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The idea of international financial reporting standards as a single global financial reporting language has come to stay. There is no doubt that developing accounting standards can be a difficult and expensive exercise. The substantial cost associated with the development of international accounting standards seems to be borne by only a handful of actors where as other actors (users of the standards) are free riding.

Who pays and who free rides?

The International Accounting Standard Setter i.e the IFRS Foundation thrives as a non-profit private organization who’s business is to commit its rather limited resources solely to the development and promotion of the use of high quality global financial reporting standards. These resources largely come from the generosity of member countries, international organizations, international accountancy firms, accounting regulators, capital market regulators, multinational firms, transnational and national accounting standard setting bodies, international banks and in rare cases governments. Given these rather limited sources of financing and the lack of obligation on the part of these sponsors, it is hard to say how much funding the IASB actually needs to enable it develop credible global accounting standards. However, a quick look through the financial statements of the IFRS Foundation suggests that majority of its funding turns to come from accountancy practicing firms, national accounting regulatory authorities and accountancy bodies that share the dream of a single global accounting standard. These sources of funding got me thinking about the wide usage of the standards as to the number of user countries and the limited funding the IASB currently has.

As many as 120+ countries currently use IFRS globally. However, very few of these countries actually contribute financially to the development of these standards. What is even more surprising is the number of developing countries (especially countries from Africa, Asia and South America) that continue to use the standards without any financial contribution to the development of the standards. Take Africa for a test case. There are 57 countries in the continent and out of this number; about 21 countries currently use IFRS in one form or another either as full scale adopters or users of modified versions of the standards. Nevertheless, only two of these countries have contributed very small amounts to the overall development of the standards. In 2010, South Africa became the only African country to have contributed 45,112 British pounds sterling representing only 0.27% of the income of the IASB.  This example was followed by Nigeria in 2011 who contributed 62,445 British pounds sterling representing 0.30% of the annual income of the IASB. The table below indicates the sources of funding for the development of International Financial Reporting Standards.


The one who pays the piper calls the tune!

I have often wondered how non-paying users of International Financial Reporting Standards (IFRS) could have influence on the work of the International Accounting Standards Board (IASB). As more countries continue to apply IFRS without contributing to its development, their ability to influence the work of the IASB become weak. Neither can they communicate problems with specific standards nor can they determine the direction or pace of international accounting standards.  Accounting standards by their nature are public goods i.e. the consumption of which by one party can not diminish the consumption of another party of the same good.  Nevertheless, what constitutes how a public good is constructed is on the bases that a common contribution is made by consumers or potential consumers of the same good. But this contribution is only made by a cross-section of the consumers while the others only wait to enjoy the benefits. On this basis, economists define public goods to mean any good from whose enjoyment non-contributors cannot be excluded.  Like many other public goods, the problem of free riding exists where some others pay to finance its construction while others do not pay but enjoy its use as much as those who paid for its construction.

IFRS has come along with such economic problem. IFRSs on this basis have equally come to represent public goods which only a handful of financial contributors make commitments towards the development of the standards while others only apply the standards without any contribution. As many developing countries look to enhance their financial informational needs, they turn to embrace the idea of IFRS and adopt these standards in some cases without the knowledge of the IASB.

The price for free riding the use of these standards is that, actors that contribute the development of these standards turn to dictate the direction of the standards. Non-paying actors will have no influence on how these standards are designed. With little or no voice on the IASB standard setting process by non-paying members, this group of users of the standards stands the chance of applying standards not designed to meet their needs.


In my last  blog entry, I referred to the chameleon nature of the description of IFRS adoption in many countries. I described the contradictions that the International Accounting Standards Board (IASB) presents when it refers to the overwhelming acceptance of the International Financial Reporting Standards (IFRS) globally. This contradiction and confusion generates ambiguity in the application of the standards in most less developed countries that seem to apply the standards from different angles than anticipated by the IASB. This in turn has the potential to undermine the achievement of the benefits of these standards as presented by proponents of IFRSs. 

The question is, how different or similar will the outcomes (results) of IFRSs application(s) be if some countries adopt IFRSs without modifications as compared to those that apply modified versions of the standards? Will the IASB be able to achieve the goal of comparability of financial statements across borders? Will the need to harmonize accounting practices globally in order to achieve uniformity be fulfilled?  The aim of this blog entry is to reassess the claims that countries and the IASB  make when they speak of IFRS adoption, looking for the best way to gauge if and when a country has actually adopted IFRSs.

