Re:Balance -- Jim Peterson

GAAP/IFRS Convergence: The SEC's Roadmap is a Highway Leading Nowhere

2010-03-07T17:59:31-06:00

For two reasons I’ve taken a while to step into the fray about the prospects for convergence between Generally Accepted Accounting Principles in the United States and the International Financial Reporting Standards.

First, it was an honest and necessary but also dreary and time-consuming task to plow through the entirety of the SEC’s statement of February 24, “In Support of Convergence and Global Accounting Standards” – here.

Second, it was a toss-up which was more enervating: to slog through all 68 pages of the SEC’s turgid and repetitive bureaucratic prose, or to contemplate whether anyone thoughtful in that agency really believe in a highly-uncertain timetable that at its most optimistic extends more than halfway through this decade.

Although the G-20 declared in Pittsburgh last September that global standard setters should complete their convergence project by June 2011 (here), the SEC gives itself all of next year even to be positioned to consider a determination whether to give more support to convergence, much less when or how. Depending on a new staff-level Work Plan that supplants the famous “Roadmap” of 2008 (here), the SEC projects that presently-undefined steps in implementation may be taken no earlier than 2015 or 2016.

The merits of convergence are debated across the spectrum, from industry sycophancy (here and here) to David Albrecht’s professorial patriotism (here) to Tom Selling’s sour challenges to its lack of intellectual substance (here) to the playful irreverence of Going Concern (here).

For me – I am agnostic on this point. First, the whole issue of whether convergence ought to happen is largely academic – because the complexities and judgments within either GAAP or IFRS themselves render the outcomes too challenging and non-comparable for any users except the dedicated experts.

But second, there are understandable reasons, based entirely on process, why the SEC’s program for convergence has more qualifiers than this month’s NCAA basketball tournament.

On the European side of the Atlantic, conspicuous on the personal roadmap of IASB Chairman David Tweedie is the stop sign of his June 2011 retirement. Now a lame duck, Tweedie has combined intellectual rigor and prickly Scottish wit, but his ability to achieve harmony among his constituents has been frustrated by the evident limitations on his diplomatic skills.

Disparate nationalistic players in Europe have shown the ability to evade, frustrate and maneuver around attempts at cross-border unification and cooperation at many levels:

· The French bankers, abetted by no less an accounting expert than President Jacques Chirac, led years of lobbying to prevent the applicability of a single international auditing standard on derivatives accounting (here).
· The Swiss judiciary continues to provide home-court advantage in frustrating the on-going efforts of the American IRS to obtain personal data on alleged tax evaders (here).
· And eight years on from the passage of Sarbanes/Oxley, the SEC has officially permitted the PCAOB to bail for another three years (here) on its supposed mandate to inject itself into the inspection and oversight of ex-US accounting firms, unable to penetrate the European rules on privilege, privacy and confidentiality.

While on the American side, the SEC’s guidance-writers did not have a great winter:

· Their late-January pronouncement on disclosure of the implications of climate change (here) was a cheerleading exercise in vacuity – see here.
· On the subject of short-selling, the SEC voted 3-2 on February 24 to re-instate an uptick rule (here), but only for shares dropping more than ten percent – a debatable exercise in cosmetics at best, that will impose obnoxious compliance costs while substituting the vacillations of motion for the reality of progress.
· And on the subject of convergence, the flabbiness of a schedule measured in geological time makes clear that compared to a real roadmap, the agency’s navigators couldn’t find first base with a compass and a guide dog.

So on one side, the Europeans can waffle and jawbone the convergence process for as long as it suits – while the SEC's political dithering only kicks the can down the road, far past the tenure of any present office-holders. Which means that the absence of accomplishment half-a-decade from now will become the responsibility of a whole new set of map-readers.

It’s all enough to speculate how Robert Frost’s 1916 poem, “The Road Not Taken,” would sound, if written by an observer of the GAAP/IFRS process:

Two roads converged in a wood.
And sorry I could not see the forest for the trees,
Long I stood in the undergrowth.
……
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads never converged
And that has made absolutely no difference.

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The Risk of Crashing on a Slippery Slope: Bankers and Lugers on Parallel Tracks

2010-02-21T14:30:29-06:00

A Risk Management class of bright, perceptive MBA students devoted their meeting this weekend to Olympic sports – scrutinizing the death on February 12 of Georgian luger Nodar Kumaritashvili, who lost control on the last curve of the world’s fastest track at the Whistler Sliding Centre and crashed into a steel pillar.

The students’ usual focus is on the manifold failures in risk identification, appreciation and evaluation over the last three years. They look to specify and learn from such displays of bias, error and miscomprehension as Jimmy Cayne’s loss of control of the real estate funds of Bear Stearns, the confession by Ramalinga Raju of a multi-billion dollar fiction in the accounts of Satyam Computer Services, and Akio Toyoda’s tone-deaf bungling of the world’s largest vehicle recalls.

What they found was a set of questions with compelling resonance for the financial crisis:

· Was a fatal crash the result of an overly aggressive and under-trained youngster, turned loose in a competitive environment beyond his skills and capabilities?
· Was there a simple but overlooked design flaw in the structure – in Vancouver, an unpadded steel pillar squarely in the path where a loss of control would eject the 90 mph victim of a small but highly consequential mistake?
· Or did the designers who pushed the limits of knowledge and technology compromise the need for safety to the desire for high-speed achievement, failing to recognize that traditional measures of safety were outmoded and insufficient?

