Institutional Forum Shopping:
The Politics of Forging a Common Language in Financial Reporting
Walter Mattli*
(walter.mattli@st-johns.oxford.ac.uk)
December 2005 1
1. Introduction
Poor financial reporting rules and their lax enforcement have been major causes of
events that have imposed great costs on society, from the stock market crash of 1929 to
the recent spectacular bankruptcies of Enron and WorldCom in the US and Parmalat and
Ahold in Europe. 2 Properly designed financial reporting (or accounting) standards
specify how particular types of events and assets should be reflected in the financial
statements issued by firms. In other words, they are rules that firms must follow in
calculating and disclosing information like profits, costs, assets, liabilities, and revenues
to their shareholders and the general public; they result in accurate descriptions of the
value and financial position of firms in a manner that is easily comparable across firms.
* Walter Mattli is Professor of International Political Economy in the Department of Politics and
International Relations at Oxford University and an Official Fellow of St. John’s College at Oxford.
1
For comments on earlier drafts I am grateful to Tim Büthe, Jeff Chwieroth, Henry Farrell, Emilie HafnerBurton, Joseph Jupille, Barbara Koremenos, David Lake, Kate MacDonald, and Duncan Snidal.
2
See, for example, US House of Representatives, Committee on Financial Services, 2001; and US House of
Representatives, Committee on Energy and Commerce, 2002.
1
1
Seemingly technical, accounting standards and related regulations create
incentives and disincentives through which they shape the behavior of firms and
consequently important aspects of a country's political economy. They determine, for
instance, how publicly traded companies report research and development (R&D)
expenses in their financial statements, making R&D more or less attractive to firms; they
influence firms' decisions whether to use stock options or other incentives to boost the
performance of managers; and they affect how firms structure their employee pension
funds. In many European countries, they also affect how corporations are taxed.
Despite their importance for the smooth functioning of national economies and
their growing centrality in global regulatory efforts in finance, accounting standards and
the institutional structures producing them have received little attention outside legal and
accounting scholarship. This is surprising for transnational accounting governance is
replete with seeming anomalies and paradoxes that beg for social scientific inquiry.
Some twenty years ago, most efforts to produce transnational financial reporting
rules were firmly in the hands of intergovernmental organizations, notably the United
Nations (UN), the Organization for Economic Cooperation and Development (OECD),
and the European Union (EU). By the mid-1990s, these institutions had largely ceased
regulatory activities in accounting. Today, the focal global forum is the rather secretive
International Accounting Standards Board (IASB), a private-sector organization
controlled by the Americans and a few close allies from the Anglo-Saxon world – much
to the chagrin of regulatory authorities in continental Europe and beyond. 3 Perhaps even
more surprising is that the standards issued by the IASB are now legally binding in all
member states of the EU for listed companies whereas they are voluntary and largely
ignored in the US. How did we get here? This is the question that this paper seeks to
explore.
3
The Board comprises 14 members; 10 of these members hail from the US, UK, Canada, Australia, and
South Africa. The adoption of a global accounting standard requires approval by 8 Board members.
2
2
The study first presents the institutional status quo that prevailed from the early
1970s, when first efforts were undertaken to issue international accounting rules, until the
mid-1990s. In this period, four institutions coexisted as parallel structures: the UN,
OECD, EU, and the International Accounting Standards Committee (IASC). They all had
their institutional strengths and weaknesses and none emerged as leading regulatory
forum in accounting. With the intensification of globalization in the 1990s, however, the
international cooperation context changed rapidly and with it the relative appeal of the
four forums, eliminating three institutional options and elevating one to regulatory
preeminence. Section three of this study reviews the set of new circumstances triggered
by globalization and explains the institutional selection of the IASC by governments
around the world.
Selection simply confers a mandate upon an institution to tackle specific
problems; it rarely predetermines the solutions to these problems. The content and
meaning of regulatory solutions, as well as the organization of the selected forum will be
shaped in stage two – the post-selection phase – by distributional politics. 4 The
distinction between the selection and post-selection stages is analytically helpful in the
sense that it forces us to identify for each stage the key actors, understand their
preferences, and specify the context of cooperation in order to account for institutional
choice. Nevertheless, the two stages are connected through the bounded rationality
assumption, an assumption that not only is of great heuristic value but – as I discovered
through interviews with key players in global financial regulation – also quite accurately
captures the process by which institutional choices particularly in highly technical and
complex issue areas are reached. Faced with an urgent and seemingly apolitical problem,
leaders will quickly select an institution that technically seems most suitable to address
the problem. It frequently is difficult ex ante (i.e., in stage one) to anticipate the
distributional consequences of such institutional choice; sometimes political leaders,
duped by the technical nature of an urgent matter, do not even suspect significant
distributional implications. 5 In the post-selection stage, however, these consequences are
4
Distributional factors are also salient in the institutional analysis of Chwieroth (this symposium) and
Hafner-Burton (this symposium); the classic study on the importance of distributional issues in
international institutional analysis is Krasner 1991.
5
See, for example, Mattli and Büthe 2003; and Burley and Mattli 1993.
3
3
bound to surface as actors seek to work out regulatory details addressing specific
technical problems.
Section four shows that in accounting, the distributional implications of projected
rules turn out to be considerable, and consequently, the fights over control of regulatory
agendas as well as the institutional direction of a selected forum are certain to be vicious
and intense. The section analyzes the distributional politics responsible for the
transformation in the 1990s of global accounting governance from IASC to IASB. It
explains how heterogeneity in terms of preferences over regulatory outcomes intersects
with what Jupille and Snidal call capability heterogeneity, that is, differences in relative
power across groups of states, to account for the direction of institutional change. 6
Section five concludes by drawing the implications of the analysis of accounting
governance for the study of institutional forum shopping more generally.
2. Initial Institutional Status Quo
The objective of this study is to explain specific institutional choices where a
multiplicity of institutional options exist, focusing on international financial reporting.
This section prepares the analytical ground for such an analysis by describing the
institutional status quo prior to institutional selection in the 1990s. Jupille and Snidal
define the institutional status quo as the pre-existing and potentially relevant institutions
around the time a new cooperation problem emerges. 7 As they note, most problems arise
against a backdrop of prior institutionalization; rare are cases of institutional clean slate.
Pre-existing institutions, of course, are themselves the result of old institutional choices –
either selection, change, or creation – and thus could be explained in terms of the
analytical framework developed by Jupille and Snidal. Such analytical regress is not
6
7
Jupille and Snidal, this symposium.
Ibid.
4
4
offered here due to space constraints. Instead, the study takes the four key institutions –
the UN, OECD, EU, and IASC - largely as given; it describes how they got involved in
financial reporting, what they have accomplished, and summarizes their institutional
strengths and weaknesses as regulators in accounting.
The United Nations
The United Nation’s interest in financial disclosure and other accounting rules
goes back to the early 1970s – a time when multinational corporations (MNCs) were
targets of volleys of criticism. MNCs were accused of systematically fudging financial
accounts, rigging transfer prices to evade taxes, bribing officials to obtain concessions,
and engaging in numerous other forms of extortion and exploitation. 8
In response, the UN’s Economic and Social Council (ECOSOC) convened a
twenty-member Group of Eminent Persons (GEP) to investigate the way MNCs operate
and their impact on developing countries. After a series of meetings with CEOs of
multinational firms, government and trade union officials, as well as academics, the GEP
issued a report highlighting, inter alia, the lack of systematic financial and non-financial
information provided by MNCs. It urged the creation of a harmonized set of accounting
rules and disclosure requirements to improve the comparability and usefulness to
governments and other interested parties of corporate financial information. 9
To achieve this objective, the GEP recommended the establishment of a UN
expert group on international corporate accounting and financial reporting as part of a
Commission for Transnational Corporations. The Commission came into being in 1975;
it, in turn, convened a year later the UN Group of Experts on International Standards of
8
See, for example, Capithorne 1971; Barnett and Mueller 1974; Muller and Morgenstern 1974; Litvac and
Maule 1969; Rubin 1971; and Lall 1973.
