, of the most strident voices, the public doesn't know whom to believe. The problem is that the loudest IFRS cheerleaders are doing their best to cash in as they speak. The AICPA is already selling IFRS certifications, and Big 4 partners have vested themselves in accumulating expertise in something that now has to be "sold." To my view, the credibility of virtually everyone hawking IFRS adoption has been auctioned off for big bucks.

Any notion of receiving a balanced view from veteran regulators is also laughable. The most prominent, including Paul Volcker, Harvey Goldschmidt and Ray Glauber have long been captured through their status as IASB Foundation Chairs or Trustees at one time or another.

Other – I could go on, but I'm running out of time and space, so I'll just leave you with these additional thoughts:

  • The issues of IASB independence and lack of uniform (or practically non-existent) enforceability throughout the world.
  • What about the cost? When is the SEC going to do a realistic study?
  • How is the U.S. going to fund the IASB, and is that a political reality?
  • Is there any substance over form to the IASB's Monitoring Board? It was supposed to solve the governance issues but I can't see that the U.S. will have any more influence than just one vote of many. Conclusion: it's just there for appearances sake.

* * * * * * *

I'll be dragging myself to the computer next week to watch the Roundtable on the web (three hours earlier in AZ!), but like I said, I sure ain't lookin' forward to it. Here's hoping that there are at least a couple of panelists who haven't either been bought or brainwashed.

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*I responded to the SEC's request for panelist nominations. The SEC has not responded to my email.

2 Comments

  1. Reply Edith Orenstein June 30, 2011

    Tom,
    Very interesting and as always thought-provoking post, although I’m not sure it is appropriate for you to assert (granted, this is your blog, and it is your opinion) that ‘the fix is in.’
    At the same time, you deserve credit for having the nerve to put yourself out there asking ‘the hard questions.’
    If it turns out you are not part of the SEC’s July 7 roundtable, (maybe you’ll be invited to participate in one of their future Financial Reporting Series roundtables?), there’s probably nothing stopping you from organizing your own private webcast (maybe in Second Life? e.g. if you speak to the fine folks at MACPA’s CPA Island?) to raise your questions for public discourse. Input from such a roundtable could also potentially serve as input for a comment letter.
    Returning more directly to the message, and title, of your post (“No News is bad news…”) the fact that further info about the July 7 roundtable isn’t posted publicly yet could be that the SEC is simply tying up loose ends like links to participant bios or something like that, or the webmaster could be tied up posting items relating to rulemaking, etc. Or, maybe they will post something on July 1 (tomorrow), which happens to coincide with the launch of a new IASB Chairman’s term, with Sir David Tweedie retiring as chairman today.
    I hope others, with a variety of views, will comment on your post. I’m sure there are lots of folks out there with reactions to the points you make.

  2. Reply Scott Green June 30, 2011

    Re small company perspectives on the question of IFRS adoption in the US:
    Based on my observations from over 20 years of auditing and then working for small companies, their limited resources devoted to finance and accounting are indeed consumed in the daily challenges of external and internal financial reporting and financial management.
    They have little to no extra bandwidth to meaningfully comment on proposed standards from the FASB; responding to what actually gets issued is challenge enough. To meaningfully consider an entire new set of accounting standards seems impossible for most small company finance departments. Their strategy likely is to just keep rolling with the standard-setting punches as they come in, including the IFRS haymaker if that arrives.
    Small company finance departments are particularly dependent on representation by organizations that represent their collective interest and instances of common causes with larger organizations.

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