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.