9
United Nations 1974.
5
5
Accounting and Reporting (GEISAR). This 14-member group mixed academics,
corporate executives, and public officials from developed and developing countries
alike. 10 GEISAR was charged with reviewing reporting requirements in different
countries and reporting practices of MNCs, identifying information gaps in existing
corporate reports, and recommending a list of minimum items that should be disclosed in
the financial reports of MNCs and their affiliates.
After two years of deliberations, GEISAR released a report unanimously
approved by the expert group, outlining an ambitious 34-page list of disclosure
requirements. 11 The list included financial statements for individual firms within
consolidated groups, segment information by line of business, research and development
expenditures, and transfer pricing policies. It also covered non-financial disclosures, such
as information about a corporation’s effect on the environment and society more broadly.
UN Secretary General Kurt Waldheim hailed the report as “a significant
achievement relative to reporting standards [and] a useful basis for the initiation of
international and national efforts to improve and harmonize reporting standards.” 12
Waldheim clearly considered the GEISAR report a decisive first step on the road toward
broad and active UN involvement in international accounting standards setting. 13
The GEISAR list needed the endorsement of the Commission for Transnational
Corporations before ECOSOC could proceed to the implementation stage. The
Commission, however, balked; representatives from developed countries objected to the
inclusion of non-financial disclosure requirements, especially in the areas of labor and
employment, investment, and the environment. 14
10
GEISAR members came from Algeria, Argentina, Brazil, France, the Federal Republic of Germany,
India, Iran, Japan, the Netherlands, the Philippines, Poland, Sweden, Tanzania, and the US. The countries
were selected by the UN Commission for Transnational Corporations but the individual members were
chosen and appointed by the UN Secretary General.
11
See United Nations 1977.
12
Ibid., 10.
13
Martinez 2001, 39.
14
For a good account of the conflicting assessments of the GEISAR report, see Rahman 1999; also E.
Stamp. 1978. Multinational Companies are Misguided in Opposing UN Disclosure Rules. Financial Times.
10 May 1978:8.
6
6
Instead, the Commission recommended that ECOSOC establish a new expert
group, the Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (IWGEISAR), to work towards an international agreement in
the field of accounting and financial reporting. 15 IWGEISAR differed from its
predecessor in two key respects: First, it had a clear intergovernmental character; a large
majority of its members were government officials, mainly from regulatory agencies,
permanent UN missions, and ministries of finance, foreign affairs, commerce, and
economic planning. Unlike the experts of the first group, IWGEISAR members were not
independent but acted on behalf of the governments that had nominated them. Second,
the group was much larger (34 members) and had a heavier representation from
developing countries (nine members from Africa, six from Latin America, seven from
Asia, nine from Western Europe and other developed countries, and three from Eastern
Europe) 16 .
IWGEISAR issued two reports, an interim report in 1981 and a final one in
1984. 17 Both reflected divergences of views, especially between developed and
developing countries, on a series of accounting issues, including treatment of
depreciation, classification of assets and liabilities, and valuation of assets and foreign
currency. In addition, developing countries favored mandatory UN accounting standards
of broad scope (i.e., covering financial as well as non-financial information), whereas
developed countries preferred voluntary guidelines narrowly focused on financial
information. 18
Despite these difficulties, the UN never abandoned the hope of becoming a
forceful voice in the harmonization of international accounting rules. Its aspiration was
given apt expression in the mid-1990s by Nelson Carvalho, chairman of the UN
intergovernmental working group of experts on International Standards of Accounting
15
IWGEISAR was established in 1979.
IWGEISAR allowed observers from the International Accounting Standards Committee, the International
Federation of Accountants, the International Confederation of Free Trade Unions, and the International
Chamber of Commerce.
17
United Nations 1981; and United Nations 1984.
18
For a detailed account of these disagreements, see Rahman 1999.
16
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7
and Reporting (ISAR) 19 , a successor to GEISAR, when he noted: “There is no other
international organization as democratic and as representative as ours. There is no other
international organization aiming at setting accounting standards in the world that has the
governmental recognition, and therefore the official recognition that we do.” 20
The OECD
The Organization for Economic Cooperation and Development (OECD) 21 got
involved in corporate financial reporting right around the same time as the UN and partly
for similar reasons. In 1975 it established the Committee for International Investment and
Multinational Enterprises (CIIME) to draft a set of standards regulating the behaviour of
MNCs. A year later the OECD issued the Declaration on International Investment and
Multinational Enterprises intended to “encourage the positive contribution multinational
enterprises can make to economic and social progress and resolve difficulties which may
arise from their operations.” 22
Annexed to this declaration was a set of Guidelines for Multinational Enterprises
recommending the disclosure in corporate financial statements of items such as
segmentation of sales figures by major lines of business and geographic area, the identity
of its main affiliates and percentage ownership of these affiliates, new capital
investments, research and development expenditure, and intra-group pricing
information. 23 Unlike the GEISAR disclosure rules, the OECD guidelines were drafted as
general and voluntary guidelines that addressed group accounts only.
The OECD guidelines were released before the GEISAR report was completed.
This has prompted some to speculate that OECD member states in fact sought to pre19
ISAR operates as part of UNCTAD’s Division on Investment, Technology, and Enterprise Development;
it meets once a year in Geneva. The proceedings of each annual session along with background papers and
related statistical data are published in the International Accounting and Reporting Issues.
20
Quoted in Cairns 1996, 17.
21
The OECD was established in 1960 and groups twenty-four of the world’s most industrialized countries.
22
See OECD website at www.oecd.org.
23
See ‘Disclosure of Information’ chapter in OECD 1976.
8
8
empt and limit the proposals being debated at the UN. “With the OECD Code completed,
developed countries could use it as the model for the type of code they wanted
reproduced at the UN.” 24 This view is consistent with statements issued during the 1970s
and 1980s by representatives from developed countries stressing that the institutional
forum for the elaboration and harmonization of financial reporting standards should be
the OECD – not the UN.
In 1979, CIIME established a permanent Working Group on Accounting
Standards with a mandate to “[s]upport existing efforts...of increasing accounting
standards comparability, [and] provide technical clarifications of the accounting terms
contained in the Disclosure of Information chapter of the 1976 OECD Guidelines.” 25 The
Working Group, which meets twice a year, has been conducting a series of surveys on
accounting practices especially in OECD member countries, organizing major
conferences on the harmonization of accounting standards, and gathering data on the use
and compliance with various sets of accounting rules. In 1986, it began to publish its
Accounting Standards Harmonization series as part of its effort to provide technical
clarifications and encourage the harmonization of accounting and reporting standards.
The series cover a wide range of topics, including foreign currency translation,
consolidated financial statements for different types of industries, and the relationship
between taxation and financial reporting as well as tax accounting. A number of MNCs
began in the late 1980s to refer in their annual reports to the OECD Guidelines.
The European Union
The European Union’s stated main goal has been the establishment of a truly
single market in goods, services, labor and capital. The harmonization of financial
reporting rules and practices is one step toward the realization of this objective; it
24
25
Martinez 2001; see also Hamilton 1984, 15.
U.S. Department of State 1982, 21.
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enhances the comparability of financial statements which, in turn, contributes to a more
efficient allocation of capital in Europe.
Regulatory initiatives and harmonization efforts within the EU in the area of
company law and accounting can be traced back to the early 1960s. 26 Two such efforts
stand out: the Fourth Directive and the Seventh Directive.
