International accