An Accounting Case Analysis IFRS is a Big Four Gravy Train.

By Richard Murphy

An Accounting Case Analysis IFRS is a Big Four gravy train. By Richard Murphy
Mahesh Ponnam

Abstract
This document discusses the implications of the adoption of International Financial Reporting Standards (IFRS). It investigates the politics and financial benefits that may accrue for particular companies or groups of companies along with the adoption of IFRS. The conclusion is reached that Richard Murphy was correct when he stated that IFRS is a Big Four gravy train. Although there is evidence that IFRS can be of benefit in some situations, there is abundant evidence that adopting IFRS requires a great deal of financial outlay for companies in the private sector and for public agencies who may need to rework entire computer systems and train employees in complicity. Finally, nations may have to change their laws significantly in order to be able to utilize IFRS. The document concludes that the IASB, the organization which is developing the IFRS, is sponsored by financial institutions, by accounting firms, companies, and banks. In short, the IASB, which develops the standards, is supported by the very organizations which will profit from adoption of the standards. Murphy is thus correct when he refers to the IFRS as a gravy train. The document will show that the IASB might well be referred to as a cartel.

Introduction
There are numerous differences between the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). The question is whether or not these differences are necessary, and needed, or whether they merely represent changes that will serve to do little more than serve as a gravy train for the Big Four accounting firms. In the case presented or analysis, Murphy argues that the IRFS is a gravy train. This paper suggests that in fact, the IRFS truly is a gravy train that will keep big accounting firms in business forever.

1 Is Murphy Correct?
Murphy argued that UK GAAP was accruals accounting and sought to match transactions in a period to provide a measure of what had happened in that time scale. Balance sheets are a residual measure in that process. In doing this, he suggested that there is a difference in emphasis between GAAP and IFRS. The IFRS, he suggests, is a snapshot of value at a point in time which can be compared to a second, later snapshot, in order to determine the financial data for the period. GAAP, however, is about financial performance. If this is true, then IRFS truly would represent a

different paradigm, or approach, than under GAAP, and it would shift emphasis from income statement to balance sheet. How does the IRFS and the GAAP really compare? Murphy suggests that the balance sheet is a sort of garbage can, but the IFRS is presented as an emphasis on valuation and on measuring income. In the IFRS, then, the value would measure income, the income would not measure value. Epstein (2012) offered a comparison of the differences in the way that the balance sheet is addressed in the two methods. GAAP, he suggests, offers only limited guidance on how to offset assets and liabilities. The statement of the financial position is not required by GAAP, and the definition of what constitutes current or noncurrent differs from the definition of IFRS. The IFRS, on the other hand, provides very specific guidance on how to offset assets and liabilities. Unless liquidity ordering is more meaningful, a classified statement of financial position is required. (Epstein, 2012). At the same time, GAAP allows exclusion of the long term debt that is being financed, while IFRS allows the exclusion of long-term debt from current liabilities. GAAP also allows the offsetting of assets and liabilities with different counterparties. It is not permissible to offset with the same counterparties unless the intention is to settle the net and the right to offset would be enforceable under the law (Epstein, 2012). In IFRSs statement of financial position, offsetting of assets and liabilities with different counterparties is permitted, when a legal provision to do so exists. Under the GAAP system, total assets are used to balance the total of the liabilities and the shareholder equity. Under GAAP, the items that are presented on the balance sheet are presented in the decreasing order of their liquidity. At the same time, the detail on the balance sheet should be of sufficient detail to allow identification of material information (Accounting Financial Tax, 2012). Under the IFRS, however, current and non-current assets are presented, and current and non-current liabilities are listed as separate classifications unless a presentation of liquidity is likely to provide ore information. If this is the case, then the assets and the liabilities are presented in the order of their liquidity. The big difference, however, is that unless the liquidity presentation provides more detail, there is no particular form of the balance sheet. A great deal of information is required, but how it is

presented is up to management discretion. In general, the IRFS balance sheets provide information on the assets, including investment properties, financial assets, intangible assets, inventories, cash, current tax assets, deferred tax assets, and a variety of other assets. Equity and liabilities must include share capital, components of shareholder equity, financial liabilities, current and deferred tax liabilities, trade payables, and so on (Accounting Financial Tax, 2012).

