International Accounting Standards and Regulation in Australia

Background and Need for Regulation

International regulation is a necessity in the finance arena, as the world bears a high degree of interconnection — particularly via banking and accounting. In 2008, Europe received international recognition for its attempts to strengthen the world financial system and protect nations around the world from a serious crisis. As Brown and Sarkozy noted: "Europe led the way last year in facing down the global financial crisis, restructuring our banking system and strengthening the global financial system. The European Union was also at the forefront in calling for a new forum for economic cooperation of G-20 leaders. And from the outset of the crisis, it was Europe that promoted the fiscal stimulus — and sought to coordinate it globally — that has been a major factor in preventing recession becoming a worldwide depression" (2009).

The reality is that in order for healthy global finance to occur, there truly needs to be global regulation. A clear example of this emerged when the EU created a thorough set of rules for the financial sector to ensure the crisis of 2008 would not be repeated. These rules consisted of elements such as tight control over credit rating agencies, stricter capital requirements on intensive products such as securitization, and a strengthening of deposit guarantee schemes (Brown & Sarkozy, 2009). These are all forms of international regulation designed to ensure that excessive risk-taking does not become the norm and that capital rules for banks are stronger and more rigorous (Brown & Sarkozy, 2009).

Benefits and Theories of Regulation

All of these decisions have the interest of the world and the global economy at heart and attempt to protect international interests. In many respects, there is a strong argument for this type of regulation. As Deegan illuminates, many markets for information simply are not efficient, and "on average" market efficiency arguments tend to dismiss or devalue the rights of individuals (2009). Other arguments for regulation demonstrate how it can be highly effective because it enables regulators to demand information from certain entities and obtain it, whereas in other circumstances this would simply not be possible (Deegan, 2009). Regulation is vital because it protects individual investors from fraudulent organizations that can hide behind fabricated or invented information (Deegan, 2009). Regulation creates an environment where more and more entities are compelled to adopt uniform methods, which in turn bolsters comparability (Deegan, 2009). Regulation forces companies and banks to adopt a greater level of transparency, protecting investors and local and national stock markets while holding everyone to a higher standard of business practice.

Transparency should not be underestimated, as it is closely related to quality. Quality is defined as "the extent to which accounting information reflects the underlying economic situation of the firm. It is related to the concept of 'transparency,' defined as the ability of users to 'see through' the financial statements to comprehend the underlying accounting events and transactions in the firm" (Gallery, 2006). Regulation is one way, some argue, that transparency and quality can be achieved; others argue for standardization or harmonization of accounting practices.

The most commonly cited theory in support of regulation is the "public interest" theory of regulation, which is founded on two assumptions (Shleifer, 2005). The first assumption holds that unregulated markets generally fail because monopolies take over or externalities disrupt normal functioning; the second assumes that governments are mostly benign and capable of correcting these failures through regulation (Shleifer, 2005). "According to this theory, governments control prices so that natural monopolies do not overcharge, impose safety standards to prevent accidents such as fires or mass poisonings, regulate jobs to counter the employer's monopsony power over the employee, regulate security issuances so investors are not cheated, and so on" (Shleifer, 2005). As the last hundred years have demonstrated, the public interest theory of regulation is the cornerstone of modern public economies (Shleifer, 2005).

Criticisms and Drawbacks of Regulation

The public interest theory is just one example of a common framework supporting regulation; however, it is a theory that has been criticized and challenged by experts, scholars, economists, and professionals for a very long time. The three main criticisms it typically faces are as follows. First, markets and private orderings can address and manage the bulk of market failures without government intrusion or regulation (Shleifer, 2005). Second, in those particular instances where a market might need extra guidance, government regulation is unnecessary because litigation can address whatever conflicts exist (Shleifer, 2005). Third, if markets and courts cannot adequately address the problems at hand, it is highly unlikely that government regulators will succeed either, given that they have reputations for being "incompetent, corrupt and captured" — creating the very real possibility that government regulation will make things worse (Shleifer, 2005).