Let’s start with the basic premise that a single global accounting standard has the prospects of improving information quality across borders and to foster cross border investments. This premise rests on the notion that granted that a single global accounting standard is in place, comparability of financial statements will be achieved, leading to a reduction in information processing costs associated with different national accounting standards, and thereby resulting in a reduction in the overall cost of capital.

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There is great ambiguity on the true representation of the ‘’adoption’’ of International Financial Reporting Standards (IFRS). What constitutes the ‘’adoption’’ of IFRS? At what point can a country, company or entity claim to have adopted IFRS? What is the best measure for IFRS adoption?

International diffusion literature and transnational governance literature provides insights as to the point of departure of how global norms are translated into local laws. It suggests that laws, norms, ideas or global regulations when diffusing turn to be reshaped and edited as they are transformed into local practices. To be exact, actors translate ideas, recombine new, externally given elements and old locally given ones to form local laws. Scholars in this arena argue that, in this context, never can we suggest that passive adoption of global standards has taken place. Yet, in many other contexts, actors at both the local level and the transnational level have tended to refer to such process as ‘adoption’ as opposed to a reflection of the variant of the law, idea or norm so implemented. In many cases, only portions of the diffused law or standards are implemented. Nevertheless, actors often refer to such as adoption as opposed to a modification of the diffused law. At other times, different actors refer to the modification of the diffused law as the adaptation of the law. This ambiguity so created has led to mixed results when looking into the idea of International Financial Reporting Standards.

In the global accountancy arena there have been several calls for the world to embrace the idea of a single global high quality accounting standard- thus IFRS. These calls have been stronger following the recent financial crisis as the world continues to pursue globalization strategies and capital flows across borders became even more pronounced. In this direction, accounting standard setters have been working to design high quality accounting standards that is applicable by nearly every country irrespective of the unique economic and cultural conditions that confront these entirely diverse countries and continents. These standards promulgated by the International Accounting Standards Board (IASB) has however, been applied in different ways than that put forth by the global accounting standard setter (IASB). In this blog entry, it is my aim to try to provide some lines of reasoning on the true meaning of IFRS adoption. I do not claim that this is the first of such arguments. However, it is my claim that global standard setters, local actors responsible for the implementation of IFRSs have often referred to entirely different versions of IFRSs when referring to IFRS adoption. If indeed IFRSs were adopted, we should expect a single version of the standard in all the jurisdictions that claim to have adopted the standards.

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CRESC, the Centre for Research on Socio-Cultural Change, is a well-known institution for many working on finance in sociology and political science, as well as researchers in cultural and media politics. By uniquely bringing together researchers from these fields, its annual conference in Manchester is an inspirational forum for unorthodox interdisciplinary exchange, without the numbing genericity of academic mega-conferences.

The theme chosen for this year’s conference (5-7 September) proved an excellent basis for taking stock of economies and societies in crisis: “Promises“. One striking feature of this conference was the presence of journalists, NGO representatives, and professionals like asset managers (as spectators and presenters) alongside academics, which added diverse perspectives and precluded overly technical/theoretical debates. (Other conferences may follow this good example.) Being spoiled for choice among the many panels, I mostly attended the ones on finance, missing the more culture-heavy sessions. Therefore, the three observations which impressed themselves upon me relate to the more political-economic questions in coming to grips with the present state of capitalism. Three insights from Manchester:

1. Financialisation is so pervasive and wide, many facets are only now being explored. Read the rest of this entry »

More than three years after I posted ‘Fair value accounting in retreat?’ on this blog, it seems appropriate to take stock of the results of reform initiatives undertaken after the financial crisis. Just as a brief reminder: In the course of the financial crisis, International Financial Reporting Standards were suspected to have exacerbated the collapse of financial markets. Particularly the use of “fair value accounting” for banks’ financial assets was scrutinized for its contribution to downwards spirals between devaluated market assets and banks’ rising capital requirements. Previously considered as a purely technical matter, accounting principles suddenly became a matter of international politics. The G20, the Financial Stability Board, IOSCO and the two leading standard setters, IASB and the US-American FASB, all got involved in what appeared a busy beehive of reform debates. Three-and-a-half years later, with the financial crisis followed and superseded by the European sovereign debt crisis, accounting principles seem to have returned to their status of “sleeping beauty”. Yet, this impression is misleading. Accounting principles continue to be a crucial link between the reporting of financial institutions and financial market regulation. All the more a reason for reviewing two recent publications which analyse international accounting standards reform and harmonisation.

