SEC on the “Performance” of Standards

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Is it useful to ask which performs better, the metric system or the imperial system of measurement? Are meters better than miles? Does one system offer more refined tools to achieve precise results? How useful is it to ask, which performs better, German or Russian? Must it depend on purpose, such as for philosophy or literature? The SEC proposes to ask a version of such comparative performance questions about international accounting versus US accounting at a hastily-called roundtable next Monday.

The SEC’s purpose in holding the roundtable is vague, with its Chairman, Chris Cox, saying it is intended to give the SEC “valuable insights” about how international versus US accounting “performed” amid current market “turmoil” and “pressures.” The roundtable occurs during intense, ongoing debate within the US about whether and on what terms the US should switch from US accounting to international accounting. Chairman Cox and the SEC make it very clear that they favor moving to international standards as rapidly as possible, while investors and others have expressed strong concern about this.

The calling of this roundtable and this framing of the discussion are therefore both interesting and important. Accounting standards are not usually evaluated in terms of their “performance.” They are certainly not evaluated with reference to a particular market environment, such as one in turmoil or under pressure. Accounting standards usually are evaluated in terms of some ultimate purpose, chiefly whether they are reasonably calculated faithfully to capture and fairly report on underlying economic activity. In the US, moreover, that assessment is made according to how useful resulting applications are to investor decision-making.

It is possible that the SEC will host this roundtable to generate discussion on the difficult issue of how the performance of an accounting system should be measured. Among many ways, this could include models to assess the relationship between reported financial results and some independent measure of economic activity. But that may be to work in circles. First, one would have to assess the performance of that independent measure. Second, that requires specifiying the objectives the system is designed to achieve. So comparing the performance of international versus US accounting in these terms would not seem particularly productive for a roundtable.

What else, then, may the SEC be trying to accomplish in such a roundtable? Talk around town is that discussion will include how those who write international and US accounting standards responded to the current situation. The issue would be whether one body is a better responder than the other to a particular market environment. This too is an interesting question, and perhaps a strange one. First, general accounting standards are set with a view that extends beyond any immediate period. They must be useful in all market environments.

Second, amid a pending financial crisis, it has not been the role of those who set accounting standards to respond to it. Accounting standard setters always have the task of articulating frameworks and principles designed to measure and classify economic activity using widely-recognized techniques. It is not their business to determine whether their system works particularly well or poorly in varying economic environments. They are simply not qualified to undertake any such exercise. Systemic concerns fall not to accounting standard setters but to authorities such as central banks, treasury officials and securities regulators.

The SEC’s stated purpose of gaining “valuable insights” into these questions may also be hard to understand. It certainly is vital to evaluate the different approaches to measurement and classification used in international compared to US accounting. And there are many differences. International standards exhibit higher levels of generality that appeal to hundreds of different financial cultures; US accounting exhibits more particularity tailored to US financial culture. But the SEC, more than any other institution, should boast the keenest insights on these questions. In its concept release embracing international accounting over US accounting, for example, the SEC asserts confidently that it has the required expertise in both systems to make the shift. To buttress that assertion, it has published studies comparing the reporting under the two systems, without saying whether one performs better than the other.

So the question remains, why this roundtable? 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. The roundtable then is likely to be an occasion to continue to trumpet the SEC’s push to international standards. If so, expect continuing laudatory rhetoric promoting international standards and rebuking US standards, with more fawning over “principles-based systems” compared to “rules-based systems”. Talk may thus even turn to whether, amid global capitalism, international standard setters perform better than domestic ones. Measuring that may require even more speculation than assessing which standards perform better.

In any event, seats at the roundtable are limited. Those attending should find it fascinating. It will provide much-awaited clues about the SEC’s next steps in paving its road to US adoption of international accounting 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.]