WEBVTT NOTE International Financial Reporting Standards: It’s About Sovereignty 1 00:00:00.000 --> 00:00:08.600 I want to talk to you briefly this morning about international financial reporting standards. 2 00:00:08.600 --> 00:00:12.760 I know it's hard for people to imagine that anything about accounting could possibly be 3 00:00:12.760 --> 00:00:25.600 of interest to the sober public, but I think it is, and that's why I'm here. 4 00:00:25.600 --> 00:00:36.880 to paraphrase James Carville, whom I'm not fond of quoting, but he is a funny man, looks 5 00:00:36.880 --> 00:00:48.160 notwithstanding. But it's all about our sovereignty. Stupid. They didn't put stupid in the program 6 00:00:48.160 --> 00:00:54.960 because we are a genteel, civilized bunch. A little bit of overview. I'm going to talk 7 00:00:54.960 --> 00:01:01.760 Talk about American exceptionalism, a myth in the White House, incidentally, a little 8 00:01:01.760 --> 00:01:08.640 bit about SOX, also known as the Sarbanes-Oxley Act of 2002, a little bit about the International 9 00:01:08.640 --> 00:01:15.420 Accounting Standards Board in London, why IFRS, IFRS and GAP, Generally Accepted Accounting 10 00:01:15.420 --> 00:01:20.700 Principles, differences, and then I'll wrap up. 11 00:01:20.700 --> 00:01:32.140 Non-American exceptionalism. This wasn't much of an issue until President Obama took office. 12 00:01:32.140 --> 00:01:40.440 He has, I think, a pretty strong track record in demonstrating his reluctance to affirm 13 00:01:40.440 --> 00:01:46.020 America, at least when he's overseas. And he certainly doesn't want to offend anybody 14 00:01:46.020 --> 00:01:50.100 Except Americans. 15 00:01:50.100 --> 00:01:57.020 On April 4th, 2009, in response to a reporter's press conference, or a reporter's question 16 00:01:57.020 --> 00:02:03.100 at a news conference in Strasbourg, France, he was asked whether he believed in it. 17 00:02:03.100 --> 00:02:11.180 And he said this, quote, I believe in American exceptionalism, then he snatched his defeat 18 00:02:11.180 --> 00:02:12.640 from the jaws of victory. 19 00:02:12.640 --> 00:02:17.880 Just as I suspect that the Brits believe in British exceptionalism and the Greeks believe 20 00:02:17.880 --> 00:02:22.080 in Greek exceptionalism. 21 00:02:22.080 --> 00:02:30.200 Moral equivalency, that's just President Strong's suit. 22 00:02:30.200 --> 00:02:31.520 Is the U.S. really different? 23 00:02:31.520 --> 00:02:39.160 I think it's fair to say that even if one is not 100% red, white and blue, to borrow 24 00:02:39.160 --> 00:02:47.640 H.L. Mencken's phrase that at least if you compare the evidence in terms of constitutions, 25 00:02:47.640 --> 00:02:55.860 we are. So far as I'm aware, ours is the only constitution that works bottom up. The people 26 00:02:55.860 --> 00:03:05.500 grant powers to the government, not the other way around. So certainly we are different, 27 00:03:05.500 --> 00:03:12.820 I think in that respect. Unfortunately, we had a lapse of sorts, at least a lot of people 28 00:03:12.820 --> 00:03:20.620 think we did, with the enactment of the Sarbanes-Oxley Act of 2002. This occurred in the summer 29 00:03:20.620 --> 00:03:29.780 of 2002, and it was actually going down to defeat until the guys at WorldCom in the neighboring 30 00:03:29.780 --> 00:03:35.660 and State, managed to turn themselves upside down. 31 00:03:35.660 --> 00:03:41.360 SOX had been introduced primarily as a reaction to Enron, which happened in late in the fall 32 00:03:41.360 --> 00:03:50.360 of 2001, and was going nowhere fast until World Comp collapsed and all of a sudden the 33 00:03:50.360 --> 00:03:59.280 vote in the House I think was 429 to 4 and in the Senate it was 99 to 1. 34 00:03:59.280 --> 00:04:05.320 And so we now have socks, which I'm going to probably offend some people here by saying 35 00:04:05.320 --> 00:04:14.320 this, but I truly believe that when individuals and groups of people don't self-regulate 36 00:04:14.320 --> 00:04:22.280 responsibly and the failure to self-regulate has significant and adverse economic consequences 37 00:04:22.280 --> 00:04:30.600 for Large Numbers of Americans, that we get the heavy, ignorant, expensive and overreacting 38 00:04:30.600 --> 00:04:35.440 hand of government, but we deserve it. 39 00:04:35.440 --> 00:04:43.760 And in particular, we got it in 2002 because my profession, public accounting, had been 40 00:04:43.760 --> 00:04:48.220 slumbering at switch for a number of years. 