Accounting Rules and Spontaneous Order

15 February 2009 at 2:08 pm 4 comments

| Peter Klein |

David Albrecht thinks the US should not replace its accounting rules (GAAP) with the new, international standard (IFRS).

A language evolves to fit its culture.  Language is not static.  Moreover, there is no one best way for a language to be. . . .

If Americans wish to speak to a person from Peking, they can get their communication translated.  The translation comes at a cost.  The benefit from avoiding this cost by switching [to Chinese] would be much less than the huge opportunity costs of educating everyone in the U.S. to speak another language.  If we continued using English, the translation to Chinese would (and is) a trivial expense, and a minor inconvenience.

Similarly, there is no good reason for anyone to have the U.S. discontinue using its accounting language (GAAP) and switch over to IFRS.  Having multiple accounting languages in the world is a minor inconvenience and translation expenses are, in the grand scheme of things, trivial.  Moreover, GAAP seems to fit our culture, economy and system of financial markets. . . . 

Who would benefit if the U.S. switched to IFRS?  Certainly not investors, for the same reason that they would not benefit if the country moved immediately to Chinese.  The beneficiaries would be the accounting firms that would teach us the new IFRS, and company executives.

My title refers obviously to Hayek’s concept of spontaneous order, language being a commonly cited example. “It was in the discussion of such social formations as language and morals, law and money, that in the eighteenth century the twin conceptions of evolution and the spontaneous formation of an order were at last clearly formulated,” writes Hayek in Law, Legislation, and Liberty (vol. 1, p. 23). “Although there was a time when men believed that even language and morals had been ‘invented’ by some genius of the past, everybody recognizes now that they are the outcome of a process of evolution whose results nobody foresaw or designed” (p. 37). (See David Gordon’s caveats, however.)

Addendum: Another accountant-blogger describes GAAP as like common law, with IFRS closer to statutory law (see Leoni). He quotes an accounting professor’s comment that GAAP

has been accreting guidance, exceptions and amendments for at least 75 years. That it often looks like a book of arcane rules is not coincidental — preparers, auditors, litigators, and to some extent users demanded it. IFRS is young, relatively untested, and only recently emerged as a comprehensive system of accounting standards. It will accumulate its own barnacles over the years.

Entry filed under: - Klein -, Austrian Economics, Corporate Governance, Institutions, New Institutional Economics.

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4 Comments Add your own

  • 1. Marcin Tustin  |  15 February 2009 at 2:20 pm

    Wait…what about the possibility that US accounting rules don’t fit the culture of the US particularly well except in so far as they allow business managers to present false accounts more easily?

    Surely the process by which USGAAP (and IFRS) must also be scrutinised to see who has influenced them for what purpose?

  • 2. Barbar  |  15 February 2009 at 3:15 pm

    What annoys me about the “spontaneous order” argument is that it tends to be trotted out selectively to defend the status quo. It’s often a fancily-dressed-up version of “things are the way they are for a reason, ‘unnatural’ change is bound to be bad.” Whether change is natural or unnatural is almost certainly a political question about legitimacy. In the end, “spontaneous order” doesn’t help us transcend the political dispute, not one bit.

  • 3. David  |  15 February 2009 at 6:29 pm

    I suppose that I should provide a more substantial reply at Prof. Albrecht’s blog, but the main problem with his argument is that it ignores 40 years of theoretical development and empirical results from the academic accounting literature. There is no need to resort to such loose analogical reasoning when there is a great body of positive research already providing a clearer view of the topic of primary interest.

  • 4. Warren Miller  |  15 February 2009 at 6:44 pm

    Well, since I make my living, in part, doing M&A work and impairment-testing projects that involve deploying the current fiasco called ‘Generally Accepted Accounting Principles,’ I’d appreciate, David, if you’d be kind enough to elaborate on exactly what it is that ‘ignores 40 years of theoretical development and empirical results from the academic accounting literature.’ An unsupported assertion like that smacks precisely of the ‘loose analogical reasoning’ which you decry.

    Like every other one-size-fits-all idea, IFRS and its kissing cousin, fair-value accounting, are the stuff that only theoreticians unconnected to the real world can embrace. In fact, did you know that not a SINGLE permanent employee of the Fin’l Accounting Standards Board (which seems to love the idea of ‘convergence’ between GAAP and IFRS) has EVER done any paying professional work involving the ‘fair value’ nonsense that FASB is dispensing? Not one.

    If you think the U.N. is effective, you’re gonna love IFRS, but only if we here in the U.S. cannot stop it. We need to.

    I’ve challenged them and toadies such as the director of the CFA Centre for Fin’l Market Integrity, Kurt Schacht (who is likewise unencumbered by any real-world experience in the fair-value arena), and shills @ to debate the issue anytime, anywhere, in front of any audience on the planet. They’re still hiding under their desks.

    So, if you have a ‘substantial reply’–and I mean ‘substantial’ in the sense of ‘substance,’ not ‘interminable verbiage’–then I, for one, would like to read it. Please enlighten us.

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