ifrs and accounting educationmilanjun08
TRANSCRIPT
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ShyamSunderYaleSchoolofManagement
EIASMWorkshop
on
Accounting
and
Economics
Universit Bocconi,Milan,ItalyJune1920,2008
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1.UniversalStandards Universalstandardsoffinancialreporting
appliedacross
time,
economies,
industries
and
corporatesizeandorganizationalformsbestservetheconstituentinterests
Standardization
does
save
costs
and
effort,
(electricalplugs,clothing,cars,streetgrids,commercialcodes)
Becomescounterproductivebeyondcertainlimits
Howdo
we
know
where
to
stop?
Rhetoricofuniversalaccountingstandardsanduniversallanguage
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2.TheStaticIdeal Thereexistsasetoffinancialreporting
standardsthat,
once
discovered
and
implemented,willinducecorporationsandtheirauditorstopreparethebestattainable
financialreports
Dynamicsofthegamebetweenmanagersandstandardsettersmakesanysuchstaticidealall
but
impossible Standardsisonlya(small)partoftheproblem
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3.PeopleorStructure Ifweselectknowledgeable,experienced,
selfless,
public
spirited,
and
wise
individualstoconstitutebodiesthatdeviseaccountingstandardsthroughdeliberation
anddue
process,
we
can
improve
financial
reporting Individualsstandwheretheysit
Muchemphasis
on
the
quality
of
individuals,
too
littleattentiontothestructureofgametheyareaskedtoplay
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4.EngineeringStandardsthroughDeliberation Itispossibletoconstructordiscoverbetter
financialreportingstandardsthroughdeliberationinproperlyorganizedcorporateentities(suchastheIASB,theFASB,etc.).
Assumesthatsuchbodiescanknowthe
consequencesoftheiractions
Historydoesnotsupporttheproposition
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5.SpecializationinSettingStandards Specialiststandardsettingbodies,standing
readyto
address
new
problems,
inquiries
andrequestsforclarificationshelpimprovefinancialreporting
Theirexistence
encourages
anew
clarification
gametargetedatthem
Theymustkeepafullagenda(performance)
Revenueand
budget
pressures
Overtime,theiroutputmustaccumulatetoathickrulebook
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6.WhatisGoodandBad? Standardsetterscantellwhichstandards
arebetter
and
why.
Littleevidencethattheyknow,orcanknow
Costofcapitalistheresultofcomplex
interactionsamong
many
factors
(including
accounting)
Theseinfluencescannotbesortedoutbyex
ante
analysis Expostanalysisofdatatoassesstheimpacton
costofcapitalmaybepossible
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7.StandardsMonopolies Grantingmonopolypowerinagivenjurisdictiontostandardswrittenbyagivenbodycanhelpimprovecorporatefinancialreporting
Informationaldisadvantageofamonopoly
Noopportunityforexperimentation
No
opportunity
to
learn
from
the
experience
of
alternatives
Nopressuretodobetter,ortocorrecterrors
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8.CompetitionandRacetotheBottom Aregimethatencouragesreportingentities
tochoose
among
the
standards
written
by
competingorganizations(andpayingthemaroyaltyfortheprivilege)inducesaraceto
thebottom to
devise
less
demanding
standards Counterexamples(Stockexchanges,bond
rating
services,
appliance
standards,
college
accreditation,bankregulation,corporatechartersacrossU.S.states,etc.)
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9.ForceandEffectiveness Increaseinthepowerofenforcement
behindauthoritativestandardsimprovescomplianceandqualityoffinancialreporting
Increasedenforcementalsoincreasesresources
devotedtoevasion
Draconianpunishmentsdonotnecessarily
inducebetter
behavior
Crime,alcoholanddrugabuse
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10.StatutoryApproachDominatesCommonLaw Thequasistatutoryapproachtosetting
accountingstandardsdominatesacommonlawapproachtofinancialreporting
Evidence?
