Peeling away financial reporting issues one layer at a time

The Hans Hoogervorst IFRS Sales Pitch Hits the Road

For a standards setter, Hans Hoogervorst, the new IASB chairman, doesn't know much about accounting. By his own frank admission, he wasn't even very interested in the subject until after the financial crisis hit in 2008, and he seems almost proud to disavow a command of the details of IFRS.

Consequently, his role on the IASB is obvious: to sell IFRS to as many countries as possible. Why anyone should expect someone with his background to do that with any sort of credibility is beyond me, but his selection seems to reflect a conscious strategy on the part of the IFRS Foundation: to promote the sizzle instead of the steak.

The Wooing of China

Hoogervorst's first major sales pitch was delivered in China last month. Predictably, there were two parts: a standard litany of the general benefits of IFRS, plus some special words like these to the good folks in China:

"[W]hile Chinese GAAP is not word-for-word IFRSs, I understand that analysis by the Chinese regulator shows that for companies with dual listings in Shanghai (using Chinese GAAP) and Hong Kong (using IFRSs) the average difference in reported profit is 0.6%. The difference in term [sic] of net assets is even as smaller [sic] as around 0.2%."

The impetus for this post was an email from one of my readers, Steve Chai, who made this telling observation:

"If [Hogervoorst] truly believes that the financial results are similar under both IFRS and Chinese GAAP, he should instead recommend switching to Chinese Standards, which are 100 times shorter and simpler than IFRS!!! … For example, Chinese Accounting Standards (CAS) have less than ONE page of guidance on how to consolidate companies (CAS 33), and CAS 24 on hedge accounting is only 7 pages."

To Steve's point I would add that if CAS can generally be expected to come close to IFRS on major financial metrics, then maybe the rest of the world should adopt CAS. Moreover, Hoogervorst doesn't even seem to be aware that the point of that simplistic statistical exercise would more likely have been to support the proposition that convergence to full IFRS was not a necessary condition for achieving "high quality" financial reporting in China. If the actual income and balance sheet numbers are similar, then there would seem to be no point to burdening Chinese companies with more detailed accounting standards.

Steve wrote to me because he is incensed that, right from the start, Hoogervorst is not telling the truth while promoting the adoption of IFRS. I am more than inclined to agree with him. Throughout his speech, Hoogervorst figuratively bows and scrapes to the Chinese for their "work," "support," and "herculean effort" to bring CAS closer to IFRS. The reality appears to be quite different.

For example, the Chinese representative to the IASB (Dr. Zhang Wei-Guo), I am told, says little if anything at Board meetings. The ostensible purpose of holding public meetings is for stakeholders to receive at least some indication of each board member's thinking, and that independent reasoning forms the bases for votes. Therefore, one might reasonably conclude that Dr. Zhang has nothing to add to the conversation.  If his accounting background is indeed rooted solely in working with the bare-bones regime of CAS, then in that respect he is much like Hoogervorst: which means that at least two voting board members are lacking technical knowledge to participate in any effective way in the Board's deliberations.

I suppose one could argue that at least Hoogervorst has a real job to do: hawking IFRS with the zeal of a snake oil salesman. But, for merely showing up and voting with the party line when required, Dr. Zhang is paid around $600,000 per year plus benefits. I wonder how that compares with what he was paid while working in China.  Did I hear anyone say "regulatory capture"?

And the other thing is that China's "herculean" contribution to the budget of the IASB is, I understand, only slightly more than Dr. Zhang's salary. The message there is also loud and clear: China will pay for made-to-order standards only. Won't it be interesting to see how that plays out once the IASB moves its sights from the U.S. towards other big fish!

The Double-Edged Butter Knife

Hoogervorst is probably a pretty sharp guy, and he may have a deep technical knowledge of something, but it isn't accounting. The China-centric aspects of his speech are sufficient by themselves to demonstrate that he will operate as a blunt instrument; a double-edged butter knife, if you will. One edge will blithely spew forth misleading statistics or generalizations, and the other will plead ignorance of the critical details.

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