Accounting (non)standards

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If the rules are inconvenient, change them. From Washington Post:
Accounting Standards Wilt Under Pressure
World leaders have vowed to help prevent future financial meltdowns by creating international accounting standards so all companies would play by the same rules, but the effort has instead been mired in loopholes and political pressures.

In October, largely hidden from public view, the International Accounting Standards Board changed the rules so European banks could make their balance sheets look better. The action let the banks rewrite history, picking and choosing among their problem investments to essentially claim that some had been on a different set of books before the financial crisis started.

The results were dramatic. Deutsche Bank shifted $32 billion of troubled assets, turning a $970 million quarterly pretax loss into $120 million profit. And the securities markets were fooled, bidding Deutsche Bank's shares up nearly 19 percent on Oct. 30, the day it made the startling announcement that it had turned an unexpected profit.

The change has had dramatic consequences within the cloistered world of accounting, shattering the credibility of the IASB -- the very body whose rules have been adopted by 113 countries and is supposed to become the global standard-setter, including for the United States, within a few years.
And a bit more:
U.S. standards have been set by the Financial Accounting Standards Board since 1973. "Right now, there is no credibility," said Robert Denham, chairman of the Financial Accounting Foundation, which oversees the FASB. "If we are going to have global accounting standards, my view is that is not going to work if the IASB is going to be jerked around by the European Commission. That is the very real risk that is posed by the EC coercion and the IASB's response."

The episode exposes how small, incremental changes in arcane accounting rules can affect billions of dollars in market value and corporate profitability. In turn, the money at risk raises the political stakes, as desperate companies begin to lobby political leaders to insist on changes that normally would come about only after a careful discussion and evaluation by experts.

For years, there has been a disconnect between U.S. and international accounting rules. With the history of corporate litigation in the United States, U.S. standards tend to be exact and explicit, making it easier for companies to defend themselves in court.

International rules rely on broad principles, giving companies greater leeway to make their own judgments. An extensive review of international accounting standards published last month by Moody's Investors Service found significant differences between two French companies on one key issue -- even though they used the same accounting firm.

Nevertheless, more than 110 countries have already adopted international rules since the IASB was established in 2001, with Japan, South Korea, India and Canada soon to make the switch. Tweedie expects that 150 countries will have adopted IASB rules within the next three years. The Securities and Exchange Commission on Nov. 14 adopted a plan to have all U.S. companies prepare their statements using international standards for fiscal years ending after Dec. 15, 2016. More than 100 of the largest companies would be permitted to adopt the rules as soon as next year.
This probably represents the next big bubble forming. And the lawyers and accountants will get very very rich. Welcome to the new aristocracy -- lawyers and politicians this time, not Kings and Queens.

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This page contains a single entry by DaveH published on December 29, 2008 8:44 PM.

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