In my previous posts, I discussed the importance of setting public-policy goals with regard to financial reporting standards in general before we in the United States attempt to make any public-policy decisions specifically with regard to International Financial Reporting Standards (IFRS). In this post, I'll describe two distinct public-policy issues related to financial reporting standards and I'll explain why it's important for us to distinguish between them. I'll also emphasize that we must address both issues if we're to make any progress toward formulating appropriate public-policy goals.
The first public-policy issue that we face revolves around the obvious question "What financial reporting standards should we use?" In the United States, the debate over that question has focused on whether the specific standards that comprise IFRS are better or worse than the specific standards that comprise U.S. GAAP. As I've mentioned briefly in past posts, that debate is poorly framed and as a result we've obtained no resolution to date. In future posts, I'll address what we need to do to frame that debate properly, but in the meantime, I want to point out that there is a separate, equally important question to be addressed: "Who should set the financial reporting standards that we use?"
Compared to the debate over "what," the debate over "who" is far more contentious and extends far beyond the United States. But both issues are significant and interrelated. From a U.S. perspective, unless we get people who are arguing about "what" into the same debate as people who are arguing about "who," we'll continue to make no progress toward resolving either issue.
As I noted in my last post, good goal-setting will require all of us to look at the "big picture," which encompasses multiple criteria viewed from both short-term and long-term perspectives. The "big picture" also encompasses all pertinent issues. It does us no good for some folks to focus on one issue while other folks focus on another issue. Having said that, here are some additional thoughts on the goal-setting challenges before us.
At the core of the debate about standards themselves is the question "Should financial reporting standards be the same among countries or should they differ?" If you believe that financial reporting should portray the economic situation of a reporting entity in a reasonably accurate and complete manner, it's difficult to argue that there should be any material differences in the portrayal of the same economic situation among reporting entities in different countries. That does not presume all entities in all countries face the same economic conditions, opportunities, and constraints; it simply means that the same economic situation should be portrayed the same way regardless of geography.
Right now, both inside and outside the United States, there is a general consensus that a single, global set of financial reporting standards is desirable. However, a question that quickly arises from that consensus is whether or not we should have one standard-setter for that one set of standards.
The geopolitical notion of sovereignty is based on universal recognition of the right of each country's citizens to choose for themselves the laws, rules, and regulations by which they are governed. The same notion can be—and traditionally has been—applied to setting financial reporting standards.
In the United States, we've generally been content to adhere to standards that everyone else in the world adheres to as long as we set the standards. But in the realm of financial reporting standards, the likelihood of other countries ceding global standard-setting authority solely to the United States is zero. Therefore, we're likely to face a bigger challenge in achieving consensus on a single standard-setter than consensus on a single set of standards. And because the challenges that we face in achieving consensus on the two issues differ significantly in magnitude, we must be prepared to invest more thought and effort into dealing with the "who" issue than the "what" issue.