Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Arguments for adopting IFRS are weak, arguments against have validity. Therefore we obviously should adopt IFRS.

with 2 comments

That is my (biased) summary of the reasons to adopt IFRS, as explained in an article by Professor Christian Leuz, Accountants of the World Unite!: Business Class

Having already taken an implied position that IFRS is not a good thing for the United States, I guess I will jump in further.

A new argument raised by Prof. Leuz in favor of full adoption of IFRS is that failure to do so would surrender the US lead in furthering global financial regulation in other areas.

Rejecting IFRS

would deal a major blow to the prospect of unified global accounting standards.

Everyone says that having a consistent, unified set of accounting standards that would apply across the globe is a good thing.  Why that is a good thing is simply assumed because some, or many (or maybe just a few) companies, investors, and pundits think it’s a good idea. Yes, yes, the heart of the argument really is ‘a lot of people think it’s a good idea’.

Remember that “unified global accounting standards” goal later in the article when you read that any country that does not like any particular part of IFRS can opt out of that part of the standards. Unified? Global? Only to the extent that any country can opt out of anything they don’t like.

On to some of the arguments in favor of, and opposed to, adoption of IFRS. Read the article for the full comments from which I will editorialize.

IFRS are supposed to improve transparency of financial reporting around the world in order to lower capital costs. The professor points out these benefits are overstated for US companies because

it is unlikely that financial reporting practices by U.S. firms will improve significantly as a result of IFRS adoption

Sounds quite reasonable to me!

Benefits of cross-border comparabilities are exaggerated, according to the professor, because IFRS will do absolutely nothing about other factors that will affect reporting such as

countries’ legal institutions, their capital markets, firms’ business and governance practices, and managers’ personal motives

Those factors will continue to create divergence in reporting, regardless of whether IFRS is in place worldwide. That will undercut that global and unified thingie.

Single reporting system for international companies is one of the major selling points of IFRS. The professor points out this ignores national or statutory reporting for foreign subsidiaries. Regardless of whether or not IFRS is in place, those other reporting requirements won’t go away. So much for a single reporting system. Companies will continue to have many complex reporting requirements.

The professor points out that one argument against IFRS is that they are inferior to GAAP. IFRS allows more discretion and less guidance than GAAP. (That first sentence is an opinion held by many – the second sentence is a statement of fact.)

The professor’s counter to this argument is that even if it is true, strong capital markets, SEC regulation, and private securities litigation would provide counter pressure sufficient to prevent any deterioration in reporting.

I fear the lack of specific rules in IFRS will encourage the next round of imaginative accounting of whoever will be the next incarnation of Enron. I am not at all persuaded the player in the next fiasco will be dissuaded by the factors cited by the professor. When the hyper aggressive CFO wants to do something inventive and gets into an argument with the audit partner, who is saying it just doesn’t feel like the particular treatment fits the general spirit of the general principle, I know who will win. “It doesn’t feel good to me” is a really poor argument. “I just don’t like it” won’t carry much weight with an audit committee either. An argument at the margin of a particular accounting treatment won’t be influenced in the least by strong capital markets, any concern for SEC regulation, or a moments thought of private litigation.

Someone pushing for an imaginative accounting treatment will have already concluded the position will obviously be accepted by the markets, the SEC, and the courts. All that is left is to persuade that pesky audit partner that those silly rules do not prohibit this treatment. Such is the power of rationalization. The only people in the argument will be the CFO and the audit partner. Without the backup of GAAP-based rules, the argument will be decided by whoever has the stronger personality. And that is not an improvement in the reporting regimen.

By the way, how did that SEC enforcement work with Madoff? How did that fear of litigation work with Tyco, WorldCom, HealthSouth, etc., ad nauseum? Transitioning from a rules-based GAAP accounting model to a judgment- and principles-based IFRS will not be an improvement.

If there should be something arise that would be a deterioration in the accounting methodology from the American perspective there is a simple option according to the professor:

the frequently voiced concern that the IASB could set new IFRS that may not suit U.S. firms or investors could be addressed by having a national endorsement protocol for new and amended IFRS, which is what most countries that already follow international standards have in place as well

Thus, if the US does not like a particular rule, we can opt out. This is what other countries are already doing. Say goodbye to that concept of a unified, global, consistent set of accounting. It will not ever exist.

I have many concerns about adopting IFRS. One of the biggest is the intellectual dishonesty of saying that the goal is unified and consistent worldwide accounting standards.  Yet what we will have is each country deciding for itself what rules it does not want to adopt. Therefore we will have different reporting, different accounting, and different disclosures in each country. That severely undercuts the very core of the argument to adopt IFRS.

Written by Jim Ulvog

June 28, 2011, 10:38 am at 10:38 am

Posted in Accounting

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  1. […] of my other posts are here, here, here, and here. Or use the search button on top right […]

  2. […] 6/28/11 Arguments for adopting IFRS are weak, arguments against have validity. Therefore we obviously should… […]


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