The latest developments in global commerce are likely to
lead to a further wave in deregulation and market reforms
By JEN SHEK VOON,
Partner, Ernst & Young
Singapore
Dec 17 - 30, 2001
As globalization works its way through local
economies via deregulation and modern market reforms, there is a need
for the convergence of local financial reporting standards with
International Accounting Standard (IAS). But, in order to achieve
greater transparency worldwide as part of a wider Global Accountability
Framework (GAF) the fundamental institutions of a modern market economy
must be put in place before the convergence becomes effective. A more
effective corporate governance code and greater independence at listed
Board of Directors' level is also needed. Finally, the new GAF would
need to embrace non-financial measures of effectiveness to provide
corporations the basis to report on their social responsibility
activities, while limiting the disclosure of financially sensitive
corporate information.
The latest developments in global commerce are likely
to lead to a further wave in deregulation and market reforms in local
economies. The demands for capital of growing businesses from the major
capital markets of the world are dependent on the convergence of local
Generally Accepted Accounting Principles (GAAP) with IAS. More plainly,
those seeking to raise funds will need to have their local adoption of
IAS converge with American GAAP, the reporting standards of the dominant
capital market of the world, International Accounting Standards.
The establishment of IAS alone is not sufficient to
achieve the type of regional business growth that we may expect.
However, the convergence of a worldwide IAS with that of the accounting
standards of the U.S. capital market, will be of tremendous significance
to effective capital flows. The U.S. Securities Exchange Commission
(SEC) is increasing its involvement in a number of forums to develop a
globally accepted, high quality financial reporting framework.
Over the years, the SEC has realized that foreign
companies make decisions about offering or listing securities in the
United States for a variety of reasons. While many of these reasons are
unrelated to U.S. regulatory requirements, some foreign companies cite a
reluctance to adopt American accounting practices as a reason for not
listing in the U.S. These companies have forgone listing in the United
States rather than follow accounting standards that they have not helped
formulate. Therefore, accepting financial statements prepared using IAS
standards without requiring reconciliation to U.S. GAAP could induce
cross-border offerings and listings in the United States.
However, other factors could continue to deter
foreign access to the U.S. markets. For example, some foreign companies
have expressed concern with the litigation exposure and certain public
disclosure requirements that may accompany entrance into the U.S.
markets. Foreign companies also may be subject to domestic pressure to
maintain primary listings on home country stock exchanges.
Currently, the SEC will not permit a foreign company
to trade their overseas stock on the New York Stock Exchange (NYSE)
without first issuing financial statements in accordance with GAAP. This
cumbersome and expensive translation requirement severely limits foreign
firm access to U.S. markets and U.S. access to foreign investment
opportunities. The investment potential is tremendous, as currently only
about ten per cent of the over 2,000 major foreign companies list on the
NYSE. Many believe that unless U.S. policy is adjusted the U.S. stock
market could lose world prominence to London or other European
exchanges.
Thus, issuers wishing to access capital markets in
different jurisdictions must comply with the requirements of each
jurisdiction, which differ in many respects. Different listing and
reporting requirements increase the costs of accessing multiple capital
markets and create inefficiencies in cross-border capital flows. The SEC
is working with other securities regulators around the world to reduce
these differences. To encourage the development of accounting standards
to be considered for use in cross-border filings the SEC has been
working primarily through the International Organization of Securities
Commissions (IOSCO), and focusing on the work of the International
Accounting Standards Committee (IASC).
Yet global accounting policies may soon change as key
accounting rule makers worldwide work toward the goal of convergence. At
the forefront is the IASC, committed to the development of accounting
standards that will bring consistency to accounting policies worldwide.
The SEC is willing to compromise and last year accepted three
international accounting standards on cash-flow data, the effects of
hyperinflation, and business combinations for cross border stock
filings. Still, the general consensus seems to be that before any real
progress can be made in the area of convergence, international standard
setters need more resources and the active participation of the major
parties involved.
A number of factors have contributed to this
convergence. Specifically, large supranational corporations have begun
to apply their home country standards in a manner consistent with IASC
standards or GAAP. In addition, while the accounting standards used must
be high quality, they must be supported by an infrastructure that
ensures that the standards are rigorously interpreted and applied, and
that issues and problematic practices are identified and resolved in a
timely fashion. Elements of this infrastructure include: effective,
independent and high quality accounting and auditing standard setters;
high quality auditing standards; audit firms with effective quality
controls worldwide; profession wide quality assurance; and active
regulatory oversight.
Corporate governance
The term "corporate governance" refers to the
"processes and structure by which the business and affairs of the company
are directed and managed, in order to enhance long-term shareholder value
through enhancing corporate performance and accountability, whilst taking the
interests of other stakeholders." The need to adopt an effective corporate
governance code is essential as we confront the waves of globalization
A useful first step in creating or reforming the corporate
governance system is to look at the principles laid out by the Organization for
Economic Development and Cooperation (OECD) and adopted by its government
members. These include: the rights of shareholders; the equitable treatment of
shareholders; the role of stakeholders in corporate governance; disclosure and
transparency; and the responsibilities of the board of directors. The guidelines
provide a great deal of detail about the functions of the board in protecting
the company, its shareholders, and its stakeholders. These include concerns
about corporate strategy, risk, executive compensation and performance, as well
as accounting and reporting systems.
Globalization
Globalization and the advent of new technologies have
dramatically changed the way business, government and society are organized. A
key driving force of these changes is a new business model. This new business
model is a philosophy of human organization based on conscious teamwork,
networking, motivating people and reducing waste, including the cost of under
using human capabilities, and to build the infrastructure for the creation of
knowledge. Distinctions in the classification between the old and new economy
business model may be somewhat artificial, but what is significant is that IAS
and the GAF should make the changed relationships and strategic alliance in
corporations more transparent.
The way in which developing countries respond to the current
forces driving globalization will have a major effect on their standard of
living, growth rates, quality of life, and development process in the coming
decades. In countries where institutions are not deeply rooted, shifting to the
new business model may meet less resistance than in countries where those
institutions are more developed.
Indeed, in countries where corporate and political governance
structures are very rigid (typically in conflict or tension-ridden societies),
adopting the new business model is likely to be difficult. As a result, these
countries may fall even further behind during this wave of globalization than
they did during the previous one. Some developing countries are flexible and can
adapt quickly, but they may face obstacles instituting changes. In short,
whether or not developing countries will benefit or lose from the new business
model and its competitive strength remains an open question. It depends largely
on how the governments of these countries respond.
The wave of the future is in flexible production and flexible
organizations. In that regard, many developing countries should continue to
improve the quality of their educational systems and their physical
infrastructure (notably telecommunications and transportation), which will
enable them to compete more effectively in local and regional markets and, in
the case of some industries, in global markets.
Conclusion
It is simple to state that we need more transparency and
accountability. In reality, the GAF will need tremendous efforts from all
parties. Prospering in the 21st century will require a multi-lateral dexterity
in coordinating the activities of the players, both the workers and the owners,
and balancing the needs of different stakeholders, the government and
regulators. These players must also develop a timely report card that is
understandable to all in both financial and non-financial measures of
effectiveness.
—AsiaNet Feature Service
|
