Description
The aim of this paper is to document the author’s keynote address in Accounting at the
16th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management
“Innovation for a Sustainable Future: Visions for 2020”, July 3-4, 2008, Brisbane, Australia.
Accounting Research Journal
Sustainability in global financial reporting and innovation in institutions
Elizabeth A. Gordon
Article information:
To cite this document:
Elizabeth A. Gordon, (2008),"Sustainability in global financial reporting and innovation in institutions",
Accounting Research J ournal, Vol. 21 Iss 3 pp. 231 - 238
Permanent link to this document:http://dx.doi.org/10.1108/10309610810922486
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Marion R. Hutchinson, Majella Percy, Leyal Erkurtoglu, (2008),"An investigation of the association between
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J ournal, Vol. 21 Iss 3 pp. 239-262http://dx.doi.org/10.1108/10309610810922495
Clevo Wilson, (2010),"Why should sustainable finance be given priority?: Lessons from pollution
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dx.doi.org/10.1108/10309611011092592
Roger L. Burritt, Stefan Schaltegger, (2010),"Sustainability accounting and reporting: fad or
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Sustainability in global ?nancial
reporting and innovation
in institutions
Elizabeth A. Gordon
Fox School of Business, Temple University, Philadelphia, Pennsylvania, USA
Abstract
Purpose – The aim of this paper is to document the author’s keynote address in Accounting at the
16th Annual Conference on Paci?c Basin Finance, Economics, Accounting and Management
“Innovation for a Sustainable Future: Visions for 2020”, July 3-4, 2008, Brisbane, Australia.
Design/methodology/approach – In keeping with the theme of the Conference, the paper considers
two areas – global accounting and ?nancial reporting, and regulation and institutions.
Findings – As business has become more global and ?nancial markets have developed world-wide,
comparable accounting and ?nancial information across countries and companies is a logical step to
continue to support and advance business. With this shift, though, the world moves towards a
monopoly in accounting standards and standard setting.
Practical implications – The potential costs, problems, and possible solutions need to be
considered. Current regulatory environments and institutions offer limited ability to effectively
monitor such a monopoly. So innovation must occur.
Originality/value – The paper shows that an infrastructure to support global investor protection
and convergence of investor protections and rights can offer such innovation to support and sustain
global business.
Keywords Financial reporting, Accounting, Standards
Paper type Viewpoint
Introduction
In keeping with the theme of the Conference, I focus on “Innovation for a Sustainable
Future: Visions for 2020.” As we look at where we are in the accounting world today
and consider the vision for the future, two themes naturally occur to me – global
accounting and ?nancial reporting, and regulation and institutions. In my view, these
two are fundamentally intertwined as I explain.
Move to IFRS
Recently, most of the world has passed the point of debating whether or not there
should a move to one set of standards and one standards setter. The decision has been
made – no more need to debate. Over 100 countries have or have committed to
adopting International Financial Reporting Standards (IFRS), among them Australia.
In these countries, the bene?ts of one set of global accounting standards have been
determined to outweigh the costs. I have gathered bene?ts and challenges (or costs)
from various sources and lists as follows:
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
This paper documents the author’s keynote address in Accounting at the 16th Annual
Conference on Paci?c Basin Finance, Economics, Accounting and Management “Innovation for a
Sustainable Future: Visions for 2020”.
Sustainability in
global ?nancial
reporting
231
Accounting Research Journal
Vol. 21 No. 3, 2008
pp. 231-238
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610810922486
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(1) Bene?ts:
.
better ?nancial information for shareholders;
.
better ?nancial information regulators;
.
enhanced comparability;
.
improved transparency of results;
.
increased ability to secure cross-border listing;
.
better management of global operations; and
.
decreased cost of capital.
(2) Challenges:
.
initial adoption implementation;
.
initial adoption costs;
.
acceptance;
.
training;
.
suitability for small and private companies; and
.
IT functions.
The costs are primarily short-term: the one-time costs of change. The bene?ts are lasting.
As we look forward 12 years to 2020, we can also see how far the move to IFRS has
come in the last 12 or so years. In 1995, the (then named) International Accounting
Standards Committee (IASC) made an agreement with the International Organization
of Securities Commissions (IOSCO) to complete the core standards by 1999. On
successful completion, IOSCO would consider endorsing IASs for cross-border
offerings. A year later, the core standards program accelerated: target 1998. The
IOSCO endorsement was received in the year 2000. Many countries and jurisdiction
have permitted or required IFRS too.
In some countries, the decision was a matter of the cost of supporting accounting
standard setting and ef?ciencies gained by outsourcing this function. For developing
countries with fewer public companies, smaller capital markets, and fewer accountants
and auditors, the bene?ts of this approach outweigh the costs.
