Peeling away financial reporting issues one layer at a time

Accounting and World Peace: It’s Time for the SEC to get Real

This is my second post reviewing the SEC Staff's Report on its IFRS Work Plan. My first post is here.

To recap only slightly, the best news to come out of the Staff Report is a forthright acknowledgement that outright IFRS adoption is clearly not feasible. Now for the bad news: the Staff is still desperately seeking any excuse possible for remaining in bed with the IASB.

I know this because no matter how damning the arguments against any form of endorsement of IASB standards, the staff's mantra is unaltered: that investors, issuers and regulators generally support "the concept of a single set of high-quality globally accepted accounting standards":

[I]nvestors and other users of financial statements generally expressed support for the concept of a single set of high-quality, globally accepted accounting standards. (page 79)

Regulators generally agreed that they would benefit from a single set of high-quality, globally accepted accounting standards that fosters transparent and consistent reporting. (page 92)

Issuers generally supported the objective of a single set of high-quality, globally accepted accounting standards. (page 104).

And, from these and similar statements we have this confident inference:

"[T]he Staff found there to be substantial support for exploring other methods of incorporating IFRS that demonstrate the U.S. commitment to the objective of a single set of high-quality, globally accepted accounting standards while addressing some of the aforementioned concerns. (page 4)

In other words, three generalities sum to a "substantial."

Whirled Peas, or World Peace?

To be fair, a great many comment letters I read, even those most critical of the SEC's IFRS proposals, begin with, "We support the concept of a single set of high quality globally accepted accounting standards." However, for two reasons, such a statement is almost always severable from the substance of the detailed comments that follow them.

First, it's boilerplate. Everyone thinks they know that in order to be on good terms with the SEC – whether to have access to policymakers or to avoid being put in the dog house by reviewers of your filings – one must be at all times outwardly deferential to the Staff.

To illustrate, let's take one of the few direct quotes (an actual data point, if you will) in the Staff Report. It comes from a May 2011 comment letter submitted by the CFA Institute:

"[t]he results [of a survey] show that our membership overwhelmingly (over 90%) supports the premise of a single set of high-quality global accounting standards as a goal to be ultimately achieved by standard setters and regulators around the world." (page 79)

This looks like pretty strong confirming evidence of the Staff's views, which no doubt is why they proudly featured it. After all, CFA Institute represents over 100,000 investment professionals, But, the Staff misleadingly fails to mention that a significant number, if not a strong majority, of CFA members do not reside in the U.S. This, along with the manner in which the survey was conducted (perhaps in order to reflect the bias of the survey's sponsor) could have highly skewed the results. (Why didn't the Staff conduct its own survey?)

Moreover, and more directly speaking to my "boilerplate" hypothesis, the Staff Report doesn't mention that CFA Institute submitted multiple comment letters in which the same statement can be found. In a subsequent comment letter the CFA Institute also expressed numerous concerns that are much more substantive and are still highly problematic. For example, CFA Institute observed that little has been done to: define what "high quality standards" means, and whether IFRS standards measure up; address IASB infrastructure and governance; or to address enforcement questions adequately.

Second, it's trite boilerplate. No contributor to a policy debate wants to be perceived as a fringe lunatic, thereby lacking credibility and hence, influence. Consequently, no matter how deep one's reservations run on IFRS, everyone as a matter of course will pledge their commitment to the accounting equivalent of world peace.

Again, to be fair, it's understandable how the staff would lap up this sort of faint praise with a spoon. After all, we should all constantly be working toward world peace; hence, to advocate for world accounting harmony is unequivocally to fight the good fight, right?

Actually, no. While every reasonably moral person has agreed for ages that world peace is a desirable outcome, we know they don't all agree that, given the current and reasonably possible future states of the world, a single set of accounting standards is a desirable outcome in the foreseeable future.

But, for the sake of argument, let's assume that it is a desirable outcome. Even then, it is too simplistic to assume that progress can only be made by moving closer to the goal. In their classic book, Human Problem Solving (1972), Allen Newell and Nobel laureate Herbert Simon demonstrated that such a pure "means-end analysis" can fail. A more sophisticated view of goal seeking behavior also places a value on the opportunity to 'take a step backward' in order to eventually achieve the desired outcome. As an extreme example, a reasonable person who is committed to working for world peace could also justify going to war under some circumstances.

Along those lines, I believe that current conditions are not suitable for moving towards the goal of a single set of standards. We first need to move backward; to promote competition among standard setting jurisdictions in the hope and expectation that it will eventually lead to higher quality accounting standards than currently exist. It may well be that standards across jurisdictions need to get more different before convergence to a single set of sufficiently robust and high-quality standards can begin.

 If the SEC even considered this kind of reasoning, it appears nowhere in their report. Perhaps it's because they loved the boilerplate too much.


  1. Reply James Ulvog July 26, 2012

    I recall the old advice about ignoring everything a person says prior to putting “but…” into the conversation. The formula is “I think you have a great idea, but here is why it won’t work.” That means the speaker really thinks you have a lousy idea.
    I see the same formula above. Many people think a single, world-wide, high-quality, no-exceptions-allowed global set of standards that applies to all cultures, economies, and industries would be a wonderful, fantastic thing. *But*, many of those people see a long list of problems, obstacles, and serious side effects.
    Even the staff report has that feel. Convergence is a great idea it says. Then the report lists page after page after page of comments that are essentially arguments against convergence.

  2. Reply Florida July 28, 2012

    As a CFA member I voted for a single set of high-quality global accounting standards, with my focus on high-quality. I didn’t assume this to be IFRS simply because of the “I”.
    I would prefer that the US diverge from IFRS and create the high-quality standards investors want. If the US could do this then audited US GAAP figures might trade at a premium due to reduced uncertainty leading to reduced discount rates. If this were to happen surely US GAAP would receive global consideration again.

  3. Reply Plovdiv August 12, 2012

    Single, world-wide, high-quality accounting standards – it look like fantastic dream. The reality is that it can’t be achieved soon.

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