1. IFRS Monopoly: Pied Piper of Financial Reporting
Shyam Sunder
Yale University
Waseda University
Tokyo, Japan, Feb 3, 2011

2. Better Society?
Better Markets?
Better Accounting?

6. Competition

7. Competition

8. IFRS through National Regulators

10. I was very creative with my accounting, but not creative enough.

11. Crusade for Fiscal Responsibility
David Walker
Former Comptroller General of the U.S.
Founder, CBI initiative to return to fiscal responsibility

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

13. Unintended Consequences

16. Promise of Uniform Currency

17. Ten Years Later

19. One Size Fits All

20. Quality through Standards

21. Co-ordination through Standards

22. Quality and Coordination Standards

24. Standardization of Financial Reporting
Disclosure
Format
Measurement

25. Good and Bad Standards

26. 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.

30. Why Is the FASB Making Too Many Accounting Rules?
Shyam Sunder
The Wall Street Journal
April 21, 1981

33. Adaptability

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

37. Statistical Studies of Accounting and Stock Markets

38. Stock Market as Objective Evidence on Financial Reporting Alternatives
This paper aims at determining the value relevance of financial reporting. …This study aims at explaining likely impact of financial reporting by listed companies on the market prices of their shares. Our study reveals that value relevance of published financial statements, per se, is negligible. … The results of our investigation depict negligible value being added by cash flow reporting.
Vishnani and Shah (International Journal of Finance and Economics, 2008)

39. Two Problems with the Argument
Could stock market be the sole or dominant criterion for choosing financial reporting?
If it were, does statistical covariation deliver on its promise?

40. The Status Quo is System A
Financial Reporting System A  Price System A

41. Estimate the Covariation of Accounting and Stock Market Data under the Status Quo
Financial Reporting System A  Price System A
Financial Reporting System A  Price System A
R(A)

42. Consider Hypothetical Alternative B
Financial Reporting System A  Price System A
Financial Reporting System A  Price System A
R(A)
Financial Reporting System B  Price System B

43. Estimate Covariation R(B)
Financial Reporting System A  Price System A
Financial Reporting System A  Price System A
R(A)
Financial Reporting System B  Price System B
Financial Reporting System B  Price System B
R(B)

44. Inference?
Financial Reporting System A  Price System A
R(A)
Financial Reporting System B  Price System B
R(B)
What can we learn about the relative desirability of A versus B from comparing R(A) against R(B)?

45. “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 of this conference that accounting may be relevant for stock markets

46. 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.

47. 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?

48. 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

49. Promotion by Interested Parties

50. 120 Countries Can’t be Wrong

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

52. 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.

53. Derivation from Known First Principles

54. Controlled Experimentation

55. Analysis of Data from the Field

56. Monopoly: No Requsite Variation for Evolution or Research

57. Rules and Social Norms

58. 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.

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

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

61. 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.

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

63. Fit in the legal, economic and business systems

64. Criteria for choice of standards
Will better standards lower the cost of capital?
Will better standards also lower the rate of return to investors
If not, what is the difference?

65. 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

66. 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

67. Dependence and Judgment

68. 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

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

70. Thank You.