In others areas and regions like the European Union (EU), ef?ciencies gained by
reducing information costs through having a common set of accounting standards
outweighed the costs. The EU had an organization in place to promote economic
development and growth. It wrote common laws and regulations, moved to a common
currency, and common accounting standards.
In other countries, it was the decision to adopt the world standard. Again, the
bene?t of reducing information costs though providing comparable information
outweighed the costs to changing standards.
Some will saythat the worldhas movedquickly. Others might sayit has been35 years
since the IASC was formed. I worked in the federal government in the USA, audited
federal government agencies and departments in Washington DC, where I often sawthe
slow, bureaucratic pace of change. Even if it has taken 35 years, I am surprised at how
quickly the world has made this move. And not mildly surprised. This pace of change
has demanded an extreme amount of co-operation and co-ordination.
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While many countries have already moved to IFRS, in others the decision has not
yet come. I am most familiar with the USA. In the USA, we have not yet lived the
transition to IFRS like many of you have. So where is the USA?
The USA and IFRS
The USA is not there yet but the Financial Accounting Standards Board (FASB) and
Securities and Exchange Commission (SEC) have committed to one set of high-quality
accounting standards and convergence. Not so long ago, a common view was the one
set of high-quality standards would be US GAAP and convergence would be towards
US GAAP. This view has changed. The Enron debacle, other scandals, the
Sarbanes-Oxley Act of 2002 all pushed the USA towards IFRS. Still, even today, about
45 percent of companies in the world (by market capitalization) use US GAAP.
The IFRS and FASB
With the Norwalk agreement of 2002, the FASB and International Accounting
Standards Board (IASB) have committed to convergence. The aim of both is a
commitment to the development of high-quality, compatible accounting standards that
could be used for both domestic and cross-border ?nancial reporting. The two
standard-setters are working in many areas, including joint projects being conducted,
short-term convergence project, liaisons and monitoring of projects, and explicit
consideration of convergence potential agenda decisions. They have worked together
on improved standards on inventory, nonmonetary transactions, share-based
payments, segment reporting, and the use of a fair value option to simplify ?nancial
instrument accounting. Recently, new standards on business combinations were
jointly issued by both standard setters.
On June 16, 2008, the Financial Accounting Foundation and FASB hosted the forum
High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial
Reporting, seeking input from various constituencies (www.fasb.org/forms/
Convergence_forum.shtml). The forum is an initial step toward the creation of a
national transition plan to IFRS in the USA.
IFRS and SEC
The ultimate decision of whether US companies will be allowed to use IFRS rests with
the SEC. Very recently, we have seen much more discussion and decisions made that
move the USA in this direction. Last November, the SEC discontinued the requirement
to reconcile net income and shareholders equity to US GAAP for IFRS reporters
(foreign private issuers). The decision to discontinue the reconciliation has been years
in coming. In 1997, Arthur Levitt the (then) Chairman of the SEC gave his speech titled
The Importance of High Quality Accounting Standards (www.sec.gov/news/speech/
speecharchive/1997/spch176.txt). More recently, the SEC issued its 2005 Roadmap
committing to make a decision by 2009, noting it could be before then (www.sec.gov/
news/speech/spch040605dtn.htm).
In Levitt’s 1997 speech, he laid out three key objectives for international standards
to gain acceptance:
(1) The standards should include a core set of accounting pronouncements that
constitute a comprehensive, generally accepted basis of accounting.
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(2) The standards must be of “high quality” – they must result in comparability
and transparency and they must provide for full disclosure.
(3) The standards must be rigorously interpreted and applied.
When the decision was made, it was made quickly and in effect almost immediately.
While the SEC stated reconciliations would not be required after March 2008, it later
allowed earlier January ?lers not to include the reconciliation.
In August 2007, the SEC also issued a Concept Release, “Concept Release on
Allowing U.S. Issuers to Prepare Financial Statements in Accordance with
International Financial Reporting Standards,” soliciting response on 35 questions on
the possible use of IFRS by US public companies, effectiveness and effects of
convergence, views of investors and other market participants, implementation
matters for auditors and educators, views of and issues foreseen by companies, views
of and issues foreseen by auditors, regulation and integrations with current rules and
processes, and transition and timing (www.sec.gov/rules/concept/2007/33-8831.pdf).
In December 2007, the SEC held two days of public roundtables regarding whether US
issuers should be allowed to use IFRS (www.sec.gov/spotlight/ifrsroadmap/
ifrsround121707-agenda.htm). Whether and how the USA will allow IFRS is still open.
As the world moves to IFRS, the USA could be considered a hold out. A lone country
standing, going its own direction. Inthis the USA, though, has beenperforming a valuable
function. The USAis a viable competitor in providing the competition in standard setting.
The adoption of IFRS by the USAwould move us to a monopoly in accounting standards
and standard setting; the costs of a monopoly need to be considered also.
