Thursday, August 28, 2008

The Financial Equivalent of Making "Ain't" Accepted Usage

I used to work in financial research, way back when before the internets, and I can tell you first hand that getting financial details on foreign companies was difficult, when it wasn't impossible, because international accounting rules are a lot looser than the Generally Accepted Accounting Principles (GAAP) that US companies have to follow. International accounting principles (called the IFRS) allow you to reclassify losses, bury tons of stuff under research and development, and generally paint a rosy financial picture of something that doesn't have a financial leg to stand on. If Enron had been filing under IFRS? It would still be a going concern today, which is frightening on several levels.

The whole point of GAAP is to get a clear picture of what corporations are doing with their money. This is called transparency. It's one of the big buzzwords in Corporate America right now. It's what GAAP rules are supposed to create for American corporations. It's what IFRS rules fog up, because they promote a much less rigorous standard of accounting. And there's a lot a foreign company can hide with a looser, less rigorous accounting standard and reporting requirement.

And in 6 years? American companies will have the same opportunity, because the SEC has decided to do the financial equivalent of declaring that bad grammar is now grammatical. The Wall Street Journal says it best. And, using the journalistic version of IFRS, it also spells out the differences as broadly as possible:

The U.S. accounting system, which is ingrained in textbooks, business schools and company treasuries, is based on detailed rules, while the international system expects companies to follow broad principles.

And in the name of what principles is this change being effected?

Competitiveness. And, oh yeah -- transparency.

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