When I was at the SEC (1992 – 93), one of the senior staff members whom I admired greatly for his competence and integrity was Robert Bayless, the Chief Accountant for the Division of Corporation Finance. ("Corp Fin" is the branch of the SEC that reviews and comments on financial statement filings.) Sometime after I had left the Commission and the position of "Chief Accountant to the Commission" had opened up, it was rumored that Bayless would be in line for the promotion. But, the chatter quickly died down after Bayless was supposed to have responded, "Why would I want to drink battery acid?"
The point of my story is that the Accounting Establishment can always make life miserable for the Chief Accountant to the Commission – especially one who, like Bayless, would have made investor protection his sole priority. I thought of him recently as I read James Kroeker's (the current Chief Accountant to the Commission) remarks at the AICPA's annual conference on SEC and PCAOB developments. Mr. Kroeker did concede that the planned imminent policy statement from the SEC on International Financial Reporting Standards could not possibly happen for at least several months. But, in all other respects, he once again demonstrated his abilities and willingness to be the implacable Chief Spinmeister for the Accounting Establishment. If nothing else, it's a way to keep battery acid out of one's diet.
Rather than criticize Kroeker point by point, I'd like to imagine that I could take his place as Chief Accountant for one day – the day of that speech. This is what I would have said:
Good morning. It's an honor and a privilege to be the Chief Accountant to the Commission for a day.
Let me begin with a discussion of the current state of the IASB/FASB convergence agenda. If I were to start with the premise that execution of the convergence projects and the results of that work are important as the staff considers the issue of incorporation of IFRS, I would have no choice but to conclude that further efforts at convergence will be a monumental waste of time. Moreover, it is clear to me that the time and efforts of this office and the FASB over the past 10 years could have been much better spent on efforts to improve the quality of U.S. GAAP, instead of on convergence with IFRS.
As all of you certainly are well aware, the work of the two Boards on convergence has been at the top of their respective agendas since 2002. It's hard not to be amazed at how many hours have been spent debating accounting issues over those ten years while so little has actually been accomplished. I am stunned that the SEC staff has not given more direction and constructive criticism to both Boards. But, as my kids would say, "I'm not gonna lie. It is what it is." (I hate both of those expressions!)
Let's go back just a little bit to see how bad things have become. At the time of the February 24, 2010 Commission Statement on IFRS, the FASB and IASB had nearly a dozen joint projects planned for completion by both boards by mid-2011. The SEC was hopeful that at least some of those projects would be completed by now, and even IFRS adoption skeptics, like me, could not have imagined that we would actually be further from convergence today than we were back in February 2010. Progress has been made toward partial convergence of some trivial matters – like the way that components of dirty surplus (so-called "other comprehensive income") are formatted, and the IASB has finally agreed to adopt the FASB's fair value measurement standards for the few items that are measured at fair value. But, everything else seems to be heading in reverse.
We have come to the point where the SEC is placing all of its hopes for any indication of significant progress toward convergence on the revenue recognition and leasing projects. However, the best that can be said of these projects is that two watered-down standards could become finalized by the end of 2012. I do not consider this to be progress, as I believe that the FASB would have been capable of creating higher quality standards without being forced to collaborate with the IASB. We do have our politics here in the U.S., but recent years have shown that it is nothing compared to the political pressures exerted on the IASB by its many "stakeholders."
The major project that seems most likely to be finalized in 2012 is revenue recognition. In the revised exposure draft issued just last month, the Boards have abandoned any semblance of a principled position on the asset/liability view – supposedly one of the prime reasons the project was begun almost 10 years ago. If finalized as currently proposed, all sorts of deferred costs will populate the balance sheet.
Overall, I think it is fair to say that this project has devolved into a desperate quest to somehow quell criticisms by preserving current practice while at the same time replacing the rules from 200 separate pronouncements and interpretations with one cohesive document. The unsurprising result is a draft standard that is so vague and lacking in robust illustrative examples, I wouldn't be surprised that we will soon have 200 new interpretations to deal with before an effective date finally comes to pass – which I expect to be no earlier than January 2017.