Competition versus monopoly in standards and standard setting
With a USA move towards IFRS, we will move from competition in standards and
standard setting towards a monopoly. Such a move raises many questions: are
accounting standards and standard setting where we expect or want a monopoly? Do
common problems (and costs) of a monopoly apply? Do the common solutions apply?
Is standard setting where we expect or want a monopoly?
The case is being made that one world-wide set of accounting standards and one
standard setting process offers the desired bene?ts at lower costs than many standards
and standard setting bodies. These bene?ts we have mentioned. In deciding that, these
bene?ts outweigh the costs, we are deciding that a monopoly in both standard setting
and standards is desirable.
Some would say that this is a natural evolution. As business has become more
global, as companies operate across borders, as ?nancial markets have developed and
grown world-wide, comparable information across countries and companies is a logical
step to continue to support and advance global business. One set of accounting
standards to be used for global investing and ?nancing decisions, global M&A,
managing worldwide operations. A common set of standards, increases comparability,
improves transparency and decreases cost of capital.
Some critics assert that IFRS do not meet the unique needs of each country, align
with institutions, or re?ect history. IFRS is laid over a structure and set of institutions
developed by each country to meet its needs. There is a mismatch – the right pieces are
not put together. However, the objectives of the IASB are clear. And, adoption by
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country, jurisdiction or market is voluntary. The IASB is not forcing any country or
jurisdiction, or market. The IASB is seemingly devoid of national ties and removed
from political in?uences. But, it does espouse an economic perspective, one that most
countries are moving towards.
One set of accounting standards and one standard setter is not, though, a natural
monopoly in the sense that there are economies of scale in production like a utility.
The monopoly is being created in a normative decision-making process where
competition in standards and standard setting is prohibited.
Do the common monopoly problems apply?
With standards and standard setting we do not have a clear analogy to some common
problems of monopolistic pro?ts, like where monopolists charge a higher price than
marginal cost leading to distortions in the economy. What is much clearer is that we
will not have the bene?ts or discipline of competition. Without correction by market
forces or even the possibility of correction, the foreseen bene?ts of one set of
high-quality global accounting standards could disappear before they even materialize.
The concern of a monopoly – no competition – is where we see the intersection with
regulation and study of institutions. One solution to a monopoly is regulation.
Numerous national regulators and standard setters have voluntarily given the
power to the IASB to set standards. They have no effective control over the IASB and
even limited input. The IASB is self-regulated. If the national regulators and standard
setters are not in agreement with the standard setting process or standards, they have
few choices. They can threaten to stop using IFRS in hopes of the acquiring some
desired outcome or concession in standard setting process. They can totally opt out of
the standards and create their own; then we are back to domestic GAAPs. They can
allow divergences or differences from the standards; then countries are not following
full IFRS. Each of these is costly; costly to companies, to investors, to markets[1].
The “if national regulators and standard setters are not in agreement” is not such a
big “if” or big stretch. We have already seen the IFRS being tested: with improving the
standards, with improving the structure, and with standards being applied as issued.
We can foresee the time when even more pressure is put on the IASB.
We are in a dif?cult spot. The progress we have made moving towards one global
set of accounting standards could have only been made free from national ties and
politics. As we move towards a monopoly though, we have no mechanism to discipline
the monopolist. There is a need for innovation.
Before discussing needed innovation, I would like to next move to the standard
setters and standards, and then other forces.
The standards setters and standards
Over the last 12 years or so, we have seen major changes in the international standard
setting organization – from the IASC to the IASB in 2001. The IASB has distinct
advantages; a relatively small board, full-time members, memberships from
throughout the world, a structure of accountability with the IASC Foundation and
trustees, the ability to be responsive with the International Financial Reporting
Interpretations Committee and Standards Advisory Council, and its open processes.
Sustainability in
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The IASB has conducted “business” in a more objective and neutral manner than
standard setting had been done previously in some countries. Still, some areas need
improvement:
.
Funding – the need for adequate, reliable, and sustainable sources of funding.
.
Interpretations – the need to be responsive to issues raised.
.
Implementation – the need for further guidance and examples.
.
Free access to pronouncements/literature for companies, auditors, and
educators.
The standards themselves have dramatically improved over the last 12 years or so.
The core standards project was the beginning. The IASB has continued with the
commitment, based on their ?rst objective:
[. . .] to develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in ?nancial statements and other ?nancial reporting to help
participants in the world’s capital markets and other users make economic decisions.
When we compare IFRS to US GAAP, there are still differences. Some are areas that
IFRS have not been addressed. Some are problems with US GAAP, others are where
the method that best matches underlying economics is just not known and a decision
could have been made either way.
If the issues mentioned above are addressed, the IASB’s structure and processes are
in a sound position to move forward. In moving forward, being innovative and
sustainable, it needs to continue to be responsive in addressing issues raised and
concerns of companies, users, investors and analysts, national regulators, national
standard setting bodies over process and standards.
