International Accounting Standards in Capital Markets

Judith A. Hora Rasoul H. Tondkar Aj ay Adhikari

Capital markets have become increasingly globalized due to advances in technology and communications and the growing trend of national governments initiatives to deregulate their capital markets. Globalization of the worlds capital markets necessitates the need for comparable and reliable financial information to support the varied transactions and operations of the markets. Regulatory initiatives have been undertaken at the national, bilateral, regional, and international levels to deal with the problems created by diversity in accounting reporting in international capital markets. This paper discusses the progress and impediments faced at each level in attempting to harmonize accounting reporting requirements, describes interactions between regional and international harmonization efforts, and suggests the most desirable and feasible course of action to achieve global harmonization in international capital markets. Efforts of the International Accounting Standards Committee (IASC) and the International Organization of Securities Commissions (IOSCO) have focused on a common goalhaving financial statements used in cross-border listings prepared in accordance with international accounting standards as an alternative to national accounting standards. Although no international mechanism exists for enforcing the accounting standards of an international body, IOSCO is the most likely organization to implement conformance. harmonization: international capital markets: interactions Key Words: and global harmonization efforts; IOSCO; IASC. between regional

In the last decade, capital markets have become increasingly globalized due to advances in technology and communications which have effectively linked the

Judith A. Hora l and Rasoul H. Tondkar l Virginia Commonwealth University, Richmond, 23284-4000. Ajay Adhikari l The American University, Washington, DC 20016-9044. Journal of International Accounting Auditing & Taxation, 6(2): 17 I- 190 Copyright 0 1997 by JAI Press, Inc. All rights of reproduction

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ISSN: 1061-9518 in any form reserved.

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markets of the world. Due to the growing trend of national governments to deregulate their capital markets, investors are increasingly interested in foreign equities as a means of enhancing investment performance (Choi and Levich 1994). Globalization of the worlds capital markets has brought to the forefront the increasing need for comparable and reliable financial information to support the varied transactions and operations of these markets. Diversity in accounting reporting (defined as measurement, presentation, and disclosure) affects capital market participants. In an extensive survey of capital market participants, i.e., investors, corporate issuers, investment underwriters, market regulators, and rating agencies, almost one-half of the respondents stated that their capital market decisions were affected by accounting diversity (Choi and Levich 199 1b). In the absence of comparable accounting principles and disclosure practices, analyzing foreign financial statements is difficult for investors. For companies seeking to raise capital in foreign markets, complying with foreign disclosure and reporting requirements often becomes a cumbersome and costly process. For regulators faced with the dual responsibility of protecting domestic investors and attracting foreign companies to the domestic market, developing reporting and disclosure requirements for foreign companies becomes a fine balancing act. Regulatory initiatives have been undertaken at many levels to harmonize accounting reporting requirements in capital markets to facilitate cross-border listings. The purpose of this paper is to review recent developments in efforts to harmonize accounting reporting requirements, particularly those pertaining to the harmonization of global stock exchanges.

RESPONSESTOACCOUNTINGDIVERSITYINCAPITALMARKETS

Attempts to alleviate the problem of diversity in accounting reporting in the capital markets are currently being made at the national, bilateral, regional, and international levels.* This paper discusses the progress and impediments faced at each level in attempting to harmonize accounting reporting requirements in capital markets by analyzing specific examples from the U.S. (national level), Canada-U.S. (bilateral level), African Accounting Council, the Association of Southeast Asian Nations, and European Union (regional level), and the International Accounting Standards Committee (international level). While there are other countries and organizations engaged in promoting harmonization, the above examples were selected because they represent some of the more prominent initiatives at each of the levels. The paper concludes with a discussion of the interaction of harmonization efforts at the different levels.

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National Level-United States

