Review of business accounting article from 2002

¶ … studied appeared a business accounting publications. A partial list publications article selected: The Accounting Review, Barrons, Wall Street Journal, Business Week, Fortune, Barrons, and Wall Street Journal.

GAAP article review:

Crovitz, Gordon L. (2008, September 8).Closing the information GAAP. The Wall Street

Journal. Retrieved November 22, 2010 at http://online.wsj.com/article/SB122083366235408621.html

GAAP article review:

Crovitz, Gordon L. (2008, September 8).Closing the information GAAP. The Wall Street

Journal. Retrieved November 22, 2010 at http://online.wsj.com/article/SB122083366235408621.html

The Wall Street Journal is famous for its pro-business, conservative editorials. So perhaps it is no surprise that in 2008, Journal editorial writer Gordon L. Crovitz praised the Securities and Exchange Commission (SEC)'s decision to mandate a shift to international accounting standards, in a phasing out of GAAP (Generally Accepted Accounting Principles) by 2016 for all U.S. firms. The Journal writer said that this was reflective of the "remarkably quickening pace of acceptance of a true lingua franca for accounting," (Crovitz 2008). GAAP has stood as the bible of U.S. accountants for 75 years, but the Journal says GAAP has grown rapidly outdated because of the cumbersome and unwieldy number of regulations it contains. Now International Financial Reporting Standards (IFRS), whose regulatory board is based in London, will replace GAAP.

To be a fully-involved participant in the world economic community, the U.S. must embrace widely-practiced international accounting standards, and no longer be mired in the past. The adoption of IFSC will eliminate waste and inefficiency, now that multinationals will no longer have to prepare multiple accounting books for different regulatory agencies to review. The adoption of IFRS guidelines "would also make U.S. exchanges more competitive for listings by eliminating accounting differences" (Crovitz 2008). This will, Crovitz suggests, increase the influx of international cash to U.S. firms, which is particularly important given the increased strength of the European Union in the world economy.

The Journal, of course, does not dwell on the fact that smaller companies who are not large multinationals and have never used IFSC rules will be financially hurt by this shift, as they will have to pay for the costs of adopting an entirely new accounting system. Despite its highly-touted flexibility, IFSC rules may prove onerous for some firms: the IFSC only allows the first-in; first-out inventory accounting system (FIFO) and some U.S. firms use the last-in, first-out inventory accounting system LIFO. In fact, because of its tax advantage for businesses, many firms have shifted to LIFO (Gibson 2002). Yet, despite the international guidelines' insistence upon FIFO, most firms tend to appear more rather than less profitable when using IFSC, which again seems to underline the possibility of 'flexible' accounting practices under the less detailed IFSC system.

Critics charge that IFSC regulations are less specific, and are thus more open to financial 'smoke and mirrors' of the type seen in the recent accounting scandals at WorldCom and Enron. Crovitz points out that GAAP's nine-inch, three-volume list of guidelines did not prevent such scandals and some have suggested that IFSC's emphasis on principles vs. exact policy is a superior means of ethical enforcement. "There are hundreds of pages of GAAP covering how to account for derivatives, but this didn't stop opaque pricing mismatches, which helped create the credit crunch. GAAP rules allowed trillions of dollars in securitized financial assets and liabilities to stay off the books of U.S. financial firms, while the international standard, by focusing on the true underlying economics, kept these on the books for firms-based elsewhere" (Crovitz 2008). A single set of standards, stresses Crovitz, would thus increase transparency overall and GAAP has not shown itself to be superior in ferreting out fraud, as it supporters claim.

Crovitz admits there will be difficulties in the shift to the new system. While the major accounting firms support the transition to the international standard, critics allege these amounts to an effective 'full time employment' insurance policy for accountants, given the headaches that will ensue making the shift. The mandated transition period is extremely long, but that may make things worse, rather than better for investors and organizations, given that some entities within the same industry may be deploying different standards at the same time: "The transition will also be tough on investors. Under the SEC proposal, larger companies in the same industry would switch to the international standard before smaller companies do. Investors for the transition period would have to compare similar companies using different accounting" (Crovitz 2008). Investors have already complained about the difficulties about managing and assessing risk in the complicated economic environment, and the long transition period could only worsen such confusion during a critical juncture of the nation's economic history.