We see some evidence of this in the recent roundtable on Constitution Review,
organized by the International Accounting Standards Committee Foundation (IASCF),
which included discussion of the creation of an IASCF Monitoring Group composed
of public authorities (www.iasplus.com/pressrel/0802iascfconstreview.pdf). The
IASCF Monitoring Group should provide for organized interaction between
authorities like the SEC and IOSCO. This is improved oversight but still not
regulation with teeth.
Infrastructure to support investor protection globally
Beyond a well-structured and responsive global standard setter for one global set of
high-quality, understandable and enforceable global accounting standards to be
sustained, is an adequate infrastructure to support investor protection globally. This
will help provide a check on the monopoly, and needed enforcement. We already see
certain elements of the infrastructure in place. They may need to be shored up. Others
will be innovations.
Auditors are at the front-line of investor protection. They provide the needed
assurance that ?nancial statements are prepared in accordance with accounting
principles, whatever principles they are. There are concerns about the rigor and
comprehensiveness of global auditing standards; concerns about whether global
accounting ?rms truly audit the same throughout the world.
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National regulators and stock exchanges in many countries and jurisdictions are the
enforcers, ensuring that IFRSs are applied and interpreted consistently. In many places
they are the effective enforcers. In others they are not. Unless IFRSs are applied and
interpreted consistently across companies and countries, a single global accounting
standard will not be achieved.
In considering the infrastructure, other information intermediaries will continue to
consider other forces that will still act as checks on the system. Institutional investors,
analysts, bond rating agencies, and other capital market participants will continue to
perform their important functions of ?nancial and information intermediaries. In fact,
with common accounting standards, they may become more effective.
Clearly, we are moving towards convergence of accounting standards so investors
worldwide can read comparable ?nancial statements and use them to make better
investment and ?nancing decisions. Creditors can use them to make better lending
decisions. We can read the ?nancial statements, understand them, compare them, and
make decisions based on them. But investors and creditors do not have the same rights
or protections. The next step to sustain global business is convergence in investor
protections and rights.
With differences in legal systems and institutions, this will be more challenging.
Convergence in accounting standards may seem like a “piece of cake” compared with
this next step.
How can convergence in investor (and creditor) protection and rights be achieved?
Changes in laws and regulations? Changes in legal systems? Changes in stock exchange
regulation (enforcements)? A super national legal body? Perhaps, an international
business court system for companies, where both accounting standards and
shareholder rights can be tried? Each investor (and creditor) would have a voice,
regardless of where they are or where the company is. They could raise an issue, lodge a
complaint, have it heard, and decided on. I do not have the answers. But, innovation will
occur.
Side note: innovation in other laws and regulations
One set of principles-based accounting standards will highlight differences in rules and
regulations across countries. Think of different consumer protection laws across
countries or heavily regulated industries. A principles-based set of standards should
report substance over form. Legal restrictions and requirements though, can drive the
substance. Having numerous countries reporting under one accounting standard helps
to identify some of the differences and could give rise to convergence in other laws and
regulations.
Final note: where’s the biggest innovation?
Companies will be the biggest innovators. All faced with reporting under the same set
of standards, companies will be able to further distinguish themselves through their
voluntary disclosures, investor relations, and corporate governance choices. They will
be able to go beyond those IFRS and national requirements. With the content,
transparency, timing, tone, and frequency of other disclosure channels, like press
releases and web sites, they can provide additional and supplemental information or
present it in different ways. The governance choices they make also solidify
commitment to stakeholders.
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Conclusion
Skipping politics, the words of the USA’s former Secretary of Defense Donald
Rumsfeld come to mind at times:
The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know
(February 12, 2002, Department of Defense news brie?ng).
So, what do we know about where we are and where we are going with global
accounting and ?nancial reporting, and regulation and institutions?
(1) Know:
.
moving to IFRS;
.
one standards setter;
.
one set of standards; and
.
no competition.
(2) Unknown:
.
regulatory environment and institutions strong enough, agile enough; and
.
legal rights and protections of shareholders and creditors support global
business.
But, as we know in Philadelphia, through hard work, fair play, and good collaboration
with our global colleagues we cannot just pursue the knowns and unknowns, we also
can chalk up a few wins along the way.
Note
1. Of course, many of them had monopolies in there home markets before, but those monopolies
were checked through other legal and regulatory arrangements.
Corresponding author
Elizabeth A. Gordon can be contacted at: [email protected]
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doc_337202819.pdf
The aim of this paper is to document the author’s keynote address in Accounting at the
16th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management
“Innovation for a Sustainable Future: Visions for 2020”, July 3-4, 2008, Brisbane, Australia.
