The Coming Calamity of IFRS

July 28th, 2009
Email This Post  Print This Post  

My Open Range column from the July 2009 issue of Alberta Venture magazine:

International Financial Reporting Standards will only corrupt Canada’s financial virtue

You might have noticed reports about the rude awakening experienced by some pharmaceutical companies that had outsourced blind trials to developing countries. To their shock, not every Third World subcontractor met the meticulous standards required to assess today’s intricate experimental medications. Some were sloppy, some were underequipped and some simply faked results. Seems that all the 21st century’s processes, protocols, software and “best practices” couldn’t overcome indifference, greed and fraud – that is, good, old human nature.

The accounting and regulatory brainiacs foisting international financial reporting standards (IFRS) on our unsuspecting nation as of Jan. 1, 2011, appear to have overlooked this. They’re addled by their vision of a single seamless globe-girdling system that will lift Canada to the apotheosis of accounting. In reality, IFRS will include huge inter-jurisdictional irregularities in interpretation, application, rigour and enforcement – as there is in virtually every industry worldwide. Among its numerous built-in weaknesses, IFRS will distort earnings and revenues and undermine measuring assets. At best, IFRS is deeply flawed; at worst, it’ll trigger a race to the bottom.

Canada’s own accounting standards have been time-proven as some of the world’s best, most rigorous and (until recently) practical. We have among the world’s most professional and honest practising accountants. We also have the world’s best oil and natural gas reserve reporting standards – developed in Alberta – as well as full-cost energy accounting superior to international practice. We don’t need Europe, Asia or anywhere to tell us how it’s done.

Although allegedly based on principles over rules, IFRS paradoxically departs from an age-old practice drummed into every Canadian accountant requiring that one recognize substance over form. That’s a key principle governing myriad accounting steps – like bravely flagging as debt the results of a complex transaction that created the appearance of revenues. So whatever drove Canada’s accounting leaders into the terminal embrace of IFRS? I think it stems from that weirdly Canadian psychic combo of reflexive abasement before centralized authority and an inferiority complex that sees anything transnational as beneficial, benign and better.

Other writers have used the revolting but apt analogy that when you mix ice cream and dog excrement, the result will taste much more like one than the other. In moving to IFRS, it’s just possible that – thanks to the ice cream’s influence – countries with the weakest accounting might improve. But it’s fantasy to expect we can raise everyone to uniform excellence, and condescending lunacy to claim the new standards will exceed today’s best practitioners. Imposed universality can pull the top performers in only one direction. By analogy, I always understood why a Greek or a Portuguese would want a single European currency. But it never made sense for a Swiss, beneficiary of the world’s soundest money (Switzerland voted down the euro).

More broadly, financial reporting means little if the underlying culture is corrupt. Who cares if that quarterly report from the junior mining company in Zangara or Matobo is transparent, consistent and seamlessly comparable if its numbers are mostly lies? Think of the routine industrial scandals emanating from China, Russia’s proto-fascistic thugocracy, Latin America’s narco-states or Africa’s unspeakable violence. Even the increasingly slippery Europeans, so cynical they package vast increases in greenhouse gas emissions as meeting “commitments.” Already they’re weaseling out of IFRS’s fair asset valuation standards to protect their banks.

Here in Canada, IFRS’s stealthy creep has been covered by its being equal parts confusion and deadly boredom. IFRS seminar attendees report of experts stammering non-answers to basic questions then falling asleep when the next expert presents. Forensic accountant Al Rosen estimates the changeover will cost corporate Canada hundreds of millions of dollars. Mid-sized Calgary companies I know put their internal cost in the hundreds of thousands. In an economic downturn, that’s enough to force several more layoffs while saddling salaried accounting staff with unpaid overtime. All to impose an inferior system on companies and millions of Canadian investors.

The IFRS zealot usually trumps opponents by extolling the new system’s seamless transnational financial reporting comparability. In fact the United States has delayed IFRS implementation until 2014 and is widely expected to opt for a longer timeout, perhaps even cancellation. To an IFRS-er, it’s “only” the U.S. that’s holding out. But that would be the world’s largest economy, $600 billion-plus in trade with Canada, thousands of cross-border corporate relationships and millions of investors with assets in both countries. Inter-listed Canadian companies may have an out if they yank their TSX membership and file only to the Securities Exchange Commission under American generally accepted accounting principles. Others that do business in both countries might decide to relocate.

The people running Canada’s accounting institute and standards board don’t seem to have thought through these non-trivial issues. They’ve raised “control mechanisms” and myriad other accounting protocols to an unparalleled level of refinement. Yet all their technical sophistication hasn’t overcome an essential naivete about how the world turns. I believe there’ll be immense damage done to Canadian companies and investors.

Blogmarks BlogLines Digg Facebook Google Google Reader Magnolia Yahoo! MyWeb Newsgator reddit SlashDot StumbleUpon Technorati
By George Koch