Competitive pressures have forced capital market regulators in many countries to reassess accounting reporting requirements for foreign issuers in an effort to attract foreign listings. In 1986, the Securities and Exchange Commission (SEC) allowed the New York Stock Exchange (NYSE) to modify its interimreporting requirement by pe~itting foreign companies to file inte~m-repo~s on a semiannual rather than on a quarterly basis as required of U.S. companies. More recently, in an effort to reduce reporting burdens for foreign companies, the SEC adopted initiatives which (a) extend the time periods for updating financial statements; (b) allow foreign registrants more ~exibility when selecting reporting currequirements for foreign registrants rency; and (c) simplify reconciliation (Journal of Accountancy 1995). Any foreign issuer seeking to sell or list securities in the U.S. capital markets is required by the SEC to provide a restatement or reconcilia~on of its ~nan~ial statements to US. GAAP. The SEC has been under pressure from the NYSE and foreign companies to accept registration statements from foreign companies using their local GAAP financial statements. The SEC argues that the U.S. accounting and disclosure systems set the minimum standard for reporting and any compromise would jeopardize the entire system by decreasing the protection to U.S. investors (Sack et al. 1995). This posture imposes additional costs on non-U.S. issuers and some are not willing to bear these costs (Choi and Levich 1991a, 11). This requirement is a powerful disincentive to non-U.S. issuers for listing their shares on U.S. markets. It is understandable that foreign corporations oppose reconciling their financial statements to U.S. GAAP. Foreign corporations believe reconciliation is confusing to investors, to . . . tax authorities and politicians and to the issuers various other constituencies. In addition, [foreign corporations] believe the quantitative reconciliation requirement unde~ines the credibility of their published financial statements in their home country (Longstreth 1994, 90). Ignoring the issue of international diversity is forcing capital market business offshore-to London, Frankfort, Tokyo and elsewhere (Cochrane 1992). It has been suggested that the SEC should exempt the so-called world-class non-U.S. companies from reconciliation requirements for listing in U.S. markets in order to maintain the U.S. markets position as the leading capital market center in the world and to keep pace with capital market growth (Cochrane 1992; Longstreth 1994). The proposal would allow world-class foreign issuers-defined by size of revenues, market capitalization, and trading volume outside the U.S.-to register securities with the SEC by following all of the SECs disclosure requirements except for the reconciliation requirement. Under this proposal, the local financial statements would be accepted for a U.S. capital market listing if the companies include a written (n~ative) explanation of the material differences between local accounting practices and U.S. GAAP in lieu of the quantitative rec-

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onciliation requirement (Cochrane 1992). The exemption would better protect the U.S. investors because they would be able to access securities of non-U.S. issuers on U.S. exchanges, and be protected by the securities laws of the SEC, rather than participating on non-U.S. exchanges where investors incur additional costs because of foreign custody, clearance, and settlement arrangements (Cochrane 1992). The rationale behind the world-class proposal is that the reconciliation is not necessary to protect investors. A study by Bhushan and Lessard (1992) concluded that reconciliation is of less importance to professional investment managers when compared to more uniform disclosure. Since the cost of reconciliation is burdensome, emphasis on mutual recognition subject to minimum standards of disclosure and presentation would be more effective (Bhushan and Lessard 1992). The proposal to exempt world-class foreign issuers from reconciliation was rejected by the SEC (Longstreth 1994). Although maintaining its insistence on reconciliation to U.S. GAAP, the SEC has announced initiatives to (a) expand the availability of short-form prospectuses and shelf registration to more foreign companies; (b) streamline reconciliation requirements for certain items (e.g., requiring reconciliation of the two most recent fiscal years for first-time foreign issuers rather than five years); and, (c) expand the range of companies eligible to use the multijurisdictional system with Canada (IASC 1993). Additionally, the SEC no longer requires foreign issuers that use IASs to provide reconciliations to U.S. GAAP with regard to the amortization of goodwill, the distinction between acquisitions and poolings of interests, and subsidiaries operating in a highly inflationary economy (IASC 1995a). Tosummarize,increasedcross-borderlistingshaveexertedpressureonnational market regulators, in this example, the SEC, to simplify and harmonize accounting disclosures and listing requirements. The dilemma facing national regulators is that they cannot bend the regulations for foreign companies without offering similar concessions to domestic firms. Responding to competitive pressure to attract foreign listings, national stock exchange regulators have made some progress toward accommodating foreign issuers diverse disclosure systems, but may have unintentionally created another obstacle. The uneven pace at which harmonization efforts achieve acceptability across countries creates its own barriers (Wyatt 1992b). A coordinated multinational effort by representatives of national regulators focused on harmonization among capital markets is more likely to achieve the goal of cross-border offerings and listings, and lead to more efficient allocation of resources. Bilateral Level or Mutual Recognition The multijurisdictional disclosure system (MJDS) between Canada and the U.S. is a good example of progress on coordination of accounting standards in the

