May 2006 accountancymagazine.com26

Opinion Stella Fearnley and Shyam Sunder

‘Common global standards, ifread to mean identical, is anillusory and unobtainablegoal,’ said Richard Breeden,

who served as the chairman of theUS Securities and ExchangeCommission during 1989-93. Yet,framing clear, uniform accountingstandards that yield comparablefinancial reports across businesses,industries and economies is a long-time dream among accountants,regulators and investors. Like otherwell-intentioned but misguidedproposals this, too, will founder onthe rocks of reality; a uniformclassification of transactions thatoccur in diverse environments islogically impossible.

Accounting being the language ofbusiness, consider the failed utopianvision of Esperanto. It was proposedin 1887 as an artificially constructedglobal language to eliminate thedifficulties of communicating acrossthe world. Languages are alive withwords with their meaningscontinually entering, evolving andbecoming obsolete. Development isbottom-up, driven by users oflanguage, not top-down, controlledby lexicographers. Esperanto failedbecause its promoters ignored thefundamental nature of language intheir search for uniformity.

Repeating the same mistakeEfforts to create InternationalFinancial Reporting Standards (IFRS)and converge them with the USaccounting standards are repeatingthe same mistake. Usefulness formaking investment decisions –whether to buy, hold or sell shares –is being promoted as the

fundamental purpose of financialreporting under the banner of ‘fairvalue’ accounting.

The US federal security lawsenacted in 1933 have emphasisedthe investor perspective in the USwhere corporate law is under thejurisdictions of 50 states. In the UKand many other countries, whichhave more unified corporate andsecurities laws, stewardship andaccountability of directors are keyobjectives of financial reporting.

Different financial reportingregimes generate diverse liabilityregimes. Under the US decision-usefulness model, investors bringclass actions against companies andauditors if share price drops,whereas in the UK investors sue forlosses to the company. With suchfundamental differences betweentwo English-speaking countriespresumed to have similar systems,how can one accounting modelserve the world?

Furthermore, no two transactionsor events are identical. Does uniformaccounting mean that any twotransactions with any similarity mustbe treated alike; or that any twotransactions with any dissimilaritymust be treated differently? Taken toextremes, some transactions andassets will be inappropriatelybundled together while others willnot fit at all, making accountingclassification meaningless. Varyinginterpretations of transactions indifferent countries create additionalproblems.

Uniformity ignores size. Benefits ofglobal standards to very largecompanies owned and traded in morethan one country may be obvious.

Imposing the same regime on themajority of listed companies withoutglobal aspirations is over-zealous.

Languages, accounting included,develop as social conventions. This isthe original meaning of ‘generallyaccepted accounting principles’.Country-specific standard-settersremain accountable to their usersand respective governments.Standard-setters with global reachare distant from their constituenciesand less accountable to them.Changes in their rules mustnegotiate a multi-layered, oftentortuous path. Is IFRS ‘generallyaccepted’ or is it just widelyimposed? Imposition and rigiditypoint to the possibility of IFRSsharing the fate of Esperanto.

A blessingThe impossibility of a universal set ofaccounting standards to produce auniform set of financial reports is ablessing. Active exchange andcompetition among countries toaddress emerging problems and todevise more attractive financialreporting systems and norms is amore efficient way forward.

The rejection of standardisationwill preserve self-respect, judgmentand the status of a learnedprofession for accountants, andallow the dynamic developments ofbusiness in various countries to bereflected in their financial reporting.

It is no more possible to create aglobal rule book for accounting thanto replace Monet by Microsoft Paint.In time we will see that there are nosimple right answers in accounting:what is true is not simple; what issimple is not true.

Stella Fearnley is professor ofaccounting at Portsmouth BusinessSchool. Shyam Sunder is James LFrank professor of accounting,economics and finance at Yale Schoolof Management, and president-electof the American AccountingAssociation. These views are theauthors’ own

Global reporting standards:the Esperanto of accountingLike the failed language Esperanto, standard-setters are wrong to try to impose

uniform standards on the world. Stella Fearnley and Shyam Sunder

Stella Fearnley

Shyam Sunder

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