1. IFRS Monopoly: Pied Piper of Financial Reporting
Shyam Sunder, Yale University
Canadian Academic Accounting Association
Toronto, May 27, 2011

2. Better Society?
Better Markets?
Better Accounting?

6. Competition

7. Competition

8. IFRS through National Regulators

9. All in One Voice
“Single set of high quality principles-based standards for use by all to achieve comparability”

10. Unintended Consequences

12. Promise of Uniform Currency

13. Ten Years Later

15. One Size Fits All

16. Quality through Standards

17. Quality and Coordination Standards

18. Co-ordination through Standards

20. Standardization of Financial Reporting
Disclosure
Format
Measurement

21. Good and Bad Standards

22. Bases for Deciding Prosperity of society
Inclusion of information from all
Stability over time
Adaptability to changes in environment
Robustness against manipulation
Resistance to capture
Mr. Crenshaw’s proposal was passed by a vote of one-to-six with Mr. Crenshaw casting the deciding vote.

26. Adaptability

29. Non-Bases for Deciding on IFRS
Statistical covariation between accounting and stock market data
Promotion by interested parties
120 countries can’t be wrong

30. Statistical Studies of Accounting and Stock Markets

31. “Information Content” Criterion
If statistically proximity of accounting and stock market data is to be maximized, it is trivial to achieve nirvana
Fire the accountants and report change in market capitalization as income!
Accounting from the markets, instead of accounting for the markets
Violates the maintained hypothesis that accounting may be relevant for stock markets

32. But Things are Much Worse!
We do not have stock price data under financial reporting regime B (because it is still being considered).
We have no way of estimating R(B) for comparison with R(A) even if that comparison was of any use.
What do we do?
Here is the trick.

33. Correlate Accounting B to Price A
Financial Reporting
System A R(A) Price System A
R*(B)
Financial Reporting Price System B
System B
What can comparison of R(A) to R*(B) tell us about the relative desirability of financial reporting systems A and B?

34. Accounting-Stock Market Covariation Studies
It is hard enough to derive a logical inference from comparison of R(A) vs. R(B)
Comparison of R(A) to R*(B) might make sense if stock prices were the identical under A and B
That is, if financial reporting were irrelevant to stock markets
In which case, why bother with these covariation studies

35. Promotion by Interested Parties

36. 120 Countries Can’t be Wrong

37. How Do We Learn What is Better?
A priori beliefs
Derivation from known first principles
Controlled experimentation
Analysis of data gathered from the field

38. A Priori Beliefs Truthfulness Timeliness Relevance Unbiasedness, etc.
Difficult to compare
IFRS has no evident advantage
Your head weighs 36 pounds, same as your feet.

39. Derivation from Known First Principles

40. Controlled Experimentation

41. Analysis of Data from the Field

42. Monopoly: No Requisite Variation for Evolution or Research

43. Rules and Social Norms

44. Rules vs. Social Norms

45. Principles vs. Uniformity
Any two transactions which have any similarity should be treated alike.
Any two transactions which have any differences should be treated different.

46. Language and Translation
A direct translation may not convey the exact meaning of the original language

47. Top-Down Design Cartesian view of our world
Belief in our knowledge and ability to design social systems to achieve desired ends

48. Fatal Conceit Friedrich A. Hayek
Modern civilization naturally evolved and was not planned. All of its customs and traditions naturally led to the current order and are needed for its continuance. Any fundamental change to the system that tries to control it is doomed to fail since it would be impossible or unsustainable in modern civilization.

49. Biological Evolution Darwin:
Biological evolution through replication, mutation and selection
Spenser: Social evolution through
Herbert Spencer: evolution of social processes

50. Fit in the legal, economic and business systems

51. Fortunately, we do not need to select a criterion in bottom-up evolution
Bottom up evolution of financial reporting can proceed with light regulatory oversight
Use general criterion of investment, growth, GNP, mitigation of fraud
Compare institutions across boundaries and imitate better performing ones

52. Fractal Reality Benoit Mandelbrot (1977) Infinitely detailed
No natural limit to additional detail
Structure of rules in society
No such thing as “perfectly clear”
Do not believe in applicability of principles rhetoric
Similar processes yield similar outcomes

53. Dependence and Judgment

54. Financial Reporting and Financial Engineering
Unequal battle
Slow, rule bound financial reporting has no chance against agile and free financial engineering
Monopoly will make it even worse

55. Financial reporting as eye-in-the-sky or camera-model

56. Thank You.