by John Hughes
The speeches by the IASB’s leaders often evoke some tedious game of strategy where every rhetorical point in favour of IFRS is considered to be worth making over and over, even if it accomplishes little more than moving a single piece back and forth between the same two squares. As in some Cold War espionage thriller where alliances and motives have become hopelessly twisted and murky, one often feels the specific virtues of IFRS are less relevant to the game than victory itself, that the whole exercise might soon descend into pure abstraction.
Take for example two passages from a recent speech in Johannesburg by the Vice-Chairman, Ian Mackintosh, titled “Are truly global standards achievable” (not the most gripping of titles, given the unlikelihood of building to a surprise ending in which it turns out that, actually, he doesn’t think they are). Early in his remarks, he talks about the “globally interconnected nature of capital markets”:
- “… multinational companies or investors (have) been well aware of the opportunities presented by the global marketplace for many years. For example, last week2 the international law firm Baker & McKenzie reported that the level of cross-border M&A transactions now exceeded pre-crisis levels. The report states that “powerful macroeconomic and political forces continued to provide impetus to globalisation, and companies around the world were driven by their strategies to move into new markets and jurisdictions.” It is worth noting that 40 per cent of these international M&A transactions were originated from North America.
- Consistent with this analysis, McKinsey & Co recently published their own research which showed that more than one-third of all financial investments are in fact international transactions. Moreover, they concluded that the total volume of global flows could triple in the next decade, powered by a combination of rising prosperity, the participation of the emerging world and technological progress3.
- These reports, and many others like them, paint a picture of ever-increasing global transactions, undertaken by companies operating in a global marketplace, backed by investors seeking global opportunities and diversification. Against this backdrop, it is increasingly difficult to see different and often incompatible national accounting standards as anything other than a legacy of a bygone era. They add cost, complexity and translation risk to companies and investors operating in today’s global marketplace.”
But the powerful pro-globalization forces that Mackintosh describes have obviously flourished despite the current environment of different accounting standards. And even if that issue disappeared tomorrow, by establishing IFRS as the only financial reporting language, international capital flows would still have to grapple with the complexities and risks arising from different tax and regulatory regimes, from different governance and cultural environments, and from differences in spoken and written language, none of which show any sign of going away. It’s generally accepted that in these other areas, nations have an overriding interest in maintaining their own systems, even if that’s not in the direct interest of global capital flow (which, by the way, isn’t necessarily an unquestionably virtuous thing either) and over time, participants in the capital markets get used to dealing with them. In insisting that no such legitimate interests can exist in the area of financial reporting, Mackintosh is basically only saying that accounting isn’t as important as those other areas, and that those who would argue a jurisdiction-specific case for something other than IFRS are necessarily just pedants who won’t yield to greater forces.
Another passage from the speech illustrates much the same thing, He talks about the failure to achieve convergence between IFRS and US GAAP, observing among other things:
- “…much like a football team that always plays the same formation, our critics have learned how to use convergence to play the boards off against each other, and by doing so to delay or derail much-need improvements to financial reporting. The strategy of ‘divide and conquer’ pre-dates the Roman Empire, and has become an effective tool for defeating efforts to achieve convergence. Pick off one or other board to deviate from an agreed position, and then argue that a lack of convergence undermines the benefits of the project.
- Moreover, there are many dangers in pretending that converged national standards can serve as a substitute for global standards. The devil is always in the detail. Small differences in accounting requirements can have a substantial effect on reported performance. We should not expect investors and other users of financial statements to have to understand differences buried in thousands of pages of accounting literature in order to compare the financial performance of, say Ford, Hyundai, SAIC, Toyota and Volkswagen.
- These are the reasons why full convergence can probably never be achieved, and why adoption of IFRS is the only viable approach to achieving global accounting standards. There really is no shortcut to meeting the challenges of economic globalisation, other than by providing a single set of high quality, global accounting standards. That is what IFRS does.”
Mackintosh’s “divide and conquer” passage seems to be based on a premise that failures to achieve convergence couldn’t possibly be based in anything other than malevolence, that again there couldn’t possibly be principled differences of opinion and jurisdiction-specific analysis standing in its way. Of course, it would be a great leap toward global accounting standards if all remaining jurisdictions just threw their thinking on the matter out of the window and decided to adopt IFRS. But it’s equally naïve to assume that even if two entities in vastly different jurisdictions both purport to report under IFRS, a detailed look at their financial statements won’t reveal equally significant small differences – as I wrote recently, consider the implications of the lousy approach taken by some companies to something as basic and crucial as the cash flow statement. Would peace in the Middle East be suddenly achieved if all but one group of negotiators bizarrely capitulated and announced they were giving the lucky winners everything they wanted? Of course not – various factions on all sides would continue to fight for and implement their points of view, perhaps even more violently than they do now. It’s an overblown comparison I know – financial reporting doesn’t have that kind of historic passion behind it. But I don’t think either that it’s helpful or reasonable to imply, as Mackintosh seems to do, that all those who don’t share the IASB’s exact vision are merely intellectually arid obstructionists….
The opinions expressed are solely those of the author