Sweet Next-to-Nothings from the SEC’s Chief Accountant
I’m not going to beat around the bush here. James Schnurr’s first major speech as the SEC’s Chief Accountant amounted to 3,000 words of next-to-nothing. He achieved this prodigious rhetorical feat with a medley of five disparate topics, such that each one could only be discussed in the most superficial terms.
In an effort to make something from next-to-nothing, I have sorted these five topics in rough ascending order of their next-to-nothingness. (Parentheses are used to reveal Mr. Schnurr’s secret thoughts.)
Audit Committee Disclosure — The disclosure rules haven’t changed since 1999. Chair Mary Jo White thinks it’s time to change them. Mr. Schnurr has thought a lot about this. We haven’t the slightest idea what he will recommend to the Commission. (He doesn’t want to change anything.)
The New Revenue Recognition Standard — The words in the Accounting Standards Codification will be vaguer (to convey the false impression that the new standard is principles-based). However, practice should be largely unaffected because the “concepts” of revenue recognition have not changed.
FASB — The FASB has been bending over backwards to appear busy while itself accomplishing next to nothing. It is doing just fine. It should continue to operate as an “independent” standard setter, with Board members being appointed by the plutocrat-dominated Financial Accounting Foundation. (After Mr. Schnurr serves just long enough at the SEC for appearances sake, he hopes and expects the FAF will reward him for his fealty, and for doing next-to-nothing, by appointing him to one of those $600K+/year positions on the FASB. After all, that’s what they did for his predecessor.)
PCAOB* —The PCAOB has a staunchly independent and visionary chairperson. It is not doing fine. Even though the PCAOB works through its docket faster than the FASB, it works too slowly. This is because the PCAOB is attempting to accomplish much more than next-to-nothing. It should only be working to perpetuate the myth that audit deficiencies can be mitigated by making marginal changes to audit procedures for the thousandth time. The PCAOB must stop threatening the auditors’ business model by attempting to identify and correct the actual root causes of audit failures. (The PCAOB must not forget that Mr. Schnurr — like his predecessor and his predecessor’s predecessor, etcetera, etcetera, etcetera — is a former Big Four auditor. This is for reasons that no one must ever mention.)
IFRS — In May of 2014, Chair White assured the FAF that IFRS is a high priority for her. Accordingly, she has directed Mr. Schnurr to make a recommendation as to the path “forward.” Mr. Schnurr doesn’t know what he will recommend (but if he doesn’t say next-to-nothing in this speech, that would amount to only nothing). What he said amounted to less-than-nothing:
“As one [and the only] example [of what we are considering], we understand that some domestic issuers may, now or in the near future, prepare IFRS-based financial information in addition to the U.S. GAAP based information that they use for purposes of SEC filings. However, regulatory constraints may dissuade some issuers from providing this information, as current SEC rules would consider IFRS-based information to be a “non-GAAP” financial measure for a domestic issuer. Should IFRS-based information continue to be considered “non-GAAP” financial measures subject to the requirements for such measures, or should it be thought of differently? Under this line of thinking, issuers that do not believe IFRS-based information would be beneficial to investors would not be forced to undertake what we understand to be, in some cases, significant implementation costs.”
To quote my second all-time favorite tennis player (after Roger Federer), “YOU CAN’T BE SERIOUS!”
It took me less time than it takes to hit a second serve to come up with “one example” of the games that issuers could play:
Facts: A technology company reporting under US GAAP must expense all of its R&D costs. But, under IFRS it would be able to report higher earnings by capitalizing those costs it determines were incurred during the “development phase” of a project.
Question: Should disclosure of the effect on net income of the difference between R&D expense under IFRS and US GAAP be excepted from the disclosure requirements that must accompany all other “non-GAAP” financial measures?
Interpretive response: No way!
Perhaps Mr. Schnurr has forgotten that there are really important reasons why there are still hundreds of differences between US GAAP and IFRS. The differences in R&D accounting, in particular, were universally thought to be low hanging fruit, yet attempts by the FASB and IASB to converge them away were a spectacular, albeit under-publicized, failure. To its significant credit, the FASB saw that the IASB’s hazy, lazy criteria for capitalization would be a step backwards from the FASB’s earliest struggles for the cause of principles-based accounting (SFAS No. 2). To the IASB, acceptance of a converged solution for which Europe-based Big Pharma would not be appreciative would, now as then, have posed an existential threat.
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And, this just in. Last week, Chair White gave a wide ranging speech at a major conference about the SEC’s activities and plans for the near future. She uttered nary a word about the future status of IFRS.
So much for the “high priority” status of IFRS at the SEC. More likely, Chair White wishes the whole thing would just sink into oblivion.
It will. And in the meantime she will keep her chief accountant busy working on next-to-nothing.
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*I am a member of the Standing Advisory Group of the PCAOB. The views expressed herein are my own and do not necessarily reflect the views of the Board or its staff.