FASB, the US accounting standard setter, has long protected its brand name, including by asserting copyright over its US GAAP standards and selling them for profit. In contrast, IASB, its international counterpart, although also asserting copyright over its international financial reporting standards, gives its products away free to all persons within any country that recognizes IFRS as official. Why this strategy? One possibility is to promote adoption. If so, it has worked: some 100 countries already recognize IFRS.
But what effect does the give-away program have on the signaling value of adopting IFRS? For signaling to work, adoption must carry a cost higher than low-quality users would pay. But it is essentially costless for countries to adopt IFRS and let IASB bear all associated costs—the giveaway program makes it even more cost-effective. Other aspects of the debate on IFRS quality and enforceability aside, what effect will IASB’s marketing triumph have on the credibility of its ultimate product?
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1. Posted by Don Clarke on October 19, 2007 @ 8:26 | Permalink
Larry, this is a very interesting and provocative question, but I'm not sure all the premises stand up. First, is it really true that "low-quality users" = "poor users"? I'm not sure exactly what "low-quality" means (more prone to fudge the numbers?), and I'm not sure why it follows that being richer makes you more likely to be a high-quality user of accounting standards. Second, do accounting standards gain credibility solely or mostly through their signalling effect? It seems to me that the substance of the standards, and their usefulness to users of financial statements, must have at least something to do with it. Third, there are many costs of adoption other than paying copyright fees (for example, training people to use the system). These need to be taken into account as well.
2. Posted by Lawrence Cunningham on October 20, 2007 @ 7:40 | Permalink
Don,
Thanks for the excellent points.
By “low quality users” in the context of the signaling value of adopting IFRS, I mean countries that adopt IFRS as written standards without taking the costly steps necessary to promote their effective use, such as through high-quality auditing and enforcement. (I didn’t mean to imply anything about relative country wealth.)
The substance of the standards is vital, and IASB does a good job in that regard. Under imperfect investor information about country-by-country financial reporting quality, adopting a particular set of standards, including IFRS, could send a signal of high quality that would be useful. But the signal is only valuable if such adoption is accompanied by all the costs of effective use.
IASB may have little or no ability to influence or control any country’s infrastructure as to auditing and enforcement quality. And maybe this suggests it doesn’t matter whether IASB charges for its standards or not. Or it could suggest exercising this admittedly modest available lever of charging royalties for its standards.
In any event, at present, any country can say “we have adopted IFRS” and yet that means little or nothing on its own since the costs of doing so are zero or less.
3. Posted by jake on October 20, 2007 @ 19:58 | Permalink
Yup. Larry is correct. Any investor who does backflips over an IASB-certified set of financial statements is a wishful thinker. FASB should stick to its guns.
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