top stories
Human Instinct
Standard setting has emerged as a widespread phenomenon across societies and cultures, from medicine, through information technology and the development of the Internet, to commonly agreed metrics. As social time and space have become more complex, with richer dimensions, so the need for common standards has become a driving force in human development.
It is often assumed that the move towards global standards is driven by the globalisation of the world economy, and that this globalisation has steadily evolved over human history. In fact the move towards a global economy has always been uneven. Hirst and Thompson¹ for example remind us that in terms of human migration, the world was a far more global place at the end of the nineteenth century than at any time up to the end of the 1980s. And until very recently it was only the flow of financial capital that appeared to be global. It is primarily the growth of the BRIC (Brazil, Russia, India and China) economies that has led to globalising beyond the financial and into the industrial and commodities sectors. Even today it is probably the case that there are very few truly global organisations - organisations whose physical presence on the planet is incidental to the products or services they deliver.
The setting of international accounting and auditing standards is therefore a recent development which forms but a subset of a more fundamental human activity. What drives this activity? What might be its limits? What are its dangers?
Many believe that a sound financial reporting system, supported by high quality standards and appropriate regulatory and governance frameworks is an integral part of economic development. Robust standards in auditing, ethics and financial reporting underpin the trust that investors place in financial information, and are therefore pivotal in contributing to a country’s economic prosperity and financial stability. Investors and lenders will be more willing to diversify lending and investment across borders if they are able to rely on financial information based on a familiar set of standards, which they have confidence in. Thus adherence to international standards should yield a range of national as well as international benefits:
- they encourage a transparency in transactions crossing borders and jurisdictions
- they enable comparisons to be made between organisations and institutions around the world
- they generate financial results which do not require translation into other countries’ codes, hence reducing transaction costs
- they are instrumental in promoting free, though not necessarily fair, trade and the better allocation of scarce economic resources.
It is often argued that the threats to the international accounting and auditing standards come from the standard setters themselves, from the governance of their institutions and from the world in which they are implemented.
With regard to the standard setters, there is a growing concern that the subject matter of the standards is increasingly biased toward esoteric, complex problems that lack underlying economic substance. Detractors see them as focusing on ‘the number of angels on a pin head’ – a reference to the Medieval scholars who spent many years of their lives devoted to this theological topic – while overlooking more fundamental and pressing issues in the real world.
Secondly, critics challenge the identity of the standard setters. What gives them the right to pronounce on the accounting and auditing issues before them? What is their mandate? Who elected them? In fact these simple questions are highly complex. Our world has very few civil institutions that operate above the level of the nation-state, as for example the European Union or the United Nations, and their legitimacy is constantly being called into question. So, while the critics can ask the easy questions of the standard setters, the solutions were never going to be simple. They will evolve as societies and cultures evolve.
Finally international accounting and auditing standards are of little worth if they are not implemented in the real world, and in varying political contexts. It will be the actual implementation of them which will be a significant part of the life of the finance professional for the foreseeable future.
What's your opinion?
In your jurisdiction have international accounting standards been well received? If this is not the case, what have been the most controversial issues?
Click here to join our online debate
Reference
¹ Hirst, P Q, Thompson, G, 'Globalisation in Question' (1996) Polity Press, UK Pgs 18-50