Canada’s IFRS Reporting Aids Financial Swindlers

Canada’s IFRS Reporting Aids Financial Swindlers

AI Rosen

Governments, regulators, investors, and others seemingly have chosen to remain essentially silent about the havoc being caused by the huge thefts from savers. ?Since IFRS was brought to Canada by Canada’s external auditors in 2011-2012, a different series of additional financial collapses and ongoing troubling trickery has dramatically increased. ?Marijuana companies' failures are merely one example. ?Profit potential has easily been faked upwards in these companies; and, billions of dollars became transferred to swindlers. ?IFRS looseness is clearly to blame for many of these additional thefts because reporting rules were seriously weakened by adopting IFRS. Concepts of what was to be called “income” were deeply eroded. ?Plentiful evidence of growing financial deception exists. ?It is irresponsible to deny the evidence.

Why governments have chosen to be quiet about the unproven bloated returns on pensions, especially, is staggering. ?Long-term investments, such as in foreign countries, do not trade frequently. ?Hence, establishing their possible current “value” has been left to pension managers. ?They have to make extensive estimates, wherein many biases can easily appear.

Those managers who receive bonuses that are based on the investment returns surely can be tempted to attach higher than warranted “current values” to the pension's assets. ?Under IFRS, as opposed to what Canada previously financially permitted, cross-checking of the validity of "values” is often minimal, or even less. ?This absence of a cross-check on what constitutes reported "income” is just not being understood in Canada. Stock market prices tell a troubling story of dubious “values.” ?

Herein is where IFRS reporting is so vastly deficient to what was previously required for pension companies, and most other industries in Canada. ?A rental company, for example, prior to IFRS, reported as "income” just the net cash left over after operating expenses were deducted from received in cash rental revenue, less income taxes.?

With IFRS, a so-called second source of income (but not taxable until the rental property became sold) has been added as “income.” ?That is, property “value” changes during the fiscal period could be placed on the entity's income statement. ??Who prepared the “values,” and changes, is wide-open in Canada and seemingly is not scheduled to be controlled. ?Investors should be troubled by no independent oversight.

It is this second source of “re-defined income” that is causing much, but not all, of the IFRS havoc in Canada. ?Most financial analysts and investors that we encounter, along with our lawmakers, claim unawareness that the “value” increases, too often, are not subject to thorough, independent proof.?Instead, each entity chooses who does their "valuation”; wide variation in techniques and dollar results are being permitted. ?Hence, pre-IFRS "‘income” definitions have been changed drastically in many industries. A false impression of improved success results arise from loosened IFRS accounting.

What external auditors and others are missing for verification purposes are what pre-IFRS reporting utilized as a built-in cross-check of sorts on asset and liability published figures. ?That is, the vital issue is “whether the cash-based financial figures are in alignment with reported income?' Too often, differences under IFRS are huge. ?Many “value” changes are not cash linked and are unlikely to be credible.

Simply, most IFRS “value changes” are seriously non-cash in their nature. ?Properties may not be sold in arm's-length independent sales for another 10-15-20 years. When sold, a cash cross check usually exists. Meanwhile, evidence or proof can be difficult to find. Estimates are often far from reality because an active independent buyer-seller market usually would not exist.

Precisely why the second source of income was NOT permitted under our old Canadian GAAP (pre 2011-2012) was that “sufficient and appropriate” evidence of the legitimacy of the figures was generally not available. ?As long-time investigative accountants, we have seen "’endless” valuations that are based on extreme assumptions (such as that downtown Edmonton will shift eight kilometers west - magically to where the “being valuated” empty property now exists. ?Most large buildings simply do not grow feet and move). ?Valuators' assumptions can be endless, and too frequently will not receive essential verification. ?Nevertheless, IFRS is deeply dependent on the dubious reasonableness of management-made assumptions.

In short, IFRS reporting became vastly different from Canada’s old-GAAP (pre 2011-2012). But the governments and money managers have clearly not clued-in sufficiently to the vastly different IFRS "income” figures: unproven or disputed by lower cash receipts dollars. ?Just watch the market price behaviour of a batch of these IFRS stocks; many are incredible. ?

The marijuana companies, and the lending institutions’ failures are classic Canadian examples.?"Just follow the money,” a crucial investigation tool, could not be used for “valuation” with the early marijuana companies. ?Why? ?No money existed within the reported revenue, cost of goods sold, and gross profit figures! ?This should have been a huge warning; but many “investors looked the other way,” and chose to rely on unwarranted "hype.” (Such an investment “strategy' is foolish.)

Several other serious IFRS “deficiencies” exist.?A few are mentioned below.

Lending institutions were granted a monstrous gift by IFRS. ?In Canada, the 1980s saw many financial failures in insurance companies (e.g., Confederation Life), and banks (e.g. Canadian Commercial Bank; Northland Bank). ?A Canada-wide independent investigation report was filed in 1986.

Why? These failed institutions were lending money to borrowers who were long overdue with their required loan payments. ?The reporting outcome of such strange lending was that accrued unpaid interest, as well as unpaid loan principal, was suddenly declared as being "paid, and up-to-date.” ?Such was obviously improper, leading to corporate failures. ?By the mid 1990s Canadian GAAP prohibited such trickery. ?“Rolling a loan” to avoid recording losses became unacceptable.

Nevertheless, IFRS restored such an unacceptable “rolling” lending practice for 2012 and to date.?Hence, IFRS is merely returning Canada to the 1980s; being proven years of trickery and financial failures, from clearly bad loans not having to be recorded as losses. ?The Covid years of late have resulted in many suspect loans not having to be labelled as bad debts. ?How much? ?Who knows, when IFRS obviously can permit such bad loans to be called “assets?”

By not enforcing an obligated cash cross-check of reported “income under IFRS”, swindlers/tricksters can postpone recording losses for years. ?Despite such IFRS looseness, many credit-rating agencies strangely still commence their analysis for investors by using IFRS financial reports. ?Governments ought to find such thinking scary. ?A wake-up call is now critical. Pretending that IFRS figures are credible is not supported by growing evidence. ?Exactly how much evidence do lawmakers need, to act responsibly?

Other IFRS concerns should be followed up by government statisticians. ?In a sense, IFRS figures are appearing in many places, including measuring Canada's productivity. ?Who knows when necessary reporting changes will be legislated. ?The problems arising from IFRS will not cure themselves and are not trivial.

[Lengthy explanations about the many other serious dangers of IFRS are available in a 2022 published book “Avoiding Swindlers,” by Al Rosen (Amazon