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capital markets on a bilateral level.3 The mutual recognition between the SEC and Canadas Ontario Securities Commission acknowledges reciprocity for certain large-size companies.4 According to the agreement, a company listed on exchanges subject to regulation by either Securities Commission may satisfy the cross-border listing requirements by providing the same registration documents filed with the home country. The objective of the MJDS agreement is to facilitate cross-border offerings in Canada and the U.S. by reducing the burden of disclosure for new securities issues. Although it appears that issuing expenses are lower in cross-border listings as a result of the MJDS agreement, differences remain in the respective GAAP and corporate disclosure practices of the two countries. The mutual recognition concept appears simple-market regulators of different countries engage in negotiations seeking mutual recognition of each others accounting standards to facilitate multinational offerings. However, in some mutual recognition agreements between two countries, it is not only the regulators who are involved in the negotiation process. Other constituents who are affected by the mutual recognition are also actively involved in arriving at the final agreement. As such, the consensus building resulting from negotiations can be a lengthy process. The MJDS, for example, took more than two years of intense debate among all of the concerned parties-investors, issuers, securities dealers, lawyers, and the regulatory bodies of the two countriesAespite the fact that differences in accounting standards and disclosures between the U.S. and Canada are relatively minor (Fisher 1994). Negotiations between two countries with more significant differences in accounting systems could be more lengthy and more difficult to accomplish. Cooperation between the standard-setting organizations in the U.S. and Canada (with an observer from the Mexican Accounting Principles Commission) is apparent by the current progress on the joint project on disaggregated data disclosures. Similar standards on disaggregated data disclosures already exist in Statement of Financial Accounting Standard No. 14 and Canadian Institute of Chartered Accountants Handbook Section 1700. Users in both Canada and the U.S. had requested more detailed information regarding disaggregated data disclosures. Since the need to reconsider the extent of disclosures required in financial statements of both countries arose simultaneously, the FASB issued an Invitation to Comment jointly with the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) (FASB 1995). The resulting document was the first step in a joint standard-setting project that will attempt to develop common standards on disaggregated disclosures by sharing the written responses and resulting analyses in addition to joint public hearings. The tentative conclusions of the FASB and the AcSB were distributed for exposure and comment in January, 1996. The FASB Exposure Draft is identical to the Canadian Exposure Draft except for differences in the scope of the standards, the effects of differences in GAAP between the two countries in other areas, and differences in

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terminology and style (CICA 1996). The AcSB proposed that the Canadian standard should apply to public enterprises and all co-operative business enterprises, deposit taking institutions and life insurance enterprises, whereas the U.S. standard would apply only to public enterprises (CICA 1996). Although bilateral cooperation between Canada and the U.S. is well-developed, it must be remembered that the cultural and economic ties between the two countries have resulted in strikingly similar disclosure standards and goals. Both systems have the primary goal of investor protection through well-developed requirements for capital markets and have reliable methods for enforcing the requirements. The nature of the global capital markets may force other countries to follow suit but not without considerably more effort and time commitment since accounting systems, as well as economic and political systems, are more diverse among other countries. Regional Level Regional cooperation in narrowing differences in accounting standards is driven by increased economic cooperation and reductions in regional trade barriers. Attempts at accounting harmonization by organizations such as the African Accounting Council (AAC), the Association of Southeast Asian Nations (ASEAN), the North American Free Trade Agreement (NAFTA), and the European Union (EU) enhance foreign investment, regional commerce, and business cooperation. The objectives of regional cooperation include (a) increasing the free movement of goods, labor and capital, (b) eliminating or reducing trade barriers, and (c) harmonizing accounting reporting requirements on the respective countries stock exchanges. Among the developing nations, AAC and ASEAN are examples of regional bodies that, among other things, have attempted to harmonize accounting standards among its member states. The AAC was established in 1979 with the aim of coordinating accounting standards among African nations. After the AAC received official recognition as a specialized organ of the Organization of African Unity, expectations were heightened that the body would exert some influence in harmonizing accounting systems among African nations. However, the AAC has not made any significant progress to date. The body is largely composed of public sector accountants who have little influence over the regulation of accounting matters in their respective countries. The council has no technical staff and has largely been inactive, meeting only on a very sporadic basis (Wallace 1990b). A regional body that has received increasing attention is ASEAN, a regional political and economic alliance comprised of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Formed in 1967, the groups goal is to create a strong economic alliance culminating in an ASEAN Free Trade Area. Consistent with this goal, the ASEAN Federation of Accountants (AFA), an

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organization of the professional accounting bodies of the ASEAN member states, initially devoted resources and time to regional harmonization of accounting standards among its member states. However, cognizant of the institutional differences that exist in its member states and the strong influence of international accounting standards on domestic stand~d-setting in most ASEAN countries, the AFA has de-emphasized its vision of regional harmonization of accounting standards. The AFA is now concentrating on promoting regional cooperation on issues such as accounting education and development of training and professional standards for accountants in ASEAN countries (Saudagaran and Diga 1997). Among the Western developed nations, NAFTA and the EU are examples of regional alliances that are seeking to coordinate accounting standards among its member states. In the wake of NAFTA, the accounting standard setting bodies in Canada, Mexico, and the U.S. have completed a joint study to analyze the similarities and differences in the three countries accounting standards and financial reporting practices. The impetus for this joint study was necessitated by NAFTAs objective of eliminating or reducing tariffs and other trade and investment barriers in order to unify the three countries as a single trading block (CICA et al. 1995). In addition to analyzing the similarities and differences among accounting standards, the objectives of the study also included identifying areas where progress toward harmonizing these standards could be made, and providing users of financial statements with information that will enhance their ability to compare companies in the three countries (CICA et al. 1995). Although each country has regional interests, they are committed to support the IASC in its attempt to harmonize the accounting standards globally. All three countries agree that harmonization should occur under the leadership of the IASC. The most visible progress in h~onizing accounting standards at the regional level has been the European Unions (EU) efforts to harmonize the accounting and disclosure requirements of member states. Accounting requirements in the EU are contained in the accounting directives issued by the European Co~ssion (commission). The Fourth and Seventh Directives allow for mutual recognition on the basis of minimum rules combined with options. Each member state implements the directives into their national law with the flexibility available in the directives to mold the implementation according to national tradition. The objective of the comp~ability of financial info~ation is effected through additional disclosure in notes to the financial statements {Van Hulle 1993). Moreover, the EU has passed three directives, the Admission, Listing, and Interim-Reporting Directives, to harmonize minimum listing and filing requirements of EU stock exchanges (Tondkar et al. 1990). The Admission Directive specifies minims conditions for admission of securities to official exchange listing in member states and minimum filing requirements for listed firms. The Listing Directive specifies the minimum listing particulars necessary for listing on an exchange in a member state to ensure that comparable information is provided.

