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12/19/2012

Three Questions with Joseph Longino


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With the Securities and Exchange Commission’s (SEC) decision on the possible incorporation of International Financial Reporting Standards (IFRS) into the US system still outstanding, many are wondering about the implications for their work and organizations.

In anticipation of the potential upcoming changes, IASeminars and NYSSA will host the 18th Annual NYSSA International Financial Reporting Conference & Workshops January 8-10, 2013. In the following interview, we spoke with Joseph Longino, principal of Sandler O'Neill + Partners, L.P., and a primary resource to the firm’s clients on supervisory, regulatory, and accounting matters. Longino is also a member of the Financial Accounting Standards Advisory Council (FASAC), a diverse group of senior accounting experts who advise the Financial Accounting Standards Board (FASB) on a broad range of matters affecting financial accounting and reporting standards in the private sector, and co-chair of the US chapter of the Corporate Reporting Users’ Forum (CRUF), an international discussion forum committed to engaging the FASB and IASB as they set accounting standards.

HOW DO THE US AND GLOBAL INVESTMENT COMMUNITIES VIEW THE IFRS VS. US GAAP DEBATE?

On July 7, 2011 the US Securities and Exchange Commission held a roundtable on its suggested “condorsement” approach to international accounting convergence. At that time many observers thought it likely that IFRS would become the international accounting standard and the IASB the dominant standard setter. The sentiment on the investor panel struck me as resignation rather than enthusiasm, coupled with a desire to “hedge” through the FASB the likelihood that US GAAP would be subordinated to IFRS and the FASB to the IASB.

That outcome now seems far from inevitable, and while the lack of enthusiasm for it among US investors has many sources, I’d like to highlight three here.

First, neither the FASB nor the IASB has the track record it should in being responsive to investors, particularly when the fair value bias of the boards gets in the way of standard setting with investors in mind.

Second, preservation of the two boards’ status as coequal partners would better promote their mutual solicitude for investors, thereby providing a better foundation for the constructive convergence of international accounting standards. For the foreseeable future, preservation of a duopoly of imperfect boards in setting accounting standards would better serve investors than a monopoly.

Third, US GAAP has in the SEC an enforcement mechanism whose effectiveness is unequalled elsewhere in the world. For this reason, US investors are the canary in the mineshaft who don’t have the luxury of taking in stride adverse accounting developments, which will hit them first and foremost. This is an important reason why the global investment community views the IFRS/GAAP debate with greater equanimity than US investors.

DOES THE CURRENT AUDIT FUNCTION PROVIDE ADEQUATE ASSURANCE FOR INVESTORS?

Yes, in the US it does. While the financial statements take a snapshot of condition and performance as of a date certain, and the notes supply framing context as needed, management discussion and analysis provides the screenplay that places all else within the larger story line. Financial statements, notes, and MD&A compose a spectrum of presentation from data to integration that is increasingly within the directorial purview of management and, as a result, less susceptible of prescription and audit, but not beyond severe adverse consequences for abuse. This state of affairs is as it should be, and should be left alone.

WHAT ARE YOUR THOUGHTS ON SOME OF THE RECENT AND EXPECTED MAJOR DEVELOPMENTS IN ACCOUNTING STANDARDS?

US investors (and companies) are dismayed by the fair value bias at work in the boards’ financial instruments project, as well as other major projects. Specifically, the central conceit of the insurance contracts project is that because some insurance contracts clearly are financial instruments, all insurance contracts should be accounted for as such. Similarly, the central conceit of the leasing project is that because some leases clearly are financed purchases, all leases should be accounted for as such. Such thinking pays homage to reductive theory at the expense of reality and accounting conventions that helpfully reflect its complexity.

What is urgently needed is an empirical rather than an a priori perspective that values pragmatism over theoretical purity and understands that accounting conventions and disclosures that do not respect business models will coerce them, to the detriment of companies, investors and creditors, and society alike. Good theory reflects reality rather than distorting it. If the boards paid more attention to what investors really want, the international convergence of accounting standards would largely take care of itself. 

The views expressed here are the personal opinion of Mr. Longino, and not those of Sandler O’Neill + Partners, L.P. or any other organization with which he may be associated.

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