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Remember when the world was flat? During globalization’s peak era–from the collapse of the Soviet Union to around the time of the 2008 financial crisis, let’s say–there was general agreement that the world was on a path toward economic and political convergence. We were told that in the future there would be fewer serious structural barriers impeding the free flow of money, goods, and people across borders. From the standpoint of financial investments, hopes of global convergence rested largely upon the expectation that global companies were moving toward unified standards for financial reporting. 

Then as now, there were two standards-setting bodies with enough international prominence to guide this convergence. One was the Financial Accounting Standards Board in the United States, responsible for codifying the Generally Accepting Accounting Principles (U.S. GAAP), which homegrown firms listed on U.S. stock exchanges are required to use. The other was the International Accounting Standards Board (IASB), whose rules for financial reporting are known as International Financial Reporting Standards (IFRS). 

The stated intention of both boards was to steadily increase comparability, until U.S. GAAP and IFRS became sufficiently identical to make the merger official with little disruption to companies. Additionally, it was hoped that the existence of a single set of standards would exert pressure on holdout economies that maintained local reporting regimes. The resulting uniformity would provide the transparency needed to knit together a truly global marketplace. 

As Jenelle Conaway, assistant professor of accounting at George Mason �鶹���� School of Business, explains, “Being able to compare companies more easily makes for more efficient investment choices. And that scales from the individual level up to banks choosing who they lend to, and companies choosing who they want to merge with and acquire.” 

But in the years since 2008, as globalization’s allure has dimmed, comparability trends have grown more complicated, Conaway’s recent research finds. Her paper in tracks financial reporting data for more than 20,000 firms–categorized into subsamples according to the accounting standards used by each firm–across the 36 largest economies. Her observations span two time horizons: 1990-2001 and 2002-2018. Juxtaposing these two periods enabled Conaway to isolate the impact of concerted regulatory action in 2002, a banner year for the global-convergence campaign. 

Conaway measured comparability by analyzing how similar economic events were reflected in the various companies’ financial statements. As Conaway points out, comparability should never be taken for granted, even when the companies concerned ostensibly have much in common.  

“A lot of people think accounting is black and white, but there is a lot of discretion involved,” she says. “By and large, comparability is going to be greater among companies applying the same accounting rules. But it will likely never be perfectly comparable because of the judgement involved in financial reporting decisions.” By extension, it’s also possible for companies located in different countries–and therefore following separate accounting standards–to be more comparable than expected in some areas. 

These ambiguities surrounding comparability show up in Conaway’s findings. Her results reveal that the 2002 regulatory push worked as intended, accelerating convergence of accounting practices over the following 16 years. However, the improvements in comparability were not universal. Comparability plateaued among companies using U.S. GAAP and IFRS, mainly owning to these regulators having stalled in their progress toward the single-standard goal. Simultaneously, countries with their own financial reporting standards–including major economies such as India and China–started to drift in an international direction, without officially signing onto either IFRS or U.S. GAAP. 

For Conaway, the reasons boil down to costs and benefits. For the large multinationals that are long-term adherents to IFRS and U.S. GAAP, the ideal of perfect comparability may compromise the company’s ability to present its financials in the most relevant and reliable light. Past their current standard of compliance that satisfies both regulators and investors, these major players seem to have no pressing incentive to further improve comparability.  

Local-standard companies outside the U.S. and Europe, however, are still edging toward their cost/benefit sweet spot. Despite the U.S.’s outsized influence, representing as it does over 40 percent of global equity market capitalization, Conaway’s findings show that IFRS serves as a more congenial (if unofficial) role model for them. “Those firms are still technically following their countries’ accounting rules, but they are interpreting them or applying them in a way that makes the resulting financial statements more comparable to those of IFRS firms only,” says Conaway. 

IFRS’ international origins help explain its advantage over U.S. GAAP. Conaway says that “the IASB standard-setting process has always taken into consideration the needs of a diverse set of constituents, whereas the FASB is mostly concerned with investors in the U.S.” For countries seeking the advantageous mix of high quality standards and strong network effects, IFRS is a more appealing platform. Similarly, companies using local standards are internationalizing their reporting in line with IFRS to reap these benefits, while stopping short of official adoption. 

This study points to IFRS as the de facto global standard–a trajectory Conaway finds noteworthy. “The development of U.S. GAAP dates back to the 1930’s, long before IFRS picked up momentum in the early 2000’s.” Because of the costs involved in switching accounting standards, “Any change is a really slow process, which is why it is remarkable how widespread IFRS has become over the past two decades.” 

Conaway suggests that while internationalization is increasing among firms that haven’t yet signed onto either standard, the ebbing of enthusiasm for global comparability among regulators should concern U.S. investors. “Many retail investors are not aware of the intricacies of U.S. GAAP compared to IFRS. If the global market is shifting towards IFRS, and U.S. GAAP and IFRS are not becoming more comparable with each other, then information processing costs will be greater for investors unfamiliar with IFRS.”