1. Introduction

World leaders in have urged that the international accounting standards need to be improved. After that, the G20 called key accounting standards makers, namely IASV and FASB, to create a single set of global accounting standards with high quality, with the belief that the global convergence of accounting standards “contributes to the free flow of global investment and achieves substantial benefits for all capital markets stakeholders” (PWC, 2007, p. 1). However, business environment in different types of capitalism are distinguished, one set of standards may be not able to be useful to both kinds of countries. Walker (2010) argued that the institutional characteristics of the political and economic system probably determine the optimal design of accounting standards, thus he thought this call is unwise and highly questionable. He also highlighted the imperative of variety of capitalism, especially after going through the global financial crunch caused by sub-prime crisis. This paper aims to explore whether a single set of global accounting standards is a wise determination by IASB/FASB, and critically assess the arguments of Walker. It will begin with analyzing intrinsic illogic of conceptual framework, and then examines the correlations between varieties of capitalism and setting of accounting standards. In the final section, summary about this essay will be provided. Generally, we agree with the arguments of Walker, and we also point out several limitations on his study.

2. The intrinsic illogic of conceptual framework

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2.1 Imperfection of market with uncertainty

The importance of perfect and complete markets for accounting was first assumed by Beaver and Demski (Walker, 2010, p. 141). They concluded that the motivation of financial reporting is to improve resource allocation rather than the measurement of income; and fundamental measurement arguments cannot determine the income or asset rule options, which should be determined by investors’ preference. Since the conceptual framework established by IASB/FASB aim to fulfill the capital market investors’ demands, another set of accounting standards is needed when the conceptual framework is not suitable to the market.

To settle the imperfect market, Walker suggested one solution, which is to enhance welfare by an improved information environment through three ways, which has been shown by research on the economics of uncertainty, which are enhancing forecasts to improve economic choices ex ante; greater opportunities of risk sharing to society; and improving information (Walker, 2010, p. 142). Nevertheless, the role of risk sharing information depends on the ability of prediction of analysts. Moreover, the relevant information of producers should be able to pre-commit and should be available to the contracting parties. According to Hope’s (2003, p. 236) document, the accuracy of analysts’ forecasting is associated with disclosure quantity of annual financial reporting positively both in the US and elsewhere. Improvement of information environment although can enhance welfare, it needs the operation of firms and institutions.

2.2 The nature of the firm

Walker (2010) discussed the nature of the firm, revealed three features of the modern firm, including the general contracting role, competition with other firms and owning a unique quasi-price system, and established another solution to imperfect market, that is replacement the market by firm.

According to Garrouste and Saussier (2005, p. 180), firm refers to a place which is coordinated by the price mechanism. Coase (1937) stated that the existence of the firm is because of the cost of using the price mechanism’, which also called transaction costs, due to the imperfection of market. More precisely, if there are no transaction costs, the product price will be the addition of each part’s price of the production. However, in the real world, there will be a cost on the production contract. Through utilizing their internal implicit quasi-price system to replace market price, firms are used to substitute the imperfect market, and then coordinate and manage the economic activities in the non-existing of the market. From this angle, the relevance and reliability of fair value accounting measures, which largely based market price, are needed to be reconsidered.

In line with Ball (1989), in order to gain comparative advantage, firms need to keep commercial secrecy for information on internal affairs, especially internal contracting technologies, from competitors and other third parties. By contrast, the stock market requires the external investors to be well informed by firms for valuing the firms based on the nature of capitalism. To balance this dilemma, managers will provide summary indicators.

Furthermore, according to agency theory, there is interest conflict between the agent and the principal. Hence, a stewardship problem exit between managers and investors, which the investors attempt to acquire more information about the firms while managers attempt to manipulate the information to smooth the impact on market share price, in order to present best performance. Confronting to managers’ selective reporting, investors require the firms to provide a periodic financial reporting so that the investors can appraise whether the firms are worth to invest. However, as the radical reason for the demand of periodic repointing, stewardship does not gain central concern in the conceptual framework provided by FASB/IASB, which seems illogical.

2.3 The nature of the financial system

The FASB/IASB issued a conceptual framework of financial system, based on five assumptions established by Allen and Gale (2000), which included security markets dominate the financial system, corporate finance, individual ownership of corporate securities, security prices supply all relevant information and corporate governance by the market.

