Around the world, important elements of as-reported corporate financial statements have become unreliable. As-reported assets, investments, debts, earnings, equity accounts, and even revenue have become unreliable representations of the reality of the reported balances and activities. The problem stems from significant inconsistencies in the rules and application of those rules in financial statements as-reported today.
There is a growing awareness to the severity of these problems, but by only a small fraction of the total users of financial statements. Members of the governing accounting bodies of FASB and IASB have publicly called out many of the issues. The SEC has stated there is a growing “erosion in the quality of financial reporting.” Expert accounting practitioners have highlighted the many issues.
The case for UAFRS is becoming an obvious garbage-in, garbage-out situation. Performance metrics and derived valuation analysis built on as-reported financials are terribly distorted and in some cases useless.
Earnings can be reported to go up when in fact a firm’s performance has faltered. Price-to-earnings ratios show stocks to be expensive that are in actuality cheap. Margins, assets, capital expenditures, debts, and virtually all key financial performance indicators can be a far cry from an accurate representation of corporate activity.
This is not an attack on management
Unfortunately, the CEO and CFO have received much of the blame for the erosion in financial statement quality. Financial shenanigans of many types are cited as the main issue. For some, there is a prevailing belief that the management team is responsible.
The problem is certainly getting worse, and yet it is not because of a few unscrupulous management teams. The global financial reporting problem rests squarely with the rule-making process of the governing accounting bodies over time.
The financial reporting authorities have established a set of standards that have been argued, debated, and then established over decades and decades. The result is a set of accounting rules with inconsistent policies that reflect a mixture of differing objectives for the financial statements.
The accounting rule-making discussions do not occur in a vacuum of accounting theory and practice. Instead, these rules have been established inside very influential and changing environments.
Among a long list of accounting-influencing environments, these include varying economic climates, changing political regimes, waxing and waning trends in globalization versus nationalism, and trends in the influence of various stakeholders such as equity, credit, or the general public.
GAAP/IFRS Inconsistencies
Accounting and Financial Reporting Inconsistencies that Require Adjustments to Reach Uniform Accounting standards under UAFRS. This list is not comprehensive.
- Research and Development
- Pension Accounting
- Extraordinary Charges
- Tax Loss Carryforwards
- Working Capital Cash Balances
- Asset Life
- Excess Cash
- GDP Deflator Adjusted Gross PP&E
- Operating Long-term Investments
- Goodwill Impairment
- Acquisition Adjustments
- Asset Writedowns
- Insurance Settlements
- Dividend Income
- Pre-tax Profit/Loss from Asset Sales
- Pre-tax Profit/Loss from Investment Sales
- Discontinued Operations
- Restructuring Charges
- Merger & Related Restructuring Charges
- Non-operating Income/Expense
- Lease Capitalization