Swindle. Intransitive verb: to obtain money or property by fraud or deceit.
When we think about the worst U.S. accounting scandals ever, those new to the profession usually cite the Lehman collapse or Madoff scam of 2008, or maybe even the Enron tragedy in 2001 which has become symbolic for bad accounting and auditing. And those of us with gray (or no hair) might recall the ZZZZ Best, Crazy Eddie, or Equity Funding debacles. However, many of us may have missed what may be the largest and longest running accounting swindle ever, one that finds accountants scamming accountants.
For almost a decade now, accounting educators, local and regional practitioners, students, and regulators have been bilked of their limited financial resources by the large global accounting firms (GAFS). Yes, those of us that make up what’s left of the “real” accounting profession may have been victimized, forced to spend our cold, hard cash (and time) to stimulate the IFRS conversion advisory practices of these revenue-crazed consulting behemoths.
Why resurrect IFRS now you ask? Well, most of you that have followed the Grumpies in the past, already know that “IFRS is for Criminals.” But in case you missed it, IFRS adoption in this country is on a deathwatch, and Tom Selling of the Accounting Onion has even been so bold as to proclaim its actual death. And how did you miss the news of the demise, you ask? Well, you don’t really believe that the GAFS, or the major industry trade associations they dominate, will go public with any news that negatively impacts their revenue generating abilities, do you? The deathwatch began last summer with the issuance of a staff report by the US Securities and Exchange Commission (SEC) that failed to endorse IFRS adoption. Instead, it offered no recommendations or adoption time line, and also raised serious implementation concerns. And preparations for the wake have accelerated since we learned that our accounting brethren “across the pond,” also now are having second thoughts about IFRS. Given these developments, it just seemed appropriate to evaluate who paid the price for the IFRS adoption initiative forced upon us by the GAFS. Here’s how the swindle worked…
With revenues from Sarbanes-Oxley compliance consulting beginning to wane, the GAFS needed a “new wave” to ride. They found one in the European Union’s required adoption of IFRS in 2005, and then planned to extend this to other markets including the US. But given the SEC’s role in standard-setting, the GAFS had to “build” a demand for IFRS adoption that would effectively force the SEC to mandate their use. Their well coordinated marketing plan included the following components:
- Convince the accounting community that not only did everyone favor IFRS adoption, but that everyone was preparing to adopt. This was accomplished via poorly constructed surveys delivered to heavily biased samples, that yielded weekly newsletters touting IFRS support.
- Large industry trade associations were enlisted in the scam by promises of new revenues from IFRS training courses which they would provide to prepare practicing accountants for adoption.
- Many accounting educators also became unwitting accomplices enticed by grant monies provided by the GAFS to create new IFRS courses and conduct research into the benefits of IFRS adoption.
So, if awareness and demand could be built, and enough political muscle exercised, the SEC could be pushed into adopting IFRS in the US. The result: a really “big wave” of revenue for the GAFS. And who would pick up the tab for creating this “make believe” demand for IFRS adoption services? You guessed it…companies, educators, students, practitioners…anyone foolish enough to embraced the GAFS propaganda. And fooled we were by the numerous half-truths (i.e., the deception) intended to stimulate the demand for their consulting services. This Grumpy Old Accountant found one particular assertion particularly offensive: that the entire world except the US was adopting IFRS. What the GAFS forgot to tell you was that this global IFRS adoption was not unconditional, and was based on numerous “carve-outs,” and often contingent on IFRS consistency with local GAAP. Hence, the swindle: the GAFS together with large industry associations generated large revenues by creating and selling products to meet a largely fictitious need. So there we have it: accountants scamming accountants.
But we were warned! David Albrecht addressed the GAFS motivation for adopting IFRS in “They Still Don’t Get It” when he so eloquently and passionately stated:
And Tom Selling in his three-part series titled “Ten Claims in Support of IFRS Adoption by the SEC – and Why They are False” effectively debunked the pro-IFRS arguments key to the GAFS’ sales pitch, and concluded that:
Fortunately, the “good guys” appear to have prevailed (at least for now). And on page 2 of its staff report, the SEC recognized that a demand for IFRS adoption simply does not exist in this country, thus clearly exposing the GAFS’ contrived consulting market:
So there you have it…we were scammed! But exactly how much did we lose? It’s really hard to tell, but the number appears to be fairly substantial. In an incremental analysis of IFRS adoption in the United States, David Albrecht suggests that the total net cost potentially could reach $5 trillion if complete adoption were to occur. Thank goodness we dodged that bullet. But what losses have actually been sustained…let’s look a little deeper at a couple of the more seriously “injured” parties.
First, there are the companies electing to adopt IFRS. According to the SEC, costs to adopt could consume up to 13 percent of revenue in the first year of adoption, creating for some large companies an estimated $32 million in “extra” 10-K filing costs. And recent research also suggests that IFRS adoption drives up audit costs by over 20 percent in the adoption year. These are pretty hefty price tags for any early adopters who bought into the GAFS propaganda, especially for something you don’t really need.
Next, there are the non-trivial sunk costs imposed on both academics and their students by the GAFS’ IFRS agenda. Now to be fair, several of the GAFS did provide “seed” money to select universities to develop courses and materials in advance of IFRS adoption. However, most institutions did not receive any such financial support. So, reacting to artificial market pressures created by the GAFS, these programs were forced to fund development of IFRS related courses and instructional tools largely on their own. And then there is the time wasted by teachers in preparing themselves to teach and deliver this “valuable” IFRS content. Also, let’s not forget the monies and time squandered on IFRS adoption research in the US. Not only are there “hard” costs associated with data collection, travel costs, and the like, but there also are countless opportunity costs associated with NOT researching other more important topics, particularly in today’s challenging financial reporting environment. Yes, accounting educators paid a stiff price in this accounting swindle.
Then there are the students. Textbook publishers embraced the GAFS IFRS fable wholeheartedly and rushed to revise all accounting related texts at both undergraduate and graduate levels to include IFRS related content. And naturally, they could charge more for these new editions. No longer could students rely on used books, they had to buy the new editions with the new IFRS content. And let’s not forget the cost of enrolling in the newly-created IFRS accounting courses whose benefit to professional competence remains questionable. Finally, our accounting students bear the cost of having to study for IFRS related questions on the CPA exam. Yes, this shows you just how far the GAFS went to create demand…isn’t the exam hard enough testing just US GAAP? With today’s rising tuition costs and student debt a growing problem, the GAFS should be ashamed of themselves for fleecing our youth for the sake of their IFRS adoption “wave.”
Finally, there is the population in general. Yes, every United States taxpayer has been victimized by the IFRS adoption consulting scheme. Consider all of the monies spent by governmental regulators who have been evaluating the effects of IFRS adoption over the last decade. And who paid (or will pay) for that? And then there are the investors whose decisions are now being made using financial reports based on accounting standards that are more heavily influenced by IFRS than ever before. What will be the ultimate costs of potentially weakening our US GAAP? Although I have only discussed a few of the costs created by this IFRS adoption farce…one thing is clear. We all are paying the price for creating new revenue opportunities for the GAFS.
And the swindle continues. According to the 2012 Big Four Firm Performance Analysis, the IFRS adoption “wave” has yet to crest:
Yes, this really may be the greatest accounting swindle of all times…one created by the greed and deception of large firm accountants, then forced upon the rest of us. What are we going to do about it?
This essay reflects the opinion of the author and not necessarily that of The American College, or Villanova University.