2 Potential for Disaster

Murphy suggests that IFRS will not require accounting for stewardship of public funds entrusted, or for the supply of services, both of which are core to the management of local authorities. And we know that a failure to measure almost always means a failure to deliver in management terms. This means we have a potential disaster on our hands. Normative requirements for a good accounting system can vary, but the overall definition of a good accounting system is exemplified in the law of Armenia relating to accounting. In Armenian law, for example: The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an organization to the users of financial statements (present and potential investors, the management and employees, state bodies, suppliers and other creditors, loan issuers, the general public and other users) that is useful in making economic decisions (Armenia Accounting Law, 2003, Article 7). What are the normative requirements for a good accounting system in local authorities? Based on the description provided in Armenian law (Armenia Accounting Law, 2003, Article 7), above, the requirements are those which would provide the financial position, performance and changes in financial position of an organization to the users of financial statements. Drawing attention to the definition, it is emphasizes providing this information to the users of financial statements. Contrast this to the IFRS, which as Richard Murphy pointed out, defines decision useful information as that needed by an investor to decided whether to buy or sell shares in an entity. By virtue of its nature, the governmental entity is not one that either buys, nor sells, shares. Thus, the IFRS fails to deliver any concept of Stewardship, delivery of value for money, accountability and forward planning. This is because it is not implemented to do so. Indeed, it appears that the IFRS was never intended to deliver any attributes related to public performance, at least in its first iteration. Consider this statement from the International Accounting Standards Board (IASB) (2006):

The boards decided to focus initially on business entities in the private sector. Once concepts for those entities are developed, the boards will consider the applicability of those concepts to financial reporting by other entities, such as not-for-profit entities in the private sector and, in some jurisdictions, business entities in the public sector (IASB, 2006, p. 9). In short, any efficacy for public organizations is an afterthought, an add-on or value added. It is not and was not the purpose of the IFRS to judge or provide information on accountability of public entities.

3 Why is IFRS Being Imposed?

Stewardship, financial performance, delivery of value for money and action over time all seem to be quite relevant and desired accounting attributes for local authorities. If IFRSs are wholly uninterested in these attributes, then why are IFRSs being imposed on UK local authorities? Keates (2010) offers ideas behind the reason for the imposition, but also suggests that there are agencies that should be are excluded from IFRS reporting requirements. In Canada, for example: Government organizations are classified in the PSA Handbook as either government business enterprises, also known as GBEs, government not-for-profit organizations, known as GNFPOs, or other government organizations, sometimes called OGOs (Keates, 2010, p. 2). The use of IFRS would be appropriate for GBEs; it would not be appropriate for GNFPOs, and it might be appropriate for some, but not necessarily all, OGOs. Canada suggests that any governmental organizations which sell goods and services to individuals and organizations outside of the government as their principal activity and are not dependent on the government for ongoing assistance (p. 3) would be candidates for use of IFRS. Their logic is that IFRS is designed for use with commercial organizations. Thus, they suggest, any organization which is a commercial organization should be required to utilize IFRS (Keates, 2010). Keates also suggests that there are governmental agencies that are not really business enterprises or non-profits. Organizations such as libraries, the Securities exchange commissions, and governmental

broadcasting organizations would fall into this category of other governmental organizations or OGOs. Keates (2010) argues that organizations which are completely dependent upon governmental organizations would be better served to follow accounting provisions which are better suited for governmental organizations overall. Thus, if a governmental organization sells only to other governmental organizations, if it exists on grants from the government, or from governmental budgeting, then it should follow non-IFRB standards. If, however, the agency meets certain criteria then IFRB standards might be better considered. Thus, using IFRB should be considered: If the agency issues debt certificates or equity instruments in the public market, or If the organization hold assets for a large group of outsiders, or If the organization gets a significant portion of income from non-governmental resources, or If the agency gets so little proportion of its income from the government that it is essentially independent (Keates, 2010). Through all of the investigation and discussion thus far in the paper, there has been a consistent thread: governmental organizations which issue stock, hold assets, or develop income would be appropriate candidates for IFRB standards; governmental organizations which get the vast majority of their money from governmental funding or grants would not be good candidates for this type of accounting oversight. Thus far, the major beneficiaries of a move to IFRB have been discussed as being the governmental organizations which issue stock, hold assets, or develop income. These organizations are likely to be benefitted simply because the IFRB helps to clarify financial positions of organizations which are profit-driven. This advantage does not apply to non-profits. While the former chairman of the American SEC, Christopher Cox, supported IFRB, his successor, Mary Shapiro, does not. Shapiro suggested that: When it comes to international accounting standards, its critical that these standards are converged in a way that does not kick off a race to the bottom. American investors

