IFRS Reporting and Governance Must Not Be Ignored

Supporters of IFRS (International Financial Reporting Standards) have not adequately explained or corrected its very serious and “permanent” shortcomings. They state that investigative accountants fail to mention that many countries (not the U.S.) use IFRS.

However, what IFRS supporters do not stress is that countries, such as Canada, have other laws or deficiencies that serve to be incompatible (or possibly devastating) when combined with IFRS’ looseness and contradictions.

For Canada (and applicable for U.S. investors who purchase shares of Canadian IFRS-reporting entities) are the following types of costly negatives of IFRS. These behaviours can serve to withdraw possible or expected stockholder rights.

*??????? Canada’s Supreme Court (SCC) has rendered decisions (since 1997) that draw serious differences between the legal rights of a company’s current stockholders/shareholders versus those who are only contemplating possible share purchases. The latter have only limited legal rights if audited data is deemed to be misleading, and has caused losses.

Hence, only a few stockholders at specified dates may recover financial losses, whereas others who suffered the same types of losses are denied any reimbursements caused by deficient, pliable IFRS. In effect, in numbers, class-action Court cases have dropped appreciably after these SCC Court decisions were “proclaimed.” Under such conditions Canada, for example, from the outset, never should have adopted easily-manipulated IFRS. Repairing the deep deficiencies is likely to be painful, and costly, at best. Realistically, however, IFRS has too many significant conceptual flaws and is well beyond “repairable.” Credible dollars are often not available. Thus, IFRS is based on unattainable data assumptions.

*??????? Making matters worse for investors was/is the fact that IFRS was brought to Canada, and advocated by, of all people, Canada’s external auditors. Inappropriate auditor-based “sales” comments about switching to IFRS appeared from time-to-time. External auditors therefore created for themselves a massive “conflict of interest” by advocating IFRS.

They claimed that IFRS was some sort of mere “continuation” of what Canada previously utilized for financial reporting. Such is totally false. IFRS’ annual reported “income” could be five or more times the previous Canadian GAAP-calculated dollars. Non-cash gimmickry was/is inherent in, and accepted by, IFRS’ looseness.

When non-cash, far-off-into-the-future, possible dollar receipts from fake asset sales are allowed to be included as part of this current year’s “income,” the IFRS situation becomes beyond scary. The many investors who base their current stock market decisions on “x times current reported income” would be quickly conned by fake non-cash “income” (which may also have been declared as being “audited”).

*??????? Another major incompatibility with adopting IFRS for investor purposes exists. It has far-reaching consequences, and involves having to face a Canadian reality. External auditors are allowed to “police” themselves! “Self-governing” easily can slip into being self-serving. Canada has had a long history of not dealing adequately with weak, not monitored, self-governance bodies.

One major example arose in the SCC court case involving Hercules Managements (1997). The external auditors’ defense lawyer argued that a legal distinction should be drawn between current shareholders and prospective ones. The SCC agreed. This created significant confusion. Could a satisfactory legal line be drawn? Such was not actively pursued, it seems.

The external auditors once more faced a large “who is our customer” problem. Major potential users of audited financial statements happen to be those who are non-shareholders, who could be contemplating a purchase of shares. Reliable data is needed. The external auditors somehow chose to abandon the “prospective” group, and thereby limit an external auditor’s “possible” future customers.

A major consequence arose. The U.S. had/has laws that require specified information to be made available to the “prospective” group. No such equivalent investor protection exists in Canada. Where would you invest: silent Canada, or the U.S., with some rights?

*??????? Did Canada’s self-regulating external auditors quickly request changes to Canada’s outdated provincial “Securities Acts,” so as to narrow the shareholder-only status versus a prospective one, distinction? Not that we have seen. The self-governing external auditors seemingly continued to remain silent. This same silent auditor posture has often been demonstrated, since 1997. The current IFRS deficiencies are but one example. (Not request/require improvements.) U.S. versus Canada differences continued to grow thereafter.

As an especially important aside, Canada’s politicians criticize people such as “pension plan managers” for “not investing in Canada’s industries” (as is shown by data from various sources). Would you invest in companies that use IFRS when additional and more reliable data exists that indicates that the IFRS dollar figures have likely been tampered with? What can the politicians be thinking?

*??????? To add to this government-granted “self-governance” of external auditors confusion (including what seems to be an unwarranted “government silence” attitude) is that Canada’s taxation officials do not accept IFRS for tax-assessment purposes. Why? Might IFRS be too artificial? or, be non-cash? and more. Reasons for the tax officials’ IFRS doubts are important.

Government (non-CRA) responses to the glaring (not “repairable”) deficiencies of IFRS (i.e., usually being their “silence”) are difficult to fathom. Canada Revenue Agency/CRA clearly has valid reasons for being suspicious about the credibility of IFRS (including what is called “inferior evidence” Level 3 applications), and its timing of recording estimated non-cash “income.” That is, the “non-tax” department of government groups are sending investors an inappropriate “silence.” How can investment in Canadian industry be encouraged by being non-competitive with U.S. stock protections?