There are also some immediate practical drawbacks to government regulation. As Deegan explains, accounting regulation is not always necessary because people generally pay for information to the extent that it is useful (2009). Capital markets generally act to punish organizations that fail to provide information, treating silence as equivalent to bad news (Deegan, 2009). Regulation can also create a surplus of information, since users who do not bear the cost of supply may tend to overstate their needs. Additionally, regulation can restrict the accounting methods available to an organization, potentially preventing an entity from using methods that truly reflect its performance and position (Deegan, 2009). This is not merely an inconvenience; in such cases, regulation can impair the efficiency with which a firm communicates information about its operations to the market (Deegan, 2009).

Advantages of International Accounting Standards for Australia

At the same time, many people within the international community are pushing for the adoption of international accounting standards for a variety of legitimate reasons. Such standards mean that international investors are better able to comprehend the financial performance of companies around the world (Deegan, 2012). With this greater level of understanding and transparency, there is an expectation that greater capital inflows will be generated and that it will be even easier for companies to list on the stock exchanges of foreign countries (Deegan, 2012). If a particular company is listed on more than one stock exchange, it would need to produce only one set of financial statements, yielding significant cost savings (Deegan, 2012).

Accounting and auditing professionals working for international entities will also gain greater mobility to move between companies as a result of the unification of standards. Cost savings will concentrate around the accounting standard-setting function — as opposed to individual companies duplicating one another's work — with the bulk of standard-setting activity centering on the IASB (Deegan, 2012). Furthermore, there is an expectation that IFRS will support the development of more accurate, comprehensive, and timely financial statement information compared with the national accounting standards they replace (Deegan, 2012). Deegan also points out that "to the extent that the resulting financial information would not be available from other sources, this should lead to more-informed valuations in the equity markets, and hence lower the risks faced by investors" (2012).

In the case of Australia, many experts believe there is no point in Australia maintaining standards that the rest of the world cannot readily understand. For much of its history, Australia managed its own reporting requirements for incorporated companies and other entities; however, experts argue that such practices are isolating and do little to attract business, capital, or investors to the country. As Deegan explains: "Even if those standards were considered to represent best practice, Australia would not necessarily be able to attract capital because foreign corporations and investors would not be able to make sensible assessments, especially on a comparative basis, of the value of Australian enterprises. The need for a common accounting language to facilitate investor evaluation of domestic and foreign corporations and to avoid potentially costly accounting conventions by foreign listed companies are powerful arguments against the retention of purely domestic financial reporting regimes" (2009, p. 110).

This argument is a compelling one: a country like Australia maintaining its own unique accounting standards is perfectly reasonable if the nation chooses to operate in isolation. But in order to be an active participant in the world economy and to attract foreign investors, a greater degree of standardization is necessary. One expert even accused Australia of lagging Europe in adopting IASB standards, asserting that this was something the world economy could not afford (Godfrey & Chalmers, 2007).

When asked whether it is appropriate for foreigners to set accounting standards and regulatory practices for local entities, the answer is not straightforward. A country like Australia can certainly maintain its own standards and act in whatever it perceives to be its best interest; but the consequence of doing so is likely to drive away potential business and investment, leaving it more isolated. While it might not serve the world economy for a country the size of Australia to forgo harmonization, one can still argue that the final course of action ultimately remains Australia's decision to make.

Conclusion

Regulation of accounting practices is a clear necessity in the modern era, given the intricate and interconnected nature of the global economy. However, government regulation is not the only way to achieve quality and transparency. Regulation can occur at a private level, through independent auditors or through collective and self-regulation. Companies need to be reminded that they are still held to the highest and most fundamental ethical standards — both locally in their home countries and on the world stage.

Continuing to adopt standardized accounting practices as shaped by the international community is the best path toward attracting investor interest and advancing Australia's position on the global stage. Australia has only been aligning and harmonizing with IFRS since 2005 — it is still early in the process (Picker, 2009). While some critics have argued that the changes Australia has made so far have not yet benefited the country, it remains too early to render a definitive verdict. The real effects — measured in foreign investor interest and the international expansion of local companies — will no doubt become clear in the coming decades.