I recently read the transcripts of two recent speeches on the question of the future of IFRS in the US. They are as different as two speeches could be on this topic.
As one might expect, the adopt-IFRS-or-the-sky-will-fall speech emanated from David Tweedie, the IASB Chair. It should also come as no surprise that he gave it in a protective bubble: a meeting of the freest-spending corporate lobbying group in Washington – the U.S. Chamber of Commerce. To those tone-deaf-to-investors ears, Tweedie must have sounded like a Bach chorale. But, I wonder how many of those Dodd-Frank and fair value bashers actually understand (or care) that GAAP and IFRS will be far from converged even after the frantic race to the bottom on leasing, financial instruments and revenue recognition has been declared fini in just a few months. Here's a quick list off the top of my head of projects that were abandoned, never fully addressed or mutilated by "convergence" (feel free to add your own):
- Impairment of long-lived assets
- Research and development costs
- Borrowing costs
- Financial statement presentation, statement of cash flows and disclosures
- Contingent liabilities
- Business combinations
- Joint ventures
- Oil and gas accounting
- Goodwill impairment
I wonder how many of Tweedie's audience understand (or care) that rigorous SEC enforcement of IFRS with only 'soft-touch' enforcement elsewhere in the world will only make us out to be chumps.
Or, that the loss of sovereignty to set our own accounting rules should be antithetical to practically everything else the conservative Chamber has lobbied and stands for. From their anti-regulatory free-market standpoint, there is no valid reason why the U.S. should be colluding with the IASB on accounting standards. Instead, U.S. regulators should be pushed to compete against the IASB with constant improvements toward the highest quality financial reporting standards in the world.
Or, that Tweedie's latest "now or never" gambit sounds more like a desperate suitor whose love interest has finally discovered his true callow nature. There is absolutely no valid reason for the U.S. to be rushed into determining the long-term status of IFRS in the U.S.
"In talking with many investors over the past few years, and during the darkest days of the financial crisis, not one has ever said to me, 'What we need is to move to international accounting standards.'"
That's from the other speech, "Convergence Flaws," by Wall Street Journal columnist David Reilly.
Reilly has been following the IASB and IFRS convergence for a number of years and, and while he does not address any of the technical issues (like incomplete convergence and mutilated standards), he and I end up at the same place: there doesn't seem to be much good that can come out of U.S. adoption of IFRS, or even further efforts at convergence.
Enforcement problems – One of Reilly's more interesting observations comes from drawing an analogy between common accounting standards and a common currency. Like others, he attributes much of the Euro's problems to the absence of political unification.
"Without a common political view, there is no real way to enforce measures needed to guarantee the structure and credibility of the currency – witness how even years before Greece nearly imploded, countries such as France flouted some measures that all euro-zone countries had agreed to follow, with little to no consequences.
Similarly, a common accounting system needs a common enforcement system. Having the most intelligently crafted rules means nothing if companies feel they can simply ignore them without fear of any meaningful consequence. … Does anyone think for a moment that rules will be as consistently enforced in Russia as they are in, say, London? And it's worth noting that there isn't even a single securities regulator within the European Union." [italics added]
Moreover, Reilly scoffs at the notion that auditors are capable of taking up the slack, or that a global securities regulator, as suggested by John Mack, former chairman and CEO of Morgan Stanley, is politically workable.
Whom Should Capital Markets Serve? –Reilly explains that it is hard to come to converged accounting standards if one's view as to whom capital markets regulation should serve differs: investors, issuers (in the name of capital formation), or even authoritarian political regimes (in the name of political stability):
"It's hard to see that countries with such differing views will strive for standards that put investors first or will abide by an accounting outcome if it conflicts with a national objective.
Consider that Greece has admitting [sic] to fudging numbers about its national accounts. What then makes us think it wouldn't hesitate to twist corporate accounting rules? France has often intervened in markets to promote the interests of national champions and has already shown a willingness to politicize and pressure the IASB. And let's not pretend the Chinese communist party would hesitate to twist the accounting if it suited the needs of the politburo."
And, Why are We Going to Do This? – Even apart from cost considerations, Reilly says that if there were ever a time for U.S. adoption of IFRS, it has come and gone:
"[The push for IFRS adoption] came at a time when there was much debate about the competitiveness of U.S. capital markets. The argument went that burdensome regulation was going to push capital markets activity to London and Hong Kong. To counter that threat, the argument went, we needed to embrace the kind of light-touch, principles-based regulation and standards setting seen in London.
Today, we know better. A lack of regulation and regulatory will, not too much of it, was a large contributor to the financial crisis that brought our economy and markets to their knees. London, by the way, has since repudiated the light-touch approach."
Reilly, of course, wasn't speaking to the U.S. Chamber of Commerce choral society. He spoke at a meeting of accounting academics – the functional equivalent of a herd of cats. In other words, he spoke to people with an open mind, and without marching orders from the corporate elite.
I wonder how well David Tweedie's speech would have gone over after David Reilly's?