The political economy of financial harmonization: The East Asian financial crisis and the

Description
In the aftermath of the East Asian financial crisis, western nations established a new international
financial architecture that relied upon enhanced financial transparency and international
financial standards, including international financial reporting and auditing
standards, to govern an expanding and crisis-prone international financial system. This
paper examines the West’s response to financial crisis in the late 1990s and its implications
for the rise and diffusion of international accounting standards from a theoretical perspective
that blends institutional analysis and political economy.

The political economy of ?nancial harmonization: The East Asian
?nancial crisis and the rise of international accounting standards
Patricia J. Arnold
?
Sheldon B. Lubar School of Business, University of Wisconsin–Milwaukee, P.O. Box 742, Milwaukee, WI 53201, United States
a b s t r a c t
In the aftermath of the East Asian ?nancial crisis, western nations established a new inter-
national ?nancial architecture that relied upon enhanced ?nancial transparency and inter-
national ?nancial standards, including international ?nancial reporting and auditing
standards, to govern an expanding and crisis-prone international ?nancial system. This
paper examines the West’s response to ?nancial crisis in the late 1990s and its implications
for the rise and diffusion of international accounting standards from a theoretical perspec-
tive that blends institutional analysis and political economy. The aim is to understand how
the history of accounting has both shaped and been shaped by transformations in the late
20th century international political economy where ?nancial capital and the power of the
?nancial sector play an increasingly central role in the process of accumulation.
Ó 2012 Elsevier Ltd. All rights reserved.
Introduction
Since the mid 1990s, the institutional arrangements
governing ?nancial accounting and auditing practice,
which were organized at the national level by state regula-
tors and professional associations for the better part of the
20th century, internationalized at a surprisingly rapid
pace. This transformation is evident in the development
and widespread diffusion of international ?nancial report-
ing standards. Standards set by a supra-national body, the
London-based International Accounting Standards Board
(IASB) and its predecessor, the International Accounting
Standards Committee (IASC), catapulted from relative
obscurity in the early 1990s to become universally recog-
nized world standards today. Use of International Financial
Reporting Standards (IFRS) is now required or permitted in
over 100 countries, including the member nations of the
European Union. Even in the United States, where support
for domestic adoption of IFRS has been mixed, progress
toward harmonization
1
has gained ground following a
series of regulatory shifts, including the 2002 Norwalk
Agreement to achieve convergence between US and interna-
tional ?nancial reporting standards, and the 2007 Securities
and Exchange Commission’s (SEC) decision to allow foreign
companies to use IFRS in SEC ?lings without reconciliation
to US standards.
2
Although less prominent than the rise of
IFRS, the formalization of international auditing standards
has, likewise, gained momentum in recent years (see Hum-
phrey & Loft, 2009; Humphrey, Loft, & Woods, 2009; Loft &
Humphrey, 2006).
0361-3682/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.http://dx.doi.org/10.1016/j.aos.2012.05.001
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Tel.: +1 414 229 3837; fax: +1 414 229 6957.
E-mail address: [email protected]
1
The term harmonization refers to standardization of laws, rules, and
regulations governing commercial activities across national borders.
Accounting harmonization refers to the standardization of ?nancial
reporting standards (i.e. the rules governing corporate ?nancial reporting),
auditing standards (i.e. the rules governing the conduct of audits) and/or
other accounting-related rules and regulations such as licensing and
quali?cation requirements or ethics rules.
2
Memorandum of Understanding between the Financial Accounting Stan-
dards Board and the International Accounting Standards Board, Norwalk,
Connecticut, September 19, 2002 (www.fasb.org/memorandum.pdf,
accessed February 12, 2010); Securities and Exchange Commission Press
Release 2007-235, November 15, 2007 (www.sec.gov/news/press/2007/
2007-235htm, accessed February 12, 2010).
Accounting, Organizations and Society 37 (2012) 361–381
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The surprisingly rapid pace of accounting harmoniza-
tion in recent decades has inspired a stream of interdisci-
plinary accounting research aimed at explaining the rise
of international ?nancial reporting and auditing standards
(for example see: Bhimani, 2008; Botzem & Quack, 2009;
Camfferman & Zeff, 2007; Chau & Taylor, 2008; Chiapello
& Medjad, 2009; Humphrey & Loft, 2009; Humphrey
et al., 2009; Loft & Humphrey, 2006). Interest in the forces
driving accounting harmonization also extends beyond the
accounting literature to the broader ?eld of social sciences,
where sociologists and political scientists have turned to
the study of accounting harmonization in order to under-
stand emerging forms of global economic governance
(see: Armijo, 2001; Botzem, 2008; Eaton, 2005; Martinez-
Diaz, 2005; Mattli & Büthe, 2003, 2005; Nölke & Perry,
2007; Perry & Nölke, 2005, 2006; Porter, 2005; Posner,
2009; Simons, 2001).
This study contributes to this literature by examining
one episode in the history of international accounting har-
monization. The research focuses on an event that the
IASB’s ?rst Chairman, David Tweedie, frequently cites as
a major turning point in the history of international
accounting, namely the East Asian ?nancial crisis of
1997–1998 (Street, 2002; Tweedie, 2002, 2008). In the
aftermath of the East Asian crisis, ?nance ministers and
central bank governors from the Group of 7 (G-7) nations
3
set in place a so-called ‘‘new international ?nancial architec-
ture’’ to address the problem of systemic instability within
the international ?nancial system that had been exposed
by the crisis. The centerpiece of their plan to reform the
international ?nancial infrastructure was the creation of a
new international organization, the Financial Stability For-
um (FSF), and the endorsement of a set of 12 ?nancial stan-
dards and codes to govern the crisis ridden international
?nancial system by bringing greater transparency to the
marketplace. Signi?cantly, the FSF selected international
?nancial reporting standards and international auditing
standards as two of the 12 ?nancial standards that would
form the foundation for global ?nancial governance. Subse-
quent support for domestic accounting reforms within the
developing world from the Financial Stability Forum, the
World Bank and the International Monetary Fund (IMF) con-
tributed to the development and diffusion of international
accounting standards in several ways, both practical and
ideological.
The history of the rise of international accounting stan-
dards in the wake of the Asian crisis is interpreted from a
theoretical perspective that blends institutional analysis
and political economy, an approach that I call macro-insti-
tutional analysis.
4
The lens of political economy allows us to
examine the relationship between the process of interna-
tional institution building within the accounting ?eld and
the transformation in late 20th century capitalism that Giov-
anni Arrighi (1994, 2007) and others refer to as ?nancializa-
tion. The aim is to better understand how institutional
developments within the accounting ?eld, in this case the
rise of international accounting standards, have both shaped
and been shaped by the ascendance of ?nancial capital to a
dominant position within the world capitalist system.
The following section discusses the research methodol-
ogy. Section three describes the international ?nancial
architecture that was set in place in the wake of the East
Asian crisis and the role that international accounting stan-
dards played within this emerging system of global ?nan-
cial governance. To answer the question of why accounting
?gured so prominently in the new international ?nancial
architecture, the paper situates the history of the response
to the East Asian crisis and the G-7’s endorsement of inter-
national accounting standards in the context of several fea-
tures of the international political economy, including the
structural crisis of capitalism in the 1970s, the consequent
rise of ?nance capital and dependence of the US and other
advanced economies on the growth of the ?nancial sector,
the geopolitical in?uence of the United States in the 1990s
as the organizing center of international capitalism, and US
?nance ministers’ support for institutional ‘‘reform’’ within
emerging economies modeled on Anglo-American modes
of ?nancial governance in order to facilitate the growth
and expansion of Western capital markets. The ?nal sec-
tions of the paper discuss the implications of G-7s response
to the East Asian ?nancial crisis for the diffusion of interna-
tional accounting standards, the international auditing
industry, and prospects for global ?nancial stability.
Analytical approach and methodology
In contrast to international accounting research (Nobes
& Parker, 1988) that emphasizes the embeddedness of
accounting in national cultures and national institutional
forms, this interpretation of the G-7’s response to the East
Asian crisis and its implications for the development and
diffusion of international accounting standards adopts a
world-systems perspective (Arrighi, 1994, 2007; Waller-
stein, 2004). Power (2009) maintains that the rapidity of
accounting internationalization is less surprising if we rec-
ognize that accounting has never been a distinctively na-
tional affair; long before codi?cation of accounting norms
by standard setting bodies began in the mid-20th century,
the basic elements of ?nancial accounting had already
been widely disseminated as part of what he calls a ‘‘world
system of accounting’’ which developed over centuries
rather than decades, and which accounts for the non-trivial
degree of similarity found across various national account-
ing systems. Accordingly, Power (2009, p. 325) argues that
we need to ‘‘rethink the very conception of the ‘interna-
tionalization’ of ?nancial accounting’’ and ‘‘rede?ne the
starting point’’ for international accounting research.
Rather than taking national accounting systems as our pri-
mary unit of analysis and viewing the rise of international
accounting standards in terms of a movement from na-
tional to international accounting norms and the opposi-
tion between forces of international standardization and
nationally embedded institutional and cultural constraints,
3
The Group of 7 (G-7) includes France, Germany, Italy, Japan, United
Kingdom, United States and Canada.
4
Although the terminology is my own, the blending of institutional
analysis and political economy is not a new concept; it is prominent in the
work of economic sociologists, especially within the French regulation
school (Aglietta, 1976; Boyer, 1990, 2007). In a prior work (Arnold, 2009b), I
make a case for a broader conceptualization of institutional research in
accounting that includes a macro political and economic perspective.
362 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
Power (2009) calls for an international accounting research
agenda that takes the world system, rather than the nation
state, as the primary unit of analysis.
Methodologically, analysis at the world rather than na-
tional level can focus on the cultural dimensions of what
Meyers, Boli, Thomas, and Ramirez (1997) call ‘‘world soci-
ety’’ and/or the political and economic dimensions of the
world inter-state system (Arrighi, 1994, 2007). In the ?rst
case, the internationalization of accounting is, to para-
phrase Power (2009), viewed in relation to the diffusion
of a universalistic commercial culture over many centuries,
which is currently expressed in norms of appropriateness
and agreement as to what constitutes ‘‘good’’ accounting
shared by transnational networks of experts that populate
the accounting ?eld. In the second case, accounting history
is conceptualized in relation to the development of capital-
ism on a world scale, again over many centuries, which
currently takes form in the process of ?nancialization, i.e.
the dominance of ?nancial capital over national and inter-
national economies (Arnold, 2009a). This study adopts the
second approach taking the political and economic dimen-
sions of the world inter-state system as the primary focus
of analysis in order to better understand the relationship
between the rise of international accounting standards
and the dynamics of late 20th century capitalism.
In a prior study of institutional approaches to interna-
tional accounting research (Arnold, 2009b), I describe this
blend of institutional analysis and political economy as a
form of macro-level institutional analysis, and distin-
guished it from micro and mezzo-level institutional stud-
ies. Marco institutional analysis can be de?ned as the
study of the institutional arrangements governing econo-
mies as a whole. Research at this level examines the
long-term historical processes whereby the institutional
arrangements governing economies come into being and
change in response to ?nancial and economic crises, polit-
ical mobilizations, and social struggles. It differs from tra-
ditional political economy in the emphasis it places on
the importance of the institutional arrangements that reg-
ulate capitalism across historical time. This blending of
political economy and institutionalism is evident in the
work of French regulation theorists (Aglietta, 1976; Boyer,
1990) who pay particular attention to transformations in
the institutional mechanisms that have developed histori-
cally to moderate capitalism’s tendency toward economic
crisis and social instability. Financial reporting and audit-
ing are conceptualized as a component of the institutional
arrangements that govern contemporary capitalist econo-
mies, and the world economy as a whole. Boyer (2007),
for example, has used the regulation approach to argue
that historical cost accounting facilitated the Fordist re-
gime of accumulation that characterized the post-WWII
era, while fair value accounting plays an integral part in
the ?nance-led economic regime that characterizes today’s
political economy.
