SocGen, Kerviel & True and Fair View

by Kurt Schulzke on March 11, 2008

Yesterday, in response to Floyd Norris, I offered what may fairly be read as a “clean opinion” on Societe Generale’s use of the IFRS “true and fair view” override to report in 2007 (instead of 2008) its net loss from the Kerviel debacle. Mr. Norris today responded with his entry, “Defending SocGen.” Truth is, my message yesterday wasn’t intended so much as a defense of SocGen’s accounting as of IFRS generally. But having taking up the SocGen gauntlet, I feel somewhat honor-bound to carry it at least for a while.

Norris takes special exception to a parenthetical in my article to the effect that “some” of the Kerviel loss “arguably occurred in 2008.” In retrospect, I would probably remove the parenthetical entirely. I was hedging to reflect that I did not then nor do I now fully understand — after reading financials, notes and related press releases — exactly which side of Dec 31, 2007 all of the detailed actions, reactions and their ramifications occurred in the SG-Kerviel debacle. But, as Colbert would say, “This is obviously an uncomfortable subject for you. Let’s move on!”

Let’s assume — as SocGen says — that all of the Kerveil gain (amounting to € 1,471 million) occurred pre-2008 and all of the loss (€ 6,382 million) was incurred post-2007. On this basis, SocGen can argue that matching the Kerviel gains with the related losses (for a single-year net of € 4,911 million) is more “true and fair” than artificially splitting them into two separate gain and loss pieces recognized in two different years. The gains and losses were all a single product of the rogue behavior of a single trader who was discovered and ushered out of the company very early in 2008.

Once we agree that the two — gains and losses — should go together, it’s only a question of which year should bear the burden of the net loss. Most of the behavior that led to the net loss occurred before 2008. Therefore, arguably, recognizing the net in 2007 makes the most sense. With SocGen’s full disclosure in Note 40 to its financial statements, I don’t see how anyone is harmed. You can read Note 40 in SocGen’s statements, at p. 104. I agree with SocGen’s auditors that this approach to the Kerviel losses is unobjectionable and not inconsistent with a “true and fair view” of the Company’s finances. Those who object may be objecting more to change than to the substance of the reporting.

No one likes change. Certainly, after living on top of the accounting world for several decades, it is hard for some U.S. accountants to reconcile themselves to the new global accounting principles market. My feeling is that some members of the U.S. accounting community have taken it as a personal slight that the world is tilting toward IFRS. As a result, any time they see an accounting “shadow” suggesting some weakness in IFRS (I don’t deny that they exist), they pounce on it as justification for turning back the clock. Others are in denial, just hoping it will all go away. I don’t think either is a productive mindset, but I realize that everyone needs to come along at their own pace.