Proponents of a move toward IFRS adoption in the U.S. praise its more "principles-based" approach over U.S. GAAP, but America 's corporate culture could modify that label. In fact, the management set-up here could permeate over to Europe eventually, leading to an evolution of international financial reporting standards to more closely resemble GAAP, which has been tweaked, modified, appended, and is now nearly stumbling over its own weight.
So argues the Accounting Onion blogger, who is pleading for caution amid the "political pressure to trash U.S. GAAP and adopt IFRS." In his latest post, Tom Selling, a financial reporting and management consultant and regular CFO.com reader, argues that GAAP has evolved into its set of specific rules to compensate for our corporate ownership patterns encouraging misjudgments by management.
Unlike Europe's favored use of majority-owned corporations, the U.S. corporate governance structures are controlled by shareholders, and thus directors who are heavily influenced by management, writes Selling, who bases his theory on a study penned by Columbia Law School professor John Coffee. Management's judgment in the U.S. is more swayed by their personal stake in their company's earnings, and auditors, analysts, and directors may not have enough chutzpah to properly question financial-reporting manipulations.
"Without empowered gatekeepers to prevent accounting fraud, we have had to place our hopes on very inflexible accounting rules, and sheriffs like the SEC and private attorneys to catch the cases where management has attempted to surreptitiously cross the bright line," Selling continues.
His thinking goes against the IFRS fans who claim a less rules-based approach will
actually discourage earnings management (and of course allow more professional judgment and leeway on the part of both internal and external accountants).
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