Although Power’s (2009) suggestion to view ?nancial
accounting as a product of a universalistic and state-less
commercial culture may well be the appropriate starting
point for research on the role global networks of experts
play in the diffusion of accounting norms, a political econ-
omy of accounting must deal with the fact that the con-
temporary world system is organized as an inter-state
system. Geo-politics, inter-capitalist rivalries, economic
con?icts between nations at the core and periphery of
the world system, and the pivotal role played by states,
such as Britain in the 19th century and the United States
in the 20th century, in organizing capitalism on a world
scale are critical components of this analysis.
5
Drawing fromFernand Braudel’s history of the evolution
of capitalismas a world system, Arrighi (1994, 2005) argues
that the organizing center of capital accumulation shifted
over time from the Italian city states in the 15th and 16th
centuries, to Holland in the 17th century, to Britain in the
19th century and to the United States in the 20th century.
With each successive shift, the states that served as the cen-
ter of capital accumulation were larger and more powerful
than their predecessors, and capable of organizing capital-
ism on an increasingly larger world scale. After World
War II, the United States played the pivotal role of organizer
and promoter of world capitalism for several decades.
Although Arrighi (2007) and others argue that US hege-
mony entered into decline in the 21st century, during the
1990s the US was, as Harvey (2010, p. 36) observes, ‘‘the
controlling shareholder in global capitalism, able to call
the shots with respect to global politics’’ in part through
its in?uence over global economic institutions such as the
World Bank and IMF. For this reason, this study emphasizes
the role the United States played in shaping the West’s
response to the East Asian ?nancial crisis and constructing
the post-crisis international ?nancial architecture.
For this reason as well, the paper retains the often mis-
understood terms Anglo-American capitalism and Anglo-
American accounting, which for purposes of this study
can be interpreted as roughly synonymous with interna-
tional capitalism and world accounting as they developed
over the past two centuries ?rst under British and then un-
der US sponsorship. From a world systems perspective, An-
glo-American capitalism is not an expression of US or
British national culture, but rather an essentially interna-
tionalist project that has been spread by way of colonial
conquests, imperialism, and neo-colonial ventures. As a re-
sult, the institutional arrangements governing the interna-
tional economy have been largely shaped by the organizing
centers of capital accumulation and often, although not
necessarily, re?ect norms and practices developed in Brit-
ain and America. While it may be tempting to abandon
the term Anglo-American and replace it with the term
world accounting, to do so invites the misconception that
accounting practices are strictly a product of a universalis-
tic commercial culture or anonymous market forces and,
thus, devoid of the geopolitical underpinnings and eco-
nomic relations of power that are so important to the study
of political economy.
The research draws from the literature on political
economy and economic history including the works of Ar-
righi (1994, 2007), Harvey (2005, 2010), Brenner (2002),
Epstein (2005) and others to describe the transformation
5
Arrighi (2007, p. 92) argues that Marx’s characterization of the state as
a committee for managing the affairs of the bourgeoisie is ‘‘probably as
accurate a description as any other’’ of the states that have served as
centers of capitalist accumulation in the West.
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 363
of late 20th century capitalism and the phenomenon of
?nancialization. The sections of the paper dealing with
the G-7’s response to the East Asian ?nancial crisis draw
from the work of Wade (2000, 2007), Cumings (1998)
and other critics of the so called ‘‘new international ?nan-
cial architecture’’ that was established in the aftermath of
the East Asian crisis. In their analysis (see especially Wade,
2007), the West’s response to the East Asian crisis repre-
sented an effort, led by the United States, to seize upon
the crisis to promote the spread of Anglo-American style
capitalism to East Asia and the developing world by insti-
tuting a relatively weak ?nancial governance regime, fa-
vored by the ?nancial sector, based upon transparency,
international ?nancial standards, and market self-
discipline.
While the study relies on insights drawn from the polit-
ical economy and economic history literature for its inter-
pretative framework and to identify the macro economic
and political factors that shaped the G-7s response to the
Asian crisis, the historical research on accounting’s role in
the international ?nancial infrastructure, and the
implications of the Financial Stability Forum’s selection of
accounting and auditing as key elements of global ?nancial
governance is based on primary sources. Primary source
materials, including speeches, press releases, published pa-
pers, reports and other documents, were obtained from the
online archives of the Financial Stability Board, the US
Treasury Department, the IMF, the World Bank, the Bank
of International Settlements, and the University of Toron-
to’s G-8 Information Center, among others. Wherever pos-
sible historical events are documented with references to
primary sources, including the writing and speeches of
individuals whose involvement in the West’s response to
the crisis gave them access to knowledge of what was hap-
pening behind the scenes. Evidence and interpretations of
events were evaluated by triangulating between multiple
sources. The archival research was supplemented by inter-
views with participants who observed the West’s response
to the crisis from positions within relevant international or
national regulatory organizations, including the Interna-
tional Accounting Standards Committee, the International
Forum for Accountancy Development, the Security and
Exchange Commission, and the World Bank.
The East Asian crisis and the new international ?nancial
architecture
The East Asian ?nancial crisis (1997–1998) began in
Thailand with a panicked run on the Thai Bhat in 1997 as
short term investors, which Blustein (2001) refers to as
‘‘the electronic herd’’, pulled money out of the country.
Contagion spread quickly throughout the region leading
to major IMF rescue programs in Thailand, Indonesia, and
Korea. The ?nancial turmoil was not limited to Asia; the
late 1990s witnessed a series of serious international
?nancial upheavals including the Mexican peso crisis in
1994–1995, the Russian debt crisis in 1998, the collapse
of the US hedge fund, Long Term Capital Management, also
in 1998, and the Brazilian currency crisis in 1999. Together
these events destabilized the international ?nancial sys-
tem leading to calls for ?nancial reform and the creation
of a so-called ‘‘new international ?nancial architecture’’.
Soederberg (2001, p. 453) de?nes this architecture as ‘‘an
emerging conjuncture of institutions, practices and dis-
courses that aim to provide a managing infrastructure for
the movement of global capital ?ows.’’
While the seriousness and scale of these crises led to
widespread consensus among Western economists, policy
analysts, politicians and ?nance ministers on the need to re-
form the international ?nancial system,
6
there were funda-
mental disagreements on the formreformshould take. At the
risk of some oversimpli?cation, the various proposals for
?nancial reform advanced in the wake of the East Asian
crisis can be grouped into three approaches.
7
The ?rst ap-
proach blamed the crisis on overly rapid ?nancial liberaliza-
tion, which allowed capital to ?ow freely across borders
encouraging short-term ?nancial speculation and increasing
the risk of capital ?ight and crisis. Proponents of this
approach, including Nobel prize winning economist Paul
Krugman (1998) and pro-globalization economist Jagdish
Bhagwati (1998) among others, advocated placing con-
straints on cross-border ?nancial speculation by allowing or
encouraging governments to re-impose capital controls if
needed to prevent the kind of wholesale capital ?ight that
had proven so destabilizing in Asia. During the East Asian cri-
sis, the government of Malaysia adopted this approach when
it imposed emergency capital controls in September 1998 to
curb capital ?ight out of the country. Advocates of constraints
on the global movement of capital also favored transactions
taxes, such as the Tobin Tax,
8
to discourage short-term
?nancial speculation and raise revenue to mitigate the social
impacts of economic crises (see Crotty and Epstein (1999)
and Pollin, Baker, and Schaberg (2001) for examples).
The second approach called for the creation of stronger
international institutions with enhanced powers to govern
the international ?nancial system in order to prevent and/
or contain instability. Examples of this approach to reform
include the proposal for an international ?nancial regula-
tor, advanced by UK economist John Eatwell (Eatwell &
Taylor, 2000) among others, and a proposal for an interna-
tional credit insurer, advocated by hedge fund manager
George Soros (1998). Proposals for an international bank-
ruptcy court were also advanced. Anne Krueger (2001),
then First Deputy Managing Director of the International
Monetary Fund, for example, called for the establishment
of an international bankruptcy mechanism that would give
the IMF power to restructure sovereign debt (Wade, 2007).
Within East Asia, Japan’s proposal for the creation of an
Asian Monetary Fund, as a regional alternative to the US
dominated International Monetary Fund (Lipscy, 2003),
6
An exception to the consensus on the need for a new international
?nancial architecture was the position taken by the market fundamental-
ists who opposed any government intervention in the economy including
IMF bailouts on the grounds that they exacerbated the moral hazard
problem. See Summers (1999b) for a discussion of this position.
7
For a more in-depth discussion of proposed responses to the East Asian
crisis see summaries by Culpeper (2000), Rogoff (1999), Soederberg (2001)
and Summers (1999b).
8
The Tobin Tax, a tax on foreign currency transactions designed to
discourage short term speculation, was ?rst proposed by Nobel Laureate
economist, James Tobin, in the 1970s.
364 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
represents a regional variation on this institutional-build-
ing approach to strengthening the international ?nancial
infrastructure.
The third approach was the least radical; it blamed the
East Asian ?nancial crises on some combination of crony
capitalism, poor ?nancial governance, and a lack of trans-
parency within emerging economies. Advocates of the
third approach, including United States Treasury Depart-
ment chiefs Robert Rubin (1998) and Lawrence Summers
(1999b), opposed constraints on global ?nancial integra-
tion, and called instead for domestic reforms within
emerging economies to strengthen their ?nancial infra-
structures and bring them into line with international best
practices. Mervyn King (1999), then Deputy Governor of
the Bank of England, similarly favored domestic ?nancial
reforms aimed at greater transparency and accountability
calling it a ‘‘middle way’’ between calls for an international
lender of last resort and calls for permanent capital con-
trols that would constrain the free movement of capital
and undermine global ?nancial liberalization. With the iso-
lated exception of Malaysia’s temporary capital controls,
proposals for macro economic reforms advocated by pro-
ponents of the ?rst two approaches were never imple-
mented. Instead, the third approach focused on micro-
prudential regulation, improved transparency, domestic
?nancial reform, and adoption of international ?nancial
standards and codes of best practice by developing nations
became the framework for the G-7s response to the crisis.
The West’s efforts to construct a new international
?nancial architecture in the aftermath of the Asian crisis
was coordinated by the ?nance ministers and central bank
governors of the Group of 7 (G-7) nations: Canada, France,
Germany, Italy, Japan, the UK and the US.
9
The appendix
presents a timeline depicting the chronology of the East
Asian crisis and the G-7’s response. The G-7 holds meetings
both at the level of heads of state and at the level of ?nance
ministers and central bank governors; unless otherwise
indicated the events and decisions described in this section
and in the appendix were initiatives of the G-7 ?nance min-
isters and central bank governors.
On October 30, 1998, G-7 ?nance ministers and central
bank governors issued a statement in which they agreed
to cooperate on reforms to strengthen the international
?nancial system along the lines of the third approach dis-
cussedabove. Theyagreedto carryforwardreforms through
appropriate international institutions and forums designed
to (1) increase transparency and openness of the interna-
tional ?nancial system, (2) identify and disseminate inter-
national principles, standards and codes of best practice,
(3) strengthen incentives to meet these international stan-
dards and (4) strengthen of?cial assistance to help develop-
ing countries reinforce their economic and ?nancial
infrastructures. They further agreed on the need to set in
place a process by which the IMF would conduct surveil-
lance of national ?nancial sectors and their regulatory and
supervisory regimes and report on compliance with disclo-
sure standards andcodes of conduct. Lastly, the ?nancemin-
isters acknowledged the need for standards of transparency
in the private sector as well as the public sector, and called
upon the International Accounting Standards Committee
(IASC) to ?nalize a proposal for a full range of internationally
agreed accounting standards by 1999. The International
Organization of Securities Commissions (IOSCO), the Inter-
national Association of Insurance Supervisors (IAIS) and
the Basel Committee on Banking Supervision were directed
to complete a timely review of IASC’s standards.
