Today’s essay is simply part of an unfinished work. If one can discover what one thinks by writing about it (see Thinking on Paper, by V.A. Howard), then this is an early attempt by me to figure out what is going on in the world of IFRS. Comments are welcomed, as I am attempting to learn by writing this essay. I probably don’t have it all figured out.
Current economic orthodoxy is based on the internationalization of financial markets and free flow of capital across any and all national borders.
It has grown from two distinct origins–German and French. The German belief in the free flow of capital stems from its unpleasant experience following World War I. International control and regulation of the German economy rankled those who believe Germany could have been better off had its capital been able to flee to other countries, thereby gaining it a degree of protection. French support for the free flow of capital stems from a realization that government control of French capital only controlled middle and working class citizen’s of capital, and not that of the richer upper class. Therefore, to afford equal treatment to workers, it is necessary to endorse the free flow of capital.
European adherence to the free flow of capital is self-serving. Proponents expect that Europe will experience a net inflow of capital if worldwide, all barriers to capital are removed. Where will the capital flow from? It will come mostly from the U.S. (that is where most of the capital resides), but also from the developing world.
Building a global financial system premised on the free flow of capital requires that no nation regulate its own capital market, or at least regulate its own capital market more stringently than does any other country. Since detailed accounting standards and active enforcement of corporate compliance are hallmarks of regulation (the additional regulation/inspection of auditors is a hallmark of U.S. regulation), then more generalized and flexible accounting standards and indictment of only the most egregious corporate frauds are absolutely essential conditions for GFS and the free flow of capital. The economic theory of free flow of capital absolutely requires accounting standards such as today’s IFRS. Because the U.S. is such a large actor in the world economy, the economic theory of free flow of capital absolutely requires the U.S to discard GAAP and adopt IFRS.
This theory has several corollaries. There is a sense that capital is indestructible. If conditions suddenly turn unfavorable for capital invested in a particular company in a specific country, then the capital can be preserved by allowing it to flee immediately to another company in what very well may be another country. There is a sense that there will always be sufficient greener pastures to absorb all capital flowing away from negative investments. There is also a sense that there is enough information publicly available that investors can always accurately value alternative investments and make the most rational investment decisions. [Accountants can interpret this to mean that accounting rules do not matter, and that executive attempts to manipulate valuations will always be ineffective.]
The U.S. has a different history (socially, economically, politically) and hence has some citizens that see the world a different way. The Great Depression of the 1930s scarred the national psyche, and has produced a mindset that financial markets should always be regulated because that preserves investor capital.
Moreover, capital is viewed as a national resource. U.S. citizens demand government policies conducive to strategic creation, maintenance and management of that capital. Capital can be viewed the same way as other national resources such as precious minerals or the productive capacity for military defense. Said another way, strategic capital management is an essential aspect of the national security.
When viewed from this piont of view, it is easy to see that U.S. GAAP and SEC enforcement and the Sarbanes-Oxley emphases on internal controls and auditor inspections are essential to the national security of the United States.
There are corollaries to this view. First, capital is destructible, it can dissipate. Moreover, greener pastures (if they exist) may be insufficient to absorb any capital flowing away from adverse circumstances. Second, markets are not efficient and intrisic valuation of companies is not possible. Therefore, accounting information does matter and the specifics of accounting rules do matter.
Having gone through this line of thought, my conclusion is that if you believe that the capital of a country’s citizens can be viewed as a national resource, then you should support the U.S. retention of its GAAP. If you believe in the free flow of capital, then you should support IFRS for the U.S.
The existence of the free trade of goods and services are not directly related to the free flow of capital.
Debit and credit – - David Albrecht