Switch from GAAP to IFRS could expose accounting fraud to whistleblowers.

Office desk with supplies: calculator, pen, notepad, keyboard and mouse

Last week, James Schnurr, the new chief accountant for the Securities and Exchange Commission, told reporters that he was reviewing prior agency work on the potential accounting switch from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The transition, which the SEC has been considering since at least 2007, will be revisited again by Scnhurr, a partner at Deloitte LLP prior to starting at the SEC a month ago. No decision has been made on the ultimate course of action the agency will pursue, although it will have implications for the method of accounting used by public companies distributing financial statements to shareholders.

The Wall Street Journal identified computer software and wireless communications as two industries where this transition could lead to dramatic changes in corporate accounting. In areas where GAAP and IFRS differ, there is the possibility that the rule switch could potentially expose accounting irregularities at large corporations as historical treatments are re-examined or lead to new situations of accounting fraud if companies attempt to adopt more favorable treatments during the transition.

More than 100 countries including the European Union currently use IFRS. The United States still uses GAAP in company-issued financial statements. When measured by market capitalization, more than half of the world’s companies still use US GAAP.

DEVELOPMENT OF ACCOUNTING STANDARDS

GAAP has been used extensively in the United States since the 1930s. Development started during the Great Depression as the country needed a way to restore confidence in the financial statements of corporations. The SEC encouraged the private sector to develop the accounting standards in 1938.

The movement for development of a set of international accounting standards started to grow in the 1960s. In the 1970s, the Financial Accounting Standards Board was created and began developing the International Accounting Standards. In 2001, the International Accounting Standards Board took over development and the name change to IFRS happened.

In 2005, companies began using IFRS in the European Union. Canada replaced its GAAP with IFRS in 2011. Japan has been promoting greater use of IFRS on a voluntary basis.

The SEC began exploring convergence with the IFRS set by the IASB in 2007. The initial roadmap published in 2008 suggested the potential for use by US issuers as early as 2014. However, according to the Wall Street Journal, “concerns about cost, implementation and the burden on smaller companies” stalled momentum.

IMPLICATIONS FOR WHISTLEBLOWERS

If new rules are adopted, the transition may expose problematic accounting treatments currently on the books or lead to new cases of accounting fraud. If the transition happens, and accountants are asked to adopt questionable accounting practices, they should consider the appropriate response given available options at their employer, the company and the SEC. The SEC whistleblower program or even the IRS program are options.

The IESBA is still working on a new code of ethics for professional accountants but the proposed guidelines currently open the door for an accountant to follow their conscience and report suspected noncompliance with laws and regulations.