NATIONAL ACCOUNTING RULES IN A GLOBALISED WORLD'
PRO: AN ALTERNATIVETO A SINGLE SET OF ACCOUNTING STANDARDS FOR THE WORLD
The corporate accounting scandals in the United States during 2002 have strengthened calls trom around the world for having a single set of accounting sta;ldards. CUrrent Generally Accepted Accounting PrincipIes (GAAP) in the UnitedStates, it is claimed, have been a major part of the probIem. The reason: because the principIes are so detaiIed, they virtually invite dever accountants and attorneys to skirt the intent of the mIes by carefully circumventing their precise contours. One wideIy discussed solution is for the United States to follow the manyother countries that have embraced or, like the European Union are about to adopt,InternationaI Accounting Standards, which are written in broad principIes instead. There is a case for having a single set of accounting standards - as shortlyargued - but it does not and shouId not rest on the recent accounting failures in the Uí.1ited States. In 'virtually all of the highly publicized cases - Enron, WorIdcom, Xerox, and
Moreover, there are drawbacks to the broadprinciples-based approach embodied in IAS, which leave ample discretion to management and auditors on how to report a variety of transactions. Can one be easily assured that the same managements that were so willing to skirt the detailed mIes of US. GAAP suddenly would follow conservative accounting if they were given the freedom or license to do so? Skepticism about the answer is a major reason why the US.standards have been driven by regulators and litigation toward detailed mIes.
A far better argument for a single set of reporting standards worIdwide is to ensure that investors, wherever they may reside, can easily understand and compare the financial accounts of companies headquartered in different countries. This has become an increasingly important objective as investors expand theirportfoIios to contain ever larger fractions of foreign securities, while exchanges from different countries are merging or forming cross-border alliances. A global capital market seems to cry out for a global set of reporting standards.
AOLlTime Warner, to name a few - the probIems
(alleged or documented) grow out of the failure to enforce U.S. GAAP, specifically mIes on revenue and expen~.~recognition, and not out of sQ!i1eflaw ..,~ '. .~. ,~
in GAAP itself. The une apparent éxception, E'ílron's failure to consolidate many of its off-balance sheet "special purpose entities", in fact does not support an indictment of US. GAAP. Even in Enro~ the main problems were failures by the company and its auditor to disclose contingent liabilities of the SPEs, not consolidation per se.
* VicePresidenl, Director of EconoDÚc Sludies, and Cabot Family Chair in Economics aI the Brookings lnstitution.
The world's two main accounting standards-setters, the FinanciaI Accounting Standards Board (respcnsibIe for US. GAAP) and the InternationaI Accounting Standards Board (which sets international standards), formally recognized this imperative in September 2002 by announcing their intention toeliminate major differences between the two sets of standards by 2005. ln essence, the two bodies intend to set a single worId standard although the two standards-setters presumably would continue to co-exist. Therein lies at Ieast one of the reasons to be cautious about the joint effort. For one thing, bridging the Jarge philosophical difference between the details of U.S. GAAP and the broadprincipIes of IAS will not be easy. More fundamentally, even if the two bodies initially agree to a single set of stan-
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CESifo Forum 3/2002
dards, it is far from cIear whether that outcome will be stable over time. Pressures are...
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