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Why should Africa adopt IFRSs? Adoption is less of the story.. not practicing what you preach is the bigger evil.

In the past decade the rise in the use of the International Financial Reporting Standards (IFRS) in many countries around the world has moved the wave towards developing countries considering adopting these standards. Factually, about 120 countries presently use IFRS across the globe. Out of this number about 13 countries in Africa have already adopted (i.e as issued by the IASB without any modification) or adapted (.i.e with modification to meet local socio-economic needs of a particular accounting jurisdiction) to IFRS.

A diverse Continent a uniform accounting standard? Primarily, former Anglo-Saxon colonies have adopted IFRSs.

(Source: Data from PwC IFRS map, Own drawings)

However, it is quite surprising that Africa as whole is considering adopting IFRS given the chaotic nature of these standards on the international front and the often unseen justification given for the adoption of IFRS particularly in Africa. Many international organizations like the World Bank , the World Trade Organization , USAID and UNCTAD  have all been arguing for the adoption of IFRS in less developed countries . There are many reasons why Africa should not adopt IFRS. I will try to explain and to some extent justify this line of reasoning.

Politics over Economics

First, the merits of IFRS often mentioned include, improved comparability and uniformity of financial statements among companies and countries, resulting in a decrease in the equity cost of capital, improved transparency, a decline in information processing cost and a reduction in risk of international investment decisions amongst others. Whilst these benefits look very desirable, it is also the case that these benefits cannot be reached in every economy.

To be clear, IFRSs were designed for developed and matured capital markets. At least the economics speaks for itself. It is an undeniable fact that financial statements assist investors in making critical investment decisions. As pointed out in the general purpose of financial statements in the conceptual framework of the IASB, financial statements should aid users in valuing securities, be it when buying or when selling.

The argument for the use of IFRSs in developed countries in plausible. However, what I find puzzling is the push for IFRS adoption even in countries that have no stock markets or stock market listed companies. I do not deny that quality financial reporting should be present in economies where there are no capital markets. But I also admit that such countries have totally different financial reporting needs than industrialized countries. Accounting systems of a country are traditionally shaped by its socio- economic, cultural and political environment. Some economies are totally different from others and therefore we must recognize that these differences in accounting needs shape financial reporting.

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This is the first part of a three-part series on the regulation of securitization before and after the crisis. Why were the banks so affected by the run on the shadow banking sector, which was formally off-balance sheet? How can we explain the lack of regulation in the shadow banking sector? How did governments promote the expansion of the credit supply via the shadow banking system?

Securitization has had a very bad press reputation in recent years (but see “securitization is not that evil after all”), being related to overly complex re-securitizations, which became impossible to value during the financial crisis of 2007/2008. Before that crisis, securitization was en vogue, favored by most financial economists as a way to spread credit risk from banks into the financial markets, thereby increasing the resilience of the financial system as a whole (s. Bhattacharya et al 1997). The idea was to liquefy credits, to turn them into tradable assets, generating deep secondary markets in which traders could constantly readjust the amount of risk they held in their portfolio. Banks could refinance the credits they gave and thereby expand their lending. Credit would become cheaper, as the demand for securitized assets generated from credit increased, raising the available supply of credit.

Turning credits into tradable assets requires that the transfer of these assets into money is possible instantaneously and without loss of value. Otherwise, the entire idea of readjusting one’s portfolio to changing market circumstances; which is what underlies modern portfolio theory (also the Black-Scholes formula requires continuous adjustment of the traders position, which is why trading in continuous time is a necessary assumption for the pricing to work). Credits on banking books, in contrast, are held on the book of the banook  at historical cost accounting (s. Sigrids work on fair value accounting); i.e. not changing their value from the contracted valuethe moment the contract is signed. Only if banks undertake corrections in value to account for expected losses does the value of these credits in the books of the bank change.

In this blog I will look at the infrastructural preconditions of securitization (Special purpose entities, in the following SPEs) and the shifts in how they were proposed to be treated at an international level and how they were treated on a national level before the crisis and after the crisis. Before the crisis, there was pressure by the Committee of European Banking Supervisors to not force these SPEs on the balance sheet of banking groups (CEBS 2004). After the crisis, we can witness a 180° shift in the position of the financial stability board which states that it wants full prudential consolidation for sponsored SPEs. In my three blog entries I will have look at the impact these transnational recommendations had before the crisis on actions of national governments and will speculate about the fate of the current regulatory proposals in the future. Read the rest of this entry »

This post is provided by our “guest blogger” Bernhard Brand. Bernhard Brand works as research assistant at the Institute of Energy Economics at the University of Cologne. This contribution is the first of a series of critical reviews of transnational economic governance arrangements, based on an analysis of policy reports undertaken by graduate students of Sigrid Quack’s seminar on Transnational Economic Governance during the summer term 2010.