Just like the world’s tightly-linked capital markets, the Whistler track is wonderfully designed for success. Its users describe it as challenging but thrilling – the demands are huge, as are the rewards.

But like any other advanced and sophisticated device designed and operated by humans – whether a space shuttle or a nuclear reactor or this decade’s leading-edge array of exotic financial instruments -- a luge track is subject to the non-zero possibility of catastrophic error.

Even the engineers of the most prosaic highways, who strive to improve both safety and overall speed, are mindful of speeders who will test their design limits. Where pressing the outside limits of speed and safety is the very goal of the participants – recall the Olympic motto: “Citius, Altius, Fortius” – it is hollow and unresponsive to the point of irresponsibility to claim that the track is "relatively safe" (here).

As elsewhere, average performers disappear into the obscurity of the crowd. Outliers achieve prominence in two ways, both beyond the boundaries of ordinary expectations:

At the Games, one athlete wears a gold medal and salutes his national anthem from the victor’s podium. But at the opposite tail of the performance curve, the one who crashes earns only a memorial wreath and a home-town funeral.

In the marketplace, where the gold-medal outlier may be Warren Buffett, the opposite tail is populated by the likes of Dick Fuld of Lehman, Fannie Mae’s Franklin Raines and Countrywide’s Angelo Mozillo.

There is one huge difference between the “failure study” of the Whistler designers – who promptly lowered the luge start, re-shaped the fatal curve and padded the unfortunately-located steel pole – and the finger-pointing scapegoaters of Washington and London and Brussels.

Namely, every failure in the engineering field is an opportunity for learning – even if belated. Thanks to the iceberg, the Titanic’s design was no long the model for generations of at-risk ocean liners. Nor, after 9/11, would high-rise towers ever copy the World Trade Center.

But in the politically-motivated bickering over the allocation of blame for the financial markets’ debacle, by contrast, there is not even a civil forum in which to ask the pertinent questions – much less make progress on a search for answers.

Which, as I remind my Risk Management students, invokes the observation on learning of the 5^th century BC playwright Aristophanes:

Youth matures

Immaturity is outgrown

Ignorance is curable by education

Only stupidity is forever

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"Supplements" for the Baby Boomers -- A Generation for Whom Enough is Never Enough

2010-02-12T11:15:04-06:00

A diversion from the usual -- motivated by a recent conversation about the Baby Boomers: that displaced bulge in the population who have distorted society since they overran the nurseries of the Eisenhower years.

For this group, “joint” and “hip” once invoked a sub-culture of beads and bell-bottoms -- now associated more with “replacement” and “physical therapy.” Drugs of choice are no longer recreational, but regulate their HDL and systolic blood pressure. The numbers now threaten to swamp the delivery of elderly care, health insurance and retirement security.

The context was a nightmarish encounter with the bungled processing by an over-burdened bureaucracy of an application for Medicare – the triply oxymoronic American “health insurance program” that provides the age-advanced with no less than four inter-locking forms of coverage – for hospitals, doctors and drugs, along with an opaque and effectively non-optional layer of “supplemental coverage” that fills in the gaps in the other three.

On reflection, the concept of “supplements” seemed thematic. Unsatisfied with historically normative levels of entitlement, the Baby Boomers have invented, demanded and consumed whole categories of newly-identified goods and services – an influence evidently to continue until the long-denied arrival of their generational demise.

Consider their pervasive impact across the culture:

As noted, individual enrolment in long-term and other in-fill health insurance overage is a strategically vital supplement, because available health plans are insufficient to protect against the devastation of a catastrophic illness.

With the erosion of social security and the depleting of their under-funded savings and pension plans, the Boomers are staying at work post-retirement – consulting or teaching or hosting at Wal-Marts – to supplement income levels no longer deemed adequate to underwrite the mega-house or the bass boat behind the truck.

In the schools, the Boomers’ privileged offspring – each already classified on demand as gifted and above-average – subscribe to supplemental tutoring, test preparation and counseling as they strive to game the systems of university admission.

More youthful populist hostility to the diversion of taxpayer bail-out funds be damned, whole business sectors depend on the availability of salary supplements – bonuses being deemed vital to the compensation plans of banks and investment funds.

In the pharmacies, what were once the accepted signals of advancing maturity are now attacked by supplements ranging from age-targeted vitamins and synthetic hormones to Rogaine and Viagra.

While in front of the bathroom mirror, the previously unexceptional effects of time and gravity are defied by supplements delivered by tube and jar, scalpel and needle. Contours and visages are re-sculpted by augmentation or reduction, and the percentage of authentic body parts becomes inverse to the seniority revealed by the calendar.

Profound conclusions from these symptoms may be elusive, but strategies do emerge:

· Clearly, any politician who gets in the way of the Baby Boomers’ voracious appetites for supplements of all sorts will be trampled and left for road kill under the government-provided walkers and wheel chairs.
· On the other hand, lobbyists will prosper who line up in favor of legislative proposals for the extension of benefits of all varieties.
· And investors might expect to be smartly rewarded for adding to their portfolios the makers of titanium knee joints, D-cup gel inserts and implants for hairlines, lips and cheekbones.

While “rock on” no longer refers to Woodstock or the summer of love, but to the nap-inducing motion of a chair on the porch.

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