The Fourth Directive was adopted by the European Commission and the Council
of Ministers in 1978 after 15 difficult years of gestation. It establishes acceptable formats
for financial statements for all public and private limited liability companies operating in
the EU. 27 It also sets out minimum disclosure and auditing requirements and enjoins
particular accounting and auditing principles on preparers and examiners of financial
statements. 28
One reason for the slow pace of the harmonization process within the EU resides
in the contrasting styles and orientations of financial reporting practices among the
various member states, reflecting deeply rooted divergences in philosophy and purpose of
accounting. In most European continental countries, for example, accounts are used for
tax purposes, and therefore the accounting and valuation methods are strongly influenced
by legal and taxation requirements. An accountant’s goal in these countries is to comply
with strict legal rules and reduce the tax liability of a company. In the UK, however,
financial reports to shareholders are distinct from tax calculations, and accounting rules
are more flexible. British accountants heavily rely on judgment and do not let rigid rules
get in the way of presenting a ‘true and fair view’ of a company’s financial statements.
“[T]he “true and fair view” suggests a culturally conditioned distrust of rules – a
scepticism of their efficacy unless they are subordinated to human judgment – and a
belief in an abstract fairness that can never be completely codified.” 29
26
Thorell and Whittington 1994, 216.
Banks and insurance companies were excluded. However, the Directive of 8 December 1986 extended
the scope of the Fourth and Seventh Directive to banks and other financial instruments.
28
These principles include what in accounting lingo are called historical cost, going concern, prudence,
accrual accounting, and consistency.
29
Haskins, Ferris, and Selling 2000, 53; see also Ordelheide 1993; and Alexander 1993.
27
10
10
The Seventh Directive was adopted in 1983 after eight years of heated debates. 30
It promulgates standards governing the preparation of consolidated statements for
business groups. 31 Prior to the Seventh Directive, many EU countries had few if any rules
requiring consolidated accounts or governing their preparation. For example, as late as
1983 only about 75 percent of French listed companies published consolidated statements
and they were not legally bound to do so until 1986. Consolidated statements were still
rare in the early 1980s in countries such as Italy, Spain, Greece, and Luxembourg. 32
Widely varying practices among EU member states made negotiations extremely
difficult, involving many tricky issues, such as which forms of business should be
covered by the directive's provisions, whether entities should be defined by legal control
or economic integration, and how the technical process of consolidation should be
handled. 33
Two features of the European approach to the harmonization of financial
reporting rendered solutions possible in the end. First, the Fourth and Seventh Directives
have many options and exemptions. For example, in the area of valuation member states
are relatively free to choose whatever form of valuation they most prefer; or they may
decide to write different reporting requirements for small and medium size firms. Second,
the directives concern themselves with broad issues rather than detailed guidance; this
has the advantage of making the standards politically palatable but the drawback of
leaving great latitude to national legislatures when implementing the directives – latitude
that has compromised the objective of cross-country comparability of financial
statements. 34 Further, many important issues remained untouched by the directives,
including leases, pensions, taxation, and currency transactions.
In 1990, the EU established a Forum of European standard-setters to discuss
accounting issues not covered by the two directives, such as lease accounting and foreign
30
See Diggle and Nobes 1994.
The Seventh Directive requires consolidation where either the parent or a subsidiary company is a limited
liability company, regardless of the location of its registered office. The principle of legal power of control
determines the consolidation obligation.
32
Nobes and Parker 2004, 374.
33
Haskin, Ferris, and Selling 2000, 58-59.
34
Neither asset valuation, nor formats, nor disclosure have been completely standardized as a result of
diverging implementation legislation in the EU member states. See Nobes and Parker 2004, 99; Emenyou
and Gray 1992; and Walton 1992.
31
11
11
currency translation. However, little progress was made and the Forum closed down in
2001. Some have begun to question whether directives, which involve years of difficult
political negotiations, are the proper regulatory mechanism for harmonizing accounting
standards and whether such effort should be confined to Europe given that the scope of
the cooperation problem in financial reporting has systematically changed since the early
1990s (as discussed below). 35
International Accounting Standards Committee
The European Commission, the OECD’s working group on financial reporting
rules, and the UN’s expert group of accounting standards are political structures that
derive their existence and mandates from treaties signed by states. The International
Accounting Standards Committee (IASC), by contrast, is an international private-sector
organization. It was founded in June 1973 by 16 accountancy bodies from nine countries
(US, UK, Canada, Australia, Netherlands, Germany, France, Japan, and Mexico). Its
stated mission is to “formulate and publish in the public interest accounting standards to
be observed in the presentation of financial statements[,…] promote their worldwide
acceptance, and…work generally for the improvement and harmonization of regulations,
accounting standards, and procedures relating to the presentation of financial
statements.” 36
IASC replaced the Accountants International Study Group, a forum created in
1966 by British, Canadian, and American accountancy bodies to discuss harmonization
issues in accounting. 37 According to Anthony Hopwood, a leading figure in the European
accountancy scene, “a key impetus for the establishment of the IASC was given by the
impending entry of the UK into the European Economic Community. The imminence of
35
See Van Hulle 1993; Hopwood 1994; Hegarty 1993; and Wilson 1994.
IASC Constitution, 2.
37
See Benson 1976. Benson was IASC’s first chairman.
36
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12
this had brought fear to the British accounting bodies who were worried by the potential
consequences of what they saw as the imposition of continental European statutory and
state control on the much more discretionary relationship between corporate management
and the auditor in the UK. The British bodies mobilized an active and quite extensive
political campaign…[and] the IASC was established.” 38 The IASC was designed to give
the UK an important voice both in Europe as well as on the international stage.
The British fear failed to materialize in the end, robbing the IASC much of its
initial urgency and steam. As a result, the IASC lived a relatively quiet existence during
its first two decades. Nevertheless, it incrementally broadened its membership and
deepened its institutional structure. 39 For example, in 1982, the IASC entered into an
agreement with the International Federation of Accountants (IFAC) under which IFAC
recognized the IASC as the sole official source of international accounting standards and
promised to promote the use of international standards in all IFAC member countries.40
In return, the IASC recognized the IFAC as the authorized representative of the
accounting profession worldwide, accepted all members of the IFAC as members of the
IASC, and gave the IFAC full authority to nominate candidates for membership on the
governing Board of the IASC.
The Board was IASC’s key institutional body. Initially it comprised nine
representatives from accounting firms of the founding countries. Board membership
steadily increased, reaching seventeen by the late 1990s. 41 The members, all volunteers,
were appointed for (renewable) terms of up to five years. Each member body could send
two representatives (generally partners from the so-called Big Six accountancy firms or
finance directors of multinationals) and a technical advisor. Board members met four
38
Hopwood 1994, 243. See also Olson 1982, 226; and Nobes and Parker 2004, 81.
See Cairns 1999.
40
The IFAC was formed in 1977 and comprises today some 140 professional organizations from over 100
countries. It promulgates guidelines for the accounting profession in the areas of auditing, ethics,
management accounting, and professional education. IFAC is headquartered in New York.
41
Fourteen members were accountancy bodies from Australia, Canada, France, Germany, India (or Sri
Lanka), Japan, Malaysia, Mexico, Netherlands, the Nordic Federation (Denmark, Finland, Iceland,
Norway, and Sweden), South Africa (or Zimbabwe), UK, and USA. The other three members came from
organizations with an interest in financial reporting, namely the International Coordination Committee of
Financial Analysts Associations, the Swiss Federation of Industrial Holding Companies, and the
International Association of Financial Executives Institutes. The European Commission, the FASB,
IOSCO, and China sent observers to Board meetings.