The Siemens corruption scandal of the year 2007 was one of the largest bribery cases in the economic history of Germany. It ended with a number of (suspended) jail sentences for high-ranking executives and a painful €2.5 billion penalty to be paid by Siemens for running an extensive worldwide bribery system which helped the Munich-based company to win business contracts in many foreign countries, as for example in Russia, Nigeria or Greece. Interestingly, if the bribery case just had happened a few years before, there wouldn’t have been any sentence at all for Siemens: Until 1999, the practice of bribing officials and decision makers in foreign countries was not considered a crime in Germany. And even worse: The German law allowed companies to deduct bribes from their tax declarations – under a tax law provision ironically termed “useful payments” (in German: “nützliche Aufwendungen”). This incentive for the German industry to perform corruption in the international business became abolished under the pressure of the OECD Anti-Bribery Convention. The convention criminalizes the so-called ‘foreign bribery’, the act where a company from one country bribes officials of a ‘foreign’ country.  Germany, as well as the other OECD members had to align their legislation to the new OECD standards, enabling their courts to punish the person or entity who offers the bribe – even if the bribing action originally took place somewhere else in the world. Read the rest of this entry »

Together with our recent guest blogger Sebastian Botzem from the Social Science Research Center in Berlin I prepared a piece for this year’s EGOS Colloquium, which is taking place in wonderful Barcelona. In the sub-theme titled “The social dynamics of standardization” we are presenting our paper “The Rule of Standards: Codifying Power in the Transnational Arena” (PDF), in which we try a relatively unorthodox comparison: We contrast the case of Microsoft Windows as a technological market standard with non-technological and negotiated accounting standards in the realm of the International Accounting Standards Board (IASB).

Not least to our own surprise, both examples of standardization show many similarities that allow drawing conclusions for transnational governance by standard setting in general. Among these are the following:

  • Due to coordination effects, in both cases an increase in the total number of adopters paves the way for – though not guaranteeing – one dominating standard.
  • While having been developed differently (market competition vs. political negotiation), in both cases growing standard diffusion reduced the need for participatory or inclusive modes of standard-setting (see the figure below).
  • Finally and again observable in both cases, growing adoption can trigger what we call the dialectics of power in standardization: The successful establishment of a standard redistributes benefits and power among affected actors and feeds back into the standard formation process.

Comparing Standardization Processes

But aside from these conclusions, the paper may also illustrate why gathering seemingly very different empirical fields under the common umbrella of “governance across borders” in this blog might make sense after all.


This post is provided by our first “guest blogger” Sebastian Botzem. He is research fellow at the department „Internationalization and Organization” at the Social Science Research Center (WZB) in Berlin.

Fair value accounting has been identified as one of the causes of the current global financial crisis (see, for example, on this blog “Fair Value Accounting in Retreat?“). While it would be unfair to bookkeepers, accountants, auditors and academics to make them solely responsible for the loss of wealth and jobs, the present twists and quirks with regard to accounting policy are remarkable and merit closer attention.

A good example to show that the logic of accounting is questioned is Germany’s “bad bank”  solution: In principle there seems to be agreement to clear balance sheets from heavily impaired assets in order to free up capital and cut the risk of further writedowns. How that should be done, however, remains a big question. One of the great unknowns is of course how to determine the price for the assets to be transferred. Also, it needs to be determined how and to which degree the German taxpayers are eventually being burdened with liabilities not just for years, but for decades. The legal construction is also interesting: Germany’s “bad banks” are supposed to be set up as Special Purpose Entities (SPE). Günther Merl, former speaker of Germany’s public banking rescue fund Soffin (Sonderfonds Finanzmarktstabilisierung, in English: Financial Market Stabilization Fund), has just argued in the German quality daily Süddeutsche Zeitung that the government should exempt the proposed “bad banks” from the usual regulation that applies to financial institutions. The intention of such a move is to allow for accounting provisions that treat “bad banks” not as banks. The creation of Special Purpose Entities – one cause of much of the turmoil at financial markets – to rescue financial institutions indicates the dire straits market advocates are in. Read the rest of this entry »

The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
February 2017
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