What started off as an economic theory is having profound consequences in accounting and finance.
A while back, some French economists started writing about the need to create a global financial system. The hallmarks of this global financial system are (1) there should be a free flow of capital around the world to those who can best use it (2) a free flow of capital should be able to guarantee average investor returns due to it being the ultimate portfolio diversification (3) individual government protection of its country’s capital formation and accumulation, and its national capital market system are antithetic to the creation of a world system.
Government officials in Europe quickly bought into the theory, and implementation proceeded from the 1960s. In the U.S., buy-in started in the 1980s and 1990s, has been by both Democrats and Republicans..
Although there are a few critics who view this Global Financial System (GFS) as inherently destabilizing for citizens in any particular country and economic colonialism in its most racially crass form, GFS criticism has been largely non-existent. GFS is the orthodox view today.
As GFS is being implemented in ways that affect those in accounting and finance. For example, GFS needs a single set of global accounting standards. These accounting standards should be flexible (1) because companies need to be able to imaginatively and persuasively make a case for attracting capital, (2) because investors should be able to discern a company’s intrinsic value, the details of accounting don’t really matter, and (3) accounting standards that are too stringent are viewed as impediments to globalization.
It also turns out that the Sarbanes-Oxley Act of 2002 is a fly in the ointment. From a GFS perspective, a U.S. focus on requiring internal controls is a waste of time and effort because it hinders the flow of capital from and to places that require no internal controls. Also, the U.S. reliance on the PCAOB inspection of audit firms (both domestic and foreign) is a barrier to free capital flow.
I read a lot, and lately have increased my reading from Continental business, economic and finance sources. It is interesting. An Accountancy Age editorial on Thursday, Feb. 19 railed against U.S. resistance to IFRS, and argued that no global recovery to the current economic crisis is possible unless the U.S. immediately switches to IFRS. (That’s right, GAAP is an insurmountable barrier to the world’s economic health. Moreover, it is the only barrier.) Is it just me that thinks this idea is absurd? Of course, if you are a proponent of GFS and the free flow of capital, the editorial makes perfect sense.
Later that day, Charley McCreevey railed against the PCAOB, the Senate Banking Committee, the SEC under Mary Schapiro, and Charlie Niemeier because all insist on U.S. inspection of foreign audit firms. Like anyone who has bought into GFS, McCreevey views the U.S. imposing its view of auditor enforcement on the world as a threat to the free and unfettered international flow of capital. It is unneeded anyway, because investors can instrinsicly value companies.
Rarely, a GFS proponent will admit that the cost of capital might increase under GFS. This doesn’t matter, as the benefits from getting the world’s capital to the best companies will eventually increase the world’s wealth to a far higher level than possible under the current system.
My reaction to this, at the current time, is that we seem to be chasing a Eutopian dream much like that of the Star Trek era. No one ever needs to work again as replicators can produce all our basic needs. The problem is that in 2009 we have no replicators.
Debit and credit – - David Albrecht
internal controls are key to building trust and credibility in business and that can help capital to flow more freely. let’s say some company in Mexico or Russia wants to do business with you. But there is no audits, no internal controls, and nothing. They want you to send them $10 million dollars. Would you do it?
SOX took a lot of crap because a lot of the people say “look, all the companies went to the UK to do IPOs ’cause they don’t care about internal controls or executive responsibilities”. Guess what? AIG’s little CDF weapon of mass distruction was based out of London.
And if you take it from another view, SOX didn’t stop Satyam, AIG, and all these firms to circumvent or collude with the auditors. But the difference is consequences. Because of the law, people know Satyam is in trouble. All my friends companies are disengaging Satyam. The law makes the “fraud” more black/white.
Now, I do think you make a good point. Anytime there is contorls in place, the free of capital stops. But you need to assume that everyone plays by the game and that they face consequences if they don’t. SOX is just that.