It’s an exceptional honor to address this IFAC World Accountancy Forum on Government, the Accountancy Profession, and the Public Trust. I speak at a time of great financial turbulence and economic uncertainty, much of which reflects failures of accounting, if not specific failures of accountants.  The subprime lending crisis reminds us yet again that financial markets are extremely fragile and can easily lose their moorings when investments certified as highly safe turn out to be extremely risky.  No accounting is perfect and no accounting will deliver economic certainty and financial tranquility. But we play a very dangerous game when we rate junk bonds as triple A, rubber stamp Enron-type bookkeeping, and blithely ignore national insolvencies.

The “we” here includes economists, analysts, actuaries, regulators, credit raters, bankers, financial journalists, and, yes, accountants.  Given our training and professional certifications, we are all fiduciaries, either explicit or implicit, when it comes to overseeing the finances of business and government.  The world relies on us to keep financial score on a completely honest basis and to blow very loud whistles when we see financial malfeasance, no matter its source.

A good analogy here is EMS workers.  They may be off duty, even on vacation, but when they witness an accident, they’re professionally and morally obligated to intervene and provide medical care.  They are responsible to help the public for two good reasons.  They can help, and they are the only ones with the ability to help.

All of us here today are in that same boat.  We are all EFS workers – emergency financial services workers.  But unlike EMS workers, our role is to intervene before our patient – the economy – has a heart attack. 

For my part, I’ve spent close to two decades trying to blow the whistle on the U.S. government’s out-of-control long-term finances.  My strategy has been twofold.  First, I’ve pointed out that the government’s existing fiscal accounting is content-free from the perspective of economic theory.  Second, I’ve proposed an alternative method of fiscal accounting, called generational accounting, which has real economic content. 

The goals of generational accounting are to understand whether fiscal policy is sustainable and, if it’s not, how much more today’s and tomorrow’s children will have to pay to achieve sustainability.  Generational accounting also seeks to understand generational incidence – how changes in policy affect different generations.  These are well-posed economic questions and all well posed economic questions lend themselves to empirical analysis, including that done by accountants.

This new form of fiscal accounting, whether implemented on a cohort-specific basis or presented in the condensed form as present-value fiscal gap accounting, has been conducted in some 40 countries around the world by finance ministries, treasuries, central banks, the IMF, the World Bank, and academics.  The analyses suggest that many relatively young and quite poor countries, like Mexico and Brazil, are in much better long-term fiscal shape than older countries like the U.S.  

In the case of the U.S., recent fiscal gap accounting by economists Jagadeesh Gokhale and Kent Smetters suggests that upwards of $70 trillion separates projected future federal spending from projected future federal receipts when measured in present value. This fiscal gap is enormous and indicates that our nation is, quite literally, facing bankruptcy.

Bankruptcy is a strong term.  In a business context it means future earnings that don’t cover costs.  It also means defaulting on creditors.  In a government context bankruptcy means future receipts that don’t cover future expenditures.  It also means defaulting on creditors – all those expecting to receive government healthcare, pension, welfare, and other benefits as well as all those expecting to be employed by the government.  Government bankruptcy also means jacking up tax rates and printing money to “pay” for what the government spends.  

If anyone thinks the U.S. is immune from fiscal meltdown and high inflation, if not hyperinflation, he should think again. Too many countries, big and small, rich and poor, have learned that, sooner or later, their fiscal profligacy comes at a very heavy price. 

There are increasing signs that Uncle Sam is driving our economy in the wrong direction and that the rest of the world is taking notice. Our nation’s national saving rate is now running below 3 percent.  In 1960 it was close to 13 percent.  Our incredibly low saving rate has lead to an incredibly high current account deficit, which has led to an incredibly low value of the dollar. 

So why is our saving rate so low? Well, the counterpart of saving too little is consuming too much. As a share of national income, the federal government is consuming at roughly twice the rate it did a decade ago.  But the main explanation for the decline in U.S. saving is not Uncle Sam’s spending.  It’s the spending – the consumption – of households.  And among households the group whose consumption has been rising most rapidly is the elderly.  Since 1960 average consumption per oldster has roughly doubled relative to average consumption per youngster. 

