Over the last few years we've heard much discussion about converging U.S. and global accounting rules, suggesting that the United States will adopt International Financial Reporting Standards and designate the International Accounting Standards Board as its authoritative standard setter. After all, the argument went, over 120 countries use IFRS; why shouldn't we?

That logic brings to mind the words of H.L. Mencken: “There is always an easy solution to every human problem—neat, plausible, and wrong.” Convergence sounds easy, neat, and plausible, but careful analysis reveals that it is just wrong. Unfortunately, most people don't get past the superficial plausibility and miss the erroneous premises. Those errors are becoming apparent now that the wheels are coming off this bandwagon. Here are my 10 reasons why convergence will not, and should not, happen, despite its previously unstoppable momentum.

1. High-quality standards are elusive. Convergence adherents extol the advantages of “high-quality uniform standards,” but they overlook standard setting's long history. Since its formal beginning in the 1930s, the process has been characterized by political feasibility and compromise. For example, the Last In, First Out method of inventory accounting has remained unchallenged ever since it became generally accepted in 1939 when Congress put it into the tax code. Another unchallenged practice is systemic depreciation that has produced abysmal information about assets since it was put into practice in the 1830s. Lower-of-cost-or-market applications protect auditors without helping managers convey useful information to users. In short, high-quality standards don't exist, and an international board with divergent constituents and interests certainly won't create them.

ABOUT THE AUTHOR

Paul B. W. Miller is professor of accounting at the University of Colorado at Colorado Springs. He was a staff member at both the Financial Accounting Standards Board and the Securities and Exchange Commission and has been a long-time observer and commenter on the financial reporting policy-making process and its results. He is also a frequent contributor to leading accounting journals.

2. Uniformity doesn't equal comparability. Convergence proponents claim that getting everyone to do the same thing will make all financial statements comparable. That premise is neat, plausible, and wrong because comparability results only if everybody reports everything truthfully. Comparability doesn't happen when all firms report the same untruths or half-truths. For example, accounting for research and development requires everyone to expense every penny spent, so that those who are successful look no better than those who discovered nothing. Excluding unrealized gains and losses from income makes successful investors look worse and unsuccessful ones better. Uniformity without the truth may help auditors and regulators, but it does not help users gain access to comparable reports, and it doesn't help managers gain access to capital without greater risk penalties.

3. IFRS isn't adopted uniformly. So many reservations about IFRS exist, especially among developed countries, that local authorities disregard those pieces they find objectionable or inapplicable to their economies. According to the National Association of State Boards of Accountancy, the combined GDP of countries that fully adopt all of IFRS equals the output of California and Georgia (the state). Even if uniformity led to comparability (which it doesn't), IFRS isn't uniformly adopted.

4. IFRS isn't uniformly enforced. Many U.S. accountants presume that enforcement around the world is just as effective as it is here. That premise, as Mencken suggested, is wrong. Suppose, for example, a Belarusian company that purportedly complied with IFRS hoodwinked U.S. investors with misleading statements. Does anyone think their complaints would be prosecuted in Belarus as vigorously as they would be here? For now and a long time, real investor protection will mostly stop at our borders.

5. Users decide anyway. Many seem to forget that users of financial statements hold ultimate power. The standards are irrelevant If they don't believe what's reported. When investors know, or even suspect, they're not getting the truth, they'll either try to find it on their own or factor higher risk into their investment decisions. Either way, the result is lower stock prices, less liquidity, and higher capital costs. All that matters is how truthful, accessible, and useful the reports are. International standards aren't delivering those qualities now and there is little reason to believe IASB's complex political process will create dramatic reform.

6. The majority of adopters lack any clout. IASB has, I fear, been disingenuous in claiming more than 120 adopters. Well over half that number are tiny economies like Belarus, Georgia (the country), Gibraltar, Malawi, Sri Lanka, and the West Bank and Gaza. IFRS made sense to them because they didn't have to produce their own rules, but extending that logic to the United States is ludi­crous. There's no point sacrificing our system to descend to their level.

7. Sir David's faux pas. In August 2010, IASB Chairman Sir David Tweedie used a video interview to urge the U.S. to adopt IFRS. Seemingly eager to press his point, he threatened us with exclusion from the process if we don't adopt soon. He cited the incongruity of having four Americans as IASB members (implying that might change without adoption). Under that assumption, he said adopting later will force us to use standards we didn't shape. Rather than being credible, his words came across as whining, especially since he didn't acknowledge that IASB receives more contributions from U.S. companies than from any other country. Instead of winning converts, he may have offended allies, while cooling IASB's relations with the Financial Accounting Standards Board and the Securities and Exchange Commission have cooled.

8. FASB's retreat. Six years ago FASB and IASB agreed to complete a complex joint agenda by 2011. In February 2010, FASB's technical plan described these goals: 13 exposure drafts by that year's third quarter, 13 final statements, and three discussion papers by year-end, with six more final statements in 2011. This pace was implausible, if only for the number of comment letters to be written, analyzed, and responded to. After disastrous results (my opinion) with weak proposals, FASB's ardor has cooled and these goals have been significantly curtailed. September 2010 brought the surprise resignation of FASB's chairman, Bob Herz, a notable advocate for convergence, as well as the Financial Accounting Foundation's unanticipated announcement that FASB will once again have seven members after a recent cutback to five. This move looks like a reversal of a downsizing that may have anticipated disbanding FASB once IFRS was adopted.

9. The SEC was hot but now it's not. In fall 2008, then-SEC Chairman Christopher Cox rushed through a roadmap for adopting IFRS and IASB's political process as our own as early as 2015. By the time it was announced (and gushingly praised by the Big 4 and the AICPA), the handwriting was clear: The Democrats were going to win big. Once that happened, Mary Schapiro replaced Cox and Republicans lost the SEC majority. Not surprisingly, the new administration wasn't going to run with the opposition's agenda. Through diplomatic language, the SEC says it continues to “study” the possibility of adopting IFRS, but it clearly has little enthusiasm for that option, and would rather put this issue away forever. Indeed, the Commission's announcements cite insurmountable obstacles, including the fact that GAAP is embedded in private company practices, federal and state income tax laws, and contracts of all kinds. Even if the SEC adopted IFRS, two systems would remain in effect. Like home fans who continue to cheer when their team is down in the waning minutes, the Big 4 and the AICPA continue to find hopeful news in the SEC's words. My advice: Don't fall for their optimism.

10. Congress is not going to embrace this idea. Even with the House's recent shift, nobody should think adoption would fly in Congress, especially on one wing. Federal securities law, including the Sarbanes-Oxley Act, requires the SEC to establish accounting standards for public companies and to fund and oversee a private-sector standards setter. (The money comes from fees paid by public companies.) Even if the SEC decided it wanted to adopt IFRS, it would have to persuade Congress to amend these laws to strip out those mandates, thus turning the process over (with no strings attached) to an international body funded by foreign corporations and influenced (controlled?) by parties with interests counter (inimical?) to ours. The SEC would have to say with a straight face that this abdication would be in the best interests of American investors and capital markets. That's just not going to happen.

I expect that accounting history will treat the adoption movement as an anomalous blip, when a few with influence misplaced their common sense and pushed a change that had no chance. Simultaneously, followers were lulled into believing it was easy, simple, and plausible. I'm confident this mistaken campaign will be stopped.

On the other hand, a form of convergence will still exist as FASB and IASB work together on common standards. Even that model, however, will evolve such that FASB will probably only take IFRS requirements into consideration when creating its own new standards without having to achieve an amiable international consensus by compromising away rigor. There's just no wisdom in our slowing down when we're ahead of the pack.