39
13
13
times a year for about a week each to discuss and issue international accounting standards
(IASs), exposure drafts, and related documents. 42 They were assisted by steering
committees, one for each proposed new or revised standard. 43 Each steering committee
was chaired by a Board member and included representatives from several other
countries. The ‘due process’ for completing a new standard tended to take about two
years. Each member delegation had one vote. A two-thirds majority was required for
publication of an exposure draft, and a three-quarters majority for the adoption of an IAS.
Board activities were funded largely by Board members. 44
Three bodies were added to the IASC institutional structure over time: The
Consultative Group was established in 1981 to broaden the input of non-accountants in
the setting of international accounting standards. 45 The group met once or twice a year. In
1995 an advisory council was created to raise external funds and promote IASs. The third
body was the Standard Interpretations Committee (SIC) of 1996. It was charged with
reviewing accounting issues likely to receive divergent treatment in the absence of
authoritative guidance.
Finally, IASC had a small secretariat located in London. It consisted of a
secretary-general and an assistant secretary, as well as technical staff seconded from
accounting firms, multinational corporations, and academia for special projects. In the
1990s a technical director and research managers were added to the permanent staff; their
function was to assist steering committees in the development of IASs. 46
42
Until 1999, Board meetings were private.
In between Board meetings, work continued in the steering committees. These committees met in
different parts of the world, depending on which countries were represented.
44
In the 1990s, the revenue derived from the sale of IASC standards and publications grew rapidly,
contributing nearly 50 percent of the budget. Nevertheless, the budget remained relatively modest, rarely
exceeding £2 million.
45
By the end of the nineties the Consultative Group included the following members: The Fédération
Internationale des Bourses de Valeurs (FIBV, also known as the International Federation of Stock
Exchanges), International Chamber of Commerce (ICC), International Confederation of Free Trade Unions
(ICFTU), International Organization of Securities Commissions (IOSCO), Basle Committee on Banking
Supervision, Fédération Bancaire de la Communauté Européenne (European Banking Federation),
International Banking Associations, International Bar Association (IBA), International Valuation Standards
Committee (IVSC), International Association for Accounting Education and Research (IAAER), World
Bank, International Finance Corporation (IFC), Financial Accounting Standards Board (FASB), European
Commission, Organization for Economic Co-operation and Development (OECD), and the Transnational
Corporations and Management Division of the United Nations.
46
Cairns 1999, 25-32.
43
14
14
In the early years, the IASC strived to produce a small number of basic
international accounting standards (IASs) and get them accepted – a difficult task given
its lack of enforcement power. 47 The typical IAS built in considerable flexibility,
prescribing a particular accounting method but allowing alternative treatments provided
they were adequately disclosed and their effects noted. 48 In the 1990s, the IASC shifted
its focus to improving its rules - eliminating options, filling gaps and narrowing
differences between international accounting standards (IASs) and national requirements
- in an effort to make the rules more acceptable to capital market regulators. 49
3. Globalization: A new Cooperation Context and Institutional Selection
The framework analysis by Jupille and Snidal links institutional choice to a
‘cooperation problem’ – either a new problem which appears on the international scene
or a long-standing problem that becomes salient. The crucial new event for accounting is
the onset of globalization; it fundamentally changed the context in which the why, what,
and how questions regarding accounting rules were debated. Globalization established a
set of new circumstances that reshaped the way the collectivity of states came to view
and assess the proper scope, membership, and level of expertise of a transnational
regulator in financial reporting. In the 1990s these new circumstances brought about
institutional selection from a fixed but plural menu of institutional alternatives
summarized in the preceding section. What are these circumstances and what is the
institutional choice? This section considers each of these questions in turn.
47
IASC’s first standard was approved in 1974. By 1991 it had adopted 31 standards.
Choi and Mueller 1992, 29.
49
Cairns 1999, 6.
48
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15
First, globalization let to a rapid increase in the number of cross-border listings
beginning in the late 1980s. 50 This, in turn, raised the problem of dual and multiple
financial reporting or reconciliation. Companies with cross-border listings stood to
achieve big savings if they could produce only one set of accounts accepted by all
exchanges, thus fuelling demand for global standards. That is, the work of corporate
accountants who prepare and consolidate financial statements would be much simplified
if statements from around the world were prepared on the basis of a single set of global
standards. Similarly, the task of preparing comparable internal information for the
appraisal of performance of subsidiaries in different countries would be made easier. In
addition, the evaluation of foreign companies for potential takeovers would be facilitated.
Last but not least, greater comparability and reliability in accounting would bring down
the cost of raising capital by reducing the risk to investors. 51 For all of these reasons,
market pressure for international harmonization of accounting rules became very acute in
the 1990s.
Second, the Asian financial crisis of 1997-98 added to the pressure for effective
global governance in accounting by laying bare major deficiencies in national accounting
systems and their enforcement mechanisms. Governments around the world came to
realize that a solid international accounting regime was much needed to ensure the
stability and efficient functioning of international capital markets and enhance the
protection of investors. The Financial Times noted in 1998 that “the Asian financial
debacle may have done more for the cause of establishing an international language of
accounting than half a century of rhetoric.” 52 It firmly put the arcane matter of accounting
standards on the agenda of top-level government officials from the Group of Seven (G-7)
leading industrial nations. 53 A common accounting language would benefit not only
firms by reducing the cost of raising capital and enhancing market stability but also
50
Karolyi 1998, 9; see also Sarkissian and Schill 2004; Pagano, Roell, and Zechner 2002; and Baker,
Nofsinger and Weaver 2002.
51
Nobes and Parker 2004. 78.
52
“Accountancy: Friends in High Places – Backing from influential organizations should ease the task of
setting up better international accounting standards,” Financial Times (26 November 1998), p. 31. See also,
UNCTAD 1998.
53
Martinez 2001, 60. See G-7 1997; and G-7 1998a.
16
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investors and shareholders by improving the transparency and comparability of financial
statements.
Third, globalization has generally had a dramatic impact on the main site of
governance for standardization across sectors. It has revealed the limits and failings of
transnational public governance in technical rule-making, leading to a much greater role
for private-sector transnational standards-bodies and an acceptance of such role as not
only necessary but also legitimate. 54
Generally, delegation of governance functions to private-sector agents can have
the following advantages. It allows the public principal to draw on existing private
expertise thereby enhancing overall regulatory efficiency through specialization. 55
Second, the maintenance and updating of specialized expertise may make delegation to a
private agent more efficient and therefore more desirable than delegation to a public
agent. Governments and public agencies, which could use the specialized expertise
solely for the purpose of regulation, will find maintaining such expertise more costly than
private actors who can derive positive externalities from this expertise by also using it to
improve products, processes, etc. This economic rationale underpins many of the
arguments for industry self-regulation. 56
These specific reasons for delegating governance to a private-sector actors have
increasingly come to apply in the realm of accounting. 57 Accounting standards are
complex, technical, and have been fast-changing over the last decade or so, as new
financial instruments were invented and their accounting treatment needed to be clarified.
While there are public demands for the regulation of financial reporting, very few if any
government employees have the requisite technical expertise, and while experts might be
trained or hired, it would be very costly for career public servants (who would be needed
if government bureaucracies were to carry out the standards setting functions) to maintain
such expertise, because they would not be participants of the private financial markets
54
See Mattli 2003; also Kahler and Lake 2003b.
See Epstein and O'Halloran 1999.
56
See, e.g., Haufler 2001.
57
See Mattli and Büthe 2005.
55
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17
where the innovation in financial instruments is taking place. Expertise-based incentives
for delegation to a private regulatory agent thus clearly exist.