deserve and expect high standards of financial reporting, transparency, and disclosure along with a standard setter that is free from political interference and that has the resources to be a strong watchdog. At this time, it is not apparent that the IASB meets those criteria, and I am not prepared to delegate standard-setting or oversight responsibility to the IASB (Austin & Tscgakert, 2009, sl. 26). The difference between Shapiros opinion, and Coxs opinion, which is that the language of disclosure is a goal worth pursuing could not be more opposed from each other. However, it is significant to consider the entirety of Coxs opinion. The goal, Cox states, is a goal that should be pursued on behalf of investors who seek comparable financial information to make well-informed investment decisions (Austin & Tscgakert, 2009, sl. 26). Thus we see that even in the words of Cox, who is an ardent supporter of IFRS, the emphasis is still on making informed investment decisions, an implication that IFRS is not well suited to public agencies. Why, then, would so many organizations and high-powered individuals support the implementation of IFRS under circumstances that are clearly not well suited? A clue may lie in the document produced by Austin and Tscgakert (2009). Austin is a managing member of Swenson Investments and Accounting, LLC. Like the many members of the Big Four accounting firms, Austins firm stands to remain employed and to make money for many years to come over the implementation of IFRS. In fact, Austin and Tscgakert (2009, sl. 62) state that there are IFRS Business Opportunities for CPAs, a fact considered to be so important that it was granted a presentation slide of its own. Austin and Tscgakert (2009) devote an entire slide to ways that the CPA can have a business opportunity while assisting the client to adopt IFRS. Among the ways are to Develop thought leadership materials and to address a number of different conditions with the client, including project management, software management and tools, and training materials (slide 63). In short, money-making opportunities. Colleges and universities world-wide are implementing IFRS into their curriculum. Chartered accountants groups in England and Wales are now offering certificates in IFRS, another moneymaking opportunity. Worldwide, accounting companies offer continuing education in IFRS.

The group of selected internet resources on IFRS from the Austin and Tscgkert presentation provides more insight into who stands to benefit from the implementation of IFRS. The list is presented in its entirety, because it is so illuminating. Disbelievers or those who have asserted that the IFRS is being touted out of need, rather than greed, should consider the companies and organizations on this list, slides 74 and 75 of the Austin and Tscgakert (2009) presentation: International Accounting Standards Board (www.iasb.org) American Institute of Certified Public Accountants (www.ifrs.com) Deloitte (www.iasplus.com) Deloitte (www.deloitteifrslearning.com) KPMG (www.kpmgfacultyportal.com) PricewaterhouseCoopers (www.pwc.com/faculty) Ernst & Young (www.ey.com/ifrs) European Commission (http://ec.europa.eu/internal_market/accounting/ias_en.htm) European Financial Reporting Advisory Group (www.efrag.org) The Federation of European Accountants (www.fee.be) The Committee of European Securities Regulators (www.cesr-eu.org) Chartered Accountants of Canada (www.cica.ca) The Institute of Chartered Accountants of England and Wales (www.icaew.com) International Association for Accounting Education and Research (www.iaaer.org) Association of Chartered Certified Accountants (www.accaglobal.com) Financial Accounting Standards Board (www.fasb.org) Chartered Financial Analyst Institute (www.cfainstitute.org) Securities and Exchange Commission (www.sec.gov) SEC Roadmap to IFRS (http://www.sec.gov/spotlight/ifrsroadmap.htm) American Institute of Certified Public Accountants (www.aicpa.org) Public Company Accounting Oversight Board (www.pcaobus.org) International Auditing and Assurance Standards Board (www.ifac.org/IAASB) UN Conference on Trade and Development (www.unctad.org)

 International Organization of Securities Commissions (www.iosco.org) Financial Stability Forum (www.fsforum.org) XBRL International (www.xbrl.org) The simple list above, combined with other literature that has been presented, should show the major beneficiaries of this move, how they will benefit, and why IFRSs are imposed on local authorities given the argument that they fail to serve the purpose.

4 Implications of the IASB and the Big Four

Murphy claims that the IASB does not act in the public interest. They are a private cartel designed and promoted for the benefit of their biggest sponsors who are the Big 4 firms of accountants. This statement is a suggestion that Big Four accounting firms are literally a cartel blackmailing thousands of corporations into hiring their services. Orlik (2011) pointed out that smaller accounting firms are making money, but thus far, IFRS has added more to the coffers and CVs of the biggest firms, with mid-tier accountants jostling for crumbs at the edges. Consider this selection from an editorial in the April 2011 edition of The Management Accountant: IASB is made up of fifteen members representing nine countries, including China, Japan, Australia, and the U.S. It is sponsored by a variety of financial institutions, companies, banks, and accounting firms. In 2002, a year after their establishment, the IASB got united with the Financial Accounting Standards Board (FASB) to combine their knowledge and develop a set of high-quality accounting standards (p. 265). Who sponsors the IASB, the organization developing the IFRS? The answer lies above. It is sponsored by a variety of financial institutions, companies, banks, and accounting firms. (Management Accountant, 2011, p. 265). Lest the reader still fail to make the connection between the list of internet sponsors listed earlier, the description of sponsors above, and the possibility given by Murphy that the IASB and the Big 4 accounting firms are in a cartel behind the emergence of the international financial accounting standards (class handout), here is further anecdotal evidence. Consider that in India, the implementation of IFRS has been delayed because huge legislative changes are imperative in the field of Companies Law, Income tax Act and Rules, Securities and Exchange Board of India (Rules and Regulations), Foreign Exchange

