2.8 Uniformity and comparability of financial reporting standards

When in 2002, the European Commission required all member states to adopt the IFRS, it had the objectives of promoting uniformity, transparency and comparability of financial statements. Uniformity of standards can be defined as applied equally to all listed companies.2 Comparability exists when “two firms face similar economic outcomes, the firms report similar accounting amounts.”3 The IFRS has eliminated many of the different accounting practices among the member states which contributed to increased comparability of financial reports. However, differences in accounting practice still remain and are the result of the IFRS’s different interpretations and of the fair value accounting.4

The adoption of a single international financial reporting framework as a result of the convergence of the two major financial reporting standards, the IFRS and the US- GAAP, would facilitate cross-border business and efficiency in international capital markets. There are however, obstacles to full comparability of financial reports. Zeff (2007) refers to four factors that could interfere with worldwide “genuine” comparability of financial accounting standards. These are, the business and financial culture, accounting culture, auditing culture and regulatory culture. To overcome these obstacles, Zeff refers to the need of combining “enlightened leadership and commitment from the accounting profession”, academics, C-suite level executives from audit firms and corporate sector, the regulator, the Government, the European Commission, the SEC and through their combined efforts promote “genuine international convergence and comparability” of financial accounting standards.5

Another opinion is, given the past experiences of development of financial accounting standards, full comparability should not be expected or even aimed at; aiming at comparability would trigger rules-based standards, hinder a principles- based and less complex financial reporting framework.6

One may also ask, does either a principles-based or rules-based financial accounting standards allow higher comparability of financial statements? “A principles- based standard relies on judgments” and therefore, is “harder to defeat”, when compared to a rules-based standard.78However, a principles-based system requires some effort from regulators to avoid requiring a specific reporting method and thus transforming the principle in a rule.9

As for improvements in the convergence of financial standards, International Accounting Standards and the IFRS can be seen as a step forward towards the convergence of the financial accounting reporting standards, however, comparability is even a step further ahead.10 Openness and flexibility might be responsible for the challenge of comparing financial statements.

If companies do not specify in advance which accounting standards they use, it can create uncertainty, insecurity and the lack of comparability can generate costs for both the companies and the users of their disclosed information.11 A uniform set of accounting standards, as pointed out by Ball, R.,12 has two other advantages: i) it only needs to be developed once, therefore, there is no additional cost for additional users; ii) it protects auditors from managers seeking the best possible audit, as the auditors will have to enforce the same accounting standards.

Markets are increasingly globalized, so are economics and politics, which drives financial markets integration, financial reporting international convergence and increases comparability of information disclosed. However, the lack of comparability of accounting standards is expected to a certain extent, as countries differ economically, politically, socially and culturally.

The EU Member States have agreed, as a result of their EU membership, to transfer in certain areas some of their powers to the EU institutions. In accordance, the EU institutions would make supranational binding decisions in their legislative and executive procedures. However, experience has shown that when a member state does not agree with a certain EU rule, for example, refusing to enforce it, the EU had in result loosened its rules. Based in these facts, Ball (2006) drew the following lesson: “global rules will prevail so long as they do not run foul of important local interests.”[then questioning] Why would financial reporting rules be any different?” It is indeed a valid possibility that with the enforcement of the IFRS, national interests do also prevail.

As for the particular use of the IFRS, if these are implemented consistently, comparability of information will be higher and information costs and risks will both be lower to investors.13 How the IFRS are enforced and the extent to which they are implemented are uncertain. Given the differences in local politics, economy, society and culture, and given the fact that the application and auditing of the IFRS involves judgments, there is a possibility of uneven implementation of the IFRS across countries. Besides, the different stages of development of accounting and auditing increases the risk that countries with less developed accounting and auditing professions will only adopt the IFRS “in name”.14 Could a global enforcement institution be a solution for effective and consistent implementation of the IFRS? Keeping in mind Fukuyama’s arguments previously discussed in section 6, when discussing efficiency and legitimacy, a global enforcement institution could be developed if a balance between efficiency and legitimacy is achieved.15 Ball (2006) gives a suggestion for a solution based on the Spence signaling model, under which countries that adopt the IFRS but do not effectively implement it, would be penalized or prohibited from using the IFRS.16