10
At their Bonn meeting in February 1999, G-7 ?nance
ministers and central bank governors created a new inter-
national ?nancial organization, the Financial Stability For-
um (FSF) based upon the recommendations of a report by
Hans Tietmeyer, then President of the Deutsche Bundes-
bank, that they had commissioned the previous year.
11
The purpose of the Forum was to bring together national
authorities, international ?nancial institutions, and interna-
tional regulatory bodies on a regular basis to ‘‘assess issues
and vulnerabilities affecting the global ?nancial system and
identify and oversee the actions needed to address them’’
(Tietmeyer, 1999, p. 7). The Financial Stability Forum’s mem-
bership was composed of the ?nance ministers, central bank
governors and other regulatory authorities from the G-7
countries and other signi?cant international ?nancial centers
as well as the IMF, the World Bank, international regulatory
and supervisory bodies, and committees of bank experts.
Fig. 1 lists the Forum’s membership as of their second meet-
ing in 1999. Although the Group of 20 (G-20) was established
as a consultative body at the G-7 ?nance ministers meeting in
September of 1999 to broaden involvement and lend legiti-
macy to the Financial Stability Forum’s initiatives, the crea-
tion of the Forum was initiated by the G-7, and its
membership continued to be dominated by ?nance minis-
ters, central bank governors and ?nancial regulators from
the G-7 until its reorganization into the Financial Stability
Board in 2009.
12
9
Earlier in November 1997, President Clinton and other leaders of Paci?c
Rim countries organized a gathering of ?nance ministers and central bank
governors from 22 nations to advance reform of the global ?nancial
architecture (IMF, Guide to Committees, Groups and Clubs, September 30,
2010, accessed December 19, 2010 at www.imf.org/external/np/exr/facts/
groups.htm). The G-22 issued recommendations for reform in October
1998, including a recommendation that ‘‘priority be given to compliance
with and enforcement of high quality accounting standards’’ (G-22
Working Group on Transparency and Accountability, Report on the Inter-
national Financial Architecture, October 1998 accessed on 28 March 2010http://www.imf.org/external/np/g22/index.htm-22). The G-7 subsequently
endorsed the G-22 Report of the Working Group on Transparency and
Accountability in full (King, 1999). According to Armijo (2001), European
dissatisfaction with US dominance of the G-22 prompted the G-7’s creation
of the Financial Stability Forum in 1999.
10
Declaration of G7 Finance Ministers and Central Bank Governors, October
30, 1998 (accessed on 27 May 2011 at www.imf.org/external/np/g7/
103098dc.htm).
11
At their October 3, 1998 meeting, G-7 ministers asked Han Tietmeyer to
consult with relevant organizations and recommend any new structures
and arrangements that might be required to promote cooperation and
coordination between the various international supervisory bodies and the
international ?nancial institutions (Statement by the G7 Finance Ministers
and Central Bank Governors, Washington, DC, October 3, 1998, accessed on
27 May 2011 at www.g8.utoronto.ca/?nance/fm100398.htm).
12
For a history of the founding of the Financial Stability Forum and its
successor the Financial Stability Board see: www.?nancialstablity-
board.org/about/history.htm (accessed December 19, 2010). For informa-
tion on the founding of the G-20 see the International Monetary Fund’s,
Guide to Committees, Groups and Clubs, September 10, 2010 (accessed 19
December 2010 at www.imf.org/external/np/exr/facts/groups.htm).
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 365
At the Forum’s inaugural meeting in Washington, DC
in April of 1999, members set up three working groups
to recommend policy on highly leveraged institutions,
capital ?ows, and offshore ?nancial centers. The Forum
also agreed to create a compendium of standards listing
internationally accepted standards and codes of best
practice. In advance of the Forum’s second meeting in
Paris in September of 1999, a draft compendium was
complied.
13
The draft compendium consisted of 43 eco-
nomic and ?nancial standards all of which were formu-
lated by members of the Forum; accounting standards
were not among them. Over the course of the following
year, FSF members recommended additional standards for
inclusion in the compendium, including ?nancial reporting
and auditing standards, bringing the total number of pro-
posed standards to 64.
14
At the third Financial Stability Forum meeting in Singa-
pore in March of 2000, members agreed to focus on a com-
pendium of 12 ?nancial standards and codes, culled from
the list of 64, which they designated as ‘‘key’’ to sound
National Authorities (25 representatives)
Australia: Reserve Bank of Australia
Canada: Department of Finance
Bank of Canada
Office of the Superintendant of Financial Institutions
France: Ministry of the Economy
Commission Bancaire
Banque de France
Germany: Ministry of Finance
Bundesaufsichtsamt f r das Kreditwesen
Deutsche Bundesbank
Hong Kong: Hong Kong Monetary Authority
Italy: Ministry of the Treasury
Banca d’Italia
CONSOB
Japan: Ministry of Finance
Financial Supervisory Agency
The Bank of Japan
Netherlands: De Nederlandsche Bank
Singapore: Monetary Authority of Singapore
United Kingdom: Bank of England
Financial Services Authority
HM Treasury
United States: Department of the Treasury
Securities and Exchange Commission
Board of Governors of the Federal Reserve System
International Financial Institutions (6 representatives)
International Monetary Fund (2)
The World Bank (2)
Bank for International Settlements
Organisation for Economic Cooperation and Development
International Regulatory and Supervisory Groupings (6 representatives)
Basel Committee on Banking Supervision (2)
International Organisation of Securities Commissions (2)
International Association of Insurance Supervisors (2)
Committees of Central Bank Experts (2 representatives)
Committee on Payment and Settlement Systems
Committee on the Global Financial System
Source: BIS, Background brief made available to the Press at the 2
nd
meeting of the Financial Stability
Forum on 15 September 1999 (www.bis.org/press/p990916.htm). The IASB became a member in 2008
(IASB correspondence dated 7 June 2011).
Fig. 1. 1999 Financial Stability Forum membership.
13
Financial Stability Forum, Background brief made available to the Press at
the 2nd meeting of the Financial Stability Forum, September 16, 1999
(accessed 19 Dec. 2010 at www.bis.org/press/p990916.htm).
14
Issue Paper of the Task Force on Implementation of Standards, prepared for
the 25-26 March 2000 Meeting of the Financial Stability Forum25-26, March
15, 2000 (accessed 31 May 2011 at (www.andrewsheng.com/downloads/
publications/021216taskforceonimplementationofstandards.pdf).
366 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
?nancial systems and targeted for priority implementa-
tion.
15
These standards and their issuing bodies are shown
in Fig. 2.
Two of the 12 ?nancial standards given priority by the
Forum are accounting standards, namely (1) International
Accounting Standards
16
set by the International Accounting
Standards Board (IASB), and (2) International Auditing Stan-
dards set by the International Federation of Accountants
(IFAC). The FSF originally designated the International
Accounting Standards Committee (IASC) as the global
accounting standard setter; when the IASB was established
to succeed IASC in 2001, it replaced IASC in the
compendium.
The selection of accounting and auditing standards for
inclusion in the Financial Stability Forum’s list of key stan-
dards is notable because private sector bodies set interna-
tional accounting and auditing standards. Other standards
in the Forum’s compendium are set by organizations com-
posed of national governments or national regulators.
17
The Financial Stability Forum’s
12 Key Standards for Sound Financial Systems
Area Standard Issuing Body
Macroeconomic Policy and Data Transparency
Monetary and Code of Good Practices on International Monetary Fund
financial policy Transparency in Monetary and
transparency Financial Policies
Fiscal policy Code of Good Practices on Fiscal International Monetary Fund
transparency Transparency
Data Special Data Dissemination Standards & International Monetary Fund
dissemination General Data Dissemination Standards
Institutional and Market Infrastructure
Insolvency Insolvency and Creditor Rights World Bank
Corporate Principles of Governance Organization for Economic
Governance Co-operation and Development
Accounting International Accounting Standards International Accounting
Standards Board
Auditing International Auditing Standards International Federation of
Accountants
Payment and Core Principles for Systematically Committee on Payment &
Settlement Important Payment Systems Settlement Systems (CPSS)
Recommendations for Securities CPSS/IOSCO
Settlement Systems
Market integrity Recommendations of the Financial Action Financial Action Task Force
Task Force on Money Laundering and
Terrorism
Financial Regulation and Supervision
Banking Core Principles for Effective Banking Basel Committee on Banking
supervision Supervision Supervision
Securities Objectives and Principles of Securities International Organization of
regulation Regulation Securities Commissions (IOSCO)
Insurance Insurance Core Principles International Association of
supervision Insurance Supervisors
Source: Financial Stability Forum (now the Financial Stability Board),
www.financialstabilityboard.org/cos/key_standards.htm, accessed on 14 January 2010.
Fig. 2. The Financial Stability Forum’s 12 key standards for sound ?nancial systems.
15
Financial Stability Forum Press Release, Financial Stability Forum
endorses policy actions to reduce global ?nancial vulnerabilities, March, 26,
2000 (accessed 19 December 2010 at www.?nancialstabilityboard.org/
press/pr_000325.pdf).
16
The FSF used the term ‘‘international accounting standards’’ here to
refer to International Financial Reporting Standards set by the IASB and its
predecessor the IASC.
17
Except for the private sector accounting and auditing standard setters,
all other standard setters were also members of the Financial Stability
Forum. The IASB did not become a member of the Forum until 2008
(correspondence with the IASB dated 7 June 2011); the IFAC has never been
a member.
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 367
The IOSCO (International Organization of Securities Com-
missions) and IAIS (International Association of Insurance
Supervisors) are made up of national securities and insur-
ance regulators. The International Monetary Fund (IMF),
the World Bank, the Financial Action Task Force (FATF), the
Organization for Economic Co-operation and Development
(OECD) and the Bank for International Settlements (BIS),
which is home to the Basel Committee on Bank Supervision
(BCBS) and the Committee on Payment and Settlement Sys-
tems (CPSS), are all inter-governmental bodies. In contrast,
private sector groups issue international accounting and
auditing standards. The IASC/IASB is an independent private
sector body and the IFAC is an association of professional
associations representing commercial auditors.
The IMF and World Bank were charged with responsi-
bility for monitoring countries’ implementation and com-
pliance with the FSF’s standards and codes. As part of
their joint Financial Sector Assessment Program (FSAP),
the IMF and World Bank began conducting detailed coun-
try-by-country assessments of progress toward implemen-
tation, and publishing Reports on the Observance of
Standards and Codes (ROSC). Wade (2007) criticizes these
arrangements, which he refers to as the ‘‘standards-sur-
veillance-compliance’’ regime, on three counts. First, the
response to the East Asian crisis was drafted by a US-led
coalition of western governments, international organiza-
tions, ?nancial ?rms, and think tanks from advanced capi-
talist states, while the ‘‘global South’’ had almost no voice
in the matter (Wade, 2007, p. 115). Second, more substan-
tive reforms of the international ?nancial system, embod-
ied in proposals for the creation of a international
?nancial regulator, a international bankruptcy court, an
international deposit insurance corporation, were rejected
largely because of the ‘‘unwillingness of private ?nancial
markets to accept greater international authority, which
would afford them less latitude than a world in which a
variety of nation-states hold jurisdiction’’ (Wade, 2007, p.
119). Lastly, Wade argues that the ‘‘standards-surveil-
lance-compliance’’ regime set in place by the FSF fostered
the ‘‘Anglo-Amercianization’’ of emerging economies. In
his words:
(I)t pushed national economies toward one particular
kind of capitalism – the Anglo-American type – and
shrunk the scope of ‘policy space’ for these countries
still further than did the prescriptions of the Washing-
ton Consensus. Where the latter insisted on liberalizing
the market, deregulation and ?scal austerity, the Post-
Washington Consensus could be summed up by the
commandment ‘‘standardize the market’’ (2007, p. 116).
