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Financial Reporting: So Many Red Herrings

Mary-Jo Kranacher, MBA, CPA, CFE

This may be a decisive year for the dream of bringing the world together under one set of international financial reporting standards. The idea of having a common global financial language makes good business sense, conceptually, but achieving this goal—and so many others aimed at better transparency and reliability—has been elusive.

IFRS or GAAP?

Convergence seemed like a done deal when former SEC Chairman Christopher Cox announced a road map that tentatively planned for all U.S. companies to move to IFRS by 2014. Then in January 2009, on the same day President Barack Obama assumed our nation's leadership, Cox resigned. His replacement, Mary Schapiro, made a controversial comment during her confirmation hearings that put the future of IFRS convergence in doubt. But her subsequent choice to fill the long-vacant slot for the SEC's chief accountant, James L. Kroeker, put those doubts to rest and conveyed that the United States was ready to resume its efforts to get convergence back on track.

Differences in laws and culture as well as nationalistic rivalries have been cited as some of the ideological and practical challenges to convergence. IFRS opponents have voiced concerns about whether there will be adequate compliance, oversight, and enforcement for violations in an international arena. But let's consider the track record of our current standards-setting and regulatory system. Remember, this is the system that allowed Enron to (legally) keep off-balance sheet entities and allowed the SEC to ignore repeated warnings of Bernard Madoffs Ponzi scheme—all while investors took comfort in believing that regulators were doing their job. The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act to oversee public company auditors, but access to information for inspections of registered non-U.S. firms has been denied in China, Finland, France, Germany, Greece, Ireland, the Netherlands, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Perhaps more interestingly, many of the foreign audit firms that have avoided PCAOB inspection are affiliates of major U.S. accounting firms (pcaobus.org/Inspections/Documents/12-31_Registered_NotInspected.pdf).

Political Pressure Concerns

Another concern of those opposed to international standards is the influence and political pressure the European Union might exert on the International Accounting Standards Board (IASB). Isn't that what U.S. legislators tried to do with FASB? It was only about one year ago that FASB Chairman Robert Herz found himself under attack at a contentious congressional hearing about revising mark-to-market (fair value) standards. And now that the U.S. Supreme Court has overturned political campaign spending limits under the guise of upholding free speech, lobbyists with the deepest pockets will have increased opportunities to influence financial regulations.

But the IASB's own constituency has its skeptics; Adair Turner, chair of the Financial Services Authority (FSA), a nongovernmental body that regulates the financial services industry in the United Kingdom, expressed concern about the convergence process when he spoke at the Institute of Chartered Accountants in England and Wales in January (www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0121_at.shtml).

The essence of his concerns centered around fair value and, specifically, about the IASB's plans to change the way banks account for potential loan impairment. This topic has been particularly explosive because it is perceived to be a major cause of the current global economic crisis. Recently, the international head of Deloitte, Jim Quigley, reignited this debate by proposing that banks make separate loan-loss provisions for incurred losses and expected losses.

Expanding Useful Choices

The users of financial reporting— investors, creditors, vendors, managers— have differing purposes, interests, and information needs. What works for one group may not suffice for others. Furthermore, the needs within each of these groups may vary widely. We should utilize the capabilities of today's technology to bring timeliness and transparency to the financial reporting process and enhance its relevance and reliability for all stakeholders.

Rather than debating fair value versus amortized cost, U.S. GAAP versus IFRS, our standards setters should spend their efforts toward requiring that information be tagged appropriately and made available electronically. Tagging data allows information to be accessed and formatted as needed. Regulators could provide better enforcement by using technology to cross-reference financial data, footnote disclosures, and quarterly information from corporate conference calls.

Financial statement users shouldn't face artificially limited choices when it comes to the information needed to make decisions. Instead of the marketing and glitz included in many annual reports, let's focus instead on expanding the body of available information and let users decide what they need.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief. mkranacher@nysscpa.org.

 
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