International Financial Reporting Standards: It’s About Sovereignty

0:00I want to talk to you briefly this morning about international financial reporting standards. I know it's hard for people to imagine that anything about accounting could possibly be of interest to the sober public, but I think it is, and that's why I'm here. to paraphrase James Carville, whom I'm not fond of quoting, but he is a funny man, looks notwithstanding. But it's all about our sovereignty. Stupid. They didn't put stupid in the program because we are a genteel, civilized bunch. A little bit of overview. I'm going to talk Talk about American exceptionalism, a myth in the White House, incidentally, a little bit about SOX, also known as the Sarbanes-Oxley Act of 2002, a little bit about the International Accounting Standards Board in London, why IFRS, IFRS and GAP, Generally Accepted Accounting Principles, differences, and then I'll wrap up.

1:20Non-American exceptionalism. This wasn't much of an issue until President Obama took office. He has, I think, a pretty strong track record in demonstrating his reluctance to affirm America, at least when he's overseas. And he certainly doesn't want to offend anybody Except Americans. On April 4th, 2009, in response to a reporter's press conference, or a reporter's question at a news conference in Strasbourg, France, he was asked whether he believed in it. And he said this, quote, I believe in American exceptionalism, then he snatched his defeat from the jaws of victory.

2:12Just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism. Moral equivalency, that's just President Strong's suit. Is the U.S. really different? I think it's fair to say that even if one is not 100% red, white and blue, to borrow H.L. Mencken's phrase that at least if you compare the evidence in terms of constitutions, we are. So far as I'm aware, ours is the only constitution that works bottom up. The people grant powers to the government, not the other way around. So certainly we are different, I think in that respect. Unfortunately, we had a lapse of sorts, at least a lot of people think we did, with the enactment of the Sarbanes-Oxley Act of 2002. This occurred in the summer of 2002, and it was actually going down to defeat until the guys at WorldCom in the neighboring and State, managed to turn themselves upside down.

3:35SOX had been introduced primarily as a reaction to Enron, which happened in late in the fall of 2001, and was going nowhere fast until World Comp collapsed and all of a sudden the vote in the House I think was 429 to 4 and in the Senate it was 99 to 1. And so we now have socks, which I'm going to probably offend some people here by saying this, but I truly believe that when individuals and groups of people don't self-regulate responsibly and the failure to self-regulate has significant and adverse economic consequences for Large Numbers of Americans, that we get the heavy, ignorant, expensive and overreacting hand of government, but we deserve it.

4:35And in particular, we got it in 2002 because my profession, public accounting, had been slumbering at switch for a number of years. And I am as opposed to federal regulation as a general proposition, I think, as anybody in this room. But the person on the street has no response other than a political response. That's the only defense they have. And so that's why we got socks. I'm not a fan of socks. It happened because my profession epitomized denial, which is not just a river in Egypt.

5:26One of the provisions in SOX was the creation of the Public Company Accounting Oversight Board, aka PICABOOT, that's what it's called. The Public Company Accounting Oversight Board was formed because the then arbiter and creator of generally accepted auditing standards in the United States, the American Institute of Certified Public Accountants, is a wholly owned subsidiary of the big four public accounting firms. on Lock, Stock and Barrel, and it until then was a promulgated audit standards. One of the first actions of the new chairman of the, of Peek-a-Boo, the former head of The Federal Reserve in New York was to take away AICPA's right power to create auditing standards, and he said, we're going to do it.

6:32Again, in my view, given the pervasive and well-documented corruption at the American Institute of CPAs, and I'm not talking about my CPA colleagues here, I'm talking about senior management at AICPA. and I can prove what I say and anybody wants to challenge me on it. I'll give you one small little snippet. I was having a telephone conversation with the CEO of AICPA in December of 2005. His name is Barry Melanson, and if that sounds as if he came out of the bayous of Lausiana, he did. And Mr. Melanson is a remarkable creation. He makes over a $200 million a year, presiding over a monopoly that manages to lose money every year.

7:21For an accounting organization, that should be embarrassing. But they are nothing if not shameless. I noted in my conversation with Mr. Malansohn that in the then 14 years since I had been a certified public accountant, I had never received a ballot to vote for or against anybody on the AICPA's Council, 260 people, or on its Board of Trustees, nine others. Furthermore, I told him I had taught CPAs in 31 states and asked that same question in every class, has anybody here ever gotten one of those ballots? Nobody ever had, or at least if they did they wouldn't admit to it. So I said, Barry, you all have a level of transparency that makes the College of Cardinals look downright public.

8:15I said, and I may not know much, but I know one thing. Those people up there don't represent me. And he said, and I quote, Warren, there are better ways to get a demographically representative sample than the direct ballot. And I said, Barry, tell it to the people in Iraq. So that's what we're dealing with at AICPA. He was also voted one of the worst CEOs in America by Businessweek. Check the January 13, 2003 issue. He's just truly a remarkable and slimy human being. But anyway, I'm not saying anything here I haven't said publicly and nobody has ever challenged me on it.

