Let’s reimagine accounting! By lunchtime!

Notes on a recent speech by SEC Commissioner Kara M. Stein:

Here’s a lengthy extract:

  • “…  As both practitioners and scholars of securities law, you know that accounting is the foundation for much of what we do.  Everything from our financial reporting regime to oversight of financial firms’ liquidity and capital depends upon reliable, consistent, comparable, and understandable accounting.
  • Over the last decade or so, the accounting community has been engaged in a robust conversation about whether the United States should abandon United States Generally Accepted Accounting Principles (U.S. GAAP) and move to the International Financial Reporting Standards (IFRS).  This is an extremely complicated and controversial topic. I’d like to highlight some of my current thoughts.
  • First, it is difficult to deny the appeal of a single set of globally-recognized, high-quality accounting standards.  It’s a wonderful vision.  But, beyond the simplistic allure of a universal set of comprehensive standards lies a myriad of shortcomings.  The question is, what can we achieve and how would we get there?
  • I am not convinced of a need to abandon U.S. GAAP in favor of IFRS.  That is not to say that U.S. GAAP is perfect.  Nor is IFRS perfect.  I’m also not convinced that providing financial statements in two different sets of accounting standards would be beneficial for either investors or issuers.  With complexity in both businesses and products on the rise, it seems that presenting information in a dueling set of financial reporting standards does not really aid in understanding.
  • To be frank, this debate between dueling standards needs to move on.  Neither regime worked ideally in the financial crisis, and neither may serve investors well in today’s post-financial crisis, technologically disrupted, and data-driven world. In practice and in reality, accounting standards may vary between jurisdictions due to legal and cultural factors, as well as differences in perspective.  Remember, IFRS is not consistently implemented around the world.
  • Rather than debating the winner of the battle between U.S. GAAP versus IFRS, we should be thinking anew about what kind of accounting regime we want going forward.  With technology increasingly transforming our world and the financial crisis still fresh in our minds, now may be a good time to reimagine our approach globally.
  • In other words, while convergence makes sense, the question for me is, what are we converging to.  Is it a regime that offers clear, predictable, and comparable accounting that facilitates electronic analysis?  Or is it so flexible that investors cannot use it to compare companies, and companies themselves do not have the certainty they need to withstand scrutiny?
  • Currently, the SEC’s Division of Corporation Finance is spearheading a project to examine the effectiveness of corporate disclosures.   While the initiative was initially named “The Disclosure Overload Project,” its mission has been broadened to also address whether we need to enhance, improve, and in some cases add disclosure.
  • I’d like to suggest that we might be able to use this initiative to address accounting and financial reporting as well. Much work has already been done to converge U.S. GAAP and IFRS, and we should not recreate that wheel.  Rather, I’m suggesting that, post-financial crisis, we think about the next step – where should accounting be in the 21st century, a century in which technology and globalization are transforming the way the entire world does business?  In a highly interconnected, digital world, can we reimagine accounting so that we minimize differences and maximize global investment and access to capital?  While this may be an aspirational goal, if we avoid an outcome-dependent approach, I believe we can begin to move beyond the constraints of the current debate.  We should be looking, on a globally coordinated basis, at the real needs of investors and issuers in the 21st century and re-imagining our accounting regimes to better serve them.  We can adopt the best of what we have here in U.S. GAAP, in IFRS, and the best of the new thinking out there.”

If nothing else, this suggests Commissioner Stein isn’t likely to be a great supporter of the recent notions of allowing US registrants to provide supplementary IFRS-based information (as I wrote here, I didn’t see much point to them either) – still, if such an idea ever makes its way to the rule-making stage, she’s just one of five votes. She doesn’t seem too enthusiastic about the “simplistic allure” of IFRS in general (presumably her shot at “flexibility” is an expression of the tired cliché about excessively loose principles instead of rules). Beyond that though, this sounds like one of those would-be visionary speeches in which the actual nature of the “vision” is almost impossible to discern.

To the extent one can make sense of them, her remarks seem to mix up the substantive question of accounting standards with broader issues of new technologies and so forth. It’s certainly true that the structure of periodic financial reporting – heavily prescribed, linear communications issued on a barely changing cycle – has been almost magically unaffected by revolutions in technology (although of course, these have greatly affected what might be available on corporate websites and elsewhere). But for as long as we accept that some form of standardized financial reporting will persist (whatever its frequency or delivery platform), there’s no way to leap over the knotty question of how to actually prepare those reports. Stein’s rather arrogant waffle about “looking, on a globally coordinated basis, at the real needs of investors and issuers in the 21st century and re-imagining our accounting regimes to better serve them” implies that current financial reporting is mired in insular sludge, without providing even the slightest practical hint of what this “reimagination” might consist of. Likewise, the evocation of some new paradigm based on “the best of what we have here in U.S. GAAP, in IFRS, and the best of the new thinking out there” (a new paradigm presumably capable of surmounting the legal, cultural and other factors referred to) sounds merely like a politican’s stump speech (I’ll bring in a tax return you can fit on a postcard!), untethered to any workable policy.

“Can we reimagine accounting,” she asks, “so that we minimize differences and maximize global investment and access to capital?” Well, can we? Probably not, as long as those with some power over the matter have such a limited understanding of what the question even means…

The opinions expressed are solely those of the author

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