🚀 go-pugleaf

Final Death of Capitalism: Lies, Damn Lies, Statistics, and then
there's the International Accounting Standards Board:

They used to say that when the Public learns they can vote themselves
benefits from the Treasury, the country falls. 

What about when the Government learns that it can just print up
worthless money and account for it with worthless accounting?


 washingtonpost.com

Accounting Standards Wilt Under Pressure

By Glenn Kessler
Washington Post Staff Writer
Saturday, December 27, 2008; A01

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.

Sir David Tweedie, chairman of the IASB, acknowledged that the body
needs more protection from political manipulation before it can claim
that it has become the global gold standard.

Tweedie said he nearly resigned over the rule change demanded by
European politicians. "I was so frustrated by the whole thing," he
said. "All the time when we are trying to build a global accounting
system, and we are pretty close to it, and then suddenly out of left
field this thing appears. It's just absolutely exasperating."

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.

But the financial crisis demonstrated how vulnerable the fledgling
system is to political pressure.

On Oct. 8, the leaders of France, Germany, Italy, Britain and the
European Commission met in Paris to discuss the worldwide economic
crisis. They issued a statement saying they were working together
"within the European Union and with our international partners" to
ensure the safety and stability of the worldwide banking system. But
buried within the statement was a sentence warning that European banks
should not face a competitive disadvantage with U.S. banks "in terms
of accounting rules and their interpretation." The leaders added
ominously: "This issue must be resolved by the end of the month."

At issue is an accounting standard known as fair value, or mark to
market, in which companies disclose how much an asset could fetch on
the open market. With the values of assets plummeting, banks were
suddenly stuck with paper losses on assets they could no longer sell.
With some critics saying the provision was forcing banks to take large
write-downs, the SEC and FASB issued guidance in late September that
companies could use their own internal models for assigning a value to
assets -- in essence, a nod to the principles-based international
rules.

But European officials smelled a rat. Under rare circumstances, U.S.
companies are permitted to reclassify assets they were actively
seeking to trade into long-term "loans," using an accounting rule that
was considered weaker than the international equivalent. The
international rules did not permit such transfers, and European
officials feared that the new guidance was handing the Americans a
competitive advantage.

Shortly after the European leaders' statement, Commissioner Charlie
McCreevy of the European Commission, who was in charge of the European
Union internal market, signaled he would introduce legal changes,
overriding the international rules. McCreevy decided to exploit a
loophole in the system -- that all accounting rules must be adopted as
legislation by the E.U. So McCreevy was going to force the changes on
the IASB by threatening to remove -- or carve out -- the existing
regulation, leaving nothing in its place.

"We made it clear what the IASB should accept," said Oliver Drewes, a
spokesman for McCreevy. "There is always the right, and threat and the
pressure, that one could go for a carve-out for European companies."

Tweedie said the rulemaking body had only four days to act before
McCreevy pushed through a change in the law, even though accounting
changes of this magnitude would normally take months to achieve.

Unlike the U.S. board, the international board has no regulator like
the SEC to help shield it from political pressure. So the IASB was at
the mercy of the European Commission.

"There had been pressure on him, I suspect, from some of the European
leaders," Tweedie said, referring to McCreevy. "It was quite clear it
was going to be pushed through and that would have been a disaster. We
were faced with this hole being blown in the European accounting, and
we just wanted to step in and control it."

But the IASB bowed to demands to let the firms backdate the accounting
shift to the beginning of July -- something not permitted under U.S.
rules.

In a recent report, Moody's wrote that the backdating provision could
distort a bank's earnings and capital position, since "it allows
managements to 'cherry-pick' selected assets" and "distort their
economic reality," making it more -- not less -- difficult to compare
global bank performance.

"The measure does not make much sense in the first place," said J.F.
Tremblay, a Moody's vice president. "But the fact that a board can be
influenced like that is not good news."

� 2008 The Washington Post Company
 
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/26/AR2008122601715_pf.html