Constitution(U.K.,U.S.,Europe)
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11.WrittenStandardsDominateSocialNorms Writtenstandardsbackedbypowerof
enforcementwork
better
than
unwritten
socialnormsbackedonlybyinternalandexternalinformalsanctions
Socialnorms
govern
great
parts
of
our
lives
includingmanyaspectsoflaw
Insidertrading
Guiltybeyond
reasonable
doubt
Privatecommercialcodes(cotton,diamondtrades)
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12.Whodefendsthemiddleground? Theidealaccountingregimewouldconsist
ofallwrittenstandardsorallsocialnorms
Easiertomaketheextremecasesforstandards
ornormsalone
Difficultyofdefendingthemiddlegroundwherebothmaycoexist,astheydoinmanyotheraspectsoflife
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13.NewProblems,NewSolutions Financialreportingandgovernance
problemsoriginated
in
the
20th
century
Historytellsusotherwise
Governance
problems
of
the
East
India
Company
Clive,Hastings,andtheCompanysCourtofDirectors
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14.FinancialReportingisGettingBetter Seventyyearsofstandardizationoffinancial
reports(in
U.S.)
has
helped
improve
the
qualityoffinancialreporting Evidence?
Isathicker
rulebook
indication
of
better
financialreporting?
Perfectcorrelationbetweenaccountingand
stock
returns? Howdowejudgeifourfinancialreportsare
gettingbetter?
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15.FewerAlternatives,BetterReports Fewerthealternativetreatmentsthe
reportingentities
are
allowed
to
choose
from,thebetterthequalityoffinancialreporting
Feweralternatives
also
tie
the
hands
of
the
managementofwellruncompanieswhomaywishtosignaltheirconfidence,competenceandprospectsbychoosingreportingpracticesothers
find
difficult
to
emulate
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16.AuditorsBargainingPower Wellspecifiedstandardsenhancethe
bargainingpower
of
the
auditor
vis
vis
the
client Standardsalsoencourageclientstodemand:
showme
the
rule
Reducedrelianceonjudgment
Moredetailedthestandards,greaterthepartof
accountants
work
that
can
be
replaced
by
a
computer,andlowerthevalueoftheservice
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17.Accounting&AuditingGames Writtenstandardsconstrainthetendencyof
managers,auditors
and
investment
bankers
toplayaccountingandauditinggames
Onthecontrary,theyencourageandfacilitate
gameplayingbyreducinguncertaintyaboutwhatis,andisnot,acceptable
3percentSPEs=>Enron
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18.Individualresponsibility Writtenfinancialreportingstandards
strengthenthe
individual
responsibility
of
managers,auditors,andinvestmentbankersforfairrepresentation
Onthecontrary,theyundermineindividual
responsibilityforfairrepresentationandthebig
picturebyshiftingattentiontomeetingthe
letter,not
spirit,
of
the
specific
provisions
and
theirwording
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19.Education Writtenstandardsmakeiteasiertoeducate
betteraccountants
and
attract
talent
to
the
profession
Writtenstandardsdegradetheclassroomfrom
reasoningand
intellectual
debate
to
rote
memorization,reinforcestreetimageof
accountingasboringandmechanical
Theymake
it
less
attractive
to
young
talent
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20.NothingsNewundertheSun HaveIsaidsomethingnew?
Iwish.WilliamT.Baxter(ProfessorEmeritus,
LSE),mademanyoftheseargumentsoverhalfacenturyago(Recommendationson
AccountingTheory in
Baxter
and
Davidson,
StudiesinAccountingTheory,1stedition).
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BewareofConsensus Adifferentperspective Youwouldbeleftbehindifyoudonotfollowthecrowd
WashingtonConsensus AccountingConsensusfivemainelements
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AccountingConsensus1 Thestandardsdevelopedshouldbeconfinedtoprinciples,andnotbecomedetailedrules Nobodycantellwhichiswhich
IFRSvs.FAS,yetplanstoadoptFASwholesale
Fairvalues:principleorrhetoricaldevice
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AccountingConsensus2 Asinglesetofhighqualitywrittenstandardsoffinancialreportingappliedtoallcompanies(atleastthepubliclytradedones)intheworldwillimprovefinancialreportingbymakingfinancialreportsmorecomparable,andthusassistinvestorsandotherusersoffinancialstatementsmakebetterdecisions Allpreferhighquality,butwhatisit(Joyceetal. Principlescomparabilitycontradiction Accounting
for
research
&
development
costs
(FAS
2)
Evidencethataccountingstandardshelpinvestorsormanagersmakebetterdecisions?
