Another reason IFRS are a really bad idea

All economies, cultures, and societies operate the same way, right?

I just realized that’s a fundamental underlying concept of IFRS. One set of accounting rules can be applied consistently in all nations regardless of the divergence of legal systems, regulatory structures, ethical frameworks, and general worldviews.

I realized that is yet one more severe conceptual failure in IFRS after reading Global Accounting Rules – An Unfeasible Aim by professors Stella Fearnley and Shyam Sunder. David Albrecht has reprinted their op-ed in his blog post, UK Prof and USA Prof Against Global Accounting Rules.

Here is the key aha! sentence for me:

Accounting standards interact with law, commercial codes, and social norms in different countries in many ways.

The professors give partial credit to IASB for creating rules that allow distortions in accounting and counterproductive behaviors by banks, which in turn get partial credit for the financial crisis in Europe. I don’t follow European banking developments closely enough to understand that idea.  Check out the post for further discussion.  Put that in the category of unintended consequence.

What I do understand is different countries have developed different norms on how business is conducted and how their economies are organized. Accounting rules need to reflect that or there will be more unintended consequences. Here are a few examples of differences.

What’s okay or not okay

My study of the Olympus scandal has left me scratching my head wondering how it could be acceptable in a country to routinely engage in tobashi, which I discussed here. Essentially that means if you have some problem in your financial statements you just make it go away. Fly away huge problem!

The front end of the Olympus fiasco was apparently legal and ethical at the time.  From my cultural perspective of growing up in the United States, that is an ethics failure at a systemic level.

Another example from Japan is the far heavier role banks and lenders play in managing companies compared to the United States.

Tobashi? I have a problem with. So did the Japanese legislature, which is why they finally outlawed it.

Lenders having a major role in running a company? From my American perspective, I’m okay with that. The Japanese have developed a different way of funding business than United States. That’s fine by me. Our system won’t work for them and theirs won’t work for us.

To say that those two very different systems have the same reporting needs and should have the same accounting rules just doesn’t make any sense.

Individuality versus collectivism.

Different cultures have reached different places. For better or worse, in the United States we place a premium on individuality. This means individuals have responsibility for themselves and make their own decisions. This translates into high expectations for sovereignty in conducting our affairs at a national level. For better or worse, that’s where our society is. Other countries are in a different place.  I discussed some of the implications here.

The irritation a lot of people have with the rule setting in Norwalk (home of FASB) will be nothing compared to what we would hear if people from other cultures start making the rules from distant London.

The final illustration I have is from the current distress we see in Europe.  Sure seems to be a fairly major difference in the cultural mindset in Germany compared to Greece. To have one set of accounting rules for all countries would assume that the German economy functions the same as Greece. The Greeks run their economy the same way as the Germans, right?

Just like Japan and the United States have the same worldviews and reporting needs. Right? 

The assumption built in to IRFS is that Japan, the U.S., Germany, and Greece should all have the same accounting rules. That they have widely varying way of doing things is irrelevant. 

Seems to me that accounting rules and reporting requirements need to reflect the distinct legal, ethical, regulatory, capital market, and mindset of a country.