Friday, September 19, 2008

Danger, CPAs at Work

"No joke, accountants are the Rodney Dangerfields of business. But perhaps they deserve some respect after all. Accountants in the U.S. are signing up for a fundamental rethinking of how they do their jobs. ... The [SEC] recently announced that the U.S. will abandon Generally Accepted Accounting Principles--for almost 75 years, the bible for U.S. accountants--joining more than 100 countries around the world instead in using the London-based International Financial Reporting Standards. ... There are specific differences between the two systems; for example, the international system only allows the first-in, first-out inventory accounting system. The most important difference is that the international standard is based on principles, whereas GAAP is based on rules. GAAP suffers from the complexity of trying to set rules for all situations, a complexity that often masks economic reality. ... A single set of accounting rules would mean more effective global disclosure and transparency. ... The forensic accountants who sniff out problems will have to develop instincts using a new set of measures. The transition will also be tough on investors. ... The big U.S.-based accounting firms generally support the abandonment of GAAP. Skeptics could call this switch in systems the equivalent of the accountant full employment act for many years, but the profession itself also recognizes that GAAP often fails to refect underlying economics. A PriceWaterhouseCoopers briefing document for executives on the accounting change notes that changes will also be necessary in the law. 'If an accounting and reporting framework that relies on professional judgment rather than detailed rules is to flourish in the U.S., the legal and regulatory environment will need to evolve in ways that remain to be seen.' These include that 'regulators will need to respect well-seasoned professional judgments.' A system based on principles could create new defenses for company boards and accountants who try to do the right thing, if they fully disclose why they thought that a particular accounting treament made sense", my emphasis, Gordon Crovitz (GC) at the WSJ, 8 September 2008.

"Gordon Crovitz defuses several concerns over IFRS. Grounded in principles, U.S. [GAAP] has been accreting guidance, exceptions and amendments for at least 75 years. That it often looks like a book of arcane rules is not coincidental--preparers, auditors, litigators, and to some extent users demanded it. ... But I say go for it! ... Although IFRS is obviously deficient, auditors must stand up to clients much more under IFRS than they did in the past. And I do take issue with Mr. Crovitz's assertion that IFRS will make it easier for companies 'to do the right thing.' That option was always open through voluntary disclosures and alternative presentations, sometimes with auditors' blessings, suggesting that getting companies to want to do the right thing is a major part of the problem", my emphasis, James Largay (JL) letter to the WSJ, 10 September 2008.

Who is GC kidding? The Big 87654 must figure they can use IFRS to lobby for more lawsuit protection. The Big 87654 want to serve investors? Really? Why can't they do that now? Another selling point to the Fortune 500: possible Boards of Directors lawsuit exemption. "Professional judgment"? Does PW use that now? You know what Adam Smith said at a time like this: "people of the same trade ...". IFRS was adopted by more than 100 countries. So? My mother used to say, "If everyone else is jumping off the Brooklyn Bridge are you going to jump too"? This is bandwagon propaganda, GC and this "argument" would have been shredded in my fifth-grade class. Yes, GAAP frequently does not reflect economic reality. So? Will IFRS be better? I wonder if GC used a PW "resource person" who should have told him, disclosure is no substitute for measurement. Imagine, CPAs have Statements of Financial Accounting Concepts. Such statements exist? Yes. Current GAAP uses concepts? Yes. What's really going on here?

JL is a Lehigh accounting professor. Yes, US GAAP is "grounded in principles". In a sense, US GAAP is like "common law" as opposed to "code law". We make up more detailed rules as we go along. I prefer common law. Is JL serious: "auditors must stand up to their clients"? Why don't they do that now? IFRS, GAAP, CRAP (Cleverly Rigged Accounting Ploys) or MAAP (Martian Accepted Accounting Principles), unless you change CPAs' incentives, nothing of substance will change. Yes, "that option was always open". What will change under IFRS?


Anonymous said...

burn baybee burn. those beans are meaningless now. got ammo?

Anonymous said...

ballad of accounting:

Doji Star said...

I'm not expecting IFRS to work miracles, but you have to admit that in many areas it has been leading GAAP. IFRS forced expensing of stock options long before GAAP. IFRS requires more fair valuation (e.g. agricultural assets). Besides, they have been working on convergence for many years.

No, it isn't going to clean things up very much, largely because the US enforces accounting standards more than other countries. The SEC audits, I do not believe the FSA does. The FSA also allows auditors to issue qualified opinions -- "yes, we agree with everything but page 35 *hint hint*" whereas auditors in the US must either sign off on the whole thing or not.

Disclosure: I am a CFA, not a CPA, and have been trying to forget my accounting classes ever since I finished grad school.

Independent Accountant said...

I do not think the "big" accounting problem is IFRS, instead of GAAP. That said, I prefer GAAP because it leaves CPAs less "wiggle room". The big problem is: CPAs incentives. The Big 87654 are pushing IFRS to get more exemptions from lawsuits.
We can agree to disagree on this one.
Both IFRS and GAAP are infected with all kinds of political compromises and will be in the future.

Jenia said...

What for to correspond to the international standards of the financial reporting (IFRS/GAAP)?

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