ifrs and accounting educationmilanjun08

8/2/2019 IFRS and Accounting EducationMilanJun08

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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

6/27/2008(c)2005Sunder,NannyKnowsBest 3


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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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