The SEC's Mary Schapiro on the Myths of GAAP/IFRS Convergence: The Lady Doth Protest Too Much

            Local news item: “Last night the high school drama club played Shakespeare. Shakespeare lost.”

 Last week, SEC Chairman Mary Schapiro played the 2010 annual conference of the chartered financial analysts. Her speech is here.

Credibility lost.

Her ambitious list of messages included a major tilt at four “myths” about the SEC’s lukewarm attitude toward GAAP/IFRS convergence and globally merged accounting standards.

In protesting that “you can’t always believe what you hear,” Schapiro’s pushback suffers the inductive fallacy that opposition to your critics is not the same as proof of your own position.

Whether or not the agency’s own “commitment to international standards has flagged,” Schapiro either could not face – or is still denying – the implacable international antagonisms to convergence that her agency lacks the capacity to resolve.

 There is, indeed, no more eloquent concession of the “convergence gap” than Schapiro’s own admission that “US GAAP and IFRS are currently not converged in a number of key areas,” including “the accounting for financial assets (the very types of securities at the center of the financial crisis), revenue recognition, consolidation principles, and leases.”

 Any other problems, Madame Chairman? These on her list are so comprehensively grave that they will keep the international standards standoff alive until the end of time. 

 It’s not necessary to believe Schapiro to be as malign as Shakespeare’s Queen Gertrude, or to fault the bona fides of her commitment to the “fundamental principle” of “comprehensive and neutral accounting standards.” Because on the prospect of core-level GAPP/IFRS convergence, she is committed as were the pre-Copernican astronomers to the “fundamental principle” of an earth-centric solar system.

 It’s just that while good faith is fine, eventually it must yield to reality.

 In assessing the feckless attitude of America’s chief securities regulator, it helps to keep at hand a glossary of trans-Atlantic euphemism. That is:

•  ·      When a Frenchman says, “We need to be pragmatic,” what he means is, “Agree to do it our way – or there’s no deal.”
• ·      When an Italian says, “You don’t understand how things are done here,” the unspoken message is, “You have no chance – cut your losses and head for home.”
• ·      And when the typical balls-out American attitude gives way to Schapiro’s concession to “understand the importance of process to a successful conclusion (her emphasis, not mine), it means “We know we’re screwed for now, so we’ll kick the can down the road and try to sell it as success.”

The targets for Schapiro’s spin were not clear, as she advanced the assertion that discussion on accounting principles “is often limited to specialized journals and a handful of websites for the kind of people that can tell a repo 105 from a 401(k).”

As if her pimping would be seductive. Weighing in from his base in Minnesota, academic blogger Dave Albrecht (here) made it clear that he did not just fall off the turnip truck, with a trenchant Twitter message that the intelligence level of Schapiro's constituents other than the mainstream brown-noses is entitled to more respect: “Ridiculous comments, sad that some might believe her.”

Also counting against Schapiro’s credibility is that, despite building her speech on the three obvious pegs of the SEC’s mission, initiatives and priorities, she gave not a single reference to a most basic issue – the continued viability of the global assurance function.  

Anyone still thinking that the life-threatened auditors have “had a good crisis” over the last three years (here) has not spent recent time around the courthouses – the latest bullets added to the Big Four firms’ deadly game of Russian roulette being Ernst & Young’s inclusion in the Lehman Brothers litigations (here) and the two-billion dollar claim against PwC by the winding-up board of Iceland’s Glitnir Bank (here).

On the very day of Schapiro’s speech, with its bare one-phrase reference to her “overseeing … the PCAOB,” that agency published a list of some 400 non-US companies whose auditors could not be inspected because of obstacles under their home-countries’ laws (here).    

The PCAOB claims to be “currently prevented” from its mission – as if the issues of non-US confidentiality, data protection and privilege have not been readily knowable since before Sarbanes/Oxley birthed the agency birth back in 2002.

A good index of global-scale companies, whose audits are out of reach of the PCAOB, could be built from that list: a quick sample of household names from around Europe includes AB InBev, Nokia, Total, AXA, Daimler, Deutsch Bank, SAP, Ryanair, Luxottica, ArcelorMittal, ING, Ericcson, ABB, Credit Suisse, Royal Bank of Scotland, WPP, BP, AstraZeneca, Pearson and Unilever. 

To be really transparent, the internationally toothless PCAOB might publish its short list of those companies for whom audit inspection did not present obstacles (a sub-set whose total market capitalization would not make a flyspeck on the windshield of the world’s economic engine). Or, perhaps, the far longer list of those companies for whom auditor inspections have not even been attempted.

Schapiro claimed that “investors – from anywhere across the globe – come under the SEC’s umbrella of protection. ” 

She might more candidly confess to all investors, “bring your own foul weather gear – you’re on your own.”

 

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Comments

[David Albrecht]

Jim,

Nice post. I wish Schapiro, the politician, could admit defeat and shift efforts in more productive areas. Unfortunately, politicians (political appointees are still politicians) feel it unmanly (and unwomanly) to admit defeat.

Dave Albrecht