Morgenson on FIN 48

Alright, I know I said that I wouldn't be doing my weekly reads of Gretchen Morgenson. But I didn't say I'd stop talking about her columns. Today's work is a particularly egregious example of her efforts, where she may once again have a perverse effect on public policy. So here goes again.

On Wednesday, the FASB will consider whether to grant a delay in implementing its FIN 48 on disclosure of firms' tax positions. The new rule will let firms recognize only positions on tax matters that are more likely than not to survive an examination. As such, it will provide arguably needed comparability in financial disclosures.

Apparently, nobody's arguing about the rule – the only question right now is when it will go into effect. Gretchen nods to the pro-delay position, quoting the concern of David L. Bernard, vice president for taxes and real estate at Kimberly-Clark and international president of Tax Executives Institute Inc., that “disclosures may be incomplete (or excessive), inaccurate, and inconsistent and therefore impede rather than advance the objective of providing investors, regulators and the capital markets appropriate financial statement information about their tax positions.”

Is this a legitimate position? Not according to Gret:

Sound familiar? In 1994, Silicon Valley used similar arguments to derail the FASB’s attempt to require the expensing of stock options. Inaccurate, inconsistent, incomplete financial statements were going to be a result of that initiative, too, critics said. The FASB received almost 2,000 letters on the proposal, most of them decrying it. The board backed down, Silicon Valley got its way and we know what investors got: a raft of stock-option scandals.

She's taken this line before. It doesn't bother her that the argument is highly questionable: requiring expensing of only in the money options arguably encouraged firms to backdate, by creating an artificial distinction between the options they would, and would not, have to expense. Moreover, opposition to an accounting position is not the same thing as arguing for a delay.

Morgenson further discredits the pro-delay position by assuming that companies just didn't like the effect the new rule would have on their bottom line. Is that really the most likely explanation, given that they're going to have to comply eventually?

More important, she discounts or ignores the legitimate arguments for delay:

1. Particularly since executives now have to certify financials, there's considerable pressure for over-disclosure.

2. In order to be sure they're complying, firms need to look at what Lehman Brothers' Robert Willens called an "overwhelming" amount of data. CFO.com quotes Raymond Zaniewski, tax reporting director at Monster Worldwide as saying: "Can you possibly fathom any tax audit of a large multinational company being completed in a period of less than a year for one jurisdiction, let alone every jurisdiction (federal, state and international) in which we are filing and those in which we should be filing, for all open years, and all being conducted concurrently??"

3. Firms need to consider what the IRS will do with the new information. Willens noted that "There is a lot of fear the IRS will use this disclosure to tailor and fine-tune their audits." With respect to this concern, see this earlier CFO.com article.

Given these problems, there's a considerable need to develop guidance and standards.

If Gretchen has her way (no delay) will investors be better off?  They'll get these disclosures a few months earlier.  But will they get better information?  They may have to wade through a lot of qualifiers and hedging that may be quite unclear during the shakedown period. As a result, we may get more of what Malcolm Gladwell called "mysteries" (discussed here), where piling on more information just makes things more obscure for investors.

CFO.com notes that the FASB usually accedes to delay requests. When it comes up on Wednesday, after Gretchen's column, will it do so this time?

Let's be clear on this: the one-sided and unsophisticated reporting this former stockbroker churns out week after week is a disservice to investors, whatever she would like us to believe.

Comments

[Rory]

Its unfortunate that the FASB responded in an almost mechanical wa without considering the plight of the thousands of comapnny that will have to implement FIN 48 overnight. Unfortunatly, FIN 48 will breed diversity and accomplish almost the opposite intention of its goal - which was put everyone on equal footing in recognizing tax uncertainties. FIN 48 is too subjective and practiotioners have way too many questions which the FASB is simply closing its eyes and forcing all companies who wish to be GAAP compliant to simply interpret. Good Luck!