business and politics noelke the globalization of accounting standards

Volume 7, Issue 3 2005 Article 1

Business and Politics

Introduction to the Special Issue: TheGlobalization of Accounting Standards

Andreas Nolke

Recommended Citation:Nolke, Andreas (2005) "Introduction to the Special Issue: The Globalization of AccountingStandards," Business and Politics: Vol. 7: Iss. 3, Article 1.DOI: 10.2202/1469-3569.1140

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Introduction to the Special Issue: TheGlobalization of Accounting Standards

Andreas Nolke

Abstract

We are currently witnessing the evolution of global accounting standards, as developed bythe International Accounting Standards Board (IASB). This is a remarkable development, not onlybecause accounting standards are relevant for all business operations. Whereas accountingstandard-setting has previously been a task of national authorities, the process will now bemanaged internationally by a London-based organisation whose parent foundation is a privatecompany incorporated in the US state of Delaware and mainly financed by the Big Fouraccounting firms. Furthermore, the US appear to be willing to accept foreign standards that arequite different from their own Generally Accepted Accounting Standards (GAAP). This does notonly contradict a widespread perception that equals globalization with Americanization, but alsooffers a remarkable contrast to US unilateralism in other policy fields. Finally, we are also amidsta major change in the substance of accounting standards, as indicated by a shift from historic costto fair value accounting within the work of the IASB. This special issue of Business and Politics isdevoted to a systematic explanation of these developments, drawing on concepts fromInternational Relations, International Political Economy and Systems Theory.



Introduction to the Special Issue

On 1 January 2005, all publicly listed companies in the European Union started using International Financial Reporting Standards (IFRS) written by the International Accounting Standards Board (IASB). Some 70 other countries have also adopted IFRS. In April 2005, the US and the EU came to a basic agreement to mutually accept IFRS and US Generally Accepted Accounting Principles (GAAP), thereby creating a roadmap towards truly global accounting standards. These developments are important on three accounts:

Firstly, whereas accounting standard-setting has previously been a task of national authorities from the private or public sector, the process will now be managed internationally by a London-based organisation whose parent foundation is a private company incorporated in the US state of Delaware and mainly financed by the Big Four accounting firms. We are thus witnessing a transfer of regulatory authority from national to global and, in many cases, from public to private. Given the wide repercussions of recent corporate scandals, it is puzzling that accounting regulation apparently can be entrusted to a private organization.

Secondly, the case of accounting standards is fairly unusual since the US are finally willing to accept foreign standards, although they had resisted all earlier calls to harmonize their GAAP with international standards. This does not only contradict a widespread perception that equates globalization with Americanization, but also offers a remarkable contrast to US unilateralism in other policy fields. The move by the US to bring its own regulations more in line with international standards is even more surprising if we take into account that there are considerable differences between the principles-based standards of the IASB and the highly intricate rules-based system in the US.

Thirdly, we not only witness a change in the mode of regulation, but also in its substance. Traditionally, there have been considerable differences within the contents of accounting standards, even within the OECD-world. So accounting standards in continental Europe traditionally tended towards debtor-interests. Anglo-Saxon standards, in contrast, share a much more investor-friendly view. Still, there are substantial differences within the Anglo-Saxon world, in particular between the rules-based standards of US GAAP and the principles-based standards of the IASB. To complicate matters, there is also an important inter-temporal variation within the Anglo-Saxon accounting community, caused by a shift from historic cost to fair value accounting within the work of the IASC/IASB.

In spite of the overall significance of these developments, and of the current public focus on accounting stemming from recent financial scandals involving companies such as Ahold and Parmalat, Enron and WorldCom, the politics of international accounting standard setting have hardly been explored. It

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Nolke: Introduction to the Special Issue: The Globalization of Accounting Stan



is only recently that scholars have begun to reflect on the political dynamics of international accounting standard setting,1 and the implications of the adoption of IASB standards for the political economy of the European Union.2 Business and policy professionals have also highlighted the significance of global accounting standards convergence.3 This special issue of Business and Politics is devoted to a systematic study of these processes. All four articles deal with one common theme, namely recent attempts to set global accounting standards. Still, each of the contributions focuses on a different empirical aspect and is written from a slightly different theoretical perspective

Tony Porter places the issue of accounting internationalization into the context of current discussions on globalization and global governance in general, and transnational private governance in particular. He demonstrates the crucial role of two types of authority that are becoming increasingly important relative to the public authority that traditionally has been the only recognized type in international affairs: private and technical authority. He suggests that public, private and technical authority are linked not through the erasure of one by another, but rather through a process of politicized functional differentiation, involving the transformation of multi-functional units into a set of more autonomous units.

Leonardo Martínez-Díaz documents the rise of the International Accounting Standards Committee (IASC) from its beginning until its breakthrough and transformation towards the IASB in 2001. He demonstrates how an epistemic community finally succeeded in establishing itself as an important regulator, by creating broad-based coalitions with important international organizations and the most important national regulator, the US Securities and Exchange Commission. In the process, this epistemic community was very much supported by both structural and temporal changes in global financial markets, including the Asian financial crisis.

