IFRS v. U.S. GAAP: Which is More Corrupted by Politics?

The New York State Society of Certified Public Accountants (Society) seems to have become the first group of professional accountants to break with the AICPA's big push to get the SEC to throw out U.S. GAAP and adopt IFRS. The Society's comment letter responding to the IFRS roadmap proposal expressed numerous concerns, including the following:

• The SEC's plan for adoption lacked sufficient detail as to "... the methodology and criteria expected to be applied to the milestones in assessing the adequacy of IFRS in meeting the needs of preparers, users, and auditors."

• The proposal did not recognize any tilting in the cost-benefit calculus that must surely have occurred as a result of the current economic environment: "…companies, investors and other participants in the U. S. capital markets have to face the continued dearth of capital at an economically feasible price. It would be reasonable to conclude that the monetary and human capital costs of the transition to IFRS could be burdensome to entities with limited resources and prohibitive for smaller entities, even over a period of many years." [italics supplied]

• For a variety of technical, legal and practical reasons, IFRS will not enhance comparability of financial statements across companies. As this is one of the purported benefits of IFRS adoption, if not the primary benefit being touted, a positive net benefit from adoption is somewhat illusory. Moreover, another benefit of IFRS adoption put forth in the proposing release is the added flexibility afforded to issuers to account for transactions and events by applying their own judgment; the Society is concerned that opportunities for management judgment will actually result in less comparability.

• Recent events indicate that the IASB is inappropriately influenced by various national regulators and others "... who promote the interests of their specific constituencies, as opposed to the needs of the worldwide community." The Society cites as an example the recent changes to IFRS (IAS 39 and IFRS 7) that have allowed companies to "... 'cherry pick' [financial] assets with significant losses and reverse those losses out of net income."

Regarding that last bullet point, Steve Zeff, the eminent accounting historian, recently replied on the Society's blog page asking why just "one or two" instances of political interference in IASB standard setting should cause concern. After all, according to Steve, given the extensive history of political influence and lobbying on GAAP, which he lays out elegantly yet succinctly, those instances cited by the Society's comment letter pale in comparison.

I don't believe the Society was at all implying in their comment letter that the "one or two instances" cited were the only ones that could have raised concerns. Moreover, the larger point is that IFRS and U.S. GAAP are both being raced to the bottom by special interests. For those of you scoring at home, here are a few other very recent examples that I have written about in past posts, and which reinforce this race-to-the-bottom notion:

• In its recent revision of IAS 23 on interest costs, IFRS abandoned its "benchmark" alternative of expensing interest to require capitalization, which heretofore was merely the "allowed alternative." The fact that no substantive basis for conclusions was given for abandoning long-established and well-reasoned basis for conclusions leaves no doubt that behind-the-scenes politicking by the IFRS issuers most addicted to interest capitalization threw their weight around.

• IFRS 3R on business combinations was not fully converged with SFAS 141R in respect to measuring non-controlling interests –- even though the FASB was led by representatives of the IASB to understand that if the FASB held their ground on this controversial issue, the IASB would follow suit. Here is a case where the FASB withstood political pressure and the IASB caved. I do concede that accounting for minority interests can be a more sensitive topic in Europe than the U.S.; but nevertheless, this one gets scored as yet another recent case of the IASB sacrificing its principles for politics.

• IFRIC 15 on construction contract accounting was finalized just a few months ago, and it is cleverly crafted to provide discretion to the construction industry for managing their earnings. The same loopholes were closed in U.S. GAAP decades ago. The IASB could have easily converged to GAAP instead, but political interests again won the day.

• The Chinese are putting pressure on the IASB to amend IAS 24 to suppress required information about related party transactions. All indications are that the Chinese government will get what they want from the IASB. 

Like Steve's examples, the ones I bring to bear clearly reveal an intent on the part of the standard setter to appease special interests. But, there are broad swaths in GAAP and IFRS where we can never really nail down the degree to which an accounting rule has been influenced inappropriately . For example, is IFRS less prescriptive than GAAP because the IASB believes as a matter of principle that such a policy maximizes the quality of financial reporting? Or, does the policy spring from a cynical calculation borne out of a desire to gain acceptance of IFRS by as many countries as possible?  Pardon my own cynicism, but I am inclined toward the latter hypothesis.

It is both obvious and unfortunate that politics has and will continue to play too large a role in both U.S. GAAP and IFRS. Aside from the academic question as to who is guiltier of yielding to politics in the past, the relevant question when considering the SEC's Roadmap proposal is whether IFRS adoption will expand or limit the potential for politics to influence accounting standards. Even if you are somewhat biased toward IFRS, the answer to that question must be self-evident 'yes.' 

And even if you still hold on to the notion that IFRS has been relatively free of political meddling, it is more than a little disingenuous to presume that U.S. adoption won't be a game changer--for the worse. All the stakeholders in eventual IFRS hegemony must surely know that the IASB needs to be on its best behavior until the U.S. ventures so far down the road(map) toward adoption that it can't turn back. But even knowing that, the examples I have provided evidence a broad array of political interests are still having lots of trouble keeping their hands out of the cookie jar.

I am quite sure that Steve's comments were motivated purely by a desire to ensure that whatever decisions come out of the Roadmap proposal, they should be well-reasoned. But, few will share Steve's purity of motive.  I expect that the responses by the IFRS lobby in the U.S. to the concerns about political influence will disingenously ignore the hopelessness of a cure for the inevitable Pandora's box of political meddling on a global scale. Instead, they will propose oversight mechanisms that can amount to nothing more than symbolic gestures. Power corrupts, and monopoly power over accounting standards will corrupt absolutely. 

Call me a chauvinist, but I would prefer to consume information that tastes like American-style corned beef hash instead of European blood sausage mixed with Chinese chop suey. 

Comments

[Kathryn P. O'Mara]

Your list of watered-down IFRS standards is depressing, but if it is any consolation, it seems that Jim Leisenring and Mary Barth ripped into the recent FASB proposals to water down FAS 157 and strongly urged their fellow IASB members not to fall into the same trap.

[NoSpam]

US GAAP: Brought to you by the land of Big Oil, Enron, Sub-Prime and the most powerful lobbyists in the world.