New financial reporting standards for Canadian businesses this year aim to improve companies’ standing in global capital markets, but they could also make it harder for investors to assess and compare corporate performances.
The new format will appear as early as first-quarter reporting season this spring. At best, the difficulties could be short-term in nature, according to the accounting industry. But some forensic accountants warn that discarding Canadian Generally Accepted Accounting Principals (GAAP) for a customized version of the new International Financial Reporting Standards (IFRS) will create long-term problems, including opening the door for unscrupulous executives to cook the books.
“We expect IFRS will make life miserable for investors,” say forensic accountants Al Rosen and Mark Rosen, authors of Swindlers: Cons & Cheats and How to Protect Your Investments From Them. The father and son team, founders of Accountability Research Corp. in Toronto, are outspoken critics of what they consider a lack of oversight by Canada’s accounting industry. And they say the cozy nature of the sector has allowed the introduction of new reporting standards that serve the interests of auditors over investors.
Since 2005, IFRS has, through its various permutations, become the accounting standard in the European Union, Britain, Australia and many other countries. But to bring together disparate cultures and interests, the architects of IFRS have had to create a framework broad enough to encompass everyone.
“To get consensus on IFRS, they really had to water it down from the start,” Mark Rosen said in an interview.
Canada’s Accounting Standards Board says it made the decision to adopt IFRS for public companies following “extensive consultation with stakeholders.” IFRS is rapidly becoming the global language of accounting, and Canadian businesses operating and competing in global capital markets cannot afford to retain “made-in-Canada reporting standards.”
For Canadian investors and businesses, there will be “short-term pain for considerable long-term gain,” says Peter Martin, director of accounting standards at the Accounting Standards Board. “The long-term gain is that we’re getting closer to the point where investors will be able to look at any financials, from anywhere in the world, and understand them and be able to make comparisons.”
But Mr. Rosen says the comparability factor is just one of several myths put out by the accounting industry to justify new standards that have already delivered extensive consulting fees to the industry and at the same time off-loaded some of auditors’ liability to the boards of companies.
“The comparability factor seemed like an attractive notion, but if you dig into it you see it’s just pie in the sky. It’s just ludicrous to think that if you loosen up all the rules, that will increase comparability,” he says. “All you have to do is look at two companies in the same industry in Canada and you can see immediately they are not compatible because of the choices allowed in IFRS.”
In the real estate sector, for example, IFRS rules require firms to record assets at fair value rather than historical book value. But there are several ways to adjust book value to fair value. RioCan Real Estate Investment Trust opted last September for a one-time adjustment that raised the value of its portfolio by $1.6-billion to $6.9-billion.
Brookfield Properties Corp., on the other hand, has chosen a different course and will adjust the fair value of its portfolio each quarter. Each method is legitimate, but the financials of the two businesses aren’t comparable any more using traditional investor ratios, such as return on equity, Mr. Rosen says.
“Now you’ve opened up the possibility of what management considers fair value to be. And that gets into all sorts of ridiculous choices of internal versus external valuators, what kind of [capitalization] rates to use – all sorts of things that get buried in the notes of financial statements and get incredibly difficult for people to understand.”