Sarah Eaton’s contribution is focused on the more recent history of the IASB, and in particular its relationship with the US regulatory authorities. Drawing on social constructivist theories developed within International Relations, she demonstrates how another crisis – caused by the massive corporate scandal of Enron as well as the demise of Arthur Andersen – has led to a rather unusual policy shift of the US government, towards a far more receptive stand on standards that do not originate from the US. Based on recent contributions to International Relations (IR) theory that emphasize the influence of scope conditions on patterns of governance her research suggests that private-sector

1 Mattli and Büthe (2005). 2 Dewing and Russell (2004). 3 Journal of International Law and Business (2005).

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Business and Politics, Vol. 7 [2005], Iss. 3, Art. 1

DOI: 10.2202/1469-3569.1140



international institutions, often quite weak in relation to leading states, find that they have relatively more influence in times of uncertainty or crisis.

Finally, James Perry and Andreas Nölke take a political economy perspective on current accounting standard-setting. They argue that the process not only signals a major shift in the mode of governance (towards private authority), but also in the substance of what is being governed. In political-economic terms, the most significant change the IASB brings to accounting is an increased reliance on market values in the form of so-called “fair value accounting”. This accounting paradigm represents a financial perspective on business operations. Perry and Nölke demonstrate that this perspective is matched by process and structure of international accounting standard-setting, based on a network analysis of IASB committee memberships. The article thus links substance to governance and in doing so also provides an empirical measure of private-sector influence in the formal IASB policy network.

All articles within this special issue share a common “dependent variable”: They all seek to explain why IFRS have become the (nearly) global accounting standards. Each focuses on a different part of the puzzle: the choice of private and technical authority as the focus of harmonization (Porter), the timing and the success of the transformation from the IASC/IASB from a center of best practice to global regulator (Martínez-Díaz), the increasingly positive attitude of US regulators towards IFRS (Eaton) and the political economy of fair value accounting as a core concept within IFRS (Perry/Nölke). Thus, articles care both about the (private and technical) mode of accounting standard governance (Martínez-Díaz and Porter), and about its substance, particularly the shift from a rules-based to a principles-based system (Eaton), and from historic-cost to fair-value accounting (Perry/Nölke).

Similarly, all articles share the same set of “independent variables”, broadly conceived. They all highlight the importance of two core factors, the structural evolution of global financial markets and the importance of the knowledge of “technical authority” (Porter) or, more specifically, an “epistemic community” (Martínez-Díaz). Crises in financial markets have triggered important steps in the evolution of international accounting standards, such as the Asian crisis for the transformation from IAS to IFRS (Martínez-Díaz) and the Enron crisis for the policy shift of the US government (Eaton). At the same time, long-term structural changes in financial markets have not only supported the structural power of the US SEC as “financial hegemon” (Martínez-Díaz) and led to an increased globalization of accounting (Porter), but also strengthened the financial sector vis-a-vis other business sectors (Perry/Nölke). Together, these changes have empowered the private and technical authority of an epistemic community that consists of (predominantly Anglo-Saxon) accounting specialists with strong personal linkages to the Big Four and financial business in general.

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Finally, all articles share a common aversion to the usual state-centric theories that are still dominant in International Relations and International Political Economy. Not only the allocation of rather important regulatory authority to a private institution, but also epistemic communities and financial markets as main driving forces behind this allocation defy the conventional category of a given national interest. This special issue therefore is an important contribution to the study of the transnational interactions between firms and political actors. Our contribution is relevant for four audiences in particular:

(1) The case of accounting regulation is especially relevant for scholars researching interest intermediation and business lobbying, in particular to those focussing on the influence of business on regulation above the nation state and on international standard-setting.4 What stands out in comparison to other issue areas is the strong role of the (accounting) profession and of a very narrow group of private actors (the Big Four) in the process of formal rule setting.

(2) International accounting regulation furthermore is also one of the most striking cases of private authority in international affairs,5 given that the rulings of a private body are being made obligatory for more than 7000 listed companies in the EU alone. Together with auditing, accounting standards are the only private regulations so far that the G7 Financial Stability Forum has adopted for its “12 Standards for Sound Financial Systems”;6 in all other cases the issuing bodies are intergovernmental organizations such as the IMF or OECD. Although there are some references to accounting in the literature on the increasing role of private actors in global economic governance,7 it is rarely studied in much detail.

(3) Accounting is also an important cornerstone of corporate governance and of the varieties of capitalism in more general.8 Our set of articles documents the political struggle between representatives of different systems of corporate governance and details the implications of recent accounting standards on the power balance within companies.

4 Braithwaite and Drahos (2000); Greenwood (2003); Mattli (2003). 5 Cutler, et al. (1999); Biersteker and Hall (2002); Sinclair (2005). 6 FSF (2002). 7 Strange (1996), pp.135-146; Sassen (1999), pp. 413-414; Braithwaite and Drahos (2000), pp. 121-2; Woods (2002), p. 31; Germain (2004), p. 15. 8 Hall and Soskice (2001); Gourevitch and Shinn (2005).