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AccountingConsensus3 Thebestwaytodevelopsuchstandardsistocreateasingledeliberativecorporatebodyconsistingofappropriateexpertswithapropergovernancestructureandlegallyassuredfunding,functioningundertheoversightofstatutoryregulatory
authorities
such
as
the
SEC
and
the
EC Difficultyofassessingproposedstandards
Evensimpleengineeringdesignneedfieldtrials
Complexityofsocialinstitutions,riskofgettingboxedintoawrongstandards
Divisionof
simplicity
and
complexity
between
strategy
and
institutions
Ecosystemviewoffinancialreportingsystem
Competitionwithnotaxrevenues
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AccountingConsensus4 Tothisend,theoperationsoftheFASBandtheIASBshouldbegraduallymergedintoonecorporatebodyandonesetofstandardstobecalledIFRS Fromsocialnormstouniformwrittenstandards
Effectofuniformityofeducation,researchand
profession
Compareaccountingeducationtoeducationforotherprofessions
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AccountingConsensus5 ThissinglesetofstandardsshouldbepracticedintheU.S.,EC,andelsewhere,andtheU.S.educationalsystemshouldprepareitselftointegrateIFRSintoitscurriculasoU.S.graduateswillbeabletoprepare,use,andauditfinancialreportsbasedonIFRS Educationalconsequencesanafterthoughtatbest Effectofexpansionofwrittenstandardsonclassroom
discourse
Educationalcapacity:
chance
to
shift
to
general
principlesofaccounting Placeofaccountingintheuniversity:medicineor
plumbing
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TheProblem
ofSetting
EfficientStandards Criteria
Generationof
alternatives
Evaluationofalternatives
Complexinteractionsamongaccounting,capital
and
labor
markets Facilitationofevolutionofaccountingnorms
Balancingstatutoryandcommonlaw
Balancing
adjustment
speed
and
errors Nosubstituteforpersonalresponsibility
Thenannydoesnotknow,butcanhelp
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HowCantheNannyHelp? Government,quasigovernmentorprivatesector
bodiescan
play
apositive
role
in
evolution
of
normsofaccountingthroughoversight Nomonopolyjurisdiction
Competition
with
alternatives
(royalties) Opportunitytoexperiment
Coexistenceofmultiplesetsofstandardsfordifferentclientelesdiversityessentialtoevolution
Excelconversion
workbooks
(high
R
square)
Personalresponsibilityforfairrepresentation
AccountingCourt:guiltybeyondreasonabledoubt
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InContrast
toIASB
(FASB)
Command&ControlView Todevelopaccountingstandards:
Asingleset(monopoly?)
Ofhighquality(whatdoesthatmean?)
Understandable(towho?)
Enforceable(stick,notnorms)
Global(noclienteleordiversity)
Arewe
ready
for
an
alternative
mind
set
aboutfinancialreporting?
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WhitherAccounting:
WindowsorOpenSystems
Comfortvs.choice
Uniformityand
stagnation
vs.
dynamic
change
Predictabilityvs.somedisorder
Highpricesortheadvantagesoftechnological
progress Financialreportingasanecosystemora
machine(gardenorabuilding)
Huxleyor
Hayek
Nannyorpersonalresponsibility
Roleofaccountingresearchers/professors?
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ConcludingRemarks IntheprefacetohisDictionary,Johnson
wroteabout
his
fortuitous
and
unguided
excursionsinto theboundlesschaosofalivingspeech."Canauthoritativeuniform
standardswithout
collaboration
with
social
normsbringasemblanceofordertothechaostofinancialreporting?Aftersevendecades
of
incessant
efforts,
the
answer
staresusintheface
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[email protected]\faculty\sunder