Suiting up for Armageddon: an Evening with St. David

Oct 23, 2008

At a dinner last night, the Northern California chapters of Financial Executives International had the privilege of hearing from Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB) and the person at the very top of my very short list of nominees for sainthood. Sir David spoke of the need for global adoption of the emerging International Financial Reporting Standards (IFRS).

For you happy people not eating, sleeping, and breathing accounting issues, this is not just an esoteric debate among beancounters. At stake are the clarity and meaningfulness of the financials issued by U.S. public companies. And that means a lot, because the value of their shares is directly related to the credibility of their financials.

But I digress. The principal civilized (I am using this term very, very loosely) nation that has not adopted IFRS is, guess who, the U.S. For decades, the reporting standards for U.S. public companies have been set by the Financial Accounting Standards Board (FASB) – our equivalent of the IASB – and published in a gigantic set of rules collectively called Generally Accepted Accounting Principles (or GAAP, and please, no snide comments about the acronym).

The difference between IFRS and GAAP is fundamental and not at all subtle: IFRS is “principles-based” and GAAP is “rules-based.” U.S. GAAP documentation runs to about 25,000 pages – compare that to, say, the U.S. Constitution or the Magna Carta. Nevertheless, GAAP statements failed to prevent the Enron fiasco and, even after the imposition of the Sarbanes-Oxley legislation, did nothing to warn us of the impending meltdown in the credit markets. [Future posts will elaborate more on these issues.] IFRS is, how can I put this delicately, less than 25,000 pages. Maybe 90% less.

We are in the middle of an apocalyptic battle between these two types of standards. Arrayed on the side of IFRS’s “principles-based” approach, whom just for brevity we shall objectively call The Forces for Clarity and Good, are: the Securities and Exchange Commission, the accounting profession, the FASB, most corporate financial officers, and most of the rest of the world. On the other side, those supporting GAAP’s “rules-based” approach – let’s just call them The Forces for Incomprehensibility and Evil (FIE) – include: uhhh, nobody.

Does this mean that IFRS will ultimately prevail in the U.S.? Don’t bet on it.

This war should be, and probably will be won by the good guys. However, inertia is a terrible thing. But anyone who speaks as eloquently as St. David about this issue, not to mention about Scotland’s best-known product other than haggis, deserves our support!

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