41 00:04:48.220 --> 00:04:56.740 And I am as opposed to federal regulation as a general proposition, I think, as anybody 42 00:04:56.740 --> 00:04:59.440 in this room. 43 00:04:59.440 --> 00:05:06.360 But the person on the street has no response other than a political response. 44 00:05:06.360 --> 00:05:09.680 That's the only defense they have. 45 00:05:09.680 --> 00:05:12.600 And so that's why we got socks. 46 00:05:12.600 --> 00:05:14.940 I'm not a fan of socks. 47 00:05:14.940 --> 00:05:26.900 It happened because my profession epitomized denial, which is not just a river in Egypt. 48 00:05:26.900 --> 00:05:32.760 One of the provisions in SOX was the creation of the Public Company Accounting Oversight 49 00:05:32.760 --> 00:05:39.440 Board, aka PICABOOT, that's what it's called. 50 00:05:39.440 --> 00:05:45.560 The Public Company Accounting Oversight Board was formed because the then arbiter and creator 51 00:05:45.560 --> 00:05:49.600 of generally accepted auditing standards in the United States, the American Institute 52 00:05:49.600 --> 00:05:55.000 of Certified Public Accountants, is a wholly owned subsidiary of the big four public accounting 53 00:05:55.000 --> 00:05:56.720 firms. 54 00:05:56.720 --> 00:06:10.080 on Lock, Stock and Barrel, and it until then was a promulgated audit standards. 55 00:06:10.080 --> 00:06:19.920 One of the first actions of the new chairman of the, of Peek-a-Boo, the former head of 56 00:06:19.920 --> 00:06:32.920 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. 57 00:06:32.920 --> 00:06:46.920 Again, 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. 58 00:06:46.920 --> 00:06:51.560 and I can prove what I say and anybody wants to challenge me on it. 59 00:06:51.560 --> 00:06:56.360 I'll give you one small little snippet. I was having a 60 00:06:56.360 --> 00:07:02.160 telephone conversation with the CEO of AICPA in December of 2005. 61 00:07:02.160 --> 00:07:04.760 His name is Barry Melanson, 62 00:07:04.760 --> 00:07:10.440 and if that sounds as if he came out of the bayous of Lausiana, he did. 63 00:07:10.440 --> 00:07:15.320 And Mr. Melanson is a remarkable creation. He makes over a 64 00:07:15.320 --> 00:07:21.240 $200 million a year, presiding over a monopoly that manages to lose money every year. 65 00:07:21.240 --> 00:07:25.680 For an accounting organization, that should be embarrassing. 66 00:07:25.680 --> 00:07:29.960 But they are nothing if not shameless. 67 00:07:29.960 --> 00:07:34.680 I noted in my conversation with Mr. Malansohn that in the then 14 years since I had been 68 00:07:34.680 --> 00:07:41.040 a certified public accountant, I had never received a ballot to vote for or against anybody 69 00:07:41.040 --> 00:07:49.760 on the AICPA's Council, 260 people, or on its Board of Trustees, nine others. Furthermore, 70 00:07:49.760 --> 00:07:55.800 I told him I had taught CPAs in 31 states and asked that same question in every class, 71 00:07:55.800 --> 00:08:00.800 has anybody here ever gotten one of those ballots? Nobody ever had, or at least if they 72 00:08:00.800 --> 00:08:06.520 did they wouldn't admit to it. So I said, Barry, you all have a level of transparency 73 00:08:06.520 --> 00:08:15.600 that makes the College of Cardinals look downright public. 74 00:08:15.600 --> 00:08:18.920 I said, and I may not know much, but I know one thing. 75 00:08:18.920 --> 00:08:22.880 Those people up there don't represent me. 76 00:08:22.880 --> 00:08:30.940 And he said, and I quote, Warren, there are better ways to get a demographically representative 77 00:08:30.940 --> 00:08:35.640 sample than the direct ballot. 78 00:08:35.640 --> 00:08:42.300 And I said, Barry, tell it to the people in Iraq. 79 00:08:42.300 --> 00:08:45.880 So that's what we're dealing with at AICPA. 80 00:08:45.880 --> 00:08:50.580 He was also voted one of the worst CEOs in America by Businessweek. 81 00:08:50.580 --> 00:08:55.620 Check the January 13, 2003 issue. 82 00:08:55.620 --> 00:08:58.680 He's just truly a remarkable and slimy human being. 83 00:08:58.680 --> 00:09:02.640 But anyway, I'm not saying anything here I haven't said publicly and nobody has ever 84 00:09:02.640 --> 00:09:03.640 challenged me on it. 85 00:09:03.640 --> 00:09:12.680 And besides, besides, there's no slander here, it's the truth. 