10
business finance
july/august 2009
It has been only 5 months
since the FederalResere announced that the wealth of American familiesplunged nearly 18 percent in 2008 — a loss that was equalto the combined annual output of Germany, Japan, and theU.K., the
Wall Street Journal
reported.It’s no secret that more than half of U.S. householdsinest their saings in the market. In fact, no other country comes close to the number of households participating. It’s just this sort of local wealth disaster that inites public scru-tiny of subjects that ordinarily may not hae appeared ripefor public consumption.IFRS is just such a topic. Its ery acronymic identity could tame een the heartiest of appetites among businessnews addicts. Howeer, when $11 trillion of Americanwealth suddenly anishes, something as seemingly arcaneas International Financial Reporting Standards becomes a iable menu option. And, as luck would hae it, the inclu-sion of IFRS on the public menu could not be better timed.It appears that America’s wealth debacle has occurred just as the U.S. prepares to outsource the ery guts of itsregulatory operating system. Or to put it another way, if America’s regulatory system were an IBM computer, IFRSwould be on the erge of becoming the next MSDOS.And while to this day business school students stilldebate how IBM management could hae somehow beenblinded to the strategic consequences of not owning thesystem within, America seems to be orbiting in a similarstate of impairment — one fueled by a simple assumption:that the adoption of IFRS by the United States will reducethe cost of capital by achieing comparability of financialreporting through a common global accounting language.
Are GlobalStandardsBad for America?
It’s a rational assumption, een an intuitie one. But it’s adistraction. Whateer fruits the adoption of global stan-dards may bear, the forfeiture of America’s soereignty oer accounting standard-setting may be at a price too high— at least when you consider the political and opportunity costs that America will incur if and when it opts to out-source its system of standard-setting.“The larger cost of IFRS is what we will be giing up interms of the technology of standard-setting and hainga set of standards that, frankly, work with our regulatory system — by that, I mean standards that work with howthe SEC sees financial reporting, how inestors see financialreporting,” explains Karthik Ramanna, a Harard BusinessSchool professor who has recently published a number of studies examining the conergence of accounting standardsglobally. Among the more noteworthy conclusions is thenotion that multiple standard-setting bodies, rather thanone international body, would result in better standardsglobally.“One adantage of competing standard-setters is thatthese alternate accounting systems can coexist, and com-panies rather than regulators will hae a choice of select-ing into a particular accounting system — this allowsinnoation in performance measurement and innoationin control to happen,” says Ramanna, who beliees thatthe financial crisis was in part caused by the failure of accounting systems to keep up with the leel of innoationtaking place within financial securities. “The innoation of accounting systems has been kept at the regulatory leelas opposed to the firm leel, and regulators don’t hae thetypes of incenties to innoate that firms do,” explains
No matter what fruits a single set of accounting stan-dards may bear, the forfeiture of America’s sovereigntyover standard-setting may be at a price too high.
By jack Sweeney
coverstory
www.businessfinancemag.com
jack Sweeneys o fof
Business Finance
.
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