SEC on the “Performance” of Standards

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2 Responses

  1. A.J. Sutter says:

    1. I’m sorry, you lost me in the penultimate paragraph, if not sooner: “Most likely, the SEC now has a strong sense of how to measure the comparative performance of accounting systems. It likely has evidentiary data at hand to support the view that internatoinal accounting standards perform better than US standards.” This may be a trivial point, but do you mean that the SEC *believes* (or will assert) it has such a sense and such data, even though, in your view, such a belief is likely to be vacuous, and such data incapable of supporting such a proposition?

    2. Actually, in retrospect, you lost me sooner. You say (a) “[Accounting standards] are certainly not evaluated with reference to a particular market environment, such as one in turmoil or under pressure,” (b) “authorities such as central banks, treasury officials and securities regulators” are the ones whose “business to determine whether their system works particularly well or poorly in varying economic environments”. Couldn’t doing the activities in (b) include the evaluation in (a)? If so, then since you mention it’s the business of securities regulators to do so, what’s wrong with the SEC calling a roundtable? Or do you think they should make their determination without asking soliciting anyone else’s views?

    3. Outside of 19th Century prose fiction (Russian), and possibly 19th & 20th Century poetry (which arguably is kind of a dead heat between the two), German performs better than Russian in both philosophy and literature.

  2. Lawrence Cunningham says:


    Thanks for the queries and my apologies for any difficulties. I think you got my gist on both points and engage them nicely.

    On 1, it is my hunch that the SEC will offer data tending to show that international standards somehow “perform better” amid the pending market crisis. This may include things like reporting deteriorating financial positions more rapidly or more slowly. People disagree vigorously about which approach is more useful to investors. Whether such data will help the discussion much thus seems doubtful.

    [Incidentally, there is a literature in accounting that attempts to evaluate the quality of financial reporting, including how useful financial information is to investors for valuation assessments or capacities for companies to engage in earnings management. There is even a relatively recent effort in the literature to inquire into whether international or particular country standards are more conducive to such ends. But the literature is cautious to avoid suggesting that it will enable determination of which system “performs better” for some of the reasons I’ve suggested, including how the systems may be pursuing different objectives based on applicable financial culture.]

    On 2, sure, it is possible that the SEC’s role in evaluating systemic matters should include reviewing how accounting standards influence outcomes like financial stability. But this is novel and controversial territory for accounting and accounting standard setters. Historically, accounting’s job is to report accurately, whether good news or bad, and whether leading to positive or negative systemic developments. Accounting standard setters have historically sought to produce objective and unbiased standards, not standards that would independently influence market perceptions and trends.

    More important, accounting standard setters have not been asked to intervene amid market developments to change standards to influence market behavior. Central banks do that when providing liquidity as the Fed is now doing. Securities regulators can also do that, as the SEC is now doing in prohibiting short selling in securities of major financial institutions. The SEC could decide to waive applicability of certain accounting standards in particular market environments. But it generally has been seen as better practice to limit the function of the standard setter to laying out the standards that will produce fair and faithful reporting rather than to draw it into how its standards will affect economic behavior.

    [Notably, too, neither international nor US standard setters have any authority to enforce their standards. In the US, that is the SEC’s job. To evaluate how standards “perform” obscures the issue of how enforcement authorities perform. It could be useful for this or another roundtable to look at how the SEC’s enforcement division has performed.]