The following sections discuss the macro political and
economic underpinnings of the FSF’s choice of accounting
standards as key components of this ‘‘standards-surveil-
lance-compliance’’ regime and assesses the implications
of that choice.
The political economy of accounting harmonization
University of Chicago historian, Bruce Cumings (1998, p.
54) writes that at the height of the East Asian ?nancial
crisis in 1997, US Secretary of the Treasury Robert Rubin
personally held up the IMF bailout of Korea for 10 hours
while he pushed Korea to adopt new accounting standards.
Such high level advocacy for accounting reform is not an
isolated incidence. In comments on the East Asian crisis
made in 1999 to the Institute of International Finance
(IFF),
18
Deputy Secretary of the Treasury Lawrence Sum-
mers, who would succeed Rubin as head of the US Treasury
Department in July of 1999, underscored his view of the
importance of accounting standards to the creation of an
international ?nancial infrastructure by stating:
If one were writing a history of the American capital
markets I think one would conclude that the single most
important innovationshaping the market was the idea of
generally accepted accounting principles. GAAP are not a
single institution. They are not a single magic bullet.
They are an ongoing process that really is what makes
our capital market work and what makes it as stable as
it is. Very much the same kind of thing is necessary in
the emerging economies (Summers, 1999a, p. 3).
Alan Greenspan (1999), Chairman of the US Federal Re-
serve System, likewise, spoke publicly about the need for
improved accounting within emerging economies noting
that:
It is no coincidence that the lack of adequate accounting
practices, bankruptcy provisions, and corporate gover-
nance have been mentioned as elements of several of
the recent crises that so disrupted some emerging-mar-
ket economies. Had these been present, along with the
capital markets they would have supported, the conse-
quences of the initial shocks of early 1997 might well
have been quite different.
Rubin, Summers and Greenspan’s support for generally
accepted accounting standards is remarkable in that it
demonstrates that support for accounting reform in the
wake of the East Asian crisis came from high echelons of
power within the US Treasury Department and central
bank.
Why did accounting standards rise to such prominence
in the minds of US ?nance ministers and central bankers?
The answer to this question, which bears directly on our
question of why international accounting standards ?g-
ured prominently in the ‘‘new international ?nancial archi-
tecture’’, established by the G-7 in the wake of the East
Asian crisis, is rooted in the late 20th century economic
transformation known as ?nancialization.
Financialization
Economic historians and political economists use the
term ‘‘?nancialization’’ to describe the transformation that
occurred in the international political economy during the
last quarter of the 20th century.
19
The 1980s and 1990s saw
18
The International Institute of Finance (IIF) is a politically in?uential
global association of ?nancial institutions; its membership includes the
world’s largest commercial and investment banks (http://www.iif.com).
19
See Epstein (2005) for a discussion of various de?nitions of the term
‘‘?nancialization’’.
368 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
signi?cant changes in the world economy which included
not only the widely studied phenomenon of globalization,
but also ?nancialization, which has been de?ned as a ‘‘pat-
tern of accumulation in which pro?t making occurs increas-
ingly through ?nancial channels rather than through trade
and commodity production’’ (Krippner, 2004, p. 14 cited in
Epstein (2005, p. 3)). The processes of ?nancialization and
economic globalization, as well as the rise of neoliberal ide-
ologies to rationalize them, occurred contemporaneously.
Duménil and Lévy (2005), however, contend that ?nancial-
ization is critical to understanding the contemporary global
political economy. In their analysis, ‘‘it is ?nance that dic-
tates the forms and contents in the new stage of internation-
alization; it is not internationalization or globalization that
created the insuperable necessity for the present evolution
of capitalism’’ (Duménil & Lévy, 2005, p. 17).
In his study of late 20th century political economy,
Brenner (2002) traces the transformation in capitalism
from the post World War II boom to the speculative bub-
bles of the late 1990s and 2000s. In Brenner’s analysis,
the so-called ‘‘new economy’’ of the 1990s failed to resolve
the structural crisis that had surfaced in the 1970s as a re-
sult of uneven development, intensifying inter-capitalist
competition between the US, Japan and Germany, global
overproduction, and declining rates of pro?t. Harvey
(2010, p. 45), likewise, attributes the transformation of
the late 20th century political economy to the 1970s crisis,
which he describes as an over-accumulation crisis; pro?t
rates were too low to attract reinvestment of capital sur-
plus leading to stagnation and economic decline. In re-
sponses to declining pro?ts and stagnation in the real
economy, the United States adopted a host of monetary,
?scal, economic and (de)regulatory policies, as well as
aggressive foreign and trade policies in order to open chan-
nels for accumulation via the ?nancial sector. The United
States was not alone in this effort; the United Kingdom ac-
tively promoted the growth of its ?nancial sector during
the 1980s and 1990s (Hutton, 1996), and other developed
western nations bene?ted from and supported ?nancial
liberalization and international capital mobility (Abdelal,
2007). Nonetheless, given its hegemonic position within
the inter-state capitalist system the 1980s and 1990s, the
United States took the lead in furthering ?nancialization
on a global level by encouraging international capital
mobility and the expansion of global ?nancial markets.
Financialization and the accompanying expansion of
integrated international ?nancial markets was not a spon-
taneous event; nor, was it driven solely by technological
advances in telecommunications as Friedman (2000) and
others maintain. It was the product of conscious state-
led, political efforts to dismantle the institutional mecha-
nisms that had been set in place to control cross border
capital ?ows following the Great Depression of the
1930s. As Schor (1992) observes, the degree of interna-
tional ?nancial openness has oscillated historically in re-
sponse to economic crisis, social struggles and political
interventions. The 19th century world economy was char-
acterized by a high degree of ?nancial openness and cross
border capital mobility (Polanyi, 1944). In the aftermath of
the Great Depression in the 1930s, political and institu-
tional controls were established over international capital
?ows, and a system of non-integrated, nationally based,
?nancial systems was set in place that lasted into the
1970s. Just as the post-World War II political economy
with its characteristic Keynesian economic policies, capital
controls, and national ?nancial systems was the product of
conscious policies and political compromises (Schor,
1992), the return of ?nancial liberalization and the re-inte-
gration of world ?nancial markets in the 1980s and 1990s
was similarly the product of state action and political
interventions. The world economy was reshaped in the last
quarter of the 20th century by state-led policies to disman-
tle Keynesian institutions, to eliminate capital controls, lib-
eralize national economies, and to open national borders
once again to international capital investment and cross
border capital ?ows (Helleiner, 1994; Kapstein, 1994;
Schor, 1992).
In Arrighi’s (2007, p. 230) view, ?nancialization (which
he characterizes, quoting Braudel, as the ‘‘capacity of ?-
nance capital to take over and dominate for a while at least
all the activities of the business world’’) provided a tempo-
rary ?x to the problem of economic stagnation. Financial-
ization helped to revive economic prosperity in the
1990s,
20
but it did so at the cost of making the US economy
and its position within the world economy increasingly
dependent on the growth and welfare of the ?nancial sec-
tor.
21
In her analysis of the East Asian crisis, Soederberg
(2001, p. 457) compares this dependency on the ?nancial
sector to the relationship between Dr. Frankenstein and
his monster in Mary Shelley’s classic novel Frankenstein.
Through the monster’s exploits, he gains increasingly
more power over his creator – interestingly enough lar-
gely through neglect. In similar fashion, through almost
a decade of imposing the imperatives of free capital
mobility the Washington Consensus has not only
increased exponentially the power of the international
?nancial markets over states but also over the United
States. As a consequence, the viability of U.S. structural
power has become ever more dependent on the health
and stability of global ?nancial markets – of which large
U.S. based ?nancial investment institutions are signi?-
cant actors
Financialization increased the political power of the
?nancial sector, which by the late 1990s exercised sub-
stantial in?uence in Washington, DC. Bhagwati (1998, p.
7) attributes the US-led response to the East Asian crisis
20
Unlike Arrighi (2007) who attributes the revival of the US economy in
the 1990s to the monetarist counter-revolution that began in 1979–1982,
Brenner attributes the revival to the Plaza Accord, which stimulated US
manufacturing by devaluing the dollar, but failed to solve the problem of
over production on a world scale.
21
For evidence of the increasing importance of the ?nance sector to the
US economy see Foster and Magdoff (2009), especially Chart 2.4 (p. 55) and
Chart 6.2 (p. 123). As these charts show, during the 1970s, US manufac-
turing pro?ts declined steadily as a percent of total domestic pro?ts; after
1985 ?nancial pro?ts began to take up the slack. In 1991, ?nancial industry
pro?ts ($122.1 billion) for the ?rst time exceeded manufacturing pro?ts
($99.4 billion). (Table B-91: Corporate pro?ts by industry 1960–2009.
Economic Report of the President. Transmitted to Congress February 2010.
Washington: DC: US Government printing of?ce, accessed on 15 March
2010 athttp://www.whitehouse.gov/administration/eop/cea/economic-
report-of-the-president).
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 369
largely to the close ties between Wall Street and the US
Treasury Department, an alliance that he refers to as the
‘‘Wall Street Treasury Complex’’. While the in?uence of
the ?nance sector is critical to any understanding of the re-
sponse to the Asian crisis, regulatory capture theories, such
as Bhagwati’s, tend to ignore the structural underpinnings
of the ?nancial sector’s political in?uence. In contrast, Har-
ry Madgoff, Paul Sweezey, David Harvey, and other Marxist
political economists
22
link the ?nancial sector’s dispropor-
tional in?uence in Washington to structural factors, namely
the crisis of capitalism that began in the 1970s and led in the
1980s and 1990s to the dependence of western capitalism
on ?nance sector growth and pro?tability to restore eco-
nomic prosperity. In their view, the ?nancial sector’s politi-
cal power stems not only from its lobbying prowess, but also
from its structural importance to the US economy. As a re-
sult, the belief that what was good for Wall Street was good
for America and the world economy exercised in?uence over
Washington policies in the 1990s and guided the US re-
sponse to the East Asian crisis.
Political economists and economic historians from
Brenner to Arrighi have long warned that the late 20th cen-
tury economic revival was unsustainable.
23
Brenner (2002)
was among the ?rst to warn that the ‘‘new economy’’ of the
1990s failed to resolve the underlying crisis of over produc-
tion and over accumulation that characterized the world
economy in the 1970s. Based on his study of economic his-
tory, Arrighi (1994, 2007) further contends that ?nancializa-
tion marked the beginning of the end of the era of US
economic leadership in the world. Taking a long view of eco-
nomic history, he observes that as the center of capital accu-
mulation shifted over time from the Italian city-states in the
15th and 16th centuries, to Holland in the 17th century, to
Britain in the 19th century and to the United States in the
20th century, each successive ‘‘cycle of accumulation’’
24
fol-
lowed a similar pattern of emergence and decline. The pat-
tern began with a period of growth, followed by an
economic downturn, and culminating in a period of ?nancial
expansion that temporarily restored prosperity based on
?nancial returns from credit markets and speculation. In
each successive cycle, ?nancialization foreshadowed the
end of the epoch. Just as the center of capitalist accumula-
tion shifted from Great Britain to the United States in the
last century, Arrighi (2007) argues that US hegemony over
the world system entered into decline in the 21st century
as the center of productivity and economic growth shifted
to China.
In the 1990s, however, the mainstream economic view
was that a ‘‘new economy’’ built upon services, particularly
telecommunications and ?nancial services, could reverse
the decline in pro?tability that began in the 1970s. Propo-
nents of the ‘‘new economy’’ saw international ?nancial
leadership, open ?nancial borders, free capital ?ows, glob-
ally integrated ?nancial markets, and expanded trade in
?nancial services as essential to continued US and world
economic prosperity. Moreover, as the following sections
show US ?nance ministers viewed international account-
ing reform as a component of their efforts to promote glo-
bal ?nancial integration and the spread of Anglo-American
?nancial markets.