86 00:09:12.680 --> 00:09:24.120 Section 108 of SOCS, let me catch up here a bit, inserts a section in the Securities 87 00:09:24.120 --> 00:09:34.920 Act of 1933 that allows the SEC may recognize as generally accepted for purposes of the 88 00:09:34.920 --> 00:09:40.360 securities laws any accounting principles established by a standard setting body that 89 00:09:40.360 --> 00:09:45.320 is organized as a private entity, has for administrative and operational purposes a 90 00:09:45.320 --> 00:09:52.840 board of trustees serving in the public interest, key phrase, is funded as provided elsewhere 91 00:09:52.840 --> 00:09:58.960 in Sarbanes-Oxley has adopted procedures to ensure prompt consideration by majority vote 92 00:09:58.960 --> 00:10:04.560 of its members and so on. 93 00:10:04.560 --> 00:10:11.000 This is not the part of Sarbanes-Oxley that has gotten a lot of attention. 94 00:10:11.000 --> 00:10:16.520 Obviously the public company accounting oversight board got a lot and in fact was actually challenged 95 00:10:16.520 --> 00:10:23.920 in a lawsuit, the Free Enterprise Fund versus Peek-a-Boo, that was adjudicated June 28, 96 00:10:23.920 --> 00:10:29.620 2010, by the Supreme Court. 97 00:10:29.620 --> 00:10:37.000 The court ruled that while the law itself was constitutional, the fact that the board 98 00:10:37.000 --> 00:10:44.440 exerted regulatory power, yet its members were not appointed directly by the president, 99 00:10:44.440 --> 00:10:51.440 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. 100 00:11:14.440 --> 00:11:25.320 And IFRS itself is a siren song for uniform financial reporting worldwide. 101 00:11:25.320 --> 00:11:29.400 It ignores culture, it ignores norms, it ignores a whole lot of things. 102 00:11:29.400 --> 00:11:34.080 If you look on the website of the International Counties Standards Board, you'll see that 103 00:11:34.080 --> 00:11:39.040 they trumpet the fact that approximately 135 countries have adopted IFRS. 104 00:11:39.040 --> 00:11:44.160 What they don't tell you is that I think all but one of those countries has adopted 105 00:11:44.160 --> 00:11:48.740 Not only the parts of IFRS that they like, okay? 106 00:11:48.740 --> 00:11:50.760 Only the parts that they like. 107 00:11:50.760 --> 00:12:03.760 And in fact, I got an email just as I was riding over here, I stopped at a parking lot, 108 00:12:03.760 --> 00:12:13.160 red light, and I got this note from a good friend of mine in Virginia. 109 00:12:13.160 --> 00:12:21.280 It comes from a blog called the Accounting Onion post late last night. 110 00:12:21.280 --> 00:12:26.200 The guy behind the blog, Tom Selling, who lives out in Arizona and is my kind of accounting 111 00:12:26.200 --> 00:12:33.240 bomb thrower, said that he had heard from a source he could not identify, but he had 112 00:12:33.240 --> 00:12:41.280 heard from a really reliable source that India yesterday pulled out of IFRS because its government 113 00:12:41.280 --> 00:12:46.600 found that it was going to have to have 65 separate carve-outs if it complied with IFRS 114 00:12:46.600 --> 00:12:52.160 and it decided that's just too much hassle, we don't need IFRS and so they pulled out 115 00:12:52.160 --> 00:13:01.640 according to this post. Tom Hasen to say he hasn't seen anything in print on it so he's 116 00:13:01.640 --> 00:13:07.600 kind of holding his breath and is asking for people who might know anything to contact 117 00:13:07.600 --> 00:13:16.640 India has about 17% of the world's population. That would be a significant defeat for IFRS. 118 00:13:16.640 --> 00:13:23.760 We're getting IFRS not so much because of the siren song of uniform financial reporting 119 00:13:23.760 --> 00:13:30.400 worldwide, that's what's told to people like you and me, but because the big four public 120 00:13:30.400 --> 00:13:35.760 accounting firms see billions and billions of dollars of fee income here. That's why 121 00:13:35.760 --> 00:13:40.920 That's why they love Sarbanes-Oxley, billions and billions there. 122 00:13:40.920 --> 00:13:45.720 But apparently billions of dollars of fee income are not enough for the big four who 123 00:13:45.720 --> 00:13:52.080 would sell their mother and their firstborn child if it would make them a buck. 124 00:13:52.080 --> 00:13:57.160 They also have pushed an idea called Little Gap. 125 00:13:57.160 --> 00:14:01.000 Generally accepted accounting principles in the United States currently are promulgated 126 00:14:01.000 --> 00:14:05.000 by the Financial Accounting Standards Board. 127 00:14:05.000 --> 00:14:09.000 FASB for years has debated whether to 128 00:14:09.000 --> 00:14:13.000 have a version of accounting principles that are appropriate for smaller 129 00:14:13.000 --> 00:14:17.000 non-public companies. 