Over this first decade of the 21st century, especially since the International Accounting Standards Board went through its reorganization, there has been a lot of talk about the advantages and even the need for convergence on a single worldwide set of standards.Some of it is the usual buzz on the latest news item du jour, and some of it is mere political twaddle with no substance and lots of posturing, predictably positioning the speakers on the side of angels.

Lately, though, the talk is getting more serious, with the Securities and Exchange Commission allowing filings by foreign companies using International Financial Reporting Standards, instead of U.S. generally accepted accounting principles, and perhaps allowing American companies to use them, too. In addition, Financial Accounting Standards Board Chairman Bob Herz has made comments recently that very much sounded like a merger could be in the offing.

If we were betting, we would say that opinion highly favors convergence on a single set of standards issued by a single authorized body representing everyone in the whole world. What could possibly be wrong with that idea? Who could possibly be against it?

With (typical) boldness, we raise our collective hands with questions we don’t think have been asked, or, if asked, have not been adequately analyzed before they were answered. So, at the risk of getting booed and hissed, we write this column to nudge people to consider another perspective.


The seemingly unassailable logic for convergence goes something like this:

* Uniform standards lead to uniform practice;

* Uniform practice promotes inter-company consistency;

* Inter-company consistency creates comparability; and,

* Comparability is a good thing.

We beg to differ. While we agree that comparability is good, we don’t think the links between uniformity and comparability are as tight as they look.

Specifically, uniformity may be necessary for comparisons, but it isn’t enough. Effective uniformity has to produce the same information for conditions and events with similar economic substance, while also producing different information for conditions and events with different substance. In other words, comparability is in the output from the process, not the inputs. The goal is challenging and unpopular because it involves telling the truth, the whole truth, and nothing but.


As evidence that uniform standards don’t work, we present three exhibits from GAAP.

Exhibit A: SFAS 2 requires all research and development costs to be written off when incurred. Companies that spend a lot and find a lot look just as badly off as those that spend a lot but find little or nothing. Ironically, the companies that spend the least look best, but their statements reveal nothing about their sacrifice of future profitability. The present uniform reporting for these different situations doesn’t produce comparable reported results.

Exhibit B: Accounting for marketable securities follows SFAS 115, which creates three portfolios based on management intent. For example, assume three different investors hold equal amounts of another company’s bonds. The first one intends to sell its bonds at any time. The second one intends to consider selling them when the time is right. The third one intends to hold them to maturity. All three hold exactly the same assets, but don’t present identical results in a given year despite experiencing the same real economic outcomes. The first two mark the bonds to market, but the first runs the value change through income, while the second parks it in equity. The third ignores market value and systematically amortizes up or down to maturity value.

When sold, the first reports a realized gain/loss equal to the selling price less the previous market value. The second reports a realized gain/loss equal to the selling price minus original cost, and the third reports a realized gain/loss equal to the selling price minus amortized book value. In this case, the differentiated treatments aren’t rooted in valid economic distinctions. All three portfolios need the same treatment to attain comparability, but not just any same treatment; it needs to reveal everything that happens, which is what value-based accounting accomplishes.

Exhibit C: Impairment accounting causes some assets to be marked down but forbids marking others up. The practice may be uniform, but it’s uniformly bad.

Portfolio theory says that diversification helps protect returns and mitigate risk by holding assets that move in opposite directions in response to market trends. Thus, some go up in value while others go down. The only way to assess a portfolio’s effectiveness is to mark all the assets to market. The sure way to obscure its effectiveness is to selectively write down losers while freezing winners at book value.

Even though everyone must apply impairment accounting, the reported outcomes aren’t comparable because there is no symmetry in accounting for gains and losses. (Of course, liabilities are also part of the whole portfolio.)

We rest our case, ladies and gentlemen of the jury.


History shows that there are no perfect accounting standards, because they have all emerged from political processes in which powerful participants are appeased through compromise. As a result, standards seldom (perhaps never) produce information that’s fully useful for decisions. Some contamination always creeps in and keeps the best available information from getting reported. This has always been true in accounting, dating back to ARB 1, issued in 1939 by the old Committee on Accounting Procedure. The members equivocated even in dealing with the most basic treasury stock issue by saying, “It is perhaps in some circumstances permissible to show stock of a corporation held in its own treasury as an asset” (ARB 1, page 6).

So, if there are no perfect standards that translate events and situations into fully comparable financial statements, then uniform application cannot create comparability.


Extending a standard-setting body’s jurisdiction to the whole world greatly multiplies the political interests that must be served. Because of this expanded challenge, does it really make sense to put all authority in one basket?

On the other hand, if a single board is empowered by and accountable to multiple and diverse masters, will it have enough power to bring about any significant change at all? Without some singular strength behind it (such as the SEC provides for FASB), will it try to please everyone and end up losing sight of its real objective? We think it could. In circumstances like these, it’s human and political nature to leave the status quo unchallenged.


How, then, can innovation be achieved? Or, to put it another way, how can stagnation be avoided? The answer is simple: through competition.

Why have cars gotten better? Why have computers gotten faster and cheaper? Why has most everything changed in style, variety, price and availability? Because of the “invisible hand” of competition, seeking an ever-growing piece of the ever-growing pie.

Given this powerful economic force for innovation, why would the accounting world decide that the only sure route to progress is by consolidating all standard-setting power in one board? Would it make more economic sense to develop multiple boards to compete to produce the most useful standards and financial statements?

This strategy seems to us far more likely to succeed than today’s popular answer. Because of entrenched interests contrary to the public’s interest in efficient capital markets and economies, we think the present urge to converge and merge could be a well-intentioned but unwise rush to the lowest common denominator.

If multiple recognized bodies competed to bring the highest-quality financial statements to market, a company’s management would be free to choose which standards to use. Smart managers’ choices would be driven by their understanding of what information would help the capital markets reach equilibrium prices close to their securities’ intrinsic economic value. Others would choose poor standards in the vain hope of creating false positive images, and pay the price through discounted stock prices.


Perhaps the biggest impediment to this strategy is the entrenched mindset that claims that everybody is surely better off if everybody just does the same thing.

In a time when car color options are constantly updated in response to changes in consumer demand, accountants remain convinced that Henry Ford had the right idea in offering only black. That’s nonsense, of course, but unfortunately it may be what is behind the popular rush into convergence and merger.

At a time when accountants are saying, “Let’s join hands and sing ‘Kumbaya,’” we think the chant should be, “Let the competition begin!” Of course, we know lots of angles need to be considered, but for now, we’re content to provide a contrarian point of view. Future columns will elaborate on what is needed for this competition to be effective.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors’ views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.

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