Integrating East Asia into the world ?nancial market
In the same speech to the ?nancial industry in which
Deputy Secretary of the Treasury Summers (1999a, p. 1)
extolled the virtues of generally accepted accounting prin-
ciples as the cornerstone of an effective ?nancial infra-
structure, he summarized his vision of the role that
western ?nance would play in the world economy:
There are few things with as great a potential to raise
human welfare than the creation of a safe and sustain-
able system for the ?ow of capital from the developed
world to the developing one. The major industrial
nations are crossing the threshold into an era of rising
rates of retirement and much lower rates of labor force
growth . . .All of the world’s population growth over the
next 25 years – and the lion’s share the its growth in
productivity – will take place in the developing nations.
The upshot is that we are heading into a period when
there will be exceptional global bene?ts to successful
economic development in the developing world. And,
make no mistake; a healthy capacity to mobilize capital
in these economies – because of the trade that it
?nances, because of the technology it brings, and
because of the opportunities it offers – has a very
important part to play in that development.
The development model that Summers is espousing
here is a neoliberal development model (Harvey, 2005)
which depends upon ?nancial liberalization – that is, on
the elimination of capital controls, the opening of emerg-
ing economies to foreign investment and international
?nancial markets, the dismantling of so-called national
‘‘regulatory barriers’’ to trade in ?nancial services, and
the standardization of world ?nancial markets. While
ubiquitous today this development model was by no
means unchallenged in the 1990s. The East Asian develop-
ment model, the path to development followed by Japan
and South Korea, offered a competing model of capitalist
development that was at odds with the neoliberal agenda
Washington promoted throughout the 1980s and 1990s.
The East Asian development model was characterized by
a strong state role in promoting economic development,
nationalist economic and industrial strategies, and state-
mediated capital directed toward large domestic ?rms try-
ing to capture foreign markets (Cumings, 1998).
Cumings (1998) argues that during the Cold War, the US
was willing to tolerate the East Asian development model
22
See Foster and Magdoff (2009) for an intellectual history of economic
thought on the relationship between production and ?nance from Keynes,
to Minsky to Magdoff and Sweezy.
23
Although Brenner and Arrighi offer different, and at times opposing
readings of evolution of 20th capitalism from the post-war boom, to
stagnation in the 1970s, to the bubble economy of the 1990s, they agree
that the late 20th century’s economic revival was unsustainable. For a
summary of the debates between Arrighi and Brenner see Arrighi (2003).
24
Arrighi (2005) identi?es four ‘‘cycles of accumulation’’ each spanning a
‘‘long century’’: (1) the Genoese-Iberian cycle, extending from the 15th
century through the early 17th century, (2) the Dutch cycle, extending from
the late 16th century through the late 18th century, (3) the British cycle
extending from the mid 18th century through the early 20th century, and
(4) the US cycle, extending from the late 19th century through the early
21st century.
370 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
despite its East Asian allies’ unwillingness to accommodate
western ?nancial interests because of the important exam-
ples they set for the rest of the developing world as highly
successful models of non-communist economic develop-
ment. After the end of the Cold War, however, the major
reason for indulging the East Asian development model
disappeared and the US sought not only to open Asian
economies to western investment and ?nance, but more
importantly, to destroy the competing model of capitalist
development before it spread from Korea and Japan to
the rest of the developing world, including China. In Cum-
ings’ analysis (1998, p. 45), ‘‘the deep meaning of the East
Asian crisis therefore lies in the American attempt to bring
down the curtain on ‘late’ development of the Japanese and
Korean type.’’
Accordingly, when the ?nancial crisis spread to Korea,
the IMF’s rescue package was made conditional on major
restructuring and ?nancial liberalization.
25
The terms of
the IMF’s rescue of Korea, which were negotiated largely
from Washington (Blustein, 2001), insisted that Korea radi-
cally restructure its ?nancial sector to make it more trans-
parent, market-oriented and open to western ?nancial
institutions. The agreement stipulated that Korea would al-
low foreign ?nancial institutions to participate in mergers
and acquisitions, and establish bank subsidiaries and bro-
kerage houses within Korea. Foreign banks would be al-
lowed to purchase equity in Korean banks without
restrictions. Capital markets were liberalized by increasing
ceilings on foreign ownership of Korean shares from 26%
to 55% and restrictions on foreign borrowing by corporations
were eliminated (IMF, 1997).
A demand for accounting reform went hand in hand
with the demand to liberalize ?nance. As a condition for
IMF rescue, Korea agreed to strengthen domestic regula-
tion of its ?nancial sector in accordance with international
best practice standards (IMF, 1997, Para 28). Korea further
agreed that corporate ?nancial reports would be improved
by enforcing accounting standards in line with generally
accepted accounting practices, and that the ‘‘?nancial
statements of large ?nancial institutions’’ would hence-
forth be ‘‘audited by internationally recognized ?rms’’
(IMF, 1997, Para 28). In compliance with the terms of the
IMF bailout, Korea established the Korean Accounting
Standards Board in 1997 and nearly all the ?nancial
accounting standards were rewritten for comparability
and consistency with existing International Accounting
Standards set by the IASC (Saudagaran, 2005).
26
Accounting’s role in ?nancial integration
The Financial Stability Forum’s focus of ?nancial reform
within emerging economies was rationalized by the argu-
ment that the lack of ?nancial transparency within East
Asian countries, rather than overly rapid ?nancial liberal-
ization, inadequate regulation at the international level
or market failure, lie at the core of the East Asian ?nancial
crisis (Wade, 2000). The same was true of accounting re-
form. An in?uential study of accounting practices in East
Asia, prepared by the United Nations Conference on Trade
and Development (UNCTD) provided the rationale for
accounting reform by identifying non-transparent ?nancial
reports and lack of compliance with international ?nancial
reporting standards as a contributing cause of the crisis.
The report (Rahman, 1998), argues that if East Asian banks
and corporations had followed international, rather than
national, accounting standards, investors and creditors
would have had more relevant and reliable information
about conditions that triggered the crisis. The UNCTD re-
port (Rahman, 1998) further suggests that the crisis might
have been avoided or attenuated if investors and creditors
had received early warning signals about East Asian enter-
prises’ deteriorating ?nancial conditions.
Although evidence suggests that East-Asia’s relational-
based ?nancial systems failed to conform to western
norms of accounting transparency,
27
the G-7’s decision to
rely on accounting reform as a remedy for ?nancial instabil-
ity is troubling in two respects. First, western enthusiasm for
transparency was inconsistent. In the case of the United
States, Treasury Department of?cials opposed the Financial
Stability Forum’s attempts to require greater transparency
for hedge funds and offshore ?nancial centers, even as they
touted the bene?ts of accounting transparency. Joseph Sti-
glitz, chairman of President Clinton’s Council of Economic
Advisors from 1995 to 1997 and Chief Economist at the
World Bank from 1997 to 2000 writes that:
as attention focused on transparency, it became clear
that to know what was going on in emerging markets,
one had to know what hedge funds and offshore bank-
ing centers were doing. Indeed, there was a worry that
more transparency elsewhere would lead to more
transactions going through these channels, and there
would overall be less information about what was going
on. Secretary Summers took the side of the hedge funds
and the offshore banking centers, resisting calls for
increased transparency, arguing that excessive trans-
parency might reduce incentives for gathering informa-
tion, the ‘‘price discovery’’ function in technical jargon
(Stiglitz, 2002, p. 236).
Second, and more importantly, the emphasis given to
accounting and other ?nancial reforms, begs the question
of why the West’s response to the East Asian crisis focused
exclusively on micro-prudential regulation and reform
within emerging economies, to the exclusion of more sub-
stantive changes in the international ?nancial architecture
and/or constraints on speculative capital ?ows. The argu-
ment that a mismatch between governance arrangements
in emerging economies and the information needs of for-
eign investors and creditors creates ?nancial instability
25
Cumings (1998) and Wade and Veneroso (1998) argue that this
response was an unnecessary overreaction to the Korean crisis, which
was a liquidity crisis, rather than a solvency crisis.
26
In 2007, Korea decided to adopt IFRS effective in 2011.
27
Blustein (2001, p. 130) notes: ‘‘of?cial ?gures indicated that Korean
?rms had about $65 billion in payments falling due over the coming year.
As . . .[IMF of?cials] would learn, the ?gure was much greater; the overseas
af?liates of Korean banks and companies owed an additional $50 billion in
debts’’ which was not re?ected in the of?cial ?gures. Rahman (1998) also
?nds understatements of debt related to methods of accounting for
derivatives, related party transactions and off-balance sheet ?nancing.
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 371
can be used to justify a policy of allowing developing na-
tions to establish some form of capital controls to mitigate
the severity of crises, as readily as it can be used as a jus-
ti?cation for a policy of promoting domestic accounting re-
forms. The critical difference is not that transparency is
better suited to preventing crisis, but rather that capital
controls impede the drive to global ?nancial integration
while accounting and other ?nancial reforms facilitate it.
As Wade (2000, p. 92) notes, the argument that non-
transparency contributed to the crisis when taken to its
logical conclusion implies that countries lacking transpar-
ency should proceed very slowly with liberalization and
integration into the world capital markets. It can take
years, even decades, to build the institutional infrastruc-
ture for transparent ?nancial systems. The World Bank’s
experience in promoting domestic accounting reform in
the wake of the East Asian crisis bears this out; developing
nations often lack the legal and professional infrastructure
to support transparent ?nancial reporting even long after
they of?cially adopted international accounting standards
(Hegarty, Gielen, & Barros, 2004). The G-7’s decision to
continue to move forward with ?nancial integration before
the arduous process of implementing domestic accounting
reforms was complete and without setting in place institu-
tional safeguards at the international level to manage cri-
ses in the interim can be explained by macro-political
and economic factors including economic ?nancialization,
the consequent dependence of US and other western econ-
omies on the global expansion of the ?nancial sector, and
the drive to integrate East Asia and the developing world
into the international ?nancial markets.
Western capitalism’s deepening economic dependence
on the ?nancial sector and the growth of international
?nancial markets required more than the dismantling of
Keynesian-style capital controls and barriers to trade in
?nancial services, it also required re-regulation. New insti-
tutional arrangements needed to be set in place to create
the legal and accounting infrastructure necessary to facili-
tate cross border ?nancial transactions and rationalize the
opening of East Asia and other developing economies to
western ?nance. Global ?nancial integration thus required
not only the destruction of old institutions, but also the
creation of new institutions, in this case, a global ?nancial
governance infrastructure patterned after the Anglo-Amer-
ican model.
As Zysman (1983) shows in his comparative study of
national ?nancial systems, capital market based ?nance
is an essentially Anglo-American development. Histori-
cally, the US and UK developed predominately capital mar-
ket-led ?nancial systems, while in Zysman’s typology
(1983), France developed a predominately state-led ?nan-
cial system and Germany a bank-led system. The rela-
tional-based systems characteristic of the chaebôls in
Korea and the keirestsu in Japan, likewise, provide histori-
cal examples of non-capital market based ?nancial sys-
tems. While accountability mechanisms such as ?nancial
reports and audits were used across economies and time
periods, formalized ?nancial reporting standards set by
private sector bodies and external audits conducted by
commercial auditing ?rms came to play a central role in
governing, rationalizing and legitimating Anglo-American
?nancial markets from the mid-20th century on (Merino
& Neimark, 1982).