Institutional Selection
The four transnational institutional forums reviewed above coexisted as parallel
structures during the 1970s and 1980s and none emerged as focal institution. Growth to
regulatory preeminence was stunted by different combinations of institutional strengths
and weaknesses. The UN expert groups, for example, were highly inclusive, representing
members from all major regions of the world; their deliberations were public and
procedures transparent. Progress, however, was slow due to the divergence of interests
between developed and developing countries. The OECD committee benefited from
being populated by like-minded countries. It sometimes succeeded in preempting UN
work items and re-directing discussions. However, as a counter-forum to the UN, its fate
was closely linked to that of the UN expert groups - developing strength when the UN
was in an activist mood, flagging otherwise. The EU Commission pursued harmonization
of accounting rules with the aim of building a common European market. In most
European countries accounting rules derived from tax legislation; tax authorities,
however, resisted ceding jurisdiction in tax matters to the Commission. Further, the gap
between the tax-based model of accounting and the shareholder-oriented view of
financial reporting, combined with an EU rule of unanimous decision-making in matters
of taxation and finance, made progress difficult. Finally, the IASC, unquestionably a
great repository of technical expertise, suffered its own share of institutional handicaps.
Arguably, its biggest problem was a general perception that as a private-sector
organization it lacked legitimacy. This was not helped by the exclusion of the public from
its meetings and low procedural transparency. Further, it could not claim to be
accountable to or have the endorsement of any regulatory public authority or
democratically elected body. No surprise then that the IASC suffered from an endemic
enforcement problem.
18
18
In the 1990s, however, the international cooperation context rapidly changed (as
mentioned above) and with it the relative assessment by the collectivity of states of the
four forums, eliminating three institutional options and elevating one to regulatory preeminence:
First, the scope of the accounting 'problem' was now clearly global, calling for
global solutions. A common set of European accounting rules would certainly have been
a big step forward even in this new context, but it would have done nothing to obviate the
problem of multiple financial reporting faced by an ever-growing number of firms
seeking cross-regional listings. Similarly, harmonized standards within the OECD
member states would have considerably improved the business environment in advanced
economies, but it would have done little to prevent global financial crises triggered by
shady financial reporting practices in developing countries. The prevention of such crises
was in the strong common interest of developed and developing countries alike. In sum,
both the EU and OECD options were off the menu, leaving the UN and IASC (see Figure
1).
Figure 1
Dominated Options
Dominated
Options
International
(Regional)
Public
UN
EU
OECD
Private
IASC
-
The contest between the two remaining institutional options was easy, however.
Global capital markets generate highly complex financial instruments at brake-neck
19
19
speed, requiring matching accounting standards of ever-greater technical sophistication.
The UN simply does not possess the high-calibre expertise or institutional capacity to
respond in a timely fashion to these challenges. Further, any attempt to beef up its
institutional structure and endow it with the means to tackle the new tasks would have
been blocked by the United States and close allies who generally take a dim view of UN
operations. 58
This left the IASC, a private-sector expert organization that governments around
the world were now willing to accept, step-by-step, as the most suitable transnational
regulator in accounting. 59 The first public endorsement came in 1995 when the
International Organization of Securities Commissions (IOSCO) – an intergovernmental
organization of financial market supervisory institutions from 105 countries, regulating
90 percent of the world's financial securities markets – reached an agreement with the
IASC, committing stock market regulators to accept a set of 'core standards' when
completed by the IASC. 60 The member-states of the WTO backed this endorsement at the
conclusion of the Singapore Ministerial Meeting of 1996 in statement in which they
“encourage[d] the successful completion of international accounting standards…by the
International Federation of Accountancy (IFAC)…[and] the International Accounting
Standards Committee.” 61 Joel Trachtman has argued that this statement signals the
WTO’s deference and in effect delegation (at least in part and in political terms, as
opposed to legal terms) to the IASC.
The WTO thus has…‘delegated’ to a specific functional organization the
task of establishing standards to facilitate the free movement of
accountancy services. This particular delegation is not inconsistent with
prior practice in other areas, such as food safety standards (Codex
58
The UN has had to content itself since the 1990s with the minor role of reviewer and discussant of
standards produced by its main rival, the IASC.
59
Chwieroth (this symposium) also highlights the importance of expertise in influencing institutional
choice. The difference between our analyses is that in mine expertise is an asset shaping the perceived
functionality of the IASC, whereas in his study expertise endows the World Bank’s stuff with relative
autonomy vis-à-vis political appointees.
60
See http://www.iosco.org (accessed 25 February 2005). Under the agreement, IOSCO was allowed to
monitor the IASC standard-setting process both as a non-voting observer at steering committee and Board
meetings. In 2000, IOSCO endorsed 30 extant international accounting standards and generally
recommended the use of IASs for cross-border offerings and listings.
61
World Trade Organization 1996. The IFAC writes auditing standards only.
20
20
Alimentarius Commission) and general product standards (ISO). We
begin to see some evidence of a common institutional solution...utilizing
informational ‘delegation’ to specialized functional organizations. 62
In 1998 the G-7 Finance Ministers and Central Bank Governors issued a
declaration similarly endorsing the work of the IASC and calling on the committee to
“finalize by early 1999 a proposal for a full range of internationally agreed accounting
standards.” 63 This and other statements by the member-states of institutions such as the
World Bank, IMF, and the Basle Committee on Banking Supervision (BCBS) provided
the IASC with an implicit but nevertheless firm mandate to produce global financial
reporting rules. 64 As a result, the number of countries with stock listing requirements or
national securities legislation permitting foreign companies to prepare their consolidated
financial statements using international accounting rules has grown steadily.
In sum, a series of remarkable events triggered by globalization catapulted the
IASC within less than one decade from relative obscurity to prominence. Capital market
regulators, as well as trade and finance officials from around the world agreed to accept it
as the main site of global governance in financial reporting. The standards of the IASC
could no longer be dismissed or ignored, they mattered henceforth.
4. The Politics of Institutional Change: The Distributional Game
The preceding account of institutional selection based on specific exigencies in
terms of scope, membership, and expertise dictated by a novel international cooperation
context follows a strongly functionalist logic. Such institutional selection, however, is
often only a first step in the transformation of governance. As Miles Kahler and David
62
Trachtman 2002; see also Anonymous 1997, 3.
G-7 1998b; see also G-7 1997; and G-7 1998a.
64
See IMF 1999; World Bank 1995; Wolfensohn 1997; Basle Committee on Banking Supervision 2000;
and Financial Stability Forum 2000. The World Bank now includes IASs as a condition of its loan
agreements.
63
21
21
Lake recently noted, general efficiency gains alone do not explain governance changes. 65
Selection simply confers a mandate upon an institution to tackle specific problems; it
rarely predetermines the solutions to these problems. This is particularly true in a
decision-making context of bounded rationality and delegation to private agency.
The assumption of bounded rationality refers to cognitive and informational
limitations that decision-makers experience when faced with urgent and complex
problems. 66 As applied by Jupille and Snidal to questions of institutional choice, the
bounded rationality approach emphasizes that states do not have full knowledge of
various institutional consequences; 67 in other words, a boundedly rational actor faces
uncertainty because he cannot fully anticipate the distributional and other implications of
his institutional choices.
In this study, uncertainty about institutional consequences stems, in part, from the
delegation of regulatory authority not to a familiar intergovernmental organization but to
a relatively unknown private-sector technical agency. Public officials who were involved
in the first-stage institutional choice (i.e., selection of IASC) readily admitted in
interviews that their knowledge of the actual operations of the IASC was quite limited at
the time of selection. 68 The problems they faced were complex, the pressure for action
was acute, and the IASC seemed the most expert group around to expeditiously tackle
global accounting issues. Most interviewees also conceded that they had little inkling of
the potential distributional implications of their institutional choice. These implications,
however, emerged in the post-selection (or post-delegation) stage, unleashing a dogged
fight between competing interests over control and direction of the IASC and its agenda.
This section provides an analysis and illustration of the regulatory politics and
institutional change post-selection. It proceeds by first presenting the main actors and
their preferences, then discussing what Jupille and Snidal call capability heterogeneity,
65
Kahler and Lake 2003a.
