It is with some awe that I continue to observe the energy that is going into launching this new industry called IFRS in the US.  It’s like SOX is the washed up celebrity and there is a fresh new face all over the tabloids that everyone is paying attention to (and throwing money at).  Reporting systems are now advertised as being “IFRS compliant” as if you can buy it prepackaged with a module that will automatically convert your US GAAP financial statements.  Recruiters are getting a bead on technical accounting talent to eventually place at their clients.  Every single Big 4 firm is issuing countless commentaries on the subject (each one trying to outdo the other).  And there is no shortage of IFRS training and seminars to make sure you are ready.

Ready for what?!  Since this craziness ramped up late last year, the recently approved and highly anticipated roadmap from the SEC simply says that they will look at the matter for another three years or so and make their decision in 2011.  Don’t get me wrong - as a revenue recognition consultant, I always knew there would be enough years of grief with US GAAP that I’d have more than enough work until someone tried to fix it.  Then my practice would have a few years of implementation/conversion work under whatever the new standards were, followed by a few more years of dealing with the new grief caused by the inevitable interpretations of interpretations of the guidance that was meant to fix everything.  I initially thought this chain of opportunity would stem from the joint IASB/FASB project on revenue recognition (which has been going on since 2002, by the way).  However, it appears I now have an alternative benefactor in IFRS – or do I?

Despite the usual internal objections to actually having a deadline at all for the FASB Board to finally issue a revenue recognition standard (2011), I hope the timing is not just coincidental with when the SEC will make their decision as to whether to proceed with IFRS.  I have to hope the benefits that come from discussing improvements over accounting for the biggest number on your P&L for almost a decade will not go to waste.

For those who are so eagerly anticipating the introduction of IFRS, let’s do a reality check for a moment:

• for nearly 75 years, it has been the job of the SEC to protect investors by issuing very specific guidance, often in response to abuses;
• the accounting standard setters have evolved US GAAP into its “rules-based” approach by issuing guidance like SOP 97-2 for companies that sell software;
• we have trained generations of accountants and auditors in this “rules-based” regime; and
• if a judgment call is not objectionable under GAAP, management will (as expected) push the limits of interpretations of principles to report desired financial results. 

The question is not whether companies are ready to adopt IFRS, but rather whether the regulators, standard setters, and the accounting profession itself are ready.  Companies will do what they did when SOX was introduced – spend a lot of money in a short period of time based on someone else’s advise on what they think section 404 means, and those who start sooner with an appropriate level of resources will be better off than those who wait to address this issue.  At least with IFRS, we have a bit of runway, but first I have to ask a basic question:  If we can’t figure out something as fundamental as what VSOE of fair value is under rules-based guidance like SOP 97-2, how will we even begin to entertain adoption of a principles-based approach like IFRS when the level of judgment is widened?

In response to this rhetorical question, here is what I predict the next several years will look like:

• on or before 2011, the SEC will say that it needs more time to look at IFRS because they will have done their own reality check of the situation;
• the SEC won’t abandon it altogether because it will become increasingly embarrassing that rest of the world has long moved on to the standard;
• instead, it will become clear IFRS is the way to go, but that there are still some specific rules that are needed to continue to ensure consistency and comparability;
• the SEC will need to work on these rules and interpretations for a while which will include the revenue recognition standards that come out of the joint IASB/FASB project (assuming the project is actually completed);
• we will end up with a “rules-based” version of IFRS for US companies; and
• despite the roadmap just introduced, the majority of filers will be allowed (or forced) to adopt IFRS somewhere near 2020. 

Global standards are nothing new and even IFRS is nothing new.  I do believe the long term benefits of adopting IFRS will be improvements to comparability and consistency in financial statements.  However, when given a choice between usefulness of financial statements and protection, investors will choose protection.

The mandate of the SEC is to protect investors, and that is what they will continue to do no matter what form of GAAP companies file under.

My wife (who works for one of the Big 4) said I should entitle this “Working with Auditors” to send a more positive message.  I thought about that and decided that “dealing” with them is still the more accurate verb when I think of interactions between auditors and management.

On the other hand, I certainly would not put auditors in the category of a “necessary evil”.  They are necessary, but they are not evil (for the most part).  While management is responsible for the financial statements, the auditors are the ones putting a signature on the opinion.  None of us should deny they have a key stake.

f you do any public filings of financial statements or otherwise need an opinion on GAAP financial statements, you have to go through an auditor to get them.  If you don’t mind a frustrating audit or review process combined with needless cycles of inefficient discussions, rework, and/or adjusting journal entries, don’t bother reading on.  However, if you want to continue to improve the process of issuing financial statements, here are a few things I’ve noted along the way that tend to create useful paths of least resistance.

Take responsibility for your financial statements.  The audit opinion states the “financial statements are the responsibility of management”.  I still come across some finance executives that think the best way to deal with an issue is to wait until the auditors find it.  This is poor management, not to mention poor control.  However, don’t let your audit team unduly influence your decision when there is a judgment call to make.  Just because it may be a more aggressive position, this does not mean it is objectionable under GAAP, or even inconsistent with their firm’s official position.

Consult and communicate.  Auditors don’t write those memos telling you how to account for transactions like they used to.  However, what they often do now is publish 3-400 page commentaries on certain topics.  Where you have a complex arrangement, these guides are good sources of more fully described interpretations.  And if the arrangement is so complex (provided the transaction is not yet under audit), get the audit team in a room and discuss the issues.  I have not yet found an audit team that is unwilling to do this.  It is not an internal control issue if management is considering all the potential alternatives of accounting for a transaction.

Own the audit process.  Again, they are your financial statements.  So when you get those extensive “to be prepared by client” lists, ensure they are asking for the right things, and update it yourself for any changes in accounts, policies, or any other matters.  And if you are being held to deadlines of various sorts, ensure the audit team reciprocates the emphasis on when things need to be done.  An audit is just another project that needs to be managed like one.

Find productive counterparts.  If you know there is a complex issue to resolve, don’t start with the junior on the job and let him or her escalate it.  Pick the level of responsibility that is required at the beginning of the discussion (at least senior manager or partner) so that any further escalation to their technical group can be done quickly if needed.

Get them comfortable, and get them out.  This works much better if complex issues are resolved during the quarter as deals come in.  At any rate, at some point, once appropriate decisions are made around accounting methodology, and everything is appropriately documented, the audit of the transaction has to have an end (some people call this “pencils down”).  Once you find the remaining issues in your technical memo are your grammar and writing style, that’s a pretty good sign the auditors have what they need.

Some or all of these may seem obvious, but I still observe many management teams struggling with their audit teams.

If anyone has any other helpful hints, feel free to add them via a comment.