From a world systems perspective, variations between
national ?nancial systems and their associated modes of
governance were products of the post-World War II, For-
dist accumulation regime in which, following Keynes’
maxim, trade was to be global while ?nance remained na-
tional. During the post-war period, capital controls were
established and ?nance became nationally based to an ex-
tent that it had not been in the 19th century. When na-
tional ?nancial systems were re-integrated into the world
?nancial market in the closing decades of the 20th century,
the international ?nancial markets were dominated by a
powerful ?nancial services industry, based mainly in the
US and UK, and the Anglo-American model of ?nancial
market governance was held up as the model for interna-
tional best practice. The global ?nancial governance re-
gime developed in the 1990s was patterned largely after
the Anglo-American model of capital market governance.
Nascent international bodies, such as the International
Organization of Securities Commissions (ISOCO) and the
International Accounting Standards Committee (IASC)
were fostered and supported to replicate the Anglo-Amer-
ican approach to ?nancial market regulation at the inter-
national level, and accounting standards set by private
sector bodies and external audits by international account-
ing ?rms, based predominately in the US and UK, were pro-
moted as the international norm.
28
Western efforts to build an international ?nancial infra-
structure patterned on the Anglo-American model and
conducive to the expansion of the western ?nancial ser-
vices industry pre-date the East Asian crisis. In an effort
to expand international trade in ?nancial services, the
World Trade Organization formally recognized IOSCO, IASC
and the IFAC as the international standards setting bodes
as early as 1996.
29
The East Asian ?nancial crisis provided
an opportunity to further this agenda. Former US Treasury
Secretary Summers (1999b, p. 12), himself, acknowledges
that the Asian crisis gave international momentum to US ef-
forts to reform the international ?nancial architecture that
had been a ‘‘pre-occupation’’ of the Clinton administration
dating back to the G-7 summit in Naples in 1994.
Accounting reform was particularly suited to the goal of
integrating ?nancial markets because the call for transpar-
ency was relatively non-controversial; almost everyone
could agree on the bene?ts of transparent accounts.
30
Accounting reform could, thus, be portrayed as merely tech-
nical at the same time as it facilitated the objective of creat-
ing the infrastructure for the export of Anglo-American style
?nancial markets. As Secretary Summers (1999b, p. 14)
writes in describing efforts to foster global ?nancial
integration:
28
See Davies and Green (2008) for a description of the global ?nancial
governance regime and the organizations that comprise it.
29
World Trade Organization, Singapore Ministerial Declaration adopted on
13 December 1996.
30
Information economists, of course, recognized that transparency has a
cost subject to cost-bene?t analysis. Outside the domain of esoteric
technical debates, however, accounting transparency was, as Summers’
statement suggests, politically uncontroversial.
372 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
First, activity has focused on promoting changes that can
be portrayed as technical and directly in the economic
interest of individual countries, – notably steps to
increase the transparency of domestic and international
?nancial markets. If one were writing a history of the
American capital markets, I would suggest that the sin-
gle most important innovation that has helped make it
as successful as it is today was the idea of generally
accepted accounting principles. La Porta et al. (1997)
provide broader support for these kinds of reforms with
the ?nding that countries with stronger, more transpar-
ent systems of investor protection have larger and dee-
per domestic capital markets (emphasis added).
The East Asian crisis provided an opportunity to ad-
vance longstanding US and western economic interests in
promoting ?nancial liberalization in East Asia and
throughout the developing world. Moreover, as this quote
suggests, accounting reform was seen as instrumental to
the accomplishment of that goal.
US preference for soft law and ad hoc governance
The United States’ backing for what Wade (2007) and
others characterize as a ‘‘relatively weak’’ international
?nancial architecture, based on ?nancial reform within
emerging economies and market transparency, can also
be understood in terms of the US preference for ‘‘soft
law’’ (Chiapello & Medjad, 2009) and a piecemeal approach
to global governance. While other developed western na-
tions shared in the economic bene?ts of ?nancial liberal-
ization, the United States was somewhat unique in its
preference for what Abdelal (2007) calls ‘‘ad hoc globaliza-
tion ’’ as opposed to ‘‘managed globalization’’.
31
The United
States often favored market self-regulation, non-compulsory
standards (soft law), and private sector governance over the
creation of strong international economic institutions and
binding international agreements (hard law). This prefer-
ence was not based solely on an ideological belief in the free
markets or the dif?culty of achieving multinational agree-
ments; the United States also had political incentives for
opposing strong forms of global governance. Given its struc-
tural power in the 1990s as home to the largest capital mar-
ket and as the leading world power, in the absence of
binding international laws, the United States was well posi-
tioned to impose its will, and the will of its ?nancial sector,
on other nations through unilateral policymaking or bilat-
eral negotiations. Europe, on the other hand, generally pre-
ferred a more managed approach to globalization and
?nancial liberalization (Abdelal, 2007), one characterized
by creation of autonomous international organizations and
international rules of law that would apply to all nations,
including the United States.
Abdelal (2007) argues that the United States’ preference
for ‘‘soft law’’ and a piecemeal, ‘‘ad hoc’’ approach to ?nan-
cial globalization explains its willingness to delegate
responsibility for ?nancial governance to private sector
bond rating agencies (Abdelal, 2007). US support for a
?nancial infrastructure dependent upon accounting stan-
dards set by private sector bodies and surveillance by com-
mercial auditing ?rms is consistent with the United States’
preference for private sector governance over the empow-
erment of autonomous international institutions. In the
aftermath of the East Asian crisis, the United States not
only opposed major institutional restructuring, such as
the creation of an international ?nancial authority to set
and enforce standards,
32
but also moderate reforms such
as the IMF’s proposal for an international sovereign debt res-
olution mechanism to give it power to orderly unwind debt
in the event of a default by a sovereign nation (Krueger,
2001; Wade, 2007). According to Howard Davies, head of
the UK’s Financial Services Authority from 1997 to 2000
and chair of the Financial Stability Forum’s working group
on highly leveraged institutions, even the authority of the
Forum, which initially undertook initiatives to address the
problems of unregulated hedge funds and off-shore ?nancial
centers, was ultimately reigned in by the United States (Da-
vies & Green, 2008, p. 116). The US successfully opposed
allowing the Financial Stability Forum to undertake inde-
pendent initiatives, leaving it as little more than a clearing-
house for the work of its member organizations.
The United States’ preference for a relatively weak
international ?nancial architecture may appear irrational
in retrospect given its position as lender of last resort
and interest in global ?nancial stability. It becomes under-
standable in the context of ?nancialization, deepening US
economic dependency on the global expansion of the
?nancial markets, and the Treasury Department’s stanch
advocacy of de-regulation and expansion of the ?nancial
services sector. A comparatively weak international ?nan-
cial architecture based on ‘‘soft law’’, i.e. noncompulsory
?nancial standards and codes, bene?ted the United States
and the ?nancial sector – at least in the short term. Harmo-
nization of accounting and auditing standards facilitated
the goal of integrating East Asian and other emerging econ-
omies into the international ?nancial market. And, the
establishment of a governance regime based on private
sector institutions, such as bond rating agencies, account-
ing standards setters, and commercial audit ?rms, pro-
vided the infrastructure that rationalized the expansion
of western ?nancial markets without conceding authority
to international economic organizations; as such, it left
the United States and its politically powerful ?nancial
31
Abdelal’s thesis is convincing in some respects, but he overstates his
case when he argues that the United States’ preference for ‘‘ad hoc’’ rather
than ‘‘managed globalization’’ refutes claims that the US was instrumental
in managing the process of ?nancial globalization in Wall Street’s interest.
To the contrary, the an ‘‘ad hoc’’ approach arguably gave the US more
unilateral control over the course of global ?nancial integration, while the
international rule-based approach favored by Europe threatened to
constrain US autonomy. Moreover, the Clinton Administration was willing
to use a hard law approach when it bene?ted US and Wall Street interests
as evidenced by US support for World Trade Organization agreements
designed to promote international trade in ?nancial services.
32
The United Nation’s Task Force charged with studying the crisis
endorsed the plan to establish minimum standards for ?nancial regulation
and supervision, but instead of relying on private sector governance, the
Task Force emphasized that minimum standards should go hand in hand
with stronger global regulation, including the creation a of a world ?nancial
authority charged with setting the necessary international standards for
?nancial regulation (UN, 1999).
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 373
services industry largely in control of the process of global
?nancial integration.
Implications for the diffusion of international
accounting standards
The Financial Stability Forum’s decision to include
international ?nancial reporting and international auditing
standards in its compendium of 12 key standards gave
impetus to the diffusion of international accounting stan-
dards in several ways. First, recognition by high-level G-7
?nance ministers and central bankers gave legitimacy
and urgency to the work of hitherto obscure international
standards setters. Second, the International Monetary Fund
and World Bank were authorized to monitor countries’
progress toward implementing the Forum’s 12 standards
and codes and report on compliance via the Reports on
the Observance of Standards and Codes (ROSC) program.
As part of this initiative, the World Bank established a pro-
gramto assist its member countries in implementing inter-
national accounting and auditing standards that continues
to this day.
Third, the Financial Stability Forum’s endorsement of
international accounting standards created a new ideolog-
ical rationale for adoption of international accounting stan-
dards. Prior to the East Asian crisis, the main rationale for
harmonization was that it would reduce transaction costs
by eliminating the need to reconcile ?nancial reports pre-
pared under different national standards. After the crisis,
harmonization took on a new urgency as it was promoted
both as a prerequisite for ?nancial stability and a path to
economic development. In David Tweedie’s (2002) words,
‘‘we are not just talking about arcane accounting practices
here. We are talking about trade; we are talking about
growth; we are talking about investment; we are talking
about employment’’. The Forum’s endorsement of interna-
tional accounting standards as a component of the infra-
structure for a sound ?nancial system created a new
imperative for nations to implement international stan-
dards in order to attract foreign investment dollars. There-
after, accounting reform was touted as a path to economic
development and global ?nancial stability. With the de-
mise of the communist model in the USSR and Eastern Eur-
ope and the crippling of the East Asian development
model, Anglo-American ?nancial capitalism became nor-
malized (Wade, 2007). Accounting reform was no longer
lauded as a particular path to development, but the only
path to economic development and integration into the
world economy.
Lastly, the Financial Stability Forum’s endorsement was
an important step in the acceptance of ?nancial reporting
standards set by the IASB as the recognized global stan-
dard. In the early 1990s, the belief that US ?nancial report-
ing rules would become the de facto global standard by
default as multinational ?rms began to adopt or reconcile
to US generally accepted accounting principles (GAAP) in
order to obtain listings on US stock exchanges was still
widely held (Camfferman & Zeff, 2007; Volker, 2001). Ru-
bin and Summers’ calls for accounting reform in the wake
of the East Asian crisis were, likewise, phrased in general
terms, rather than speci?cally advocating international as
opposed to US accounting standards. When general calls
for accounting reform were operationalized, however,
international ?nancial reporting standards set by IASB
and its predecessor, IASC, were designated as the global
standard.
The US recognized that European and other nations rep-
resented in the Forumwould not accept US ?nancial report-
ing standards as international standards.
33
If accounting
reform was to be included as an element of the post-crisis
international ?nancial architecture, the only politically feasi-
ble option was to recognize and encourage the development
of IASC/IASB as the international standard setter. IASB Chair-
man David Tweedie (2002) acknowledged this in comments
on the response to the East Asian crisis, stating:
It was quite interesting to watch the American reaction,
because the American reaction was that it should not be
US GAAP and the reason was that they believed that
seven Americans sitting in Connecticut subject to the
pressures from Congress and the US domestic pressures
could not set standards for the rest of the world. To use
a phrase from American history, ‘‘no accounting with-
out representation’’.