Accounting Research Journal
Sustainability in global financial reporting and innovation in institutions
Elizabeth A. Gordon
Article information:
To cite this document:
Elizabeth A. Gordon, (2008),"Sustainability in global financial reporting and innovation in institutions",
Accounting Research J ournal, Vol. 21 Iss 3 pp. 231 - 238
Permanent link to this document:http://dx.doi.org/10.1108/10309610810922486
Downloaded on: 24 January 2016, At: 21:07 (PT)
References: this document contains references to 0 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 4529 times since 2008*
Users who downloaded this article also downloaded:
Marion R. Hutchinson, Majella Percy, Leyal Erkurtoglu, (2008),"An investigation of the association between
corporate governance, earnings management and the effect of governance reforms", Accounting Research
J ournal, Vol. 21 Iss 3 pp. 239-262http://dx.doi.org/10.1108/10309610810922495
Clevo Wilson, (2010),"Why should sustainable finance be given priority?: Lessons from pollution
and biodiversity degradation", Accounting Research J ournal, Vol. 23 Iss 3 pp. 267-280 http://
dx.doi.org/10.1108/10309611011092592
Roger L. Burritt, Stefan Schaltegger, (2010),"Sustainability accounting and reporting: fad or
trend?", Accounting, Auditing & Accountability J ournal, Vol. 23 Iss 7 pp. 829-846 http://
dx.doi.org/10.1108/09513571011080144
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Sustainability in global ?nancial
reporting and innovation
in institutions
Elizabeth A. Gordon
Fox School of Business, Temple University, Philadelphia, Pennsylvania, USA
Abstract
Purpose – The aim of this paper is to document the author’s keynote address in Accounting at the
16th Annual Conference on Paci?c Basin Finance, Economics, Accounting and Management
“Innovation for a Sustainable Future: Visions for 2020”, July 3-4, 2008, Brisbane, Australia.
Design/methodology/approach – In keeping with the theme of the Conference, the paper considers
two areas – global accounting and ?nancial reporting, and regulation and institutions.
Findings – As business has become more global and ?nancial markets have developed world-wide,
comparable accounting and ?nancial information across countries and companies is a logical step to
continue to support and advance business. With this shift, though, the world moves towards a
monopoly in accounting standards and standard setting.
Practical implications – The potential costs, problems, and possible solutions need to be
considered. Current regulatory environments and institutions offer limited ability to effectively
monitor such a monopoly. So innovation must occur.
Originality/value – The paper shows that an infrastructure to support global investor protection
and convergence of investor protections and rights can offer such innovation to support and sustain
global business.
Keywords Financial reporting, Accounting, Standards
Paper type Viewpoint
Introduction
In keeping with the theme of the Conference, I focus on “Innovation for a Sustainable
Future: Visions for 2020.” As we look at where we are in the accounting world today
and consider the vision for the future, two themes naturally occur to me – global
accounting and ?nancial reporting, and regulation and institutions. In my view, these
two are fundamentally intertwined as I explain.
Move to IFRS
Recently, most of the world has passed the point of debating whether or not there
should a move to one set of standards and one standards setter. The decision has been
made – no more need to debate. Over 100 countries have or have committed to
adopting International Financial Reporting Standards (IFRS), among them Australia.
In these countries, the bene?ts of one set of global accounting standards have been
determined to outweigh the costs. I have gathered bene?ts and challenges (or costs)
from various sources and lists as follows:
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
This paper documents the author’s keynote address in Accounting at the 16th Annual
Conference on Paci?c Basin Finance, Economics, Accounting and Management “Innovation for a
Sustainable Future: Visions for 2020”.
Sustainability in
global ?nancial
reporting
231
Accounting Research Journal
Vol. 21 No. 3, 2008
pp. 231-238
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610810922486
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(1) Bene?ts:
.
better ?nancial information for shareholders;
.
better ?nancial information regulators;
.
enhanced comparability;
.
improved transparency of results;
.
increased ability to secure cross-border listing;
.
better management of global operations; and
.
decreased cost of capital.
(2) Challenges:
.
initial adoption implementation;
.
initial adoption costs;
.
acceptance;
.
training;
.
suitability for small and private companies; and
.
IT functions.
The costs are primarily short-term: the one-time costs of change. The bene?ts are lasting.
As we look forward 12 years to 2020, we can also see how far the move to IFRS has
come in the last 12 or so years. In 1995, the (then named) International Accounting
Standards Committee (IASC) made an agreement with the International Organization
of Securities Commissions (IOSCO) to complete the core standards by 1999. On
successful completion, IOSCO would consider endorsing IASs for cross-border
offerings. A year later, the core standards program accelerated: target 1998. The
IOSCO endorsement was received in the year 2000. Many countries and jurisdiction
have permitted or required IFRS too.