Who’s paying for this growth in the consumption of oldsters? The answer, in large part, is Uncle Sam.  Take Medicare and Medicaid benefits, the vast majority of which go to the elderly.  Every year that Uncle Sam allows these benefits to grow much more rapidly than the economy – and we are talking about virtually each one of the past 60 years – the government directly expands the consumption of the elderly.  Uncle Sam has also been cutting taxes on the elderly, which has also permitted them to consume a lot more.

So the picture provided by generational accounting of Uncle Sam taking ever more resources from young savers and giving them to old spenders is showing up in the level of consumption of the elderly, in the rate of U.S. national saving, in our current account deficit, and in the value of the dollar. 

Generational accounting has provided a good guide to what has happened and provides a good guide to what will happen. To be sure, generational accounting has its challenges and limitations.  The greatest of these is knowing the present value of highly uncertain government receipts and payments.  In research I’m doing with Steve Ross, a professor of finance and economics at MIT, we are using arbitrage pricing theory to show how future government receipts and payments should be valued in the present given their risk.  Our preliminary findings suggest the U.S. may be in worse fiscal shape than conventional generational accounting reveals.

Although I foresee significant near-term methodological improvements to generational accounting, skeptics will always correctly claim that the future is unknowable and argue that traditional short-term fiscal budgeting, i.e., deficit accounting, while imperfect, is at least based on reliable numbers.

My main task today is to disabuse you of this notion.  In fact, we can’t learn anything whatsoever from short-term deficit accounting for the simple reason that what we measure as the deficit depends on how we label government receipts and payments.  And this choice of labeling/language is not pinned down by economic theory. 

Take a simple economy in which the government takes an amount H each period from the young.  What should we call the H? Should we call it a tax of H? Or should we call it a tax of 50H less a loan back to the young of 49H.  Or should we call it borrowing of H? Or should we call it borrowing of 2000H less a transfer payment to the young of 1999H? The equations in our economic models don’t tell us what words to use.  Nor, for that matter, do they tell us whether to discuss their implications using French or English.  As long as our choice of fiscal labels/language is consistent, so that we don’t misstate the true nature of the lifetime budgets facing each household, we’re free to use whatever words we like and announce whatever size deficit we choose. 

Take, as an example, 30-year-old Joe who hands the government $3,000 this year and, to keep things simple, gets nothing back in the future in exchange. We could label this as a current “tax payment.”  Alternatively, we could call this a $3,000 loan from Joe to the government and also say that in 2020 Joe will receive repayment of this loan with interest, but that in that year Joe will also face a tax equal to the $3,000 plus accumulated interest.   Regardless of the words, Joe hands over $3K this year and gets nothing back in the future in exchange.  But if one uses the second set of words rather than the first, this year’s official deficit is $3,000 larger.

This example may seem too simple to be relevant to our real world in which there are cash constraints, distortionary taxes, all manner of uncertainties, asymmetric information, time-inconsistent policy, etc.  But as I’ve shown in a recent paper with Harvard Professor Jerry Green entitled, “On the General Relativity of Fiscal Language,” the labeling problem is generic to economic models no matter what one includes in the models, provided the agents in the model and the institutions they establish are rational.  Rational here requires that the choices agents make and the institutions they establish not be fooled by or predicated on language. 

Jerry Green and I used the term “general relativity” not to suggest we are budding (actually graying) Einsteins, but because there is a parallel between the measurement of deficits in economics and the measurement of time and distance in physics.  Einstein showed that how one measures time and distance depends on one’s physical frame of reference – one’s labeling system if you will.  Each frame of reference entails a different measurement of time and distance.  So there is no absolute measurement of time or distance on which one can count.  But Einstein also showed that while absolute time and distance are, in his words, “an illusion,” theoretical physics needs neither notion to proceed about its business, namely understanding physical reality.

Economic theory tells us that the deficit too is an illusion, actually a delusion, which is the term I used back in 1986 in a Public Interest article entitled “Deficit Delusion.” As I argued there and have repeated for each of the past 21 years, each dollar the federal government takes in or hands out can be labeled differently and each set of labels will produce a different measure of this year’s deficit. 

