USA v the World: Political Economy of Accounting

♠ Posted by Emmanuel at 3/12/2013 05:54:00 AM
One of the more arcane debates in international political economy I am aware of from taking lots of accounting courses over the years is that which concerns adoption of accounting standards. Basel III capital adequacy standards notwithstanding, this subject matter is admittedly dull but quite important in the sense that it matters which standard is followed for corporate financial reporting to make these comparable worldwide.

For the longest time, the United States has followed its own standard known as the Generally Accepted Accounting Principles (GAAP). The GAAP was perfectly alright in the past insofar as much economic activity worldwide was conducted by American MNCs. With the rise of the rest, however--especially the equally standards-happy European Union--there has been the emergence of a rival global standard known as the (surprise!) International Financial Reporting Standards (IFRS).

The logic of harmonizing accounting standards is similar in that the goal is to reduce transaction costs for various stakeholders. Those reading financial statements do not need to adjust their interpretation depending on whether it's GAAP or IFRS. Companies--even American ones--only need report in a single standard instead of multiple ones even if it's not necessarily the US one and so on and so forth:
Financial reporting standards and requirements vary by country, which creates inconsistencies in financial reporting. This problem becomes more prevalent for investors trying to identify accounting reporting differences when they are considering providing funding to capital-seeking companies that follow the accounting standards and financial reporting of the country in which they are doing business. The International Accounting Standards Board (IASB) seeks a workable solution to alleviate the existing complexity, conflict and confusion created by inconsistency and the lack of streamlined accounting standards in financial reporting.

The main difference between the GAAP and the IFRS is the approach each takes to the standards. The GAAP is rules-based while the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines attempting to establish rules and criteria for any contingency, while the IFRS begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation.
As you would expect, the portrayal of the benefits is in a similar line of argument:
The Consequences of Initiatives on Worldwide Accounting Diversity
The convergence and subsequent change of accounting and reporting standards at the international level impact a number of constituents, including corporate management, investors, stock markets, accounting professionals and accounting standards setters and agencies.

Impact on Corporate Management
Corporate management will benefit from simpler, streamlined standards, rules and practices that apply to all countries and are followed worldwide. The change will afford corporate management the opportunity to raise capital via lower interest rates while lowering risk and the cost of doing business.

Impact on Investors
Investors will have to re-educate themselves in reading and understanding accounting reports and financial statements following the new internationally accepted standards. At the same time, the process will provide for more credible information and will be simplified without the need for conversion to the standards of the country. Further, the new standards will increase the international flow of capital.

Impact on Stock Markets
Stock markets will see a reduction in the costs that accompany entering foreign exchanges, and all markets adhering to the same rules and standards will further allow markets to compete internationally for global investment opportunities.

Impact on Accounting Professionals
The shift and convergence of the current standards to internationally accepted ones will force accounting professionals to learn the new standard, and will lead to consistency in accounting practices.

Impact on Accounting Standards Setters 
The development of standards involves a number of boards and entities that make the process longer, more time consuming and frustrating for all parties involved. Once standards have converged, the actual process of developing and implementing new international standards will be simpler and will eliminate the reliance on agencies to develop and ratify a decision on any specific standards.
In my mind, there is no real reason why the US should retain separate standards for accounting.