IFRS

GLOBAL IMPLICATIONS OF ACCOUNTING

10106941

Extended Summer 2014

Accounting 521 - Advanced Accounting – Section 01W - CL

In early 2010, a mandate was passed down from the SEC to create a work plan that would help detail the issues that may arise in attempting to implement IFRS in the United States. In 2011, a new direction was taken when the SEC decided to transition under a plan known as “condorsement.” This new plan details a long term approach to transitioning IFRS into our standing GAAP and could potentially help minimize the potential effects of changing our accounting practices. While four years have passed since the original mandate and three years since the term “condorsement” was coined, IFRS still has not been implemented in the United States.

During the development of the “work plan” by the SEC, numerous challenges that could face companies, both private and public, in the United States were uncovered. While these challenges vary in their degree of importance, every possible aspect should be examined to ensure that the (potential) transition to IFRS is as seamless as possible. In “A Tough Road Ahead: The SEC's Work Plan for Assessing IFRS Adoption by U.S. Public Companies Insights” many challenges are described that would affect a large number of U.S. companies. (Scanlon & Patch, 2010) These challenges are as follows:

· Vast differences between GAAP and IFRS on major accounting topics are causing US companies to oppose adoption of certain topics;

· IFRS may lead to more “opportunistic accounting” due to the need for more professional judgment and flexibility to exercise the judgment;

· Greater flexibility from IFRS may make financial statements more difficult to audit;

· IFRS may impact the SEC’s enforcement program;

· May cause companies to have to “dual report” due to differences between tax laws and federal securities laws;

· Privately owned companies may choose not to use IFRS causing issues when said companies attempt to “go public;” and

· There may be an issue of “human capital readiness” for companies who are forced into the adoption, including maintaining corporate governance guidelines.

Further research indicates that not much has been done in the past few years to move past these problems. The “Final Staff Report” of the work plan released in July of 2012 by the SEC goes on to detail that these challenges are still preventing the implementation of IFRS.

While the degree of severity differs for each of the potential challenges listed above, the most pressing challenges we are facing are the ones that could lead to more fraud or inaccurate reporting within our financial system. The possibility of opportunistic accounting and flexibility of interpretation of the “principles,” instead of set rules, could very well open the door for extensive fraudulent activity. US GAAP takes a rules-based approach, which provides a more consistent application of the guidelines and, in theory, lowers the risk of fraudulent activity. In contrast, IFRS is a more principles-based approach, which allows a user to utilize individual judgment on how to report and account for a wide range of financial activities. (Scanlon & Patch, 2010) This approach results in easier manipulation and acceptable variations of accounting for transactions.

After the financial scandals of the early 2000’s (Enron, WorldCom, and Adelphia), the US government saw the need for immediate reform of accounting practices. This reform brought about swift passage of the Sarbanes-Oxley Act (SOX) which provides provisions for corporate governance and financial accountability by auditors and management among other regulations. These scandals demonstrate how much harm can be done with loose application of accounting standards and when flexibility is allowed in interpretation. (Tysiac, 2012) For example, “20,000 former employees and retirees in Enron's pension and 401(k) retirement plans that held Enron stock suffered $1 billion in losses.” (Iwata, 2006) This figure does not include the financials losses suffered by outside stakeholders, loss of employment of Arthur Anderson and Enron employees, loss of trust in the financial system, or any of the other social impacts.

If we allow more flexibility for financial officers and companies to interpret and apply guidelines as needed, or as they feel is applicable, we are opening our financial sector for future scandals. This possibility coupled with concerns about corporate governance and the availability of knowledgeable accounting firms, especially smaller ones, creates a tedious situation. (Scanlon & Patch, 2010) While larger accounting firms are thought to have “significant IFRS expertise,” many smaller publically traded companies are serviced by smaller accounting and auditing firms, which poses the problem of oversight and accountability of accurate reporting by these companies. These smaller companies would most likely not have comparable effects to those of the Enron scandal; however, investors, employees, and communities could be significantly harmed if such a scandal took place. The lack of IFRS expertise available will also extend to audit committees and accounting staff within these smaller companies, making compliance with SOX difficult to impossible if the interpretation of “expertise” is expanded to include IFRS and not only GAAP. (Scanlon & Patch, 2010) Another issue is raised if you consider the cost of training and educating our current workforce in IFRS based accounting.

The lack of qualified auditors, accounting staff and potential audit committee members also presents the possibility of inaccurate financial reporting or application of the guidelines, not necessarily with fraudulent intent. Professionals who have completed their education may not have sufficient knowledge to interpret the principles in an accurate and consistent manner. The varying application of principles in different companies in a common industry (or across many industries) can lead to inaccurate and incomparable financial statements, making them hard to utilize properly for external users. If external users are not able compare financial standing with confidence, we risk undermining our entire financial system.

The United States has not made any significant progress in implementing IFRS, other than exploration of potential courses of action and problems. It is important to note that while a convergence is still possible, there are many critics who feel that it will not happen. One such critic is Chris Cox, former chairman of the SEC, who stated in June 2014, “Today, I come to bury IFRS, not to praise them. The fact is, far too much time has gone by with no meaningful progress. I think we have to fairly conclude that the moment has passed. Full-scale adoption of IFRS in the United States might once have been possible, but it is no longer.” (Whitehouse, 2014) Before the US can transition to, or convergence with, IFRS can take place; we must first tackle the issues that exist. Greater flexibility in the application of principles, instead of set rules, can lead to extensive fraudulent activity and/or inaccurate and incomparable financial statements. This flexibility paired with the lack of an educated accounting and auditing base is a significant hurdle to transition to some form of IFRS. Until these issues can be addressed and resolved, either by the FASB or the IASB, implementing IFRS does not seem to be wise decision. The potential harm to investors, employees, and the American people in the event of premature convergence is immeasurable.

Bibliography Iwata, E. (2006, January 29). The Enron Trials. Retrieved June 13, 2014, from USA TODAY: http://usatoday30.usatoday.com/money/industries/energy/2006-01-29-enron-legacy-usat_x.htm?csp=38 Scanlon, M., & Patch, D. P. (2010). A Tough Road Ahead: The SEC's Work Plan for Assessing IFRS Adoption by U.S. Public Companies. INSIGHTS, 11-15. Tysiac, K. (2012, September). Still in flux: Future of IFRS in U.S. remains unclear after SEC report. Retrieved June 13, 2014, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2012/Sep/20126059.htm Whitehouse, T. (2014, June 9). Cox Dissects GAAP-IFRS Convergence Meltdown. Retrieved June 20, 2014, from Compliance Week: http://www.complianceweek.com/cox-dissects-gaap-ifrs-convergence-meltdown/article/354650/