IFRS monopoly: the Pied Piper of financial reporting

Abstract

The links among better financial reporting, better markets, and better economy and society are arguable, but they remain poorly understood. The addition of IFRS to the set of available alternatives may improve these linkages, but granting them monopoly status does not. Claims that the universal adoption of IFRS as a single set of high-quality principles-based standards will yield global comparability are overblown. Accounting standards operate less like a uniform system of weights and measures and more like a single currency, in that both play multiple roles in modern economies. An IFRS monopoly is evolutionarily disadvantageous in that it eliminates the opportunity to compare alternative practices and learn from them. It also disallows the tailoring of financial reporting to local variations in economic, business, commercial, legal, auditing, regulatory and governance conditions across the globe. Empirical studies of statistical covariation across financial reports produced by IFRS have yielded mixed results and, in any case, provide little insight as to the merits of granting IFRS a world monopoly. The vociferous campaign in support of IFRS monopoly is reminiscent of the 1990s campaign in support of the now-discredited ‘Washington Consensus’. Then, as now, it was a case of promoting theoretical benefits while obscuring potential costs and risks. This is the familiar story of the Pied Piper leading his trusting victims to their doom.

Keywords:

• Accounting
• International Financial Reporting Standards
• IFRS
• monopoly
• risks

Acknowledgements

This is a revised version of a paper presented at the Information for Better Markets Conference, Institute of Chartered Accountants of England and Wales, London, on 20–21 December 2010; and at the International Symposium on the Prospects of IFRS Adoption: Present Situation in the U.S., Canada, and the World, Waseda University, Tokyo, Japan, on 3 February 2011. I am grateful to Kai Du for preparing a detailed analysis of research on IFRS available in the working version of the paper (http://ssrn.com/abstract=1763311). I am also grateful to the Editor, an anonymous referee, Karim Jamal, Ken Lee, D.R. Myddleton, Richard Macve, Shizuki Saito, Brian Singleton-Green, Eiko Tsujiama and others for their comments and suggestions, and to Nancy Gratton and Diane Whitbread for preparation of the manuscript.

Notes

The evidence that adoption of IFRS results in greater comparability of financial reports across national boundaries, even within the European Union, remains to be adduced; anecdotal evidence in support is accompanied by similar evidence to the contrary.

This is true, even from the point of view of investors. Once we include the points of view of other parties in the financial reporting system, the justification for statistical correlation weakens further to the point of disappearance. However, this broader issue is not addressed here. See Beaver and Demski (1974) and Sunder (1997).