Simon 1997.
67
Jupille and Snidal, this symposium; see also Chwieroth, this symposium.
68
These interviews were conducted in the summers of 2004 and 2005 in several European capitals and in
Brussels. Most officials also confessed to having little specific knowledge of accounting issues.
66
22
22
that is the sources of relative bargaining power of competing groups, and finally
explaining the transformation of global accounting governance from IASC to IASB.
The Main Actors and their Preferences
The process of international standards setting is not primarily one that involves
writing rules from scratch but is more about promoting existing national rules and the
systems that produce these rules. Each system has spawned networks of vested interests
that are not easily displaced; they are likely to put up fights to ensure survival of the
system. Standards battles at the international level thus tend to be intense and ruthless.
Two accounting systems clash at the international level: the Anglo-Saxon model
and the continental European tradition. They reflect differences in the legal system, the
relative importance of capital markets, and the role of government in capital and other
markets. The two systems thus offer different answers to the following question: For
whom are accounts produced and for what purpose?
In the US and UK, where stock markets are the main source of capital, the needs
of investors have been a main consideration in the development of accounting standards.
In these countries the elaboration of standards has long been delegated by public
regulators to the private-sector, specifically, the accountancy profession. The relationship
between corporate management and auditors is best described as flexible and
discretionary. As mentioned earlier, in most continental European countries, the main
purpose of statements of accounts has been tax assessment and the protection of creditors.
The basis of accounting thus tends to be highly legalistic. Private shareholding has been
less widespread than in the Anglo-Saxon world; individual investors traditionally have
preferred bonds to equity. The key providers of capital have been banks. These financial
institutions are often represented on the boards of companies in which they are significant
investors. As such they are assumed to be privy to inside information; legal disclosure
23
23
requirements are therefore of less importance to them than to American or British holders
of financial securities. 69
In sum, in the continental European tradition the dominant concern is taxation and
the protection of credit institutions, not the provision of information for investors.
Accounting principles are enshrined in tax laws which are the products of democratic
political processes; by contrast, in the Anglo-Saxon model, accounting rules result from
private-sector processes funded by industry. Inevitably, differences in philosophies and
general principles underlying accounting standards lead to fundamental substantive
differences in the treatment of many economic activities (such as mergers, pensions,
leases and changes in the value of financial instruments). 70
Until the late 1980s, IASs were sufficiently flexible – allowing for many options
and alternative treatments - to accommodate different accounting practices based on these
two models. However, the rules that the IASC had been 'mandated' to develop in the
1990s had to be truly standardized, disallowing for exceptions and options. Vague
standards would be of no use to global corporate actors and unacceptable to capital
market regulators. The IASC thus embarked on an ambitious project of revising all of its
standards, updating some and eliminating alternative treatments in others.
The project was politically highly sensitive for it was bound to pit the AngloSaxon model against the European continental tradition of accounting. Finding a solution
in effect required now siding either with one or the other model; compromise 'solutions'
were generally no longer acceptable. Progress was conceivable only if assisted by
institutional change of the IASC. Under the present IASC structure and decision-making
69
Nobes and Parker 2004, 16-72.
Consider the following example: income taxes in Germany are based primarily on externally reported
accounting profit, so there are strong legal and economic pressures to report income and asset values
conservatively. Consequently, German accounting standards allow management considerable flexibility in
determining the appropriate allowance for all possible losses. Specifically, transfers to and from reserves
need not be disclosed. Thus if a firm wants to report an increase in income it can charge some expenses
against reserves instead of against income without having to disclose such charges in the financial
statements. Such practices are expressly prohibited in the US and UK where reserves can be set aside for
identifiable probable losses and where transfers to and from reserves must be disclosed in the financial
statements.
70
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24
rules, potential losers - that is those required to pay steep switching costs, could easily
resort to institutional blockage. 71
Two competing blueprints of institutional reform were presented, one by the EU
Commission – the main defender of the continental European interests in the global
standards game, the other by the US, backed by the UK, Australia, Canada, and New
Zealand.
The EU Commission wanted global financial reporting rules to be set by a body
that included representatives from a much wider range of constituencies, including
financial analysts, institutional investors, and preparers of financial statements. A
reformed IASC needed to be more inclusive and democratic; this implied getting rid of
the dominance of the accountancy profession and rendering the Board more accountable
to public regulators and political authorities from around the world. A two-tier
accounting structure, with the political level monitoring and approving the work done at
the technical level, would confer upon the IASC the necessary political legitimacy.
The Anglo-Saxon camp was not keen on the EU proposal for it feared that a
politicized IASC would lead to horse-trading in which complex technical arguments were
decided by countries with little expertise voting en bloc. It envisaged instead structuring
and organizing the IASC according to the US Financial Accounting Standards Board
(FASB), a private-sector organization born in 1973 with a mandate by the Securities and
Exchange Commission (SEC) to produce accounting standards for the US capital
market. 72 The FASB model had already proven influential in shaping the national
standards setting bodies notably in the UK and Canada. The defenders of this blueprint
argued that a FASB-type structure would be most desirable because it was based on
independence (that is, absence of political interference) and high-level technical expertise
(that is, dominance of the accountancy profession). Legitimacy of a reformed IASC, they
argued, could solely be based on technical expertise and objectivity.
71
Recall that a two-thirds majority was required for publication of an exposure draft and a three-quarters
majority for the adoption of an IAS.
72
See Mattli and Büthe 2005, especially 407-417.
25
25
The two models were incompatible and had starkly different distributional
implications (see Figure 2 where y measures the 'welfare' improvement for Continental
Europeans, and x the gains for the Anglo-Saxon camp). An IASC reformed according to
the Commission plan would have heavily favored Continental European interests since
final decisions would have been with governments and the vast majority of countries had
tax-based accounting systems (see point 'Two-Tier IASC' in Figure 2). An IASC
modelled on the FASB – an International Accounting Standards Board (IASB), however,
would have put the Anglo-Saxon camp in control of the global accounting regime since
accountancy expertise was heavily concentrated in the countries with the largest capital
markets 73 (see 'IASB' point in Figure 2). 74 In the early 1990s, the US counted over
260,000 certified public accountants and the UK some 100,000 chartered members of
accountancy bodies; in France and Germany the figures were 11,000 and 5,000
respectively. 75 The Anglo-Saxon accounting profession is also older. The profession in
the UK dates back to 1854 (when the Society of Accountants was founded) and in the US
to 1887 (when the American Institute of Accountants was established), whereas the
German profession dates only from 1932, and the French from 1942.
Further, the projection of the FASB model onto the global stage would have
conferred upon constituencies in the Anglo-Saxon world the advantage of being able to
operate in an institutional environment they were perfectly familiar with; they knew how
to lobby a FASB-type organization and obtain information from it. However, operators
from the non-Anglo-Saxon world, where private accounting agency simply was not
known, would first have had to adjust their domestic institutional accounting structure
and traditions to fit with a global FASB. This clearly would have put them in the short
term at a strategic disadvantage in the global standards games where early involvement
and timely information about new proposals is of the essence.
73
The US capital market accounts for about half the world's capitalization.
In keeping with the bounded rationality approach, no assumption is made that a Two-Tier IASC or IASB
would satisfy any optimality condition. Placing the respective points off the Pareto Frontier simply suggests
that the two institutional options would both be viewed as improvements over the IASC.
75
Stewart Hamilton, Financial Times, March 20, 1998, 12. These figures do exaggerate the skew of the
distribution of accounting expertise by not considering that the various functions of accountants in the US
are fulfilled by several different professions in some other countries (such as Wirtschaftsprüfer,
Steuerberater, and tax lawyers in the German context). There is no doubt, however, that the distribution of
financial reporting standards expertise is skewed.
