The Institutional Economics of the Globalized Financial Regulation; Example on International Accounting Standards Board
Abstract: The internationalization of business and finance has brought out a need for a uniform, international set of accounting standards. International Financial Reporting Standards (IFRS) came out as a result and its reporting is used in 85 countries for all domestic companies. A company`s share prices are highly dependent on auditor reports and auditing is run over the financial reports prepared as International Accounting Standards Board (IASB) decides. Hence the standard-setters also set the rules of the corporate game. This paper focuses on the following main questions from an institutional economics perspective in order to enlighten the political interest problems related to the background of the internationalization process of the IFRS; Is IFRS really suitable for all the countries? What are the political forces behind the standard setting institutions? Are the countries that had a voting power on the formation of these standards are the ones that benefit from this application most? A theoretical cost-benefit analysis (CBA) of IFRS convergence and investor reactions is used to show the difference between the expected economic earnings of the developing countries and the industrialized countries after the convergence. The representational structure of the IASB shall be clarified in order to see whether an international accounting model set by a private institution could be strong enough to fend off governmental political pressures. The paper concludes that based on empirical studies in different countries after their convergence to IFRS, it can be clarified whether a more democratic standard setting board organization, where more countries are represented, could create a more efficient international set of standards.