I should also mention that the prospects for a high-quality lease accounting standard are even more dismal. The Boards are being pushed to whittle down recognition of lease obligations to some crudely calculated minimum amount that lessees might grudgingly accept. Lessor accounting, after years of vacillation and improvisation, is still in flux.
Ironically, if my predecessors had been completely honest with the public, they would have admitted long ago that the greatest progress made on convergence has been to point out where convergence has no chance of succeeding in our lifetimes.
Take financial instruments. Please. Given the 2008 financial crisis, the impending implosion of bank balance sheets in Europe and the recent embarrassment in the U.S. of MF Global, this is the one area where the Boards could provide an immediate service to investors. Yet, the SEC stood idly by as one FASB Chairman was fired by the Financial Accounting Foundation for daring to insist that convergence result in high quality financial instrument standards, and while the FAF stacked the Board with three more reliable IFRS shills. But, it seems that nothing less than a return to post-WWI hidden-reserve accounting will satisfy the German and French bureaucrats. (At least we can thank the current members of the FASB for resisting at least that much.)
Even as the SEC's arguments for continuing with convergence have been pounded to dust by the vast majority of SEC registrants and independent-thinking investors, the staff has been blithely proceeding (albeit at a snail's pace) with its work program – exploring whether and, if so, how the Commission could or should proceed with a decision to incorporate IFRS for U.S. issuers. In truth, the scope of that work plan is woefully inadequate. I have absolutely no idea how the staff will produce a rigorous analysis of the costs and benefits of incorporating IFRS into U.S. GAAP that meets the standards set by a recent court ruling against the SEC.
My skepticism in this regard is further reinforced by the two progress reports that the staff has recently issued in the form of Staff Papers. The first is a comparison of the differences between U.S. GAAP and IFRS. Although revenue recognition, leasing, and financial instruments were excluded, it's amazing how many significant differences still exist! First, there are all of those convergence projects that have been abandoned or indefinitely postponed; second, there are the significant differences that remain from projects that the staff is counting as converged; and third, there are the differences that are so fundamental, the boards didn't even bother to put them on any convergence agenda.
Yet, it appears that the staff has attempted to downplay the sheer impossibility of bridging these differences, mainly by providing a document that no Commissioner would find any reason to actually read, except perhaps as a natural and highly effective cure for insomnia. The bulk of the report is a turgid regurgitation of differences between IFRS and U.S. GAAP that could have easily been lifted from a pamphlet written by any one of the Big Four. The staff also made sure to leave out any summary, takeaways, or any indication whatsoever of the dim prospects for, and herculean efforts that convergence will continue to entail. If the authors' intention was to provide no new information or guidance, then they succeeded admirably – and they should also be quite ashamed of themselves for the dismal quality of their work.
The second Staff Paper is an analysis of the use of IFRS in practice by the subset of Global Fortune 500 companies that claimed to comply with IFRS in their financial statements. This paper was actually well done (and it should be noted that it was not written under the direct supervision of the Chief Accountant to the Commission). The number of apparent departures from IFRS noted, and the inconsistent ways that IFRS has been interpreted by the largest companies, should explode the myth that worldwide adoption of IFRS will result in more comparable financial statements. The unavoidable conclusion is that even if a single set of global accounting standards were possible, the paper leaves no reason to believe that effective global enforcement would occur. A single set of standards without a single, consistent and rigorous enforcement mechanism will fail to deliver on the promise of comparability.
In summary, as I reflect on the negative feedback from the July Roundtable and these two staff papers, I see absolutely no reason to continue consideration of IFRS adoption in any manner shape or form. But, I'm only the Chief Accountant for today, and James Kroeker returns tomorrow. You should expect that he will continue to display his singular talents to spin convergence whilst the SEC's project spins ever more rapidly out of control (or down the toilet, if you will).
Thank you for listening. If only the Commission would do the same for once.