It’s coming up to your mid-term numeracy exam, so here’s hoping you’ve been studying hard, because cheats and conmen are itching to separate fools from their money.
Especially in Canada and especially in the equity marketplace.
Shady corporate dealers in this country, it appears, will soon have an easier time of it. With a little applied Canadian apathy, this country could become a world leader in seeding fertile ground for deceptive financial statements.
Step 1 in preparing that ground: adoption of International Financial Reporting Standards (IFRS).
Members of the accounting fraternity have applauded Canada’s move to replace Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS) with IFRS equivalents.
In previous Business in Vancouver stories, they’ve opined that the move to synchronize this country’s auditing rules with those in the wider world would add clarity to Canadian financial reports and streamline access to global capital markets.
That, however, was back in 2007.
Since then some discouraging words have been heard.
For example, a recent Canadian Financial Executives Research Foundation report noted that – news flash! – “the Canadian corporate tax environment has become increasingly complex.”
It notes that adopting IFRS will be among the priority items for senior finance executives on the tax complexity front over the next year.
But complexity is not the only concern here. For investors, obfuscation and flim flam are atop the list.
Consider, for example, that the Great Recession has done little to reform the world of high finance.
Lending an ear to what former Lehman Brothers executive Lawrence McDonald has to say in reporter Richard Chu’s story in this issue (“Poor corporate governance threatens global financial system”, page 10) illustrates that.
Lehman, says he, was a bank that “was an out-of-control reckless monarchy … that wasn’t rotten at the core. It was rotten at the head.”
Worse still, its collapse, according to McDonald, did little to change standard operating procedures: “We still have systemically risky banks that don’t have proper board governance.”
And while Canada appears to have awoken to the prudency of establishing a single federal securities commission to replace the country’s ineffective patchwork of 13 provincial and territorial regulators, somehow there’s a disquieting sense that all is not Mozart and maypole dancing on this file. For example, the move to IFRS has come under heavy phosphorous bombardment from Al and Mark Rosen.
The highly regarded forensic accountants note in Swindlers: Cons and cheats and how to protect your investments from them that auditors in Canada have next to no legal responsibility to protect investors from corporate chicanery.
Their only allegiance, the Rosens write in their new book, is to the companies that pay them to audit their financial statements.
Auditors and accountants in this country are also in charge of making the rules that govern how they report audits and what’s reported to the public. That doesn’t add up to adequate safeguards for consumers.
As Swindlers points out: “Investor protection in this country is a joke. It simply doesn’t exist.”
As to the switch to the IFRS: “Inadequate auditing rules under IFRS will allow auditors to dump almost all responsibility for financial statement figures onto corporate management. Management can therefore report whatever it wants, while the role of the auditor diminishes or, in certain cases, vanishes altogether.”
That won’t help build confidence in Canada’s stock markets or attract vital investment from abroad. And it certainly wouldn’t score a passing grade on any legitimate numeracy exam.
Timothy Renshaw ([email protected]) is the editor of Business in Vancouver. His column appears every two weeks.