*??????? Yet, extensive Canadian corporate failures (such as more than just the marijuana and financial institution examples) indicates that recurring investor losses are not trivial. An obvious question is: have the “non-tax” government departments (such as Finance or Industry) just not performed the obvious fact-gathering, and have they not seen the extensive data that is contrary to the claims of supporters of IFRS? IFRS is clearly not compatible with Canada’s weak, or archaic, other laws. IFRS is just plain based on fantasies, such as the rare availability of current market values.

*??????? What should be now more than obvious to Governments is that since the 1997 (SCC Hercules Managements case, and the declared “abandonment” of prospective investors in Canadian industries) concepts underlying IFRS are, in essence, merely management “fantasies.” Hence, promoting easily-manipulated IFRS in its commencement years of 2005-2012, was really an obsolete/irresponsible action of self-governing external auditors. Prospective investors were not relevant, it seems. Damages keep piling up. A totally independent governance group is urgently needed to oversee the issues, and avoid the narrow focus of external auditors, especially for public companies using IFRS.

*??????? Many more examples of the need for independent external auditor oversight can be listed, but space is limited. For example, Canada’s auditors are currently signing audit reports that in essence state that, overall, the financial statements are not “materially misleading.” However, within IFRS, so-called large dollar Level 3 investments can exist in many companies. Level 3 means that included therein are amounts for which credible “proof” of the “current value” dollar amount as needed for Levels 1 and 2 could not be generated.

*??????? In short, a series of assumptions and estimates are commonly being utilized for IFRS financial statements. Yes! IFRS is supposedly “current value” based. When “current market values” cannot be found, should an entity abandon the “current market value” concept? Apparently not, it seems in Canada. But how? IFRS supporters somehow claim that it is “current value”-based. What is reality? Not IFRS.

To make matters worse, how can external auditors assert that the required but inherent “guesswork” of IFRS can just be “tolerated?” Precisely on which basis can the external auditors somehow claim that the result is within rules of IFRS-based financial statements? According to some auditors, the “variations” of IFRS are concluded to be just “not materially misleading” to investors. Double-talk obviously confuses investors. Savings vanish.

*??????? Additional, and continuing, examples exist to what occurred in the SCC Hercules case. That is, the external auditors adopted policies to “back away” from what would appear to be their duty if they still wish to remain being “self-regulators.”

*??????? For example, at some stage auditors have to rely upon the accuracy and comprehensiveness of companies’ “internal control” or “cross-check” systems. A weak control system allows considerable trickery, frequently leading to overall unworthy financial statements (especially with IFRS).

Given the choice, Canada’s auditors again strangely “backed away” and chose as their “standard” to audit only a portion of a company’s internal controls (versus U.S. auditors having to check essentially 100%). An auditor conclusion of “statements not being materially misleading” thus becomes a dubious or suspect overall claim. Given repeated “backing away,” why do Canadian laws still require external audits, if only partial, inadequate checking actually occurs for important dollars?

*??????? Other examples where permitted auditor self-regulation has approved of vulnerable investigations include “fraud analysis,” a company’s “going concern” status, and various duties that amount to management having to become responsible for “detection,” and not the external auditors.

Added together, external auditors have made many one-sided major changes to their roles as they existed pre-1997. Yet, given the Canadian reality that no “Ministers of White-Collar Crime” monitors appear to exist, investing, or not, in Canadian public companies is clear, and almost futile. Eventually, investors will come to recognize that previous protections have vanished (along with their savings).

The foregoing and similar problems cannot, and will not, correct themselves. IFRS is definitely constructed on “quicksand” it seems. Procrastination by governments is obviously making matters much worse. Simply stated, the foregoing governance responsibilities cannot possibly be turned back to the external auditors’ mentality, to cure the problems. They have long displayed unwillingness or ineptitude (over 25 years).

The U.S. cannot continue acting as a partial “watch dog” for what has been needlessly happening in Canada. Buck-passing is not a solution. Lack of confidence in IFRS-based stocks is growing. At some point it has to explode.

Canadian pension plan asset “values” are at risk. In addition, not helping investors understand the vagueness of IFRS surely is a government failure. IFRS does not help to provide equity dollars for the country. A revamped non-IFRS financial reporting system is needed in Canada. Those not having “IFRS baggage,” or making similar mistakes is essential for Canada.

For governments to do nothing is obviously irresponsible. IFRS is just too garbled without a foundation to be continued in Canada.

Meanwhile, investors have three main choices:

1.????? continue to believe the supporters of IFRS, with its costly, growing flaws, and its unrealistic “current market value” conceptual foundation; or

2.????? help to protect your savings by selling many or all of your investments in Canadian companies that report financially using IFRS. (Replace with U.S. stocks which have laws that monitor and prohibit against IFRS “gimmickry”); and, or

3.????? combine 2. above with writing to your members of Parliament in Canada (provincial and federal) asking for an active independent oversight group to quickly phase-out IFRS, revamp and control the audit function in Canada and write new legislation which helps to protect prospective investors, and updates Securities Laws.

Investors have been far too patient waiting for governments and regulators and external auditors to rescue them. The evidence against self-regulation, including IFRS, is overwhelming.