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Al Rosen: Over a hundred ‘dirty tricks’ possible under new IFRS accounting regulations

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Toronto. Al Rosen, one of Canada’s leading forensic and investigative accountants, wrote in his book Swindlers the following: “Under the IFRS (International Financial Reporting Standards)”–which Canada just adopted on January 1–according to Rosen, “corporate managers will have even more freedom to distort and manipulate their financial reports to make themselves look better than they really are,” Rosen writes further, “… because of a complete disinterest from lawmakers and a lack of recognition by investors that auditors have no interest in upholding their needs.” And he says auditors do this mostly for the money. Now joining us is Al Rosen, one of Canada’s leading forensic and investigative accountants. Thanks for joining us, Al.


JAY: So talk about this IFRS. Why is this matter to us as Canadians [sic]? And then, why does it matter to Americans?

ROSEN: Well, the concern for Americans–I’ll start with them–is that evidence should be gathered about the problems we’re having in Canada. And we’re just getting into this. And I don’t see that there’s enough US concern. There are immense problems with this IFRS. There are all sorts of holes, which I think people are aware of, where you could pull a dirty trick, which you could not do under US accounting [inaudible]

JAY: For example?

ROSEN: Related-party transactions, where you have executives own their own companies and they are selling into the public company. And so the rules under this IFRS on reporting are very weak, in my opinion, compared to what the US had, and I thought the US should have strengthened their rules. So in [inaudible] before the politicians get rolling and try to get US onside with this IFRS, I think they really, really seriously have to look at how weak this IFRS–.

JAY: Because existing American regulations are stronger than this on how audits have to be done and such.

ROSEN: Yes, exactly. And so if you decided, for example, in 2008 the problems of the financial system in the US and elsewhere in the world were caused in part by deregulation, you have a massive deregulation of this IFRS. I can’t believe the premise for this IFRS, which is saying management knows the corporation best, therefore they should pick the way they’re going to report. This is incredible in my mind, because it’s saying, here, go do what you want. How many executives are going to write financial reports under this IFRS that say fire me because I’m incompetent?

JAY: From a political point of view, how does such a thing get passed? You would think these enormous pension funds, some of the big institutional investors–and they’re very powerful forces. Why would they go along with something like this?

ROSEN: I don’t think they’ve studied it well enough. Like, we sat down and looked at the Canadian practices we had under Canadian reporting, we looked at IFRS, and we have over 100 dirty tricks you can pull under IFRS.

JAY: Give a few more examples.

ROSEN: Revenue recognition. They’re working to try to improve it, but I’ve had, myself, at least a dozen cases where you have a mortgage company, they lend money, and guess what? Nobody pays them. But what they are able to do is to increase the assets on the balance sheet, they’re able to increase revenues and profits and equity, on a basis of no cash coming in. And how do they do this is because IFRS rules talk about eventually getting some economic benefit.

JAY: So they can just make up what they think something might be worth and cover up the fact they’re not getting paid.

ROSEN: Yeah, it gets really silly. Other places–.

JAY: I mean, that’s–we’re into subprime kind of psychology here.

ROSEN: And on and on. This is why I don’t understand why the political pressure in the US is not just hammered down by people saying, well, look at the savings-and-loan fiasco, look at the Enron, look at the WorldCom.

JAY: But once this does start to get really known, in the US at least twice now, and which–the second one causing a global crisis, there was a real unraveling. Is there such a thing possible in Canada, when the fact is that a lot of these assets and banks and institutions aren’t worth what they say they’re worth?

ROSEN: Absolutely. There’s no question whatsoever in my mind, because we have–if I look at the files in our office over the last 25 years and I see how many of the people who started the particular trickery or scam, whatever you want to call it, were not Canadians, were not North Americans–these people are coming in from other countries. Why do they come to Canada? Because there’s no prosecution here. So IFRS just opens the floodgates. They talk about these wonderful phrases of let’s get onside across the world with everybody doing the same thing.

JAY: So who drove this IFRS? I mean, why–.

ROSEN: Well, the auditors, auditor community has pushed it in Canada, and same with the US, with the–.

JAY: And are the CEOs in on this? That makes their life easier too, I suppose.

ROSEN: Well, if you have a lot of international companies and so on and you say, well, I like the idea of there being one accounting, yeah, there’ll be some who do it. But the ones–like, in our business, where we’re always looking at how are people manipulating, it was obvious to us right from the beginning that this was terrible stuff. It was originally started in Europe, where they had a short time with the European Union trying to get all the European countries together on a common accounting. What they did is they sunk; they just found the lowest common denominator of reporting. And we in Canada foolishly decided, a couple of years after the 2005 start of this in Europe, to go ahead and adopt it. We didn’t have any idea what we were buying. And now that we’ve had a good close look at it over the last several years, it’s a disaster.

JAY: And what’s–for investors it’s obvious what it means, and of course this affects a lot of workers who have money in pension funds. But how does it affect other ordinary people?

ROSEN: Well, if you have a mutual fund, you have a stock market investment, you have a pension, whatever it happens to be, you’ve got two companies: this one is fundamentally honest; this one is crooked. But yet they appear to be the same. So you’ve got pension money and mutual fund money being attracted to these people because they know how to use the dirty tricks to cover up. And then eventually they use the tricks and, wow, they’re better than the one here. And then they run out of cash. They collapse. And we’ve had a rash of these in the last ten years in North America. So why people aren’t looking at the evidence and saying, come on, this is exactly the wrong thing to do–.

JAY: Why have you not seen a sectorial unraveling or collapse in Canada the way you did in the US [inaudible] more systemic?

ROSEN: The publicity is much different. Like, I have a case that is over $1 billion. I and other people testified in the case. The decision will be out sometime in early 2011. Now, for Canada to have a $1 billion or $2 billion scam or alleged scam, however you want to put it, that I think is very significant. So when you compare it to the WorldComs and Enron and all that type of thing, this is still a big issue.

JAY: Well, how much media play do you think’s–does this whole issue get?

ROSEN: Very little. We have whole TV stations that are always painting the rosy picture. We have a bunch of business newspapers and so on, the sections, rosy picture. We alone in Canada came up with this business income trusts idea. Most of them were Ponzi schemes, so you’re just getting your own money back. And what happened out of it? I kept on thinking, when Nortel collapsed, somebody would register that, just a minute, what went on there? Business income trusts, many of them collapsed. Like, how many strikes before you finally do something?

JAY: Thanks very much for joining us. You can find out more about Al and his take on the Canadian economy in his new book Swindlers. Thanks for joining us on The Real News Network.

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Al Rosen is a forensic accountant, principal at Rosen & Associates Ltd. He has given expert accounting testimony in Canada's highest courts, a certified fraud examiner, and a specialist in investigative and forensic accounting. For 15 years, he served as a technical adviser to three Auditors' General of Canada.

Dr. Rosen has taught accounting at universities across North America. He graduated from the University of British Columbia in 1957 and later earned his M.B.A. degree from the University of Washington. In 1966, he obtained his Ph.D. from the University of Washington. He founded Rosen & Associates Ltd. in 1990. Al is the co-author of Swindlers: Cons and Cheats and How To Protect Your Investments From Them, Published Oct 20 2010.