The issue of IFRS convergence among EU countries has been a running sore for years. Now it seems to be a lever for those in the US who would rather that IFRS didn't come to American shores. At the same time, EU issues are getting tangled up in weak arguments as to why IFRS should not prevail against GAAP. According to Financial Week:
Revenue recognition in particular is a sticking point for some. IFRS is more flexible than GAAP when it comes to booking revenue, said Tony Lopez, senior managing director for the forensic and litigation practice at FTI Consulting. However, auditors in Europe are seen as more trusting of management, and therefore they let more errors into financial statements, said Mr. Lopez, a former staffer at the SEC chief accountant's office.
This is is the sort of thing that could only be spouted by a xenophobic ignoramus. Restatements and attendant litigation are routine in the US whereas they are rarely seen as an issue in Europe. If the US is to successfully adopt IFRS (with the attendant principle based audit philosophy) then it needs to address the potential for a tsunami of regulatory infractions. That could be avoided through a beefing up of audit quality standards and enforcement. In making the argument, Lopez conveniently forgets the number of fraud based failures in the US pre-SarBox. Or the most recent debacle over failures to register. Or the recent attempts to put lipstick on the Big Four pig.
The UK has vigorously defended its principles based system of audit, seeing rules based systems as fundamentally flawed (I'll get to that in a moment.) Worse still, Lopez argument could be construed as a direct attack on European audit quality. While there is plenty to argue over elsewhere, this won't wash. If that was true then we'd see a profession in a state of chaos. There may be plenty to criticize but even I would not argue chaos. Moving on:
Mr. Herz said that the reconciliation requirement provides some needed discipline for foreign filers that don't have much oversight.
That is hardly a proven fact and yet more xenophobic nonsense.
Ending reconciliation could lead to vastly different revenue recognition rules for some foreign companies, with U.S. companies still under stricter standards.
Stricter? Is Lopez totally deluded? Rules based systems lead directly to attempts to circumvent or re-invent. We've seen this time and again. Has Lopez conducted a comparison between the way revenue is recognized in the US and Europe? Where is the evidence? Read on.
But eventually, IFRS revenue recognition rules could lead to fewer trivial restatements, Mr. Lopez said. Revenue recognition is the leading cause of restatements in the United Statesâ€"a fact, he said, that is driven mostly by the constrictive and complex nature of GAAP: "Whatever we're doing here isn't working."
What the US has been doing that isn't working is called the flawed nature of rules based systems. They call for a writ of accuracy that's almost impossible to work and can never be guaranteed. It is precisely why the EU doesn't use rules as the basis for understanding revenue recognition or published accounts preparation. When rules are applied, some genius will always look for ways around them.
Then again, investors may not really have a clue as to how companies recognize revenue in Europe.
On this I can agree. Issues over the handling of tax in accounts for example could definitely do with review. A code of ethics that matters would also help. And it is true to say that the obdurate manner with which certain EU governments have chosen to step around IFRS or provide their own interpretations does not bode well.
Of course I could be totally deluded. Somehow I doubt it. If anything, this should be a wake up call to EU governments to get over their petty IFRS squabbles and get realistic about the future of standards. And enforcement.
ENDNOTE: Alan Shipman writes an excellent and well balanced discussion covering the main discussion points.
http://feeds.feedburner.com/~r/flacknhack/jRao/~3/...