74
26
26
Bargaining Power and Institutional Outcome
The Anglo-Saxon camp sensed early in the 'second-stage' game that it needed to
pool its institutional resources and create a credible fall-back or exit option to improve its
bargaining power and stand a chance at gaining the upper-hand in the institutional reform
process.
The national standards setters of the US, UK, Canada, and Australia used to meet
occasionally to develop concerted views on major harmonization projects ahead of IASC
meetings. In the first half of the 1990s these meetings became more frequent and were
eventually formalized through the creation of the Group of 4 (G4). 76 The G4 formed
working groups to write position papers intended to guide the work of IASC steering
committees. In 1996, it moved one decisive step further by going beyond position papers
and beginning to produce full-fledged harmonized standards on such tricky accounting
topics as goodwill, joint ventures, and financial instruments. 77 This pooling of impressive
resources and show of unity sent a strong and unambiguous message: The G4 had go-italone power. 78 It could credibly threaten to exit the IASC, leaving behind a much
enfeebled institution. It then had the options of becoming the de facto global rule-maker
or launching a new organization, a World Accounting Standards Board (WASB), to
which only ‘friendly nations’ would be invited. This is represented by point G4 in Figure
2.
A few players on the European continent were aware of the challenge that the
creation of the G4 posed. Karel Van Hulle, the combative Belgian head of the financial
information unit at the Commission, admonished his fellow Europeans: “When you have
a European market that operates with one currency you need common European thinking
76
New Zealand joined the group after it was founded.
After protests by the IASC that the G4 threatened to undermine it, the group extended an invitation to the
IASC to attend its deliberations and changed its name to G4+1 (the 1 being the IASC). Stig Enevoldsen, the
Danish Board member of the IASC since 1991 and IASC chairman from 1998 to 2000, told this author that
he rarely felt welcome to G4 meetings. Not even as chairman did he feel accepted by the club of AngloSaxon national standards setters. The IASC clearly was not viewed or treated as an equal by the G4
(interview conducted on 15 August 2005 in Copenhagen). See also Street and Shaughnessy 1998.
78
Hafner-Burton (this symposium) describes similarly how the lack of exit strategies or fall back options
forced what she calls ‘conceders’ to accept human rights protection and enforcement standards.
77
27
27
on accounting and regulation of accounting and financial markets…We must get our act
together in Europe – there is no alternative.” 79 To achieve this objective, he proposed the
creation of a European Accounting Standards Board (EASB) as a counterweight to the
G4 (see point EU in Figure 2). The British expressed clear opposition to such plan for
reasons all too obvious. As a result, the proposal went nowhere. A bit later, a final
attempt was made “to give a more forceful voice to European concerns and rival the
G4+1” 80 when European accounting heads formed a 'think tank' known as the E5+2. The
group comprised the European Board members of the IASC, as well as the EU and the
Fédération des Experts Comptables Européens (FEE). This attempt too foundered on the
many incompatibilities of the various national accounting practices and the organizational
segmentation of the accountancy profession in Europe.
In the end, Europeans had no fall-back option, no functioning institutional
platform from which to fight the Anglo-Saxon camp. The European bargaining position
was dealt a further blow when major European corporate actors started to adopt US
accounting standards to be able to tab into the US capital market. A listing on the New
York Stock Exchange (NYSE), they hoped, would broaden their firms' financial options,
allowing them to raise more capital and on better terms than in the home market; it also
would widen the shareholder base, spreading financial risk; finally, it may add an element
of prestige and recognition to their firms' names. 81 The first major European corporation
to embrace US accounting rules and list on the NYSE was Daimler-Benz in 1993. When
it broke ranks, many Europeans regarded the move as treachery. 82 The lure of the US
capital market, however, seemed irresistible and soon other major European firms
jumped on the US GAAP bandwagon, including VEBA, Hoechst, Rhone-Poulenc,
Peugeot, Citröen, and Volkswagen. 83
79
Van Hulle cited in Anonymous, 1987. Europe sets out its stall. Financial Times. August 13:9.
Accountancy, “E5+2: A rival to G4+1,” January 1998 (International Edition), p. 8.
81
Martinez 2001, 54-56.
82
Not only were they incensed by Daimler-Benz’s willingness to adopt US GAAP, they were also troubled
by its acceptance of the requirement to publish quarterly results. Few Germans understood the American
fixation on earnings per share as a performance measure. (Stewart Hamilton, Financial Times, 20 March
1998).
83
Foreign companies raised in 1990 $8 billion in the US; by 1998 the number had increased to $170
billion. (See SEC Division of Corporation Finance 1997 and SEC 1998). Note, however, that in recent
years the trend has changed markedly. New regulation in the US (including the Sarbanes Oxley Act) has
shot up the price and risk of raising capital in the US. At the same time, liquidity of European capital
markets has improved significantly since the introduction of the EURO and the launching of a series of
80
28
28
institutional initiatives to create a single financial market (including the creation of stock market networks
such as NEXT), slashing the cost of raising capital in Europe. These trends have recently led to a series of
delisting by European companies from the NYSE and Nasdaq.
29
29
Figure 2
y
Pareto Frontier
EU
Two-Tier
IASC
IASB
Status Quo in Stage 2
(IASC)
G4
x
No surprise then that the Americans and their close allies prevailed in the battle
over the IASC reform. In November 1999, the IASC Board approved a plan that in
essence remade the IASC in the image of the FASB. A nominating committee, overseen
by SEC chairman Arthur Levitt, was convened to appoint a board of 19 trustees.
Significantly, no EU Commission representative was invited to join the nominating
committee. Instead, the committee included national stock market regulators from the
US, UK, Hong Kong, and France, as well as representatives from industry and major
accountancy firms. The board of trustees, in turn, had the responsibility of appointing the
members of the standards Board - experts with full and exclusive discretion of the
technical agenda. The Commission’s idea of a Board based on national or geographic
representation of various constituencies was rejected in favour of a Board chosen solely
for their technical accounting expertise (irrespective of nationality). Another Commission
proposal, namely to establish a broadly representative Consultative Group with real
30
30
decision-making powers, was discarded in favour of a Standard Advisory Council with
no power to prepare or approve standards. This was a crushing defeat for the EU. As a
Commission official exclaimed: “We had different positions and it is the US position
that…has won.” 84 The Financial Times ran stories titled ‘American coup that shut out
(continental) European influence from the reformed IASC’ and ‘Brussels lost voice:
Europe may have left it too late to challenge US dominance in attempt to shape global
accounting standards.’ Allister Wilson, director of accounting at Ernst&Young
concluded: “The reality is that the [new system] is going to be a US-dominated
system.” 85
About a year later, in January 2001, the trustees published the list of standards
Board members: 5 of the 14 members were Americans. The US, UK, Canada, South
Africa, and Australia together accounted for no fewer than 10 members. 86 Considering
that under the new rules the adoption of a standard requires approval by 8 of the Board’s
14 members, the Anglo-Saxon victory was consummate. With its mission accomplished,
the G4+1 group quietly disbanded. 87 All of its members were given permanent (liaison)
memberships on the new standards Boards. The restructured IASC, now called the
International Accounting Standards Board (IASB), began its operations in April 2001.
What was there for the Commission left to do? Michael Peel perceptively wrote:
“The question for the [European] Union has become one of tactics. Its strategic vision has
84
Michael Peel, “Accord puts common world standards drive back on track,” Financial Times, 19
November 1999.
85
Quoted in Fran Littlewood, “Hard Politicking Ahead,” Financial Times, 8 February 2000.