In some countries, the decision was a matter of the cost of supporting accounting
standard setting and ef?ciencies gained by outsourcing this function. For developing
countries with fewer public companies, smaller capital markets, and fewer accountants
and auditors, the bene?ts of this approach outweigh the costs.
In others areas and regions like the European Union (EU), ef?ciencies gained by
reducing information costs through having a common set of accounting standards
outweighed the costs. The EU had an organization in place to promote economic
development and growth. It wrote common laws and regulations, moved to a common
currency, and common accounting standards.
In other countries, it was the decision to adopt the world standard. Again, the
bene?t of reducing information costs though providing comparable information
outweighed the costs to changing standards.
Some will saythat the worldhas movedquickly. Others might sayit has been35 years
since the IASC was formed. I worked in the federal government in the USA, audited
federal government agencies and departments in Washington DC, where I often sawthe
slow, bureaucratic pace of change. Even if it has taken 35 years, I am surprised at how
quickly the world has made this move. And not mildly surprised. This pace of change
has demanded an extreme amount of co-operation and co-ordination.
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While many countries have already moved to IFRS, in others the decision has not
yet come. I am most familiar with the USA. In the USA, we have not yet lived the
transition to IFRS like many of you have. So where is the USA?
The USA and IFRS
The USA is not there yet but the Financial Accounting Standards Board (FASB) and
Securities and Exchange Commission (SEC) have committed to one set of high-quality
accounting standards and convergence. Not so long ago, a common view was the one
set of high-quality standards would be US GAAP and convergence would be towards
US GAAP. This view has changed. The Enron debacle, other scandals, the
Sarbanes-Oxley Act of 2002 all pushed the USA towards IFRS. Still, even today, about
45 percent of companies in the world (by market capitalization) use US GAAP.
The IFRS and FASB
With the Norwalk agreement of 2002, the FASB and International Accounting
Standards Board (IASB) have committed to convergence. The aim of both is a
commitment to the development of high-quality, compatible accounting standards that
could be used for both domestic and cross-border ?nancial reporting. The two
standard-setters are working in many areas, including joint projects being conducted,
short-term convergence project, liaisons and monitoring of projects, and explicit
consideration of convergence potential agenda decisions. They have worked together
on improved standards on inventory, nonmonetary transactions, share-based
payments, segment reporting, and the use of a fair value option to simplify ?nancial
instrument accounting. Recently, new standards on business combinations were
jointly issued by both standard setters.
On June 16, 2008, the Financial Accounting Foundation and FASB hosted the forum
High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial
Reporting, seeking input from various constituencies (www.fasb.org/forms/
Convergence_forum.shtml). The forum is an initial step toward the creation of a
national transition plan to IFRS in the USA.
IFRS and SEC
The ultimate decision of whether US companies will be allowed to use IFRS rests with
the SEC. Very recently, we have seen much more discussion and decisions made that
move the USA in this direction. Last November, the SEC discontinued the requirement
to reconcile net income and shareholders equity to US GAAP for IFRS reporters
(foreign private issuers). The decision to discontinue the reconciliation has been years
in coming. In 1997, Arthur Levitt the (then) Chairman of the SEC gave his speech titled
The Importance of High Quality Accounting Standards (www.sec.gov/news/speech/
speecharchive/1997/spch176.txt). More recently, the SEC issued its 2005 Roadmap
committing to make a decision by 2009, noting it could be before then (www.sec.gov/
news/speech/spch040605dtn.htm).
In Levitt’s 1997 speech, he laid out three key objectives for international standards
to gain acceptance:
(1) The standards should include a core set of accounting pronouncements that
constitute a comprehensive, generally accepted basis of accounting.
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(2) The standards must be of “high quality” – they must result in comparability
and transparency and they must provide for full disclosure.
(3) The standards must be rigorously interpreted and applied.
When the decision was made, it was made quickly and in effect almost immediately.
While the SEC stated reconciliations would not be required after March 2008, it later
allowed earlier January ?lers not to include the reconciliation.
In August 2007, the SEC also issued a Concept Release, “Concept Release on
Allowing U.S. Issuers to Prepare Financial Statements in Accordance with
International Financial Reporting Standards,” soliciting response on 35 questions on
the possible use of IFRS by US public companies, effectiveness and effects of
convergence, views of investors and other market participants, implementation
matters for auditors and educators, views of and issues foreseen by companies, views
of and issues foreseen by auditors, regulation and integrations with current rules and
processes, and transition and timing (www.sec.gov/rules/concept/2007/33-8831.pdf).
In December 2007, the SEC held two days of public roundtables regarding whether US
issuers should be allowed to use IFRS (www.sec.gov/spotlight/ifrsroadmap/
ifrsround121707-agenda.htm). Whether and how the USA will allow IFRS is still open.
As the world moves to IFRS, the USA could be considered a hold out. A lone country
standing, going its own direction. Inthis the USA, though, has beenperforming a valuable
function. The USAis a viable competitor in providing the competition in standard setting.