The Financial Stability Forum’s endorsement of interna-
tional ?nancial reporting standards, did not, however, sig-
nal that the US was ready to relinquish its in?uence and
authority over standard setting. To the contrary, the Secu-
rities and Exchange Commission, which was one of three
organizations representing the US in the Forum, viewed
the decision to promote international accounting stan-
dards in the developing world as separate and distinct
from the decision to adopt international accounting stan-
dards in the US. The Whitehouse had agreed to allow the
SEC to take the lead in decisions regarding use of interna-
tional accounting standards at home, and the securities
regulator opposed use of international ?nancial reporting
standards in the United States on the grounds that US
GAAP provided greater transparency for investors. The
SEC, however, had no objection to the adoption of interna-
tional accounting standards by emerging economies as a
means of improving market transparency provided those
standard were implemented and enforced.
34
A single set
of global accounting standards remained the goal, but it
would be pursued through a process of convergence be-
tween US and international standards.
The agreement among Financial Stability Forum mem-
bers to endorse international accounting standards pro-
33
It was not politically feasible for an international body, such as the
Financial Stability Forum, to designate any nation’s standards as interna-
tional standards; FASB could not be of?cially recognized as the interna-
tional standard setter any more than the SEC, rather than IOSCO, could be
designated as the international securities regulator.
34
Interview with Lynn Turner, former Chief Accounting with the Secu-
rities and Exchange Commission, June 7, 2010. Turner and SEC Chairman,
Arthur Levitt, met with Whitehouse of?cials on two occasions to coordinate
policy toward international accounting standards; the SEC opposed any
effort to move to US adoption of international standards and sought to
ensure that the administration’s policy did not undermine them on this
issue. Nonetheless, the SEC did not object to use of international accounting
standards in emerging economies provided those standards were imple-
mented and enforced.
374 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
vides support for Power’s (2009, p. 326) contention that
‘‘the emergence of the International Accounting Standards
Board (IASB) and its history of competition with other
standard setting bodies is largely mis-described as a con-
?ict between ‘national’ and ‘international’ standards.’’ In
the wake of the East Asian ?nancial crisis, intra-accounting
debates over the content of national versus international
standards were overshadowed by the broader consensus
among Western ?nance ministers and central bankers on
the desirability of transparency in emerging markets, the
need to rationalize the international ?nancial system, and
the goal of integrating East Asia and other developing
economies into the international capital markets. Issue-
based debates over the content of accounting standards
would continue and even grow in intensity, but after the
East Asian crisis debate focused on convergence between
US and international standards and/or control over the
standard setting process; international ?nancial reporting
standards set by the IASB had secured a formal position
within the international ?nancial governance structure.
Implications for international auditing practice
The ?nancialization of capital created new opportuni-
ties for the cartel of Anglo-American based international
accounting ?rms to achieve market concentration and con-
solidate control over the accounting and auditing industry
worldwide. Prior to the East Asian crisis, the major interna-
tional ?rms’ economic interests had become closely
aligned with those of the international ?nancial services
industry. By the 1990s, they were working in coalitions
with international ?nancial ?rms to lobby governments
to reduce what they perceived as national ‘‘regulatory bar-
riers’’ to international trade in ?nancial services (Arnold,
2005). Non-harmonized ?nancial reporting standards were
considered one such ‘‘regulatory barrier’’ to both global
?nancial integration and the large audit ?rms’ ambitions.
The major international auditing ?rms took advantage
of the East Asian crisis to advance their interests in harmo-
nization of ?nancial reporting standards by establishing a
new organization called the International Forum on
Accountancy Development (IFAD) in 1999. The purpose
of the IFAD was to bring together the expertise of the inter-
national accounting industry and the political leverage of
institutions such as the World Bank, the IMF, IOSCO, the
Basel Committee on Banking Supervision, and others in
an informal partnership to advance the goal of promoting
harmonization and accounting reform in the developing
world (Street & Needles, 2002). The international ?rms’
push for accounting reform in the wake of the East Asian
crisis not only advanced their existing harmonization
agenda, but also enabled them to de?ect attention from
their own role in the crisis. By blaming poor ?nancial
reporting standards in the developing world, the ?rms di-
rected attention away from the role audit failures played
in the crisis in much the same way that the West’s focus
on domestic reforms in emerging economies de?ected
attention from their own responsibility for the crisis.
In his report prepared for the UNCTD, Rahman (1998)
identi?ed substandard auditing practices within the larg-
est international auditing ?rms as a factor contributing to
the crisis. His study found that although local af?liates of
the largest international accounting ?rms audited most
of the large corporations and banks in East Asian countries,
they followed local auditing standards and practices rather
than more rigorous international auditing standards. Inter-
national auditing ?rms, in other words, were not ensuring
the quality of audit work performed by their international
af?liates:
Many East Asian corporations and banks that received a
clean bill of health from their auditors proved to be ‘‘not
a going concern’’ within a few months of the comple-
tion of an audit. When the ?nancial statements of a cor-
poration or bank receive an unquali?ed audit opinion
from an auditor belonging to one of the largest interna-
tional accounting ?rms, the external users of these
?nancial statements tend to feel comfortable about
the quality of the audit and the reliability of the infor-
mation. Therefore, there is an obligation on the part of
the international accounting ?rms to take the necessary
steps to ensure that the quality of audit services pro-
vided by their national practices all over the world does
not fall short of practices in North America and Europe
(Rahman, 1998, pp. 47–48).
By taking a leadership role in the formation of the IFAD,
the international accounting ?rms hoped to in?uence the
reform agenda. Tensions between the auditing ?rms and
regulators within the SEC and the World Bank, however,
soon became apparent. While the ?rms sought to use the
IFAD as a vehicle to leverage the power of international
organizations to expand into major markets such as Japan,
Korea, Brazil and China (Street & Needles, 2002), regulators
were increasingly concerned about the quality of interna-
tional audits.
35
If auditing surveillance was to be relied upon
as a global governance mechanism, regulators wanted the
international audit ?rms to take responsibility for the qual-
ity of the audit work done by the af?liate ?rms within their
international auditing networks. Lynn Turner, then Chief
Accountant for the SEC, openly acknowledged this con?ict.
In 2001, he stated:
Another organization with the potential to play an
important role in the development of a global ?nancial
infrastructure is IFAD, the International Forum for
Accountancy Development . . .. However, my skepticism
about this organization was heightened when at a
meeting the leadership presented a vision for country-
by-country assessments and action plans with great
fanfare and high hopes. But this plan lacked any signif-
icant actions to be taken by the ?rms themselves to
upgrade the quality of their own auditing policies, pro-
cedures, and quality controls on a global basis. . .
Instead of relying exclusively on Country Action Plans,
IFAD’s members could be asking themselves: ‘‘What
can we do today, while we work with countries, to
improve their frameworks for auditing standards?’’ The
35
The World Bank informally asked the ‘‘Big Five’’ international account-
ing ?rms to refrain from signing ?nancial statements that were prepared
(and/or audited) using standards that were below international standards
(Financial Times, October 19, 1998).
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 375
answer seems clear: IFAD, with the experience and the
resources of the Big Five andother international account-
ing ?rms, could begin now to make a signi?cant differ-
ence in the quality of international audits and in
international ?nancial reporting. IFAD could promptly
undertake major voluntary actions by the ?rms them-
selves to agree on best practices, and to sign their ?rm
names only to audits conducted in accordance with high
quality internationally acceptable standards and
practices.
On February 23, 2000, I sent a letter to the leadership of
IFAC and IFAD, expressing concern about IFAD’s focus
on regulatory reforms as a pre-condition to action by
the accounting profession. I urged that IFAD, and in par-
ticular, the ‘‘major ?rm’’ members, take a leadership
role by raising their own ?rms’ minimum standards.
(Turner, 2001).
The IFAD disbanded in 2001 (Street & Needles, 2002),
but the issue of audit quality within the international
accounting networks remained unresolved. Camfferman
and Zeff (2007, p. 16) contend that the SEC’s refusal to
eliminate its reconciliation requirement in 2000 was based
upon concerns about the quality of international auditing
and supervision of international af?liates. Monitoring by
the World Bank’s ROSC program further con?rmed that
audit reports signed by international ?rms offered little
assurance about the quality of audit work done by ?rms’
international af?liates. Based on their experience with
ROSC, Hegarty et al. (2004, p. iii) conclude that:
There are inherent limitations to the extent of reliance
that can be placed on the international audit ?rm net-
works and their individual national member ?rms to
compensate for weaknesses in domestic regulatory
regimes. Given the governance and management
arrangements of the networks, and the fact that the net-
works themselves are not regulated (only their member
?rms are, at a national level), the main determinant of
audit quality is the strength of the relevant domestic
regulatory regimes, rather than network membership.
More recently, Davies and Green (2008, p. 224) echoed
this concern when they identi?ed the absence of consoli-
dated oversight over the global networks of audit ?rms
as a continuing risk to ?nancial stability. This concern
has guided much of the subsequent history of international
auditing standards, which revolves around ongoing at-
tempts by states and international organizations to exert
political oversight over international auditing practice.
36
Implications for ?nancial stability
In the late 1990s, US structural power and its depen-
dence on the continued growth and global expansion of
the ?nancial services sector effectively ruledout any macro-
economic response to the East Asian crisis that would slow
the pace of global ?nancial integration, or cede too much
control to international institutions. Even proposals for
modest institutional reforms, suchas giving the IMF author-
ity to unwind sovereign bankruptcies (Wade, 2007), or
allowing the Financial Stability Forum to take independent
initiatives to control hedge funds and offshore ?nancial
centers were unacceptable to the United States and its
?nancial services industry and cast aside (Davies & Green,
1998). Instead the G-7 nations, endorsed a relatively weak,
pro-market, international ?nancial architecture based on a
compendium of standards and codes in which transpar-
ency, private sector accounting standards, and surveillance
by commercial audit ?rms were to play a key role in
governance of globally integrated ?nancial markets.
This choice enabled the western ?nancial sector to con-
tinue to grow and prosper, but it did so at the expense of
ensuring ?nancial stability and social protections. Because
of the economic disruption they caused and the systemic
problems they exposed, the ?nancial crises of the late
1990s provided a rare opportunity to forge stronger insti-
tutional arrangements for governing international ?nancial
markets and protecting populations from the conse-
quences of systemic instability. But, momentum to reign
in ?nancial speculation, to subject international ?nance
to regulatory supervision, and to curb the power of inter-
national ?nancial industry was lost. The ?nancial architec-
ture established in wake of the East Asian crisis failed to
implement the institutional reforms needed to address
the problems that were exposed by the series of crises that
rocked the ?nancial world in the late 1990s. Instead, it re-
lied upon the highly ideological notion that markets would
self-regulate given suf?cient ?nancial transparency. Prob-
lems ranging from unregulated hedge funds, to the bur-
geoning use of ?nancial derivatives, to offshore ?nancial
centers, to governments’ inability to stem ?nancial conta-
gion, to moral hazard, to the growing political power and
in?uence of the ?nancial sector were left unresolved, and
remain with us today.
In his retrospective on the crisis, former UK Prime Minis-
ter Gordon Brown (2010, p. 78), who served as Chancellor of
the Exchequer during the East Asian crisis, characterizes the
creation of the Financial Stability Forumas a ‘‘compromise’’
and ‘‘half measure’’. The inadequacy of the G-7’s ?nance
ministers’ response to the East Asiancrisis is not only appar-
ent in retrospect. Early critics of the work of the Financial
Stability Forum warned that the G-7’s response to the crisis
was doing too little to protect the world from future sys-
temic crises. Culpeper (2000), then head of the North–South
Institute, for example, was prescient in warning that the
West’s response to the East Asian crisis, which he describes
as long on domestic reforms to improve ?nancial transpar-
ency in emerging markets and ‘‘short on macro measures
that can genuinely be said to address the international
architecture’’, was disproportionally directed toward policy
changes in the developing world. As a result of this asym-
metry, he predicted that future crises were increasingly
likely to be generated ‘‘in or among the world’s richest
countries, rather than emerging markets’’.
