IFRS and principles too weak to work?

Al Rosen, in the second of a three part series in the Financial Post about the transition from Canadian GAAP to IFRS:

IFRS is too weak in its current form for investors to accept on par with current Canadian standards. Nonetheless, we are on course to implement IFRS in just three years.

He quotes and agrees with Arthur Levitt, who spoke out against IFRS and principles-based standards, claiming they will increase risk to investors, conceal fraud longer than current standards, and increase, not decrease, the cost of capital.

He believes that rules are necessary and argues that Canadian GAAP is largely rules-based:

In actuality, court cases have shown that Canadian auditors automatically gravitate towards a rules-based mentality. Published materials provide extensive appendices, interpretations, industry tabulations and other comparative guidance that are nothing more than rules.

I can see where he’s coming from, but I don’t agree that we should abandon plans to adopt IFRS and go back to what is essentially accounting isolationism. The standards are new and evolving, just as standards have done in individual countries before them, because that is just their nature.

Principles can work, and in theory are better than rules. Two additional changes should be made to the profession in order to fully realize the benefit, however. Mandatory audit firm rotation and even tighter restrictions on the ancillary services a company’s auditor can provide will help principles work.

Those steps could also increase competition for audits, helping to keep costs associated with switching auditors manageable. Although the effect is uncertain, they could make it easier to find fault in fraud cases, whereas rules may provide management or the auditors to make the case they followed the letter, if not the spirit, of the standards.

In a perfect world we wouldn’t need more rules, but history has shown that in this one we do.

History has also shown that rules don’t always work and often open a new loophole for each it closes. We can either try to find a better way or just make more rules.

The benefits of a strong set of international standards based on principles is a worthy goal and will require eternal vigilance. Perhaps the standards today need improvement in areas. This shouldn’t derail the whole process.

What do you think of Al Rosen’s position? Have rules been unfairly criticized? Could international standards be improved with greater specificity? Or should we just forget the dream entirely?

3 thoughts on “IFRS and principles too weak to work?

  1. Whoa, I must completely disagree with the idea that mandatory rotation would decrease costs in and of itself due to ‘more competition’.

    The only reason it would decrease costs if you’re getting gouged and don’t realize it until you switch to someone else and they come in at a more reasonable level.

    Although anything’s possible, I doubt that many companies would let themselves be gouged so hard – they would rotate to a new auditor *now* if they were being overcharged.

    No, mandatory rotation would cause unnecessary shifts in auditors. Yeah, it’s true the incumbent may know a client really well, but that in and of itself isn’t a reason to be concerned. If you’re doing a quality job, it doesn’t matter if it’s your 2nd or 12th year auditing a company, you should still be questioning everything that deserves a deeper look.

    Taking on a new audit involves HUGE investments of time and energy. It’s fun and I encourage everyone to switch to my firm for their services , but it really is a huge investment and in the short term, you’ll definitely either face higher fees or at least higher costs on the audit firm’s side.

    To some extent, audit firms will have absorb some of the ‘first year’ costs, but in teh end, someone has to pay for the cost of business.

    As for what’s wrong with IFRS, I’d like to hear some specific complaints rather than some generalized moaning.

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