If we want the deficit to be $1.6 trillion this year rather than $160 billion, all we need do is use the right set of labels.  If we want the deficit this year to be negative, say a $5 trillion surplus, again, there are words that will deliver that result.  Indeed, economic theory tells us that independent of the actual fiscal policies they are running, governments can chose words to report any time path of deficits or surpluses they’d like.  It also tells us that the government has no claim to higher language – its choice of words is no more economic than yours or mine.  One can fill up volumes upon volumes of books with alternative time series of the U.S. federal deficit, each based on a different choice of labels, and see that the one marked “official” has no claim to distinction.

In short, when it comes to traditional fiscal accounting, we are living in Hans Christian Anderson’s world of the Emperor’s New Clothes.  The emperor is naked, everyone knows or should know he’s naked, but everyone (with the exception of one young child) claims he’s beautifully dressed.  Everyone’s lying to himself and everyone else for one and only one reason – he’s done so in the past. 

Economists are the worst offenders here.  It’s their theory, and they should know better.  But there’s no sign that the majority of academic economists, let alone business economists, will change their ways anytime soon.  Indeed, I’m surely on firm ground in asserting that none of the business economists working for any of the top 500 companies in the country would dare acknowledge publicly that the federal deficit is a number in search of a concept.

If economists won’t blow the whistle, who will? My hope rests with you accountants. It’s up to you to take the lead in endorsing meaningful fiscal measurement and discarding senseless tabulation. The stakes are too high for a country like the U.S. to be focusing on a trifling $160 billion “official” deficit when the nation’s fiscal gap – a measure which is label free and actually tells us where we stand – is increasing by over $2 trillion per year.  

Yes generational accounting has its draw backs, but it attempts to answer well-posed economic questions. Deficit accounting, in contrast, does not answer any economic question.  And using it to steer our fiscal affairs makes no more sense than driving in Los Angeles with a map of New York.

Good morning. I'm delighted to participate in ARENA 2007 here in Stockholm. I would like to thank your President, Peter Clemedston, and Secretary General, Dan Brannstorm, for inviting me to speak to you today.

I am honored to be sharing the stage with FEE President, Jacques Potdevin, and with Olivier Boutellis-Taft, FEE's Chief Executive.

I would also like to thank you for and to acknowledge FAR SRS' contributions as an IFAC member body. FAR SRS has been an active participant in the international profession since IFAC's founding.

Good evening. It's a privilege to join you at this dinner in honor of IFAC's 30th anniversary. It is a time in which we celebrate not only IFAC's achievements, but also those of its member organizations and volunteers who have contributed so much to IFAC's short, but rich history.

As a founding member of IFAC, ACCA has demonstrated during these 30 years its shared commitment with IFAC to developing the accountancy profession and to promoting quality performance by accountants worldwide.

Good morning. I'm delighted to be returning to your annual conference and speaking to you today at the sixth FCM conference. Thank you to FCM and SOEL for inviting me to be present today. I bring greetings from IFAC President Fermí­n de Valle and Chief Executive Officer Ian Ball.

I'm also delighted to be in Athens, one of the oldest and most fascinating cities in the world. It's quite appropriate that we are focusing on the accountancy profession here in an ancient Mediterranean city, because this region, in addition to serving as the cradle of civilization, is also the cradle of our profession. The great ancient Greek mathematicians -- Pythagoras, Euclid and Archimedes -- laid the foundation for all numeracy and hundreds of years after their deaths, the innovative Italians of the Renaissance formulated the basis for modern accounting.

Good morning. It's wonderful to be in Bratislava. I would like to congratulate you on the 15th Anniversary of the Slovak Chamber of Auditors, and I bring warm greetings and affection from the entire IFAC family that joins you today in this celebration.

I thank you very much for this invitation, which has allowed me, among many other things, to visit for the first time, the country where my mother was born. I must confess that I regret that it took me so long to get here, and therefore, appreciate this invitation very much.

I can honestly tell you that I feel a strong connection with this country, and I am sure that the bond will become stronger in the days to come.

For 30 years, IFAC's mission has been to work in the public interest to strengthen the worldwide accountancy profession by establishing and promoting adherence to high quality professional standards, furthering the convergence of those standards, and speaking as the voice of the profession on relevant public policy issues.

Good afternoon and thank you for inviting me to join the 75th anniversary celebration of the Chamber of Hungarian Auditors (CHA).  Congratulations on this wonderful occasion.
 
It is significant that we are marking this 75th anniversary on October 24th; one day after the Hungarian National holiday that celebrates the freedom fighters of the Hungarian Revolution of 1956. The accounting professional organization, established in 1932, has faced the challenges of operating during wartime, pushing ahead in the face of hostile political regimes and staying the course in times of great economic upheaval. Facing adversity, surviving, and thriving are testimony to the spirit of the people in this room, as well as the rest of the Hungarian people.

But Hungarians are known for more than just an enduring spirit.  Hungarians are known for a tradition of innovation.  Famous Hungarian inventors and their inventions include: John von Neumann and digital computing; Laszlo Biro and the ball point pen; and Erno Rubik and his Rubik’s cube. Such inventions require vision and a belief that the world needs what you have got to offer, which brings us to our topic this afternoon.

Good morning. I'm delighted to be here. Thank you, Eric, for inviting me to join you at the firm's international symposium. It is particularly gratifying to me to meet with you in my country. I hope you have a wonderful stay in Buenos Aires.

You have asked me to talk about IFAC's mission and how it affects global audit networks. I will gladly do that and then take your questions.

IFAC has a history of collaboration with the international networks firms such as PKF.

I want to thank PKF partners and associates for their support of IFAC's work. I would also like to personally extend a word of thanks to Theo Vermaak, PKF's representative on IFAC's Transnational Auditors Committee (TAC), for bringing his valuable practical experience to that committee. The TAC is an IFAC committee, but at the same time is the executive arm of the Forum of Firms.

As you probably know, PKF together with 22 other accounting networks involved in multinational audits, participate in IFAC chiefly through the Forum of Firms. The Forum was established six years ago to address criticisms and concerns expressed by international stakeholders with regard to the use of international standards and consistent audit performance among international auditing network firms.

Upon joining the Forum, the networks made a major commitment to IFAC standards and other quality measures.

Thank-you Mr. Chairman. Good morning ladies and gentlemen.
 
Before I start I would just like to say what a privilege and a pleasure it is for me to be able to participate on this panel. I wish to share with you today the significant points that IFAC is likely to make in the comment letter to the IASB. I will also outline some of the key findings from a micro-entity financial reporting research project. And finally I will spend a few minutes on assurance services for SMEs.
 
Let me frame my comments with some observations. In the recent past, issues impacting small- and medium-sized entities (SMEs) and small-and medium-sized practices (SMPs) have rose to the top of the agenda - of the regulators, professional accountancy bodies, standard setters, and IFAC. The IASB’s project to develop an SME accounting standard is testimony to this. It seems the main spur for this emphasis on SME/SMP is concern over regulatory overload, overload that is stifling the ability of small business to innovate, grow and compete. This regulation, including standards of accounting, auditing, and ethics, was often tailored to suit large business. It’s no surprise it is ill fitting for small business. The standards sometimes lack relevance to SME/SMP. And SME/SMP often lack the capacity to efficiently implement and comply with them.

Ladies and gentlemen, I'm honored to be here in Osaka speaking to you on the 50th anniversary of the CAPA conference. Much has happened at CAPA since the meeting of the First Far East Conference of Accountants half a century ago in the Philippines, attended by your twelve founding members. Today, CAPA is a large and very important regional accountancy organization, and its geographical area encompasses half the globe. As many of you know, IFAC is celebrating an anniversary this year too: our 30th. The progress that IFAC and the accountancy profession have been able to achieve was made possible through the cooperation of members and regional accountancy organizations such as CAPA.

Good morning ladies and gentleman. It is a pleasure to be here in Osaka, this beautiful city that was once the imperial capital of Japan. I would like to thank his Imperial Highness Crown Prince Naruhito for welcoming us all to his country.

Osaka is a very fitting place to host the 17th conference of the Confederation of Asian and Pacific Accountants. In ancient times, this city served as the gateway to Japan for foreign visitors and envoys from across Asia. Today, Osaka once again welcomes visitors from across the Asia-Pacific region with open arms.

CAPA continues to play an integral role in the development of the accountancy profession in this region, which is in the midst of one of the greatest economic expansions in human history. Now more than ever, professional accountants in this region are essential to the long-term sustainability of this growth through their work within business and industry, in public practice, and in government service. As the organization for the profession in this region, CAPA must continue to support high quality work by all members of the profession, as it has done for so long.