86
David Tweedie, former head of the British Accounting Standards Board was appointed as chairman; the
vice chairman of the new Board was Thomas Jones, a British national who formerly had been chief
financial officer of Citicorp. The Board included two accountants with long-time experience at FASB:
Anthony Cope and James Leisenring (a former FASB vice chairman) – Leisenring assumed the function of
official liaison Board member to FASB. The other liaison members to their respective national boards
were Tricia O’Malley, former chairwoman of the Canadian Accounting Standards Board and KPMG
partner; Hans-Georg Bruns of Germany, an official of Daimler Chrysler; Gilbert Gelart, a French partner of
KPMG and former IASC Board member; Warren McGregor, a former chief executive of the Australian
Standards Board of Canada; Geoffrey Whittington, an accounting professor at Cambridge University; and
Tatsumi Yamada, a partner at the Japanese affiliate of PriceWaterhouseCoopers. The remaining full-time
Board members were Robert Garnett, a South African and an executive of the minerals giant Anglo
American, and Harry Schmid, a Swiss executive of Nestle. The two part-time members were Mary Barth, a
Stanford University professor and former partner of Arthur Andersen, and Robert Herz, a partner at
PriceWaterhouseCooper in New York. Some of these individuals have in the meantime been replaced, but
the Anglo-Saxon group remains dominant.
87
It held its last meeting in February 2001.
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31
been destroyed within the space of a few months. It must now choose whether to
disengage and argue publicly against the IASC, or to remain inside the tent in the hope of
influencing the detail and execution of the plan…The EU may be justified in feeling hard
done by, but its absence from discussions would merely allow the US juggernaut to roll
faster. The only way forward for the Commission is to stay in and bark its dissent as
loudly as possible.” 88
In the end, the Commission stayed in. In February 2001, it unveiled a regulation
requiring listed EU companies to prepare consolidated accounts in accordance with IASs
by 2005. 89 Such measure constituted a significant step forward in the realization of a
fully-integrated European Capital Market. However, it came with a condition attached:
The EU retains the authority to exercise necessary regulatory oversight and correct any
perceived material deficiencies or concerns regarding IASs. 90
It is questionable whether such conditionality can be effective. In theory, it does
seem to be a reasonable way of ensuring that any new standard passes a minimum
legitimacy threshold; in practice, however, it may well turn out to be an ineffective
policy. The reasons are threefold: First, Europe remains divided on accounting issues; it
is unlikely that the various member states will overcome their deep disagreements at the
review stage of IASs. Second, European multinationals have a strong preference for
common global standards; they will therefore oppose a review process that
‘europeanizes’ IASs, resulting in two sets of rules. 91 Third, the key phase in any
standards game is the agenda setting stage. A review process may influence this early
phase only if the agenda setters are certain that passage of a proposal is unlikely unless
88
Michael Peel, “Case of the Dog that didn’t bark,” Financial Times, 6 January 2000, p. 16.
On 12 March 2002, the European Parliament voted in favor of this legislation.
90
The idea is similar to the two-tier process the Commission promoted in the late 1990s. The new
regulation takes the review authority away form the Commission to a new private-sector body named the
European Financial Reporting Advisory Group, incorporating expert users, accountancy professionals, and
regulators.
91
When major European firms stand united in their opposition to an international draft-standard, however,
EU conditionality can be effective. The only two examples are IAS32 and IAS39, standards on financial
instruments that Europeans rejected, forcing the IASB to draft them anew. IAS32 and IAS39 would have
required companies to report on derivatives and similar financial instruments at market value rather than
historic costs and place restrictions on the use of these instruments in hedge accounting. European banks
and insurance companies, in particular, opposed the two standards, arguing that the new rules would have
injected heavy volatility into profits and balance sheets. For a good discussion, see Brackney and Witmer
2005.
89
32
32
the reviewers’ anticipated concerns are taken into consideration. Again, given the
division within Europe, such threat is not particularly credible.
Conclusion
The project on international forum shopping, for which this study has been
written, seeks to tackle a new and exciting set of questions in international institutional
research: how do actors in the anarchic but variably institutionalized system confront
multiple institutional options? Which institutions do they choose (if any) and how and
why do they choose them? 92 Drawing on the project’s analytical framework, this study
has sought to shed light on an increasingly central component of the global financial
architecture but one that has largely been overlooked by researchers in international
political economy, namely the evolving transnational governance in accounting.
Sir Henry Benson, the first chairman of the IASC, wrote in 1976: “Major changes
take a long time in the accounting profession. [Accountants] by their training and
upbringing, are conservative in outlook.” 93 Measured against this baseline and
expectation, the changes that have been taking place in accounting governance, rules, and
practices over the past decade and a half are revolutionary. In the late 1980s the vast
majority of accounting rules were still being produced by national regulatory bodies, and
relatively few standards originated at the international level. By now this trend has been
entirely reversed. Perhaps even more significant is the move of formal regulatory
authority in international accounting from intergovernmental organizations – such as the
UN, OECD, and EU – to a private-sector expert group, the IASC. The institutional
selection of the IASC by governments was the result, in part, of mounting corporate
pressure for standardized rules obviating the problem of multiple financial reporting. It
also was motivated by a fresh determination to prevent global financial crises by rooting
out shady financial practices through the promotion of best financial reporting practices.
92
93
Jupille and Snidal, this symposium.
Benson 1976, 25.
33
33
These challenges faced by governments around the world necessitated urgent and daring
solutions. In sum – and consistent with the project’s analytical framework – the selection
of the IASC can be explained in terms of specific exigencies and requirements in relation
to scope, membership, and expertise dictated by a rapidly globalizing international
cooperation context in finance. The IASC happened to satisfy these requirements and
thus became the obvious pick from the menu of institutional options.
Selection simply conferred a mandate upon the IASC to tackle difficult problems;
it did not predetermine the solutions to these problems. Indeed, in accounting the devil is
often in the details, and the meaning of ‘best financial reporting practices’ when debating
specific technical issues is frequently not determined by science but by politics. Until the
late 1980s, political confrontations could be avoided by writing flexible standards,
allowing for many options and alternative treatments in line with practices based on
competing accounting models. In the 1990s, real harmonization was needed which meant
that flexibility was out. This enormously raised the stakes in the global accounting game;
a clash between the Anglo-Saxon and Continental European models was now
unavoidable. During the selection stage, governments around the world assessed the
problems identically and thus held similar preferences over solutions. The post-selection
stage, however, was characterized by what Jupille and Snidal call preference
heterogeneity – which in combination with capability heterogeneity reshaped the
structure of global accounting governance. The Continental European camp was united
only in its opposition to the American-led proposal for institutional change. Unlike the
Anglo-Saxon camp, however, it lacked a credible fall-back option, a functioning
institutional platform from which to proceed without the opponent. The American-led
coalition won a quick victory, and the IASC was reinvented in the image of the American
private-sector standard-setter in accounting, the FASB.
It is no surprise that the standards that the IASB has been issuing and adopting
since it began operation in 2001 look and smell like American (and sometimes British)
rules. Switching to these standards – now called International Financial Reporting
Standards (IFRS) – has been highly disruptive and time-consuming as well as hugely
costly in terms of staff retraining expenses and consultancy fees particularly for
34
34
continental European firms for whom IFRS are binding since January 2005. 94
Paradoxically, IFRS are not yet followed in the United States, though the SEC keeps
promising to soon remove the costly requirement for foreign private issuers to reconcile
financial statements prepared under IFRS to US accounting rules (US GAAP). Such
removal is viewed by all major non-US firms as the big prize of harmonization. However,
SEC deadlines have been slipping conveniently. 95 No surprise again. By dangling
removal before the eyes of its partners in the international coordination game in
accounting, the US is likely to extract all concessions it wants.
94
See, for example, Robert Bruce. 2005. Companies Urged to Have Faith in IFRS. Financial Times.
October 6:13.
95
The latest deadline is 2009. See Perry 2005.
35
35
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