Management Act (FEMA) and other allied areas (Management Accountant, 2011, p. 265). Perusal of Armenia Accounting Law (2003) leads to the conclusion that Armenian law will also have to be changed to be in accordance with IFRS. Given that these countries were in compliance with previous international accounting law, the implcation is that there will be other nations who must change their laws in order to accomodate IFRS. Veron (2008) suggests that accounting standards are being used as a scapegoat for the financial turmoil that developed in the global economy in 2008. Veron reported that this is no different than the questioning that occurred after the Enron and Worldcom scandals. However, he pointed out, accounting standards are neither the source of this problem, nor the remedy (Veron, 2008, last para.). Let there be no doubt, however, that the Big Four firms are taking advantage of the situation. Kornik (2009) reported that: With more than 1,400 conversions globally under its belt, KPMG believes it is uniquely positioned to advise clients through the entire IFRS process. Were global, and we have strong IFRS technical skillsand those qualities are limited to just a few firms, Koennecke says. Three of those firms are Ernst & Young, Deloitte and PwC. Since at least 2001, all three firms say they have been busy bulking up their U.S. practice with overseas talent and ramping up training .... While no one is quite sure just how big the potential of IFRS (and estimates vary widely), what is certain is that consulting firmsand specifically the Big 4are looking at IFRS as a potential gravy train, particularly now that the bottom has dropped out from so many other parts of the business...(paras. 5, 3). Ironically, countries who have been convinced that IFRS offers a better method of accounting will now be pouring hundreds of thousands of dollars into getting laws aligned with the new standards. Perhaps reality will sink in as governments begin purchasing new computers (to run new software), new software (to meet reporting requirements), and training new personnel (to use the computers and software).

5 Consideration of IFRS Adoption by Local Authorities in Australia

IFRS bears a great deal of scrutiny before any move is made to adopt it in its entirety by the Australian local authorities. The evidence appears to be significant that IFRS is not appropriate for

many if not most applications by local authorities. Given that local authorities in many nations are doing some form of opt out from IFRS requirements, many for small companies as well as for governmental organizations, it does not appear to be appropriate for blanket adoption by Australian local authorities. At most Australia should adopt IFRS only for publicly listed companies.

References
Accounting Financial Tax (2012) IFRS and GAAP: Balance sheet and income statement. Retrieved from http://accounting-financial-tax.com/ Armenia Accounting Law (2003) Armenia Accounting Law, Article 7. Retrieved from http://www.parliament.am/law_docs/310103HO515eng.pdf Austin, S., & Tschakert, N. (2009) Major differences in US GAAP & IFRS and latest developments. Presentation to Accounting Day, Town and Country Convention Center, May 18,

2009. Retrieved online at http://www.swensonadvisors.com/assets/MajorDifferencesBetweenUSGAAPandIFRS.pdf Epstein, B. (2012) IFRS statement of financial position. Retrieved from http://www.ifrsaccounting.com/ifrsbalancesheet.html IASB (2006) Discussion paper preliminary views on an improved conceptual framework for financial reportingThe objective of financial reporting and qualitative characteristics of decision-useful financial reporting. London: International Accounting Standards Board Retrieved from http://www.iasb.org/NR/rdonlyres/4651ADFC-AB83-4619-A75A4F279C175006/0/DP_ConceptualFramework.pdf Keates, J. (2010) Implications of IFRS on public sector accounting. Public Sector Accounting Board, Canadian Institute Of Chartered Accountants. Retrieved from http://www.psabccsp.ca/articles/item37749.pdf Kornik, J. (2009) Financial aid: IFRS. March 26, 2009. Consulting. Retrieved online at http://www.consultingmag.com/article/ART236297?C=TvJF9fgnkxq8wQR Management Accountant (2011) Editorial. April 2011. The Management Accountant 46(4). Retrieved online from http://www.myicwai.com/manacc/apr11.pdf Orlik, R. (2011) Whos riding the IFRS gravy train? August 22, 2011. Accountancy Age. Retrieved online at http://www.accountancyage.com/aa/accountancy-matters-blog/2103508/whos-riding-ifrsgravy-train Veron, N. (2008) Can accounting standards be scapegoated for the turmoil? Originally published in French in La Tribune, 21 January 2008. European Tribune. Retrieved online at http://www.eurotrib.com/?op=displaystory;sid=2008/1/21/83137/7644

Acknowledgement
This document is mainly based on the Mechatronics 2002 template.