Magazine article The CPA Journal

Uniform Financial Reporting Standards

Magazine article The CPA Journal

Uniform Financial Reporting Standards

Article excerpt

Reconsidering the Top-Down Push

Arguments for developing and enforcing uniform international standards for financial reporting have been eloquently articulated elsewhere, and I shall not repeat them at length here. The European Union and many other countries are on their way to adopting, implementing, and enforcing the International Financial Reporting Standards (IFRS). Indeed, the question today is not the desirability of uniform worldwide standards, but how we might implement them.

The core arguments for uniform standards are as follows:

* They serve as a coordinating device, saving time and effort, just as the rules of the road speed up traffic and reduce accidents;

* Public policy should be made through a well-defined, transparent process with clear outcomes; and

* They make auditing easier and are useful to auditors in their negotiations with their clients.

Although these are valid arguments, to provide a more balanced perspective on which to base public policy, we should examine both sides of the issue.

The benefits of uniform standards are clear, concrete, and immediate. The arguments on the other side are diffuse, hypothetical, and their consequences lie mostly in the future. It is easy to ignore the hypothetical in favor of the concrete. Many would concede, however, that hypothetical opportunity costs are often a better basis for making decisions than concrete historical costs.

Consider a system of supervised competition among multiple sets of standards written by independent bodies such as the IASB, FASB, or accounting firms. Investors, companies, and auditors could then choose from a set of competing standards. It is possible, through market competition, for one set of standards to win out over the others, or for several sets to coexist, each attracting its own clientele without government enforcement. This bottom-up alternative to "standards monopoly" offers several advantages.

The Language of Business

Accounting is the language of business. As with any other language, it derives its vibrancy from the changing dynamic of the meanings of words. The value of the Oxford English Dictionary arises from the encyclopedic collection of the various ways in which a word may be used, not in recommending or enforcing its opinion. The power of the English language derives, not from authority, but from the freedom with which it permits us to communicate. Many natural languages have been, and some continue to be, strangled by the over-jealous advocates of their purity, determined to force uniformity of usage. No language, including accounting, can flourish under the protective umbrella of punitive authoritative regulations.

Accounting is part of complex social phenomena. The tendency to set standards that are enforceable through the punitive power of the state is rooted in the Cartesian world view. This perspective presumes mat we have enough rational understanding of the world and enough knowledge of designing social structures to achieve the desired ends. There is no evidence, especially in accounting, that our existing or potential knowledge justifies the Cartesian view of the world of business and accounting.

As an alternative to this commandand-control perspective, consider a Darwinian world where complex phenomena emerge through unpredictable events and their poorly understood interactions. Information in our economy is inherently dispersed It is impossible for any centralized authority-no matter how wise and benign its intent-to possess the necessary knowledge to design social systems to effectively address all possible issues.

By trying to standardize accounting from the top, using command-and-control, the accounting profession seems to have learned nothing from the mistakes of central planning. Must we lose another hundred years in making mistakes we can call our own, before we learn?

The design of social systems is far more complex than that of physical systems because the elements of social design-human beings-react to the choices and adjust their behavior. …

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