However, Walker (2010) argued that these assumptions are not suitable for the real world financial systems. Firstly, it is not only the security market monitor and control the financial system but also the banks and financial intermediaries. Secondly, most firms do not issue the security for trade in the real world to against the assumption of corporate finance. Thirdly, most private individuals often pay attention on their personal saving and the investment often delegated to the banks or financial intermediaries. Fourthly, the assumption of security prices supply all relevant information would be wrong because the markets are imperfect so the perfect risk sharing does not exist. Finally, investors would control the manger to achieve their goal. From Walker’s argument, it would be probably true that conceptual framework based on unrealistic assumptions provided by FASB/IASB is untenable, which is not suitable in the real world.

In addition, stock market is not important in the most countries, for instance, in UK financial market play a central role but it is unimportant in France (Allen and Gale, 2000). This means that different countries have their different financial situations. Moreover, as the different financial situation in different countries, the intermediaries will find difficult to overcome the information barriers (Allen and Gale, 2000). Thus, a single set of global accounting standards may not be suitable for all countries.

3. Varieties of capitalism

3.1 Varieties of capitalism – national economic system

Basically being agreeable with the argument of Hall and Soskice (2001), Walker claims that varieties of capitalism could be divided into two categories, which are liberal market economics (LMEs) and coordinated market economics (CMEs). In the LMEs, companies tend to operate their activities through hierarchies and competitive market arrangements. However, in the CMEs, companies depend on non-market relationships to coordinate their activities with other actors in the market to construct their core competencies. Similarly, the early researchers normally distinguished the forms of capitalism by Anglo-Saxon capitalism that refers to English-speaking nations (e.g. UK and US), and Rhenish Capitalism which is associated with European Continental economies—most centrally Germany but also the Netherlands, Denmark and Japan (Albert, 1993). In Anglo-Saxon capitalism, markets and the price mechanism coordinate economic activities, while in Rhenish Capitalism, a range of non-market institutions operate the economic activities.

Most of the scholars recognized that there are some differences between different capitalist systems, thus different consequences would be triggered due to the range of product strategies/institutional variation. Hall and Soskice (2001) explore some features about LMEs and CMEs in five aspects. First, in the internal structure of the firm, the top management plays a monopoly control role in the firm under the LMEs, while the internal structure tends to coordinate each level of firm in the CMEs. Second, as to financial governance, in the LMEs, Capital is acquired in financial markets which are sensitive to current profits. Also, firms are incentive by a market which serves to corporate control to maximize their share prices. By contrast, in the CMEs, Capital probably provided by banks and other long term investors is not focused on quarterly earnings. Third, referring to industrial relations, in the LMEs employees are hired and fired as a part of a labour market. By contrast, Employees are often guaranteed by job security in the CMEs. Fourth, referring to training and education, in the LMEs, the workers are required general skills rather than the specific skills. On the contrary, under the CMEs, industry requires workers have sophisticated technical skills. Last, for inter-firm relationship, under the LMEs, the movements of personnel between companies promote the dissemination of technology. In the CME, the diffusion of technology will be realized by the inter-firm relationship.

3.2 Accounting standards for different varieties of capitalism

Walker pointed that there is no need to restrict the option to a single set of global accounting standard. With existing different forms of capitalism in this world, it would be obviously unfair ; inappropriate to enforce the accounting standards that designed for one type of capitalism on all other economic systems with essentially differences.

There are several differences between national general accepted accounting practice (GAAP) of countries within distinct forms of capitalism. Many scholars point that IAS or IFRSs is a form of accounting that is tailored to maximize trading in shares and predominantly reflecting Anglo-Saxon accounting model, appearing in countries like the UK, USA, and Australia, rather than Continental-European model, which can be found in such countries like Germany, France, and Italy (Flower and Ebbers, 2002 p. 56; Iandewing. et al, 2008). This means that IAS or IFRSs might be essentially distinguished from GAAP of such regimes of LME. For example, German accounting rules is stakeholder-oriented, which are generally perceived as a historical cost model that stresses to achieve income smoothing through managing fluctuations in net income, while IAS is shareholder-oriented, and commonly considered as a fair-value model (Hung and Subramanyam, 2004).