It is well to question whether a system of governance
that relies upon market self-discipline aided by ?nancial
36
See Humphrey et al. (2009) and Humphrey and Loft (2009) for a history
of international audit standard setting and subsequent attempts to govern
of international audit practice including, most recently, the creation of the
International Forum of Independent Audit Regulators (IFIAR), an intergov-
ernmental organization composed of national auditing oversight bodies,
such as the US Public Companies Auditing Oversight Board (PCAOB).
376 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
transparency, standardized ?nancial reporting, and moni-
toring by commercial auditing ?rms was ever equal to
the task of governing the rapidly expanding and crisis-
prone global ?nancial markets. Within a few years of the
East Asian crisis, Enron and other accounting scandals in
the United States cast doubts on the US Treasury Depart-
ment’s enthusiasm for generally accepted accounting prin-
ciples as the bedrock of stable capital markets. Moreover,
as this research suggests, the private sector accounting
and auditing industry was ill suited to assume a key role
in ?nancial governance on a world scale, given the inability
or unwillingness of audit ?rms to assume responsibility for
the quality of audit work performed within their interna-
tional networks (Turner, 2001). Thus, the international
?nancial architecture established by the G-7 in the wake
of the Asian ?nancial crisis was not only weak in relation
to alternative proposals for capital constraints and/or
strengthened international institutions as Wade (2007)
argues, it was weak in its own right as a result of its
reliance on a loosely coordinated and weakly governed
commercial auditing industry.
Conclusions
Incontrast toaccountinghistories that are primarilycon-
cerned with the workings of accountancy bodies and intra-
accounting debates (Camfferman & Zeff, 2007), this study
grounds accounting history within the context of develop-
ments withinthe global political economy and the world in-
ter-state system in order to provide an economic, political
and institutional perspective on the rise of international
accounting standards. In so doing, the study aims not only
to bring economics back into institutional analysis (Arnold,
2009b), but also to bring an institutional perspective to
political economybyshowingthat the institutional arrange-
ments set in place to govern economic activity matter.
To say that institutions matter is to argue that history is
not merely the outcome of immutable economic laws, but
rather that the course of history is shaped, at least in part,
by institutional forms and governance arrangements that
are brought into being by political and social struggles
which are often sparked by ?nancial and economic crises.
In other words, it matters whether governments respond
to ?nancial crises by developing strong international and
domestic institutions capable of governing ?nancial
markets, constraining the ?nancial services industry, and
protecting populations from the often devastating conse-
quences of systemic instability, or rely instead on the
rather thin promise that markets will self-correct given
suf?cient transparency, harmonized accounting standards,
and surveillance by commercial auditing ?rms.
In the case of the East Asian crisis, western nations chose
to rely upon improvements in ?nancial transparency as a
remedy for ?nancial instability instead of slowing the pace
of ?nancial market integration, constraining speculation,
or making the substantive changes to the international
?nancial architecture needed to protect societies from fu-
ture crises. That choice was, at least in part, strategic. As this
study shows, US Treasury Department of?cials saw
accounting reformas a component of their efforts to further
global ?nancial integration and the spread of western capi-
tal markets to emerging economies in East Asia and the
developing world. Accounting harmonization, thus, played
a constitutive role in the ?nancialization of the world econ-
omy and US-led efforts to shape the world economy in the
image of Anglo-American, ?nance-led capitalism.
This study has several limitations that need to be ad-
dressed by further research. The paper describes a ‘‘su-
pra-politics’’ that does not address the ways in which
institutional norms, capabilities, and organizational units
developed prior to the crisis placed boundaries around
the range of possible of responses to the East Asian ?nan-
cial crisis. Further research is needed to understand the ex-
tent to which institutional pre-conditions enabled and
constrained the macro economic and political processes
described in this paper.
Additional research is also needed to examine whether
and how con?icts within and between nation states, inter-
national accounting ?rms, and international economic
institutions in?uenced construction of the international
?nancial architecture. While this study discusses the role
international accounting ?rms played in the creation of
the IFAD, it does not examine international accounting
industry’s harmonization strategies and lobbying activities
in depth. Nor, does the study provide insights into internal
debates and divisions, if any, among Financial Stability For-
um members over the inclusion of accounting and auditing
standards in the international ?nancial architecture. Lastly,
the paper does not examine the response within East Asia
and the developing world to the West’s harmonization
agenda. Further research is needed to understand the
forms and extent of local resistance to and/or collaboration
with the ?nancial harmonization agenda.
While this macro-level analysis of the East Asian ?nan-
cial crisis provides only a partial history of the rise of inter-
national accounting standards, it highlights aspects of that
history that might otherwise be ignored. Would interna-
tional accounting standards have risen to prominence were
it not for the crisis of over-accumulation in the 1970s and
the desire to open channels for pro?t making in the ?nance
sector, the ascendance of ?nancial capital in the 1980s and
1990s, US geo-political in?uence in the 1990s as the orga-
nizing center of world capitalism, and US support for
expansion of globally integrated ?nancial markets and
accounting reform in emerging economies? This study ar-
gues that these macro-economic and political factors play
a part in the history of the rise of international accounting
standards and that the study of political economy can dee-
pen our understanding of the dynamics of institutional
change in the accounting ?eld.
The lessons of the East Asian crisis remain relevant to-
day. In 2008, a decade after the East Asian crisis, the inter-
national ?nancial system faced a crisis of even greater
proportions, this time originating in the US subprime
mortgage market. Although Arrighi (2007) and others
argue that US hegemony over the world system is now in
decline and the rise of China as an economic power has
transformed East–West relations, much else remains the
same. In the aftermath of the 2008 ?nancial crisis, we are
once again presented with an array of thoughtful proposals
for substantive reform of the ?nancial system reminiscent
P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381 377
of earlier proposals, including calls for ?nancial transaction
taxes, stronger international and domestic regulation, and
curbs on the size and power of ?nancial ?rms. The G-20
has met and created a new Financial Stability Board (FSB)
to replace the Financial Stability Forum. The Financial Sta-
bility Board and G-20 have once again endorsed the princi-
ples of ?nancial transparency and accounting convergence.
Meanwhile, in the decade since the East Asian crisis, the
?nancial service industry has grown even more political
powerful
37
while the economies of the United States and
other western nations remain dependent upon, if not hos-
tage to, the ?nancial sector. In the United States, the political
in?uence and economic importance of the ?nancial sector
has weakened domestic ?nancial reforms and meaningful
reforms at the international level are once again proving dif-
?cult to implement. Anglo-American style ?nancial capital-
ism, although discredited by the 2008 crisis, will no doubt
survive in the intermediate term and continue to exercise
economic and political in?uence within the world inter-
state system. As a result, accounting standards and surveil-
lance by commercial audit ?rms will, in all likelihood, con-
tinue to occupy a pivotal place in the governance of global
capital markets and the regulation of international banking,
thus, providing a fertile ?eld for future research.
Historical research can not only enhance our under-
standing of the forces driving international accounting har-
monization, but also help us develop a more critical
analysis of the role accounting plays in the institutional
arrangements governing ?nancial markets. This requires
questioning the adequacy of transparency as a governance
mechanism and identifying its limits. The notion that
?nancial reporting and auditing reduce information asym-
metry and thereby enable self-regulating ?nancial markets
to operate ef?ciently is a normative theory that neither de-
scribes the world nor explains the historical origins of
accounting practices and institutions. If left unchallenged
by accounting scholars, the belief will persist that ‘‘getting
the accounting ‘right’’’ (Young, 1995) will somehow ensure
?nancial stability even in the presence of institutionally
weak international and domestic ?nancial regulatory
structures and a highly ?nancialized and crisis-prone
world economy. Arguably, the illusion that ?nancial trans-
parency aided by harmonized ?nancial reporting standards
and auditing surveillance can substitute for stronger forms
of oversight and constraints on ?nancial speculation con-
tributes to ?nancial instability by providing ideological
support for dangerous levels of ?nancial speculation and
minimal regulation. This was true in the aftermath of the
East Asian crisis in the late 1990s and remains so today.
Acknowledgements
I wish to thank David Cooper, Leslie Oakes and two
anonymous reviewers for their helpful comments and sug-
gestions. Any remaining errors or omissions are my own.
37
Weissman and Donahue (2009) document that in the decade 1998–
2008, the ?nancial sector in the US spent $1.7 billion on campaign
contributions, and $3.4 billion for lobbying expenditures. Of that total,
accounting ?rms spend $81.5 million on campaign contributions and
$121.7 million for lobbying expenditures.
Appendix A. Chronology of events
July 1997 East Asian ?nancial crisis begins in
Thailand; contagion spreads to
Malaysia, the Philippines and
Singapore
August 1997 Crisis spreads to Indonesia
October 1997 Hong Kong stock market plunges. The
Dow Jones Industrial Average records
its biggest point loss to date; trading
on the US stock markets is suspended
November
1997
Crisis spreads to Korea
August 1998 Russia defaults on its debt; the Dow
Jones Industrial average plummets
marking the second-worst point loss
in the Dow’s history
September
1998
Crisis spreads to Latin America
Collapse of the US hedge fund, Long
Term Capital Management; stock
markets in the US and Europe plunge
on fears that bank losses on LTCM
could put the entire banking system at
risk
October 1998 Meeting on October 3, G-7 ?nance
ministers and central bank governors
ask Hans Tietmeyer to recommend
new structures and arrangement
needed to facilitate cooperation and
coordination among parties
responsible for international ?nancial
stability
G-7 ?nance ministers and central
bank governors issue a Declaration on
October 30 agreeing to strengthen the
international ?nancial system by
increasing transparency and openness
of the international ?nancial system,
and identifying and disseminating
international principles, standards and
codes of best practice
At the same time, they call upon IASC
to ?nalize by early 1999 a proposal for
a full range of internationally agreed
accounting standards. IOSCO, IAIS and
the Basel Committee are directed to
complete a timely review of these
standards
February 1999 Meeting in Bonn, G-7 Finance
Ministers and Central Bank Governors
endorse Tietmeyer’s recommendation
for the creation of the Financial
Stability Forum to promote
information exchange and
coordination among national
authorities, international institutions,
and international regulatory experts
with responsibilities for international
?nancial stability
378 P.J. Arnold / Accounting, Organizations and Society 37 (2012) 361–381
April 1999 Financial Stability Forum’s ?rst
meeting in Washington, DC. The initial
membership includes the ?nance
ministries, central banks and leading
regulators of each of the G-7 countries,
together with the chairs of the
international regulatory
organizations, and representative of
the international ?nancial institutions
At its ?rst meeting, the Forum sets up
three Working Groups on (1) highly
leveraged institutions, (2) capital
?ows, and (3) offshore ?nancial
centers. It also agrees to create a
compendium of standards listing
internationally accepted standards
relevant to a sound ?nancial system
At the urging of G-7 heads of state, the
Forum’s membership is broadened by
inclusion of representatives from
Hong Kong, Singapore, Australia and
the Netherlands in advance of the
second meeting
September
1999
Financial Stability Forum’s second
meeting in Paris. By this time the
Forum has compiled a draft
compendium of standards, which
would be reviewed and updated on an
ongoing basis
Subsequently a compendium
consisting of 43 economic and
?nancial standards is posted to the
Forum’s website. Over the course of
the following year, FSF members
recommend additional standards
(including accounting and auditing)
bringing the total of proposed
standards to 64
Later in September, G-7 Finance
Minister and Bank Governors establish
the G-20 to serve as a forum for
cooperation and consultation on
matters pertaining to the international
?nancial system
March 2000 Financial Stability Forum’s third
meeting in Singapore. The Forum
agrees to focus attention on 12 key
international standards. Accounting
standards set by IASC and auditing
standards set by the IFAC are among
the 12 key ?nancial standards
April 2001 The IASB is founded to replace IASC
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