08 July 2016

ICAEW´s study on financial reporting around the world

The ICAEW has published its paper on ‘Incentives and institutions in accounting: thinking beyond standards’. Local institutional differences are therefore a threat to the adoption of uniform accounting standards globally.

On a naive view of financial reporting, how it is done is determined simply by the requirements that govern it; for listed companies these days the key requirements are usually accounting standards. In fact, because of the subjective choices that accounting inevitably involves, it is shaped by a variety of different contextual features. A full understanding of how financial reporting works in practice therefore requires a full understanding of its context: the relevant institutions and the incentives of particular firms and their managers. This message emerges clearly from the research surveyed in ICAEW´s 2015 report The effects of mandatory IFRS reporting in the EU: a review of empirical research.

As the incentives and institutions that influence accounting outcomes vary among firms and among jurisdictions, it is unrealistic to expect financial reporting around the world to be completely comparable. This does not mean that the ICAEW should not seek agreement on international accounting standards, but it does mean that the goal is increased comparability – or maintaining an achieved level of increased comparability – rather than complete comparability.

The improvement of the quality of financial reporting requests not only the technical requirements that govern it, but also the incentives of those who prepare accounts and the surrounding institutions – auditing, corporate governance, enforcement, the legal system, the educational system, and so on. This implies that there are benefits in a regulatory structure that, as with the UK’s FRC, has responsibility for auditing and corporate governance as well as for financial reporting, and for enforcement as well as for rule making.

This way of thinking about financial reporting brings greater realism, but also greater complexity, to the task of deciding what the content of financial reporting requirements should be and how they should be enforced. What is clear is that financial reporting needs to be thought about in its context. This creates challenges both for those who wish to understand it through research and for those who engage in policy debates on how and whether it should be reformed. They need to disentangle, so far as this is possible, the effects of financial reporting requirements, their enforcement, and other contextual factors.

Globalisation of capital and product markets will continue to exert pressure for increasing international comparability in financial reporting. However, because of continuing institutional differences between countries:

• some countries may not adopt IFRS in the near future;

• some countries are likely to want to keep at least some differences in local requirements;

• to discourage local differences, IFRS may be amended to reflect issues that are of primarily local importance; and

• comparability of IFRS financial statements will be affected.

Because of differences in incentives at the firm level:

• countries are unlikely to require IFRS as issued by the IASB to be adopted by all firms

regardless of size, ownership and legal status; and

• comparability of financial statements will be affected. This is true for all financial reporting requirements, not just IFRS.

Full report

 

© ICAEW - Institute of Chartered Accountants in England and Wales