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The objective of the Interim-Reporting Directive is to protect investors by providing regular information of listed companies by half-yearly reports. Under the three directives, both EU and non-EU companies will be able to simultaneously list on EU stock exchanges without additional significant cost and time commitments. For example, Skandia Group, a Swedish insurance company, was one of the first corporations to achieve multiple listing on EU exchanges under the new rules. In 1990, Skandia simultaneously listed on the Copenhagen Stock Exchange and the International (London) Stock Exchange using the same prospectus. Johan Bergenstjerna, chief legal officer of Skandia, estimates that the company incurred only one-fifth of the cost of a normal London exchange listing because of the multiple listing. Another Skandia source estimates that the multiple listing resulted in a savings of around $1.86 million (Corporate Finance 1990). What distinguishes the successful EU harmonization effort from efforts of other regional organizations is the EUs ability to issue directives which are binding on member states. Pronouncements of other regional bodies are only recommendations. Additionally, the EU accounting harmonization effort is part of the encompassing EU economic integration program. Therefore, it is doubtful that the success of the EU accounting harmonization program, as it relates to the capital markets, can be duplicated by other regional groups in the near future. Regional efforts at harmonization, including bilateral efforts, are more likely to succeed (1) when working between two countries where the accounting and reporting systems are similar, e.g., Canada and the U.S.; and/or (2) when the countries within a region desire the benefits of economic integration, e.g., NAFTA and the EU. The success of regional harmonization have been significant, but the extent of success is limited to the number of members in the regional groups and the exclusivity of the groups. The European Commission issues directives which facilitate an EU firm when listing on EU stock exchanges, but the directives are irrelevant if the firm is contemplating listing on non-EU stock exchanges. In fact, some have contended that regional harmonization could effectively build trading (goods and investments) fortresses, creating economic advantages for the members of the group but disadvantages for trading outside the group. The ultimate goal should be globalization of capital markets, not subsets of capital markets. International Level

Harmonization of accounting standards at the international level is rapidly gaining momentum due to the growth in capital markets spurred by technological advances in communications and gradual deregulation of national capital markets. The major players promoting harmonized standards are two international bodies: The International Accounting Standards Committee (IASC) and the International Organization of Securities Commissions (IOSCO).

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In 1973 professional bodies of accountancy from various countries formed the IASC, an independent private-sector body. Composed of representatives of 116 professional accounting bodies from 86 countries, the IASCs objectives are: 1. to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance; and 2. to work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements (AICPA 1996). As the recognized body for the development of International Accounting Standards (IASs), the IASC has issued 32 standards, of which two have been superseded. Furthermore, ten standards have been significantly revised through the IASCs Comparability/Improvements project which resulted in promoting the comparability of financial statements prepared in accordance with IASs. The adoption of IASs by the member countries is on a voluntary basis. Thus, the IASC lacks the enforcement power to require member countries to adopt its standards. IOSCO was created in 1974 in an effort to stimulate cooperation between North and South American securities regulators. It became an international organization in 1984. IOSCO is a private-sector organization established with the goal of influencing the development and regulation of the capital markets worldwide. The influence of IOSCO emanates from its membership of over 90 organizations that include securities regulators from over 50 countries. IOSCO supports the common prospectus approach, also known as the multinational prospectus approach, which seeks to develop a single disclosure document that would be acceptable for listing and filing in all participating capital markets. IOSCO does not develop its own accounting standards to be used in the preparation of financial statements for inclusion in a multinational prospectus. However, IOSCO has indicated its acceptance of IASs, under certain conditions, to be used in the preparation of a multinational prospectus. A multinational prospectus which includes financial statements prepared in accordance with one set of GAAP would significantly reduce the barriers to multinational securities offerings (IOSCO 1989). The International Federation of Stock Exchanges (FIBV), an international organization of stock exchanges with members from over 35 countries, has endorsed IOSCOs efforts to develop a multinational prospectus. Combined Efforts of IASC and IOSCO and Recent Developments IOSCO has recognized IASC as the appropriate organization to formulate accounting standards. Since securities commissions have the power to enforce