130 00:14:17.000 --> 00:14:21.000 The Big Four has 131 00:14:21.000 --> 00:14:25.000 convinced AICPA to go along with this 132 00:14:25.000 --> 00:14:29.000 small version of reporting principles. And of course 133 00:14:29.000 --> 00:14:35.200 and so doing smaller local CPA firms, now their eyes light up with dollar signs. 134 00:14:35.200 --> 00:14:40.600 And so the big four have certainly co-opted some political opposition there. 135 00:14:40.600 --> 00:14:45.040 Most of all, however, what they have accomplished or are trying to accomplish is to have two 136 00:14:45.040 --> 00:14:53.920 sets of standards, which will, and very different sets of standards, incidentally, that will, 137 00:14:53.920 --> 00:15:01.160 that every CPA will be required to learn, that will impose insane levels of complexity 138 00:15:01.160 --> 00:15:08.000 on what is already a needlessly complex undertaking. I'm fond of describing the Financial County 139 00:15:08.000 --> 00:15:13.840 Standards Board as a textbook case of what happens when you have 65 really, really, really 140 00:15:13.840 --> 00:15:19.340 Smart People with Too Much Time on Their Hands. 141 00:15:19.340 --> 00:15:30.360 In any event, it's hard to say what's going to happen next where Ifers is concerned. 142 00:15:30.360 --> 00:15:36.480 I think it is safe to say that the 87 new Republican representatives in the House of 143 00:15:36.480 --> 00:15:41.160 Representatives probably think they have bigger fish to fry right now. 144 00:15:41.160 --> 00:15:43.040 And I would certainly agree with that. 145 00:15:43.040 --> 00:15:49.760 I also have very little doubt that once this issue gets on their radar screen, as I'm confident 146 00:15:49.760 --> 00:15:55.720 it will, unless the budget stuff just drags out and drags out and drags out until Mr. 147 00:15:55.720 --> 00:16:06.960 Obama leaves office January 20th, 2013, that it is really going to hit the fan when the 148 00:16:06.960 --> 00:16:25.960 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. 149 00:16:25.960 --> 00:16:30.960 At the end of the day, it is about sovereignty. 150 00:16:30.960 --> 00:16:37.960 But, let me point out one key difference, since my time is running down here, between IFRS and GAP. 151 00:16:37.960 --> 00:16:44.960 And it is about what is called investment property. Think real estate. Think real estate. 152 00:16:44.960 --> 00:16:52.960 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. 153 00:16:52.960 --> 00:17:01.960 Under IFRS, you can not only write it back up, but you can write it up even if you never took a write down. 154 00:17:01.960 --> 00:17:09.960 Of course, the difficulty is in determining how much is a piece of real estate worth. 155 00:17:09.960 --> 00:17:13.960 And we Austrians know about the subjectivity of value. 156 00:17:13.960 --> 00:17:20.960 So there is a gigantic cesspool there, awaiting the temptations of human nature, 157 00:17:20.960 --> 00:17:26.120 nature, because any changes, especially appreciation in investment property, would be recorded as 158 00:17:26.120 --> 00:17:32.040 a positive item on a company's P&L, its income statement. 159 00:17:32.040 --> 00:17:38.320 What this is a prescription for is greater volatility in financial reporting, which means 160 00:17:38.320 --> 00:17:44.680 greater volatility in market prices, which means lower market prices. 161 00:17:44.680 --> 00:17:51.160 All things being equal, volatility is a proxy for risk. 162 00:17:51.160 --> 00:17:54.440 Higher risk means lower prices. 163 00:17:54.440 --> 00:17:56.480 We see it every day in bond markets. 164 00:17:56.480 --> 00:18:07.920 Interest rates go up, bond prices go down, and vice versa. 165 00:18:07.920 --> 00:18:14.480 I'm expecting for SOX to be relitigated over this provision, section 108. 166 00:18:14.480 --> 00:18:21.960 And I think the key point will be where will that chardonnay-coiffing Georgetown salon 167 00:18:21.960 --> 00:18:27.800 frequenting Justice Tony Kennedy be on this one? 168 00:18:27.800 --> 00:18:32.760 We saw what happened to Sandra Day O'Connor when she hung out in those salons. 169 00:18:32.760 --> 00:18:43.320 I can argue pretty strongly that a prospective Supreme Court nominee's propensity for social 170 00:18:43.320 --> 00:18:50.320 So lionhood should probably be a disqualifier for nomination to the court, but that's a very different conversation. 171 00:18:50.320 --> 00:18:53.320 I enjoyed being with you all this morning.