The adoption of IFRS by the USAwould move us to a monopoly in accounting standards
and standard setting; the costs of a monopoly need to be considered also.
Competition versus monopoly in standards and standard setting
With a USA move towards IFRS, we will move from competition in standards and
standard setting towards a monopoly. Such a move raises many questions: are
accounting standards and standard setting where we expect or want a monopoly? Do
common problems (and costs) of a monopoly apply? Do the common solutions apply?
Is standard setting where we expect or want a monopoly?
The case is being made that one world-wide set of accounting standards and one
standard setting process offers the desired bene?ts at lower costs than many standards
and standard setting bodies. These bene?ts we have mentioned. In deciding that, these
bene?ts outweigh the costs, we are deciding that a monopoly in both standard setting
and standards is desirable.
Some would say that this is a natural evolution. As business has become more
global, as companies operate across borders, as ?nancial markets have developed and
grown world-wide, comparable information across countries and companies is a logical
step to continue to support and advance global business. One set of accounting
standards to be used for global investing and ?nancing decisions, global M&A,
managing worldwide operations. A common set of standards, increases comparability,
improves transparency and decreases cost of capital.
Some critics assert that IFRS do not meet the unique needs of each country, align
with institutions, or re?ect history. IFRS is laid over a structure and set of institutions
developed by each country to meet its needs. There is a mismatch – the right pieces are
not put together. However, the objectives of the IASB are clear. And, adoption by
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country, jurisdiction or market is voluntary. The IASB is not forcing any country or
jurisdiction, or market. The IASB is seemingly devoid of national ties and removed
from political in?uences. But, it does espouse an economic perspective, one that most
countries are moving towards.
One set of accounting standards and one standard setter is not, though, a natural
monopoly in the sense that there are economies of scale in production like a utility.
The monopoly is being created in a normative decision-making process where
competition in standards and standard setting is prohibited.
Do the common monopoly problems apply?
With standards and standard setting we do not have a clear analogy to some common
problems of monopolistic pro?ts, like where monopolists charge a higher price than
marginal cost leading to distortions in the economy. What is much clearer is that we
will not have the bene?ts or discipline of competition. Without correction by market
forces or even the possibility of correction, the foreseen bene?ts of one set of
high-quality global accounting standards could disappear before they even materialize.
The concern of a monopoly – no competition – is where we see the intersection with
regulation and study of institutions. One solution to a monopoly is regulation.
Numerous national regulators and standard setters have voluntarily given the
power to the IASB to set standards. They have no effective control over the IASB and
even limited input. The IASB is self-regulated. If the national regulators and standard
setters are not in agreement with the standard setting process or standards, they have
few choices. They can threaten to stop using IFRS in hopes of the acquiring some
desired outcome or concession in standard setting process. They can totally opt out of
the standards and create their own; then we are back to domestic GAAPs. They can
allow divergences or differences from the standards; then countries are not following
full IFRS. Each of these is costly; costly to companies, to investors, to markets[1].
The “if national regulators and standard setters are not in agreement” is not such a
big “if” or big stretch. We have already seen the IFRS being tested: with improving the
standards, with improving the structure, and with standards being applied as issued.
We can foresee the time when even more pressure is put on the IASB.
We are in a dif?cult spot. The progress we have made moving towards one global
set of accounting standards could have only been made free from national ties and
politics. As we move towards a monopoly though, we have no mechanism to discipline
the monopolist. There is a need for innovation.
Before discussing needed innovation, I would like to next move to the standard
setters and standards, and then other forces.
The standards setters and standards
Over the last 12 years or so, we have seen major changes in the international standard
setting organization – from the IASC to the IASB in 2001. The IASB has distinct
advantages; a relatively small board, full-time members, memberships from
throughout the world, a structure of accountability with the IASC Foundation and
trustees, the ability to be responsive with the International Financial Reporting
Interpretations Committee and Standards Advisory Council, and its open processes.
Sustainability in
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The IASB has conducted “business” in a more objective and neutral manner than
standard setting had been done previously in some countries. Still, some areas need
improvement:
.
Funding – the need for adequate, reliable, and sustainable sources of funding.
.
Interpretations – the need to be responsive to issues raised.
.
Implementation – the need for further guidance and examples.
.
Free access to pronouncements/literature for companies, auditors, and
educators.
The standards themselves have dramatically improved over the last 12 years or so.
The core standards project was the beginning. The IASB has continued with the
commitment, based on their ?rst objective:
[. . .] to develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in ?nancial statements and other ?nancial reporting to help
participants in the world’s capital markets and other users make economic decisions.
When we compare IFRS to US GAAP, there are still differences. Some are areas that
IFRS have not been addressed. Some are problems with US GAAP, others are where
the method that best matches underlying economics is just not known and a decision
could have been made either way.
