Now that convergence has been delayed, the anti-convergence/IFRS contingent is hopeful that this is a major sign of defeat. Whether that's the case or not remains to be seen but don't expect the debate to go away. We recently spoke with Dr. Frederick Choi, Dean Emeritus and Distinguished Service Professor of Business and Chair of the Accounting Department at New York University's Leonard N. Stern School of Business about the latest current events and what Stern does to prepare its students for IFRS in their careers and on the CPA Exam.
GC: So the number one question on everyone’s mind – will the world end if the United States converts to IFRS?
Dr. Frederick Choi: [laughs] My answer to that is to not to worry, the world will continue as it always has, so we’ll continue to have fun with accounting like we always have in the past.
GC: So there’s no risk that the U.S. will lose its imperial superpower status as a result of this?
FC: No, I don’t think so. I think there’s sufficient flexibility in international accounting standards so that we can continue on as before.
GC: So why do you think the SEC is so cautious? Are all those lawyers scared because there might be numbers involved?
FC: First of all, the U.S. environment is a very litigious environment so I think there’s a concern that IFRS will permit more judgment for the company presenting the numbers. U.S. GAAP, because of the litigious environment, has to be a little more prescriptive, that is, “here are the rules, here are the exceptions.” At one time in the US, our accounting rules were principles-based and required a lot of judgment. In the ‘60s some companies were were cooking the books which resulted in reporting scandals and class-actions. Then someone said, , “hey, the audit firms have a lot money, so let’s go after the auditors.” That’s when accounting prescriptions became much more rules-focused. So I think the big fear is that moving from an environment that is more rules-based to one that is more principles based will require much more judgment and perhaps invite more litigation.
GC: So a little current events question – what do you make of the FASB and IASB’s announcement that the convergence project is going to be a tad late? Was the June 2011 to get those G20 guys off their backs or did they really think they were going to get this pulled off?
FC: I think when they first started the project towards convergence they did so in good faith but there are some significant differences that need to be ironed out. And given the vested interests, it’s going to take a while. I’m not surprised that the deadline has been extended.
GC: And the SEC seems completely all right with it.
GC: Say I’m against IFRS – in fact, I’m a militant for U.S. GAAP. I don’t want IFRS anywhere near our capital markets because it’s too principles-based, countries need financial reporting autonomy and that it doesn’t really benefit anyone except a bunch of big accounting firms that need a new revenue stream? Plus, it’s going to be a nightmare for companies to convert to and it doesn’t really help small and medium-sized businesses…
FC: That’s correct.
GC: …having said all that, your response to me is…
FC: I look at this from the point of view of the the analyst. From the point of view of the analyst, the name of the game is to read the tea leaves and get as close to the underlying transaction as possible. The one strength of U.S. GAAP is that there’s a lot of research that goes into the pronouncements. I think U.S. GAAP – without sounding nationalistic – is the best researched, empirically as well as conceptually, accounting standards in the world. I think an analyst should not be bogged down by whether U.S. GAAP is better or IFRS is better. Analysts have always taken the numbers and massaged them to get closer to what he or she thinks the underlying economics are. In fact, if you look at the not-so-sharp analyst who will say, “Oh, we’re going to IFRS and that’s going to make my life easier,” my response is “No, it’s not.” I think it will be more complicated.
GC: Okay but there are going to be some tricky areas, right? What are those going to be?
FC: I think the biggie is the ability to write down an asset and write it back up. Here in the States, when we impair an asset we cannot go back and reverse it. The rationale behind that was you don’t want to give firms the option to manage the bottom line. Firms that write asset back up will be able to smooth earnings. Say you and I are in business and we have a good year, so we write down an asset and take the loss. Next year, we say “Oh my god, results are horrible. How can we pump up the bottom line?” We reverse the write-down. So, that’s a big concern that I have. That applies to intangible assets, it applies to plant & equipment, it applies to inventory. So this is a biggie. Another difference worth nothing is if management feels that the standard they are following is misleading, they can actually deviate from the standard. That’s a major concern as well.
GC: How familiar are you with integrated reporting? How do you think it fits in with the transition and is this something we’ll see more of or are we still at the baby steps stage?
FC: I think from an investor’s point of view, that’s going to be confusing because you’re going to have hard numbers combined with very soft numbers and I’m not so sure that’s going to make life easy. I think if you keep the soft stuff in a separate statement then the analyst can look at the hard numbers and come to a preliminary conclusion and looking at the soft numbers make some professional judgment – do you bump the number up a little bit or do you interpret it a little more cautiously. To me that’s the better state of the world.
GC: And as it stands right now, there’s no way to audit the non-financial information
FC: That’s correct.
GC: What are you doing to prepare your students at NYU for the transition?
FC: I put together a team here at Stern and we looked at all the courses that deal with financial reporting and basically I think the whole approach that we’ve taken is that our responsibility is not to teach students to memorize rules, our responsibility is to teach them how to think and think critically. We say here is an international accounting standard. Let’s talk about various measurement issues that we normally talk about and when a new standard is issued, I’ll expose you to both the U.S. standard and the international standard. For now, those two sets of standards will continue for the next several years. If the international standard is different from the U.S. standard we’ll say “here’s the implications on the financial statements and profitability, liquidity, ratios, etc.” So students can identify the impact of the different measurement framework on the financial statements.
GC: How have you balanced, from a curriculum standpoint, IFRS education and the requirements for the upcoming changes to the CPA Exam?
FC: Our approach is not to teach students to pass the CPA Exam, our approach is provide an education. Students need to learn and think critically because rules will change over time and I think it’s best to develop those critical thinking skills. We infuse international reporting standards throughout the curriculum but not in the sense where we say, “Here, memorize this rule and be able to spit it out and ace that question on the CPA exam.” We’re basically saying, “here are the standards, here are the differences, here’s how they will impact the financial statements and be aware of that.” We have a combined BS/MS in accounting program that prepares students for the 150 hours and a required international accounting and reporting course is part of that degree.
GC: So in other words, they’ve got this on lockdown and they will all be go-to experts on IFRS at their firms?
FC: I think they’ll be able to speak intelligently about IFRS but they won’t be rulebooks.
GC: What are you hearing from the firms that recruit at NYU (other than “send us the smartest ones) on this issue?
FC: I think the market likes our product because we develop those critical thinking skills and our placement rate at the Undergraduate College is close to 100%, so they like the product irrespective if they know IFRS or not because if you’re smart and have the critical thinking skills you can pick up IFRS in very short order. Given a choice between two students – one that has been exposed to IFRS and one that has not, but they’re both bright, and the firm can only take one, of course the firm will take the one with the familiarity with IFRS but I don’t think that’s ever been an issue.
GC: Back to the CPA exam. Of course everyone at NYU will be passing no problem but what about students and instructors elsewhere? Should they cram it in and get it passed in 2010 or will they be ready for the 2011 exam?
FC: I think many schools are already gearing up. We have shared our approach with many schools via workshops, conference presentations and the like. We are always ready to assist. Our approach is, “ We’ve exposed you to IFRS and if it is on the exam, youlcan get more details in a review course or you can bone up on IFRS on your own, but it shouldn’t be a big issue.