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accounting requirements, IASC has sought the cooperation of securities regulators worldwide to support the adoption of national accounting requirements that conform to IASs. Many regulators already support the approach. IOSCO has indicated that if the IASs issued by the IASC are of sufficient quality, it will urge its member countries to permit the inclusion of financial statements consistent with IASs in cross-border offerings and listings as an alternative to the use of national accounting standards (Carsberg and Sharpe 1996). The endorsement and continued support of IASC by IOSCO has been a major boost to the efforts of IASC to improve existing IASs and develop new IASs. IOSCO is playing a major role in making IASs effective by encouraging its member stock exchanges to recognize IASs and by advising the IASC on the probable acceptability of standards (Thorell and Whittington 1994)6. Originally, some of the IASs allowed users the option of alternative accounting principles to accede to countries that followed different national standards. In order to enhance the comparability of statements, IASC launched the Comparability/Improvements Project which significantly reduced the number of acceptable alternatives allowed under existing IASs. IASC hopes that the significant improvement in the quality of IASs will set the stage for adoption of IASs by capital market regulators for multinational company registrations. This hope is clearly shared by many multinational corporations. In a survey of 278 major multinationals conducted by Touche Ross International (now Deloitte & Touche) in 1990, most respondents agreed that the greatest potential benefit from the harmonization of accounting and auditing standards would be that stock exchanges around the world would accept one set of financial statements prepared in accordance with a set of internationally accepted accounting standards (Journal of Accountancy 1990). Efforts of the IASC and IOSCO have focused recently on allowing companies to list their securities on any foreign stock exchange with one set of financial statements that conform to international accounting standards and are acceptable to IOSCO. An agreement between IOSCO and IASC would offer numerous benefits to companies and investors. Currently, multinational companies can choose to raise capital in any of several countries but incur large costs to comply with different national standards. Those costs could be reduced significantly if companies did not have to collect information for reconciliations or provide two sets of financial statements. Investors will benefit by receiving high quality financial statements containing relevant and reliable information for comparison of investment opportunities worldwide. In 1993, IOSCO agreed to a list of core standards for use in financial statements of companies involved in cross-border listings. IOSCO recently has endorsed the use of the international accounting standard on cash flow statements (IAS 7), a key component of the core standards. Companies using this intemational standard will meet the requirements of foreign regulators for cash flow

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EXHIBIT 1 Status of international Accounting Standards ZAS

NO. Tideof

IAS

Accepted by IOSCO Yes/No No

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Disclosure of Accounting Policies Inventories Consolidated Financial Statements (superseded) Depreciation Accounting Information to be Disclosed in Financial Statements Accounting Responses to Changing Prices (superseded) Cash Flow Statements Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies Research and Development Costs Contingencies and Events Occurring after the Balance Sheet Date Constmction Contracts Accounting for Taxes on Income Presentation of Current Assets and Current Liabilities Reporting Financial Information by Segment Information Reflecting the Effects of Changing Prices Property, Ptant and Equipment Accounting for Leases Revenue Retirement Benefit Costs Accounting for Government Grants and Disclosure of Government Assistance Effects of Changes in Foreign Exchange Rates Business Combinations Borrowing Costs Related Party Disclosures Accounting for investments Accounting and Reporting by Retirement Benefit Plans Consolidated Financial Statements and Accounting for Investments in Subsidiaries Accounting for Investments in Associates Financial Reporting in Hyperinflationary Economies Disclosures in Financial Statements of Banks and Sirnib Financial Institutions Financial Reporting of Interests in Joint Ventures Financial Instruments: Disclosure and Presentation

I.2

Yes

Yes Yes

No3 No Yes

NNd)112
No'
Not considered by IOSCO Yes NO3 Yes No3 Yes Yes Yes Yes Yes No Not considered by 10X0 Yes Yes Yes Not considered by IOSCO Yes Not considered by IOSCO

* Status of IAS 4, Depreciation Accounting, could not be obtained. The standard is currently under revision by the IASC. * The standard is pan of the project Presentation of FinancialStatements. The standard will be revised as scheduled in the work plan Source: Correspondence (January 19, 1996) with IASC based on information from IOSCO

Norex:

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statements. In addition to IAS 7, 14 other existing IASs (a total of 15) have been accepted by IOSCO (Exhibit I). Currently, IASC has added to its work program those core standards which are not presently acceptable to IOSCO. At IOSCOs annual meeting in Paris in July 1995, IOSCO and the IASC announced an agreement on a work program between the two org~izations. Commenting on the agreement, Sir Bryan Carsberg, IASC Secretary-General, said, We are now on the brink of achieving a new kind of status-the status that comes from having the IOSCO endorsement (IASC 1995b). IOSCOs technical committee has agreed that successful completion of the work program will result in international accounting standards representing a comprehensive core set of standards. The technical committee could then recommend endorsement of the standards for cross-border capital raising and listing purposes as an alternative to the use of national accounting standards in all global markets by the end of 1999. Chairman of IOSCOs Technical Committee, Ed Waitzer, commented that IOSCO is committed to working with IASC to ensure a successful completion of the work [program] on a timely basis (IASC 1995b). An accelerated work program with a target date of March 1998 was later approved by the IASC Board at its March 1996 meeting in Brussels (IASC 1996a). International companies have indicated their desire to use IASs for reporting purposes as soon as possible. Moreover, encouragement to accelerate the work program came from members of 10X0, including the European members, the Canadian member, and the U.S. SEC (IASC 1996a). The Board also invited IOSCO to attend Board meetings through 1997 as a non-voting observer, and invited the International Auditing Practices Committee and the Public Sector Committee of the Intemationai Federation of Accountants (IFAC) to join the IASC Consultative Group (IASC 1996b). Additionally, several other recent developments have elevated the status of IASC and enhanced the possibility of the acceptance of the IASs for cross-border listings. For example, new members added to the IASC Board in 1995 included members of several national standard-setting bodies, such as the chairman of the United Kingdoms Accounting Standards Board, the former chairman of the Canadian Accounting Standards Board, the president of Indias Institute of Chartered Accountants, and a member of the Australian Accounting Standards Board (Schwartz 1996). The addition of these members will strengthen the IASC by increasing the Boards expertise and experience level while enhancing communications among national standard setting bodies and IASC. The Board also added two new members representing business: the Federation of Swiss Industrial Holding Companies and the Intemational Association of Financial Executives Institutes (IASC 1996d). These two new members, along with the current business member, the International Co-ordinating Committee of Financial Analysts Associations, wil1 make the Board cognizant of the interests and concerns of their constituencies.

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Furthermore, the European Commission has endorsed the IASCs international harmonization process. The EUs accounting directives have been successful in raising accounting standards in the EU and improving the comparability of financial statements in cross-border listing on EU securities exchanges. At the present time, however, European companies seeking capital outside Europe have to prepare a second set of financial statements or reconcile their financial results to the GAAP of the country of listing. Preparing either a second set of financial statements or a reconciliation is a costly process which confuses users and constitutes a competitive disadvantage for European firms (Commission 1995). In order to enable large European companies seeking cross-border listing outside the EU with only one set of consolidated statements, the EU considered several options (Commission 1995; IASC 1996~). The option chosen was to endorse the IASCs efforts at harmonization because only the IASC is likely to produce standards which would meet the needs for harmonization within a reasonably short time period (Commission 1995; IASC 1996d). Moreover, IASs are developed with European input to the Board, which includes representatives from France, Germany, the Netherlands, the U.K. and the Nordic Federation (IASC 1996~). The Commission believes that IASC offers the most efficient and timely solution to the problem of EU companies seeking cross-border listing outside the EU. The above initiatives and cooperative efforts among various international organizations have increased the possibility of having a multinational prospectus for cross-border listing before the year 2000.

INTERACTIONSOF REGULATORY INITIATIVES AT DIFFERENT LEVELS WITH GLOBAL HARMONIZATION EFFORTS The path to international harmonization should not be viewed as a linear process with regulatory initiatives at the national, bilateral, and regional levels (sublevels) as intermediate steps to international harmonization. While regulatory initiatives at the sub-levels can contribute to harmonization, they may also detract from international harmonization efforts because existing regulations or new regulatory initiatives may not be consistent with IASs. If inconsistent with IASs, the regulations may move the relevant unit of analysis (nation/nations/region) away from international accounting standards. At the national level, accounting requirements of a country may be inconsistent with IASs. Such a situation will not arise if countries use international accounting standards as the basis of national requirement. Several countries, such as Botswana, Brunei, Malaysia, Singapore, Thailand, andzimbabwe, use IASs as the basis of their own national accounting standards. More recently, South Africa and Australia have decided to bring all their national accounting standards in line with IASs. More significantly, the Japanese have agreed to support the IASs in the deregulatory package