If the issues mentioned above are addressed, the IASB’s structure and processes are
in a sound position to move forward. In moving forward, being innovative and
sustainable, it needs to continue to be responsive in addressing issues raised and
concerns of companies, users, investors and analysts, national regulators, national
standard setting bodies over process and standards.
We see some evidence of this in the recent roundtable on Constitution Review,
organized by the International Accounting Standards Committee Foundation (IASCF),
which included discussion of the creation of an IASCF Monitoring Group composed
of public authorities (www.iasplus.com/pressrel/0802iascfconstreview.pdf). The
IASCF Monitoring Group should provide for organized interaction between
authorities like the SEC and IOSCO. This is improved oversight but still not
regulation with teeth.
Infrastructure to support investor protection globally
Beyond a well-structured and responsive global standard setter for one global set of
high-quality, understandable and enforceable global accounting standards to be
sustained, is an adequate infrastructure to support investor protection globally. This
will help provide a check on the monopoly, and needed enforcement. We already see
certain elements of the infrastructure in place. They may need to be shored up. Others
will be innovations.
Auditors are at the front-line of investor protection. They provide the needed
assurance that ?nancial statements are prepared in accordance with accounting
principles, whatever principles they are. There are concerns about the rigor and
comprehensiveness of global auditing standards; concerns about whether global
accounting ?rms truly audit the same throughout the world.
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National regulators and stock exchanges in many countries and jurisdictions are the
enforcers, ensuring that IFRSs are applied and interpreted consistently. In many places
they are the effective enforcers. In others they are not. Unless IFRSs are applied and
interpreted consistently across companies and countries, a single global accounting
standard will not be achieved.
In considering the infrastructure, other information intermediaries will continue to
consider other forces that will still act as checks on the system. Institutional investors,
analysts, bond rating agencies, and other capital market participants will continue to
perform their important functions of ?nancial and information intermediaries. In fact,
with common accounting standards, they may become more effective.
Clearly, we are moving towards convergence of accounting standards so investors
worldwide can read comparable ?nancial statements and use them to make better
investment and ?nancing decisions. Creditors can use them to make better lending
decisions. We can read the ?nancial statements, understand them, compare them, and
make decisions based on them. But investors and creditors do not have the same rights
or protections. The next step to sustain global business is convergence in investor
protections and rights.
With differences in legal systems and institutions, this will be more challenging.
Convergence in accounting standards may seem like a “piece of cake” compared with
this next step.
How can convergence in investor (and creditor) protection and rights be achieved?
Changes in laws and regulations? Changes in legal systems? Changes in stock exchange
regulation (enforcements)? A super national legal body? Perhaps, an international
business court system for companies, where both accounting standards and
shareholder rights can be tried? Each investor (and creditor) would have a voice,
regardless of where they are or where the company is. They could raise an issue, lodge a
complaint, have it heard, and decided on. I do not have the answers. But, innovation will
occur.
Side note: innovation in other laws and regulations
One set of principles-based accounting standards will highlight differences in rules and
regulations across countries. Think of different consumer protection laws across
countries or heavily regulated industries. A principles-based set of standards should
report substance over form. Legal restrictions and requirements though, can drive the
substance. Having numerous countries reporting under one accounting standard helps
to identify some of the differences and could give rise to convergence in other laws and
regulations.
Final note: where’s the biggest innovation?
Companies will be the biggest innovators. All faced with reporting under the same set
of standards, companies will be able to further distinguish themselves through their
voluntary disclosures, investor relations, and corporate governance choices. They will
be able to go beyond those IFRS and national requirements. With the content,
transparency, timing, tone, and frequency of other disclosure channels, like press
releases and web sites, they can provide additional and supplemental information or
present it in different ways. The governance choices they make also solidify
commitment to stakeholders.
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Conclusion
Skipping politics, the words of the USA’s former Secretary of Defense Donald
Rumsfeld come to mind at times:
The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know
(February 12, 2002, Department of Defense news brie?ng).
So, what do we know about where we are and where we are going with global
accounting and ?nancial reporting, and regulation and institutions?
(1) Know:
.
moving to IFRS;
.
one standards setter;
.
one set of standards; and
.
no competition.
(2) Unknown:
.
regulatory environment and institutions strong enough, agile enough; and
.
legal rights and protections of shareholders and creditors support global
business.
But, as we know in Philadelphia, through hard work, fair play, and good collaboration
with our global colleagues we cannot just pursue the knowns and unknowns, we also
can chalk up a few wins along the way.
Note
1. Of course, many of them had monopolies in there home markets before, but those monopolies
were checked through other legal and regulatory arrangements.
Corresponding author
Elizabeth A. Gordon can be contacted at: [email protected]
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Or visit our web site for further details: www.emeraldinsight.com/reprints
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