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A Hill of Beans

The world cannot have a truly global financial system without the help of its accountants. They are letting investors down.

The biggest impediment to a global capital market is not volatile exchange rates, nor timid investors. It is that firms from one country are not allowed to sell their shares in many others, including, crucially, in the United States. And the reason for that is the inability of different countries to settle on an international standard for reporting. In order to change this, the International Accounting Standards Committee has been trying for years to persuade as many companies as possible to adopt its standards, and to convince securities regulators such as America`s Securities and Exchange Commission to let such firms list on their stock exchanges. But the IASC has so far failed to produce standards that the SEC is willing to endorse. It should produce them now. The purpose of accounting standards is simple: to help investors keep track of what managers are doing with their money. Countries such as America and Britain, in which managers are accountable to lots of dispersed investors, have had to develop standards that are more transparent and rigorous than those of other countries. And since the purpose of international standards is to encourage such markets on a global scale, it makes sense to use these countries` standards as a guide.

British and American accounting standards have their respective flaws, debated ad nauseam by accountancy`s aficionados. But they are both superior to the IASC`s existing standards in two main ways. First, they promote transparency by making firms attach to their aggregate financial tables (such as the profit-and-loss statement) a set of detailed notes disclosing exactly how the main items (such as inventories and pension liabilities) are calculated. Second, they lay down rules on how to record certain transactions. In many cases, there is no intellectually ¬ right ­ way to do this. The point is simply that there is a standard method, so that managers cannot mislead investors by choosing the method for themselves.

Let the Markets Do the Talking

If the merits of Anglo-American accounting are so obvious, why has the IASC not adopted its standards? Even in their present state, the international standards are more rigorous than many domestic ones, and therefore unpopular with local firms. But by introducing a rigorous set of international standards, acceptable to the SEC, the committee could unleash some interesting competition. Companies which adopted the new standards would enjoy the huge advantage of being able to sell their shares anywhere; those opting for less disclosure would be punished by investors. It is amazing how persuasive the financial markets can be.