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for the Japanese capital markets. The Tokyo Stock Exchange, for example, has allowed issuers from Singapore and Hong Kong to furnish financial statements based on domestic GAAP which is based on IASs in both countries (~j~u~cj~~ Times 1996). Harmonization efforts at the bilateral and regional levels may also have the potential to be competitive rather than complementary to global harmonization efforts. Harmonization efforts within clusters may be a more feasible strategy than attempts to harmonize accounting standards on a worldwide basis (Choi 1981). However, cooperation among national standard setters and governments on a regional basis may be threatening progress towards internationalization and, specifically, threatening the existence of the IASC and delaying the intemationalization of financial reporting (Denman 1994,7). As an example, a jointly developed standard will be more difficult to supersede with a subsequent international action than a single-country standard. John H. Denman of the Canadian Institute of Chartered Accountants personally commented that after he had worked with the FASB for three years on disaggregated reporting, he would shudder at the thought of going through it all again with, for instance, the European Union in another ten years (Denman 1994). As discussed earlier, the ASEAN Federation of Accountants (AFA) initially pursued a policy of fostering regional ha~onization of accounting standards. After largely an unsuccessful attempt at achieving regional accounting harmonization because of institutional differences among member countries, individual ASEAN countries actively considered IASs as the basis for their national standards.7 Currently, the ASEAN countries have de-emphasized their regional accounting ha~onization program and instead, embraced a global view of accounting harmonization (Saudagaran and Diga 1997). The possible tension between regional and global harmonization efforts has also surfaced in the context of EU harmonization. As previously discussed, the European Co~ssion specifically addressed this issue in its report titled, Accounting harmonisation: A new Strategy vis-a-vis International Harmonisation (Commission 1995). In the report, the European Commission endorsed the IASCs international harmonization process. The EU seeks to preserve its own achievements in the direction of h~onization while taking the necessary steps to ensure that existing and future IASs are consistent with the accounting directives (Commission 1995). To deal with the urgency of cross-border listings for European firms, the Commission will determine whether the IASs conform to the accounting directives. The focus will be on consolidated financial statements because of their relevance for cross-border listing. The Commission has determined that IASs are not directly transposable in all member states because of the linkage between accounting and taxation in some member states (Van Hulle 1993). If the IASs conform to the accounting directives, then the member states will analyze the IASs to determine if they conform to their national law. If there are inconsistencies, the issue will be resolved on a case-

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by-case basis between the IASC and the Commission (Commission 1995; IASC 1996~). Far from abandoning its accounting harmonization efforts, the EU is strengthening its commitment and contribution to the international standard-setting process by supporting the efforts of the IASC which appear to offer the most efficient solution to companies operating worldwide (Commission 1995; IASC 1996~). A more recent challenge to the IASC has come from the G-4 group, a previously informal working group of Australian, Canadian, U.K., and U.S. standard setters.* Although the group supports international harmonization of accounting standards, it is critical of the IASC, and, in particular, the process of international accounting standard-setting. Among its criticisms of IASC are the lack of time spent on educating board members on the issues being debated, limited research on issues being considered, limited due process, and undue influence of countries with limited technical input or expertise. While the group, so far, has restricted its activities to publishing monographs on contemporary accounting issues, some contend the group is seeking to influence the IASC to create an inner chamber that would deal with the complex accounting issues to be later endorsed by the other members of the IASC board. A more startling scenario is that the group might seek to develop and promote international accounting harmonization independent of the IASC (Kelly 1996). The potential for tension and discord between regulatory initiatives at the sub-levels and global harmonization efforts will always exist. When such tensions heighten, they may slow or even deter progress on global accounting standards. The advocates of global harmonization assert that the harmonization efforts achieved across countries at an uneven pace may create barriers to international global harmonization (Wyatt 1992b). However, others argue that harmonization efforts at the sub-levels may be complementary rather than competitive with global harmonization of accounting standards. Furthermore, tensions between the sub-levels and global harmonization efforts may also serve as a monitoring system that can raise valid concerns in the international harmonization process. For example, the IASC has formed a working group to explore ways to improve its due process system, partly, in response to concerns expressed by the G-4 group. Therefore, in one sense, friction among sub-level organizations and the IASC has helped inject discipline and accountability into the international accounting harmonization process. Ultimately, the success of the international harmonization movement depends on how well the IASC manages and responds to such challenges.

UNRESOLVEDISSUES ANDCHALLENGES
Assuming that IOSCO endorses the IASs which emerge from the accelerated work program, there still remain several unresolved issues. The first issue