Achieving genuine convergence of accounting standards is a costly objective, which required an enormous investment of funds, people, and leadership to support (Toker, 2005). As Walker argued, a cost benefit test is necessary to be carried out to examine the merits of single set of global standards that praised by advocators. In line with the argument of Wayne Upton (2008), one of the self-evident benefits from global accounting standards convergence is the reduction of cost of capital. However, the study of Daske (2006) showed that there is no proof of a decline in the cost of capital for firms operated in German which apply IAS. Similarly, a number of researches compared the accounting amounts following IAS to those applying the domestic GAAP, and have found that there is no valid difference between them. For example, Van Tendeloo and Vanstraelen (2005) found that regarding to earnings management German firms applying IAS do not exhibit remarkable differences, when compared to those following German standards.

It seems that the advantages of enforcing accounting standards convergence for all types of capitalism are indefensible. One explanation for the unsuccessful enforcement is that accounting institutions exist in a complex set of institutions instead of in isolation, thus barely altering accounting standards might not be adequate to essentially enhance the quality of financial reporting , unless alteration on the legal environment and capital market are induced synchronously (Ding et al, 2007). The demand on valued and relevant accounting information between alternative forms of capitalist system may be different tremendously. Merely forcing uniformity on financial reporting of corporations that operated in different economic systems, without consideration on other institutional factors will result in focusing on form over substance of financial reporting, which does not serve the fundamental conception of international accounting framework.

3.3 institution evolution

On account of several uncertainties and changes emerge regarding to different countries; consequently, the benefits of diversity can be encouraged. The variety of approaches of doing business offers many choices to adapt to unpredictable events. The improvement of economic will be promoted by varieties of capitalism. Walker maintained that the forced adoption of a single form of accounting standards exposes the risk of restricting the alternative forms of capitalism development. A proverb warns that do not put all your eggs in one basket. In other words, it is unwise that allow varieties of economy system to fit in with one single of standards. The differences in accounting standards come from different countries where have much diverse economic system, culture and political background, and system of law. The makers of accounting standards should establish standards on the basis of the specific circumstances.

Specifically, as result of European Union (EU) integrated with varieties of ways of doing business, the nation’s incidental to EU tailored to particular specific economic models, liberal market economics or coordinated market economics. Therefore, it is crucial for members of European Union to interpretation the strategic importance regarding to variety of capitalism. Furthermore, if all firms from different nations be required to accommodate one single set of standard, which could be deprived possible benefits from competition. Sunder (2002) proposed that a monopoly accounting standard expropriate experiment with alternative varieties of capitalism to discover their economic consequences, generate internal incentives for organizations to set efficient standards and eliminate political pressures from the approaches of doing business.

Walker ascertains that the single European market project should be much more about encouraging competition and cooperation between varieties of capitalism and much less care about standardizing the European Union economy onto a single economic model. The wealthy accounting standards obtain a good opportunity to accommodate various economic systems and different varieties of capitalism. Based on Sunder (2002), it is more efficient to allow individual companies to choose a set of accounting standards from a competitive regulatory regime within and across national jurisdictions. According to Walker (2010), it was held by Benston (2006) that within a set of high-quality standards, limited competition provides the most feasible ; flexible setting to deal with increasingly global capital markets. Walker agrees but focuses not on the need for competition between standards but on the need to encourage competition and corporative between different variety of capitalism. Because of the existence of diverse of capitalism, therefore, some of variety in accounting standard is required.

4. Conclusion

From above analysis, this essay draws the similar conclusion of Walker’s. There are several difficulties with conceptual framework of IASB, in terms of fair value, stewardship and unrealistic assumption. It is unwise to utilize a single set of accounting standards in the two kinds of capital markets. We believe that it is a feasible approach of setting two new global accounting standards for LME and CME respectively and leaving options for listed firms between their own domestic standards or one out of the two global general accounting standards, which is raised by Walker, to resolve the obstacles of accounting convergence resulting from varieties of capitalism.

Nevertheless, it is essential to note that the arguments of Walker, which are generally rational, still suffer from several drawbacks. In the first place, the adoption of a single set of accounting standards not only restricts the advanced countries of North America and West Europe, but also influences substantially a number of different accounting jurisdictions such as those of East Europe, China and India. Attention should be extended to the rest of the world. Furthermore, Walker’s arguments probably are biased to some extent. He only focuses on the superiorities of varieties of capitalism, but he does not take the potential advantages of single set of accounting standards into consideration. Again, cost-benefit analysis should be produced.

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