Last week's post explored the role that "market forces" will play in Convergence. On the assumption that some kind of transition to different financial reporting standards is inevitable in the United States, this week's post will explore the role of market forces in resolving the problems associated with a transition to different standards, such as the problem of re-educating stakeholders in the financial reporting supply chain.
A transition to different financial reporting standards in the U.S. is likely to be triggered by the U.S. Securities and Exchange Commission (SEC) either allowing or requiring domestic public companies to use financial reporting standards other than current U.S. Generally Accepted Accounting Principles (GAAP). As I have explained in prior posts, some kinds of transitions that the SEC is contemplating represent Convergence (specifically, set-level Convergence), and some don't.
The aggressive actions of the Financial Accounting Standards Board (FASB) to attain Convergence (specifically, standard-level Convergence) between U.S. GAAP and with International Financial Reporting Standards (IFRSs) may also result in a transition to substantially different financial reporting standards, even if the resulting standards are still called "U.S. GAAP."
In any case, it is important to remember that both publicly-held and privately-held companies would need to deal with such transitions, although possibly in differing timeframes and manners.
Regardless of the kind of transition that awaits us, the transition from current U.S. GAAP to different financial reporting standards won't be easy, fast, or cheap. The obvious challenges that would accompany a standards transition have led to obvious questions: What exactly will happen? How? When? Who will do what? And how much will it all cost?
In response to such questions, many stakeholders in the financial reporting supply chain have begun to express the vague-but-confident opinion that market forces will resolve any issues that may arise from a transition to different financial reporting standards. The expression of such an opinion became increasingly common after March 6, 2007, when the SEC held a roundtable discussion to solicit and obtain feedback from stakeholders in the financial reporting supply chain regarding the SEC's then-contemplated acceptance, from "foreign private issuers" (FPIs), of financial statements prepared using IFRSs as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. GAAP. That roundtable can be credited with convincing many people in the U.S. that significant changes in financial reporting standards were indeed coming.
But back to the focus of this post: Can we rely on "market forces" to resolve the many issues that will arise as the United States transitions to different financial reporting standards? My answer is no. That's not to say that market forces won't play a role in resolving the issues that will arise; I simply reject the notion that market forces alone will lead us to desirable resolutions of those issues. Here's why . . .
From a micro-economic perspective, market forces are efficient and effective at producing desired outcomes for market participants when
Diverse choices exist, at least one of which will result in desired outcomes
Market participants are well-informed about the choices available to them and about the consequences of those choices
Market participants can choose freely for themselves
The self-interests of market participants are compatible with each other
Unfortunately, these conditions generally don't exist in the markets that so many folks are relying on to resolve the issues that will arise as the U.S. transitions to different financial reporting standards. And it is for this reason that market forces alone should not be relied on to solve the problems associated with Convergence or any other kind of transition to different financial reporting standards in the United States. In my opinion, it is precisely the lack of the above conditions that represents one of the most fundamental challenges that the U.S. faces in attempting to move towards a future of improved, converged standards.
In my next post, I will examine a kind of market that is perhaps the most relevant to the challenges of transitioning to different financial reporting standards: the market for education. Specifically, I will illustrate how education markets generally fail to exhibit the above conditions. And I will propose an approach to transitioning to different financial reporting standards that relies on sound principles of supply-chain governance rather than on blind faith in free-market economics, i.e., an approach to fostering the market conditions described above before relying on market participants to do what comes naturally to them.
Market Forces and Convergence, Part 2
Last week's post explored the role that "market forces" will play in Convergence. On the assumption that some kind of transition to different financial reporting standards is inevitable in the United States, this week's post will explore the role of market forces in resolving the problems associated with a transition to different standards, such as the problem of re-educating stakeholders in the financial reporting supply chain.
A transition to different financial reporting standards in the U.S. is likely to be triggered by the U.S. Securities and Exchange Commission (SEC) either allowing or requiring domestic public companies to use financial reporting standards other than current U.S. Generally Accepted Accounting Principles (GAAP). As I have explained in prior posts, some kinds of transitions that the SEC is contemplating represent Convergence (specifically, set-level Convergence), and some don't.
The aggressive actions of the Financial Accounting Standards Board (FASB) to attain Convergence (specifically, standard-level Convergence) between U.S. GAAP and with International Financial Reporting Standards (IFRSs) may also result in a transition to substantially different financial reporting standards, even if the resulting standards are still called "U.S. GAAP."
In any case, it is important to remember that both publicly-held and privately-held companies would need to deal with such transitions, although possibly in differing timeframes and manners.
Regardless of the kind of transition that awaits us, the transition from current U.S. GAAP to different financial reporting standards won't be easy, fast, or cheap. The obvious challenges that would accompany a standards transition have led to obvious questions: What exactly will happen? How? When? Who will do what? And how much will it all cost?
In response to such questions, many stakeholders in the financial reporting supply chain have begun to express the vague-but-confident opinion that market forces will resolve any issues that may arise from a transition to different financial reporting standards. The expression of such an opinion became increasingly common after March 6, 2007, when the SEC held a roundtable discussion to solicit and obtain feedback from stakeholders in the financial reporting supply chain regarding the SEC's then-contemplated acceptance, from "foreign private issuers" (FPIs), of financial statements prepared using IFRSs as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. GAAP. That roundtable can be credited with convincing many people in the U.S. that significant changes in financial reporting standards were indeed coming.
But back to the focus of this post: Can we rely on "market forces" to resolve the many issues that will arise as the United States transitions to different financial reporting standards? My answer is no. That's not to say that market forces won't play a role in resolving the issues that will arise; I simply reject the notion that market forces alone will lead us to desirable resolutions of those issues. Here's why . . .
From a micro-economic perspective, market forces are efficient and effective at producing desired outcomes for market participants when
Unfortunately, these conditions generally don't exist in the markets that so many folks are relying on to resolve the issues that will arise as the U.S. transitions to different financial reporting standards. And it is for this reason that market forces alone should not be relied on to solve the problems associated with Convergence or any other kind of transition to different financial reporting standards in the United States. In my opinion, it is precisely the lack of the above conditions that represents one of the most fundamental challenges that the U.S. faces in attempting to move towards a future of improved, converged standards.
In my next post, I will examine a kind of market that is perhaps the most relevant to the challenges of transitioning to different financial reporting standards: the market for education. Specifically, I will illustrate how education markets generally fail to exhibit the above conditions. And I will propose an approach to transitioning to different financial reporting standards that relies on sound principles of supply-chain governance rather than on blind faith in free-market economics, i.e., an approach to fostering the market conditions described above before relying on market participants to do what comes naturally to them.