9:03And besides, besides, there's no slander here, it's the truth. Section 108 of SOCS, let me catch up here a bit, inserts a section in the Securities Act of 1933 that allows the SEC may recognize as generally accepted for purposes of the securities laws any accounting principles established by a standard setting body that is organized as a private entity, has for administrative and operational purposes a board of trustees serving in the public interest, key phrase, is funded as provided elsewhere in Sarbanes-Oxley has adopted procedures to ensure prompt consideration by majority vote of its members and so on.

10:04This is not the part of Sarbanes-Oxley that has gotten a lot of attention. Obviously the public company accounting oversight board got a lot and in fact was actually challenged in a lawsuit, the Free Enterprise Fund versus Peek-a-Boo, that was adjudicated June 28, 2010, by the Supreme Court. The court ruled that while the law itself was constitutional, the fact that the board exerted regulatory power, yet its members were not appointed directly by the president, International reporting centers are kind of like the United Nations, you know, the woo-woo idea of, you know, can't we all get along, in the words of Rodney King, sound terrific until you contend with human nature.

11:14And IFRS itself is a siren song for uniform financial reporting worldwide. It ignores culture, it ignores norms, it ignores a whole lot of things. If you look on the website of the International Counties Standards Board, you'll see that they trumpet the fact that approximately 135 countries have adopted IFRS. What they don't tell you is that I think all but one of those countries has adopted Not only the parts of IFRS that they like, okay? Only the parts that they like. And in fact, I got an email just as I was riding over here, I stopped at a parking lot, red light, and I got this note from a good friend of mine in Virginia.

12:13It comes from a blog called the Accounting Onion post late last night. The guy behind the blog, Tom Selling, who lives out in Arizona and is my kind of accounting bomb thrower, said that he had heard from a source he could not identify, but he had heard from a really reliable source that India yesterday pulled out of IFRS because its government found that it was going to have to have 65 separate carve-outs if it complied with IFRS and it decided that's just too much hassle, we don't need IFRS and so they pulled out according to this post. Tom Hasen to say he hasn't seen anything in print on it so he's kind of holding his breath and is asking for people who might know anything to contact India has about 17% of the world's population. That would be a significant defeat for IFRS.

13:16We're getting IFRS not so much because of the siren song of uniform financial reporting worldwide, that's what's told to people like you and me, but because the big four public accounting firms see billions and billions of dollars of fee income here. That's why That's why they love Sarbanes-Oxley, billions and billions there. But apparently billions of dollars of fee income are not enough for the big four who would sell their mother and their firstborn child if it would make them a buck. They also have pushed an idea called Little Gap. Generally accepted accounting principles in the United States currently are promulgated by the Financial Accounting Standards Board.

14:05FASB for years has debated whether to have a version of accounting principles that are appropriate for smaller non-public companies. The Big Four has convinced AICPA to go along with this small version of reporting principles. And of course and so doing smaller local CPA firms, now their eyes light up with dollar signs. And so the big four have certainly co-opted some political opposition there. Most of all, however, what they have accomplished or are trying to accomplish is to have two sets of standards, which will, and very different sets of standards, incidentally, that will, that every CPA will be required to learn, that will impose insane levels of complexity on what is already a needlessly complex undertaking. I'm fond of describing the Financial County Standards Board as a textbook case of what happens when you have 65 really, really, really Smart People with Too Much Time on Their Hands.

15:19In any event, it's hard to say what's going to happen next where Ifers is concerned. I think it is safe to say that the 87 new Republican representatives in the House of Representatives probably think they have bigger fish to fry right now. And I would certainly agree with that. I also have very little doubt that once this issue gets on their radar screen, as I'm confident it will, unless the budget stuff just drags out and drags out and drags out until Mr. Obama leaves office January 20th, 2013, that it is really going to hit the fan when the The idea of U.S. accounting standards being under the thumb of an international board in London on which the U.S. has exactly six representatives on a board of 15, which board will be going to 16 next year.

16:25At the end of the day, it is about sovereignty. But, let me point out one key difference, since my time is running down here, between IFRS and GAP. And it is about what is called investment property. Think real estate. Think real estate. Under generally accepted accounting principles in the United States, if you have to take a write down on an asset, you can't write it back up. Under IFRS, you can not only write it back up, but you can write it up even if you never took a write down. Of course, the difficulty is in determining how much is a piece of real estate worth. And we Austrians know about the subjectivity of value.

17:13So there is a gigantic cesspool there, awaiting the temptations of human nature, nature, because any changes, especially appreciation in investment property, would be recorded as a positive item on a company's P&L, its income statement. What this is a prescription for is greater volatility in financial reporting, which means greater volatility in market prices, which means lower market prices. All things being equal, volatility is a proxy for risk. Higher risk means lower prices. We see it every day in bond markets. Interest rates go up, bond prices go down, and vice versa.

18:07I'm expecting for SOX to be relitigated over this provision, section 108. And I think the key point will be where will that chardonnay-coiffing Georgetown salon frequenting Justice Tony Kennedy be on this one? We saw what happened to Sandra Day O'Connor when she hung out in those salons. I can argue pretty strongly that a prospective Supreme Court nominee's propensity for social So lionhood should probably be a disqualifier for nomination to the court, but that's a very different conversation. I enjoyed being with you all this morning.