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involves identifying the appropriate auditor for the attestation function, Auditing a multinational prospectus and accompanying financial statements intended for cross-border listing will require attesting that IA% have been followed and appropriate disclosures made. Auditors are educated, trained, and certified according to the requirements of the accounting profession in their home country. Knowledge of international accounting standards has not been a customary curriculum requirement. However, if the IASs are completed by March 1998, as indicated in the accelerated work program, and approved by IOSCO shortly thereafter, this issue should be receiving priority attention. It is probable that internationally reputable auditing firms will perform the attestation task for multinational corporations seeking cross-border listing. The second unresolved issue is determining if a corporation seeking to list on a foreign stock exchange is, in fact, eligible to list according to the stock exchanges requirements. For example, in the U.S., the SEC provides the review for listing on the NYSE. Which regulatory power will determine if all of IOSCOs requirements have been met and all specified items included? Without a worldwide regulator representing IOSCO, it is logical to delegate that function to the regulatory agency representing the member stock exchange of IOSCO. These agencies currently review qualifications of each corporation to determine if they are in compliance with the requirements of the particular stock exchange. The same agency could determine compliance with IOSCOs requirements for crossborder listings. A mutual recognition process among stock exchanges would uphold IOSCOs endorsements. The third unresolved issue is that once IASs are accepted, who would be responsible for interpreting the IASs in case of conflict? Xf inte~retation of IASs is left to national standard setters and/or regulators, the potential exists that different interpretations of IASs may emerge in different countries. This would detract from harmonization. Consequently, the IASC has decided to establish a system of inte~retation for its own standards (IASC 1996e).

SUMMARY

AND CONCLUSION

The growing importance of IASs and increased international cooperation among standard-setters and capital market regulators were motivated by the need for efficiencies in international capital markets. The reduction of trade barriers, internationalization of companies, deregulation of capital markets, and growth of cooperative ventures have led to an increased aw~eness of the inefficiencies arising from the diversity in accounting practices across countries. Continuously increasing growth in international capital markets demands relevant and reliable financial information to facilitate the comparison of investment opportunities worldwide.

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The most desirable and most feasible option must be ferreted out of the harmonization attempts by numerous organizations and at various levels. The need is apparent for a mechanism that requires companies to follow a set of agreed-upon standards regardless of the choice of capital market. Although no international mechanism exists for enforcing an international body of accounting standards, international efforts require some exertion of power for conformance (Wyatt 1992b). IOSCO is the most likely organization to enforce conformance. While IOSCO does not have international jurisdiction, its representatives have significant influence in their respective countries over the orderliness of capital markets. Implementation of joint initiatives adopted by IOSCO [and IASC] can have significant effect (Wyatt 1992a, 66). IOSCO supports a multinational prospectus approach, recognizing that different national accounting requirements are a primary impediment to multinational securities offerings and other foreign listings. But IOSCO does not develop its own accounting standards. Which organization should develop international accounting standards for preparation of financial statements for inclusion in a multinational prospectus? The IASC has established a due process in which representatives from accounting professions from various countries participate and offer their expertise, experience, and resources. IOSCOs acceptance of IASs in the preparation of financial statements for inclusion in a multinational prospectus would overcome, in part, the problem of accounting diversity while facilitating cross-border offerings.

NOTES
I.

2.

3.

Although there is an active debate concerning the need for international harmonization, a discussion of the various viewpoints is beyond the scope of the present paper. This study is restricted to reporting on the progress of harmonization utilizing International Accounting Standards (IASs) in capital markets. The arguments for the use of a set of international accounting standards in capital markets is predicated on the beliefs that accounting diversity creates problems for capital market users, and international harmonization would facilitate international capital market transactions. The distinctions made in this paper between harmonization efforts at the national, bilateral, regional, and international levels are only to facilitate discussion and should not be viewed as a linear process with national, bilateral, and regional harmonizations as intermediate steps to international harmonization. National/bilateral/regional initiatives can, in fact, move the accounting regulations of a country(ies) away from international standards. This situation can arise, for example, when national/bilateral/regional regulations are inconsistent with intemational standards. This possibility is explored in greater detail in a separate section entitled, Interactions of Regulatory Initiatives at Different Levels with Global Harmonization Efforts. Another example of a successful bilateral agreement is the one between Australia and New Zealand. For an excellent discussion on the bilateral cooperation between the two countries. see Rahman et al. (1994).

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4.

5. 6.

I.

8.

Mutual recognition agreements can also exist among more than two countries, i.e., multilateral agreements. Since we are not aware of any recent formal multilateral agreements in accounting, we focus on the bilateral level. Regional harmonization initiatives which may take the form of agreements in the next multilateral are discussed section. For an excellent, thorough discussion of the politicalization of standard setting by IASC, its survival strategies and management of its external environment, see Wallace (1990a). See Thorell and Whittington (1994) for a discussion of the roles of the EU, the IASC, and national standard setters in the process of international harmonization, including the institutional framework. Additionally, for a discussion of the institutional history of IASC and the underlying processes, particularly the influential role of the SEC, through IOSCO, on IASC, see Hopwood (1994). Five of the seven ASEAN countries, Brunei, Indonesia, Malaysia, Singapore, and Thailand, use IASs as the basis for their national standards. The Philippines, reflective of their historical antecedents, follow U.S. GAAP while Vietnam is considering adopting IA& as one option in developing its accounting system. The group was formed in 1992 and originally had five members (G5). The Netherlands, one of the original members, subsequently dropped out of the group. The group is also sometimes referred to as G4 + I because the IASC has observer status in the group.

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