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DOI: 10.2202/1469-3569.1140



(4) Finally, our argument is also of interest to accounting scholars. Most studies on accounting standard-setting take a rather apolitical perspective on the process and substance of regulation. Only few authors adopt a more critical perspective, predominantly by analyzing accounting as a social practice.9 If political aspects are explicitly taken into account, they mostly remain limited to rather conventional accounts on how lobbying efforts by various actors affect international accounting standard-setting.10

This special issue deals with business strategies to maximize influence on regulatory politics, but also with transnational private and technical authority as a particularly innovative form of business regulation. As a detailed case study on this increasingly prominent form of regulation, the relevance of the analysis in these articles goes beyond the realm of accounting since it draws on and develops diverse theoretical concepts developed in International Relations and International Political Economy. Within transnational private authority, non-state actors co-operate across borders to establish rules and standards accepted as legitimate by agents not involved in their definition. Non-state actors not only formulate norms, but also often have a key role in their enforcement. The current privatization of rule setting and enforcement goes much further than traditional lobbying in allowing private actors an active role in regulation itself. The contributors to this special issue identify the particular conditions under which this type of authority becomes relevant.

Finally, the issue of accounting standard internationalization is also important to policy makers, business and other social constituencies. Heterogeneous standards are not only a hindrance to globalized capital markets, but also limit the transparency of financial statements to investors and regulators. And, as indicated by the contribution by James Perry and Andreas Nölke, current changes in the substance of accounting regulation may also affect the power balance between different groups of agents within corporations, mostly to the advantage of shareholders.

9 Power (1997); Hopwood and Miller (1994). 10 Kenny and Larson (1995); van Lent (1997), Journal of International Law and Business (2005).

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Colophon

Andreas Nölke Amsterdam Research Centre for Corporate Governance Regulation Vrije Universiteit Amsterdam De Boelelaan 1081c 1081 HV Amsterdam The Netherlands [email protected]

Research funding from the Netherlands Organisation for Scientific Research (NWO) is gratefully acknowledged.

References

Braithwaite, John and Peter Drahos. 2000. Global Business Regulation. Cambridge: Cambridge University Press.

Cutler, A. Claire, Virginia Haufler and Tony Porter eds. 1999. Private Authority and International Affairs. Albany: State University of New York Press.

Dewing, Ian P. and Peter O. Russell. 2004. “Accounting, Auditing and Corporate Governance of European Listed Companies: EU Policy Developments Before and After Enron”. Journal of Common Market Studies 42 (2): 289-319.

FSF. 2002. 12 Key Standards for Sound Financial Systems, Financial Stability Forum.

Germain, Randall. 2004. Finance Governance and the Public Sphere: Recent Developments. IPEG Papers in Global Political Economy No. 10. International Political Economy Group, British International Studies Association.

Gourevitch, Peter and James P. Shinn. 2005. Political Power and Corporate Control: The New Global Politics of Corporate Governance. Princeton: Princeton University Press.

Hall, Peter A. and David Soskice eds. 2001. Varieties of Capitalism. Oxford: Oxford University Press.

Greenwood, Justin. 2003. Interest Representation in the European Union. Houndmills: MacMillan.

Hall, Rodney Bruce and Thomas J. Biersteker eds. 2002. The Emergence of Private Authority in Global Governance. Cambridge: Cambridge University Press.

Hopwood, Anthony G. and Peter Miller. 1994. Accounting as Social and Institutional Practice. Cambridge: Cambridge University Press.

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Journal of International Law and Business. 2005. The International Convergence of Accounting Standards. Spring 2005 Symposium Issue. Volume 25, Number 3.

Kenny, S. York and Robert K. Larson. 1995. “The Development of International Accounting Standards: An Analysis of Constituent Participation in Standard-Setting.” International Journal of Accounting 30 (4): 283-301.

Mattli, Walter. 2003. “Public and Private Governance in Setting International Standards.” In Governance in a Global Economy: Political Authority in Transition, edited by Miles Kahler and David A. Lake. Princeton: Princeton University Press.

Mattli, Walter and Tim Büthe. 2005. “Accountability in Accounting? The Politics of Private Rule-Making in the Public Interest.” Governance 18(3): 399-429.

Power, Michael K. 1997. The Audit Society. Oxford: Oxford University Press. Sassen, Saskia. 1999. “Making the Global Economy Run: The Role of National

States and Private Agents.” International Social Science Journal 51(3): 409-416.

Sinclair, Timothy J. 2005. The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness. Ithaca: Cornell University Press.

Strange, Susan. 1996. The Retreat of the State: The Diffusion of Power in the World Economy. Cambridge: Cambridge University Press.

Van Lent, Laurence. 1997. “Pressure and Politics in Financial Accounting Regulation: The Case of Financial Conglomerates in the Netherlands.”Abacus 33(1): 88-114.

Woods, Ngaire. 2002. “Global Governance and the Role of Institutions.” In Governing Globalization, edited by David Held and Anthony McGrew. Cambridge: Polity.

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