The last two days have been busy, fielding calls from reporters. One called asking my thoughts on convergence, the other asked about my thoughts on whether accounting can forestall the next financial crisis.
Long time readers know what I said.
Convergence of accounting standards is a bad idea. The academic theory is that market participants benefit from detailed information tailored to that specific market. Given that capital markets are local (but are linked around the world) it makes sense that local accounting standards (that force companies to disclose as much detail as possible) would provide the greatest value.
What is the impact of accounting rules and auditors on the next financial crisis? Because auditors don’t do the job that investors wish they would do, the accounting rules hardly matter. The academic theory is that if companies are not required to secure an audit opinion, then the act of hiring an auditor signals a company’s intention to obey the accounting rules. However, if companies are required by law to secure an audit opinion, there is no theory that these audits provide value. There is a theory paying more signals intent to follow the accounting rules, but then paying more might mean that the company wants to get away with more. Therefore we are in uncharted waters. There is no theory to suggest that audit opinions will be trustworthy. If audit opinions aren’t trustworthy, then there is no effective check on the numbers reported by companies in their financial statemeents.
The two work together. If converged accounting standards are company friendly, and auditors are paid to be company friendly, then it is likely that accounting and auditors will not delay, by even a day, the next financial crisis.
I hope the reporters heard my message.
Debit and credit – – David Albrecht