SEC on the “Performance” of Standards
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.