Jacques Richard, Professor of accounting
University of Paris Dauphine
The IFRS are both obsolete and dangerous
Before the financial crisis, it was
considered good form to praise the IFRS and in particular any standards that
ensured “fair value”. Those who argued in favour were seen as “modern”; the few
scholars—including us—who criticised the turpitudes of such standards were
depicted as Jeremiahs predicting doom and gloom or as being simply “out of
touch” with modern thinking.
After the crisis (and before the
recovery!), the situation of the Jeremiahs and the out-of-touch has improved to
an extent. They are no longer openly denounced and their ideas are listened to
with greater respect. But has the situation fundamentally changed?
In reality, many sycophants of fair
value have simply fallen silent or have set out to show that the underlying
cause of the crisis stems not from the IFRS but from the abnormal behaviours of
irresponsible managers and traders. Other disciples have attempted—more
skilfully if not more convincingly—to hold on to their credo by retreating
behind a subterfuge: broadly speaking, fair value is a good thing, just not
during a crisis in which markets collapse! Why? Because during these periods,
many markets become so illiquid that market values simply disappear! It is this
kind of argument that has allowed the IASB and the majority of standard-setting
organisations to justify their shameful u-turn on the issue of setting values
for trading activities and to conjure up a sleight of hand to shelter such
activities from depreciation that would otherwise have required disclosure of
major falls in the share prices concerned!
Lastly, even harder to find are
“experts” and regulators who recognise the pernicious nature of the system and
suggest that we turn the page on the IFRS. For the most part, they conclude
that the system remains fundamentally healthy as long as it is “adapted” in
times of crisis.
It is this thesis that we wish to
contest here. In our view, papering over the cracks in the IFRS only serves to
make the situation worse and to foster yet more crises in the future because, fundamentally,
the IFRS are both obsolete and dangerous.
The IFRS are obsolete because they
do not respond to issues in the contemporary world. They remain stuck in a
quaint conception that views financial capital and investors alone as the Alpha
and Omega for managing accounting. In an era in which environmental degradation
poses a serious threat to the survival of mankind and in which innovation plays
an increasingly critical role in international competition, it is environmental
and human capital that should be placed in the spotlight of corporate balance
sheets and be the focus of systematic monitoring of their depreciation. By
focusing uniquely on maintaining financial capital, the IFRS give rise to
illusory profits and justify payouts of fictive dividends. The IFRS should give
way to an environmental accounting suited to the needs of the current
emergency.
The IFRS are dangerous because they
embody a systematic and all-out assault on a fundamental principle underlying
accounting (already fairly well eroded throughout the 20th
century)—the principle of prudence, which forbids statements of potential
profits and prescribes disclosures of potential losses. Essentially, the roots
of this financial crisis at the dawn of the 21st century can be
found in the impudent imprudence of managers and shareholders who are greedy
for short-term profit, backed by the pernicious ideology of “modern” financial
textbooks, and protected by widespread compliance with the principles of
irresponsibility—astronomical salaries and dividends, golden parachutes,
liabilities limited to share of capital, etc. By sounding the death knell for
the principle of prudence and by even daring to herald a principle of
“imprudence” (non-statement of potential losses during times of bust and
statement of potential profits in times of boom), the IFRS has contributed to
the rise to power of the irresponsibility of financial capitalists and their
executive agents with devastating results.
We need to oust the IFRS in favour
of an environmental accounting. To achieve this goal, we will need to
re-establish democracy within the national and international bodies governing
accounting regulation. Currently, it is the representatives of financial
capital and their auditors who hold sway in these bodies. To change this state
of affairs, representatives of human and environmental capital with the backing
of public opinion should take the floor and speak out. The ultimate outcome of
this struggle would be to put an end to the domination of financial capital in
accounting matters.