A Single Sandbox for Standard-Setters (Part 3) | AccountingWEB

A Single Sandbox for Standard-Setters (Part 3)

This blog post is the third of a series that explains the rationale for the United States and other countries to collaborate in creating a single, global registry of financial reporting standards rather than a single set of standards emanating from a single standard-setter. In this post, I'll explain how the "single-sandbox" approach would maximize the quality of the financial reporting standards used in the United States and throughout the world. As such, I'll be addressing one of the most strident objections to present efforts to converge financial reporting standards on a global basis.

The ongoing efforts of the world's standard-setters to eliminate differences in financial reporting standards among countries have caused many observers to cringe at what they perceive as the abandonment of quality for the sake of conformity. But even though I think that critics of the current convergence movement generally overestimate the likelihood of quality being sacrificed for conformity, I recognize and support the underlying motivation. In any case, I believe that we must address claims that eliminating differences in financial reporting standards among countries will lead to a "race to the bottom" or that an agreement among countries to use the same standards would necessarily prevent any one country from improving the quality of the standards it uses.

The quality-obsessed crowd often proposes, as an alternative to a concerted attempt to achieve convergence, to "let the market choose" from among diverse sets of standards. There is a certain intellectual appeal to this approach, especially in the market-based economies of the developed world. But the problem with it is that the "market" for financial reporting standards isn't like the market for, say, magazines.

In the magazine market, a publisher may attempt to distinguish its publication from competing publications on the basis of quality. Upon the introduction of a "better" magazine, the market responds—approvingly or disapprovingly—in relatively little time and with compelling force.

There are two reasons that market for magazines responds quickly and definitively to quality innovations. First, it is easy for consumers to familiarize themselves with competing publications—all it takes is spending a little time in the magazine aisle of Barnes & Noble. Second, the costs of switching from a lower-quality publication to a higher-quality publication are minimal—you just stop buying one and start buying the other.

Neither of those two conditions exists, however, in the current "market" for financial reporting standards. Because different sets of standards vary in language, format, structure, completeness, authoritativeness, and accessibility, "consumers" of standards are deeply challenged to comprehend what might make one set better than another. Additionally, the costs for an individual company to switch from one set of standards to another are huge. And the collective cost for an entire country to switch from one set of standards to another is so astronomical that switching standards must be considered a "hundred-year" event at best.

As a result of the idiosyncrasies of the "market" for financial reporting standards, letting the market choose from among diverse sets of standards might work, at most, once in a lifetime. The rest of the time, barriers to switching are so formidable that vast differences in quality could develop among sets of financial reporting standards without ever resulting in a country or company switching to the "best" set. And as long as such barriers to switching exist, each standard-setter has relatively little incentive to improve the quality of their standards, even if through imitation of competitors, since the likelihood of altering their "market share" is effectively zero. For those reasons, a market-driven solution to maximizing the quality of financial reporting standards is presently infeasible.

But what if market conditions were to change? What if the barriers to switching standards were dramatically reduced? Then competition and the positive benefits to society therefrom would flourish in the market for financial reporting standards as they have in so many other markets. Then we could rely on the market to compel continuous improvements in quality through healthy rivalry among standard-setters and through the imitation and diffusion of successful innovations—again, just like in many other markets. Well, the single-sandbox approach would change market conditions in precisely this way.

In a nutshell, the single sandbox, as I have described it in previous posts, would be an improvement in the world's standard-setting environment because it would increase comparability (and the benefits therefrom) while encouraging competition (and the benefits therefrom). Furthermore, it would encourage innovation at the frontiers of standard-setting (i.e., areas where there is the least agreement on what's best) while providing uniformity and stability at the core (i.e., areas where there is the most agreement on what's best).

In my next post, I'll explain even more practical advantages of the single-sandbox approach.

P.S.: I invite you to check out my recent artice, "Could Codification Weaken Internal Controls?", at CFO.com. And don't forget that my webcast series "This Month in Accounting", sponsored by AccountingWEB, is coming in May.


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Bruce Pounder, MBA, CMA, CFM, DipIFR (ACCA) is an internationally recognized expert on corporate financial reporting and the global convergence of financial reporting standards. He has two decades of firsthand financial reporting experience as the CFO of a privately held corporation and has served as a financial reporting consultant to many public corporations. Currently Bruce is President of Leveraged Logic, a leading provider of educational products and services to accounting professionals. He is the author of the 2010 U.S. Master GAAP Guide (CCH), the Convergence Guidebook for Corporate Financial Reporting (Wiley), and the monthly "Financial Reporting" column of Strategic Finance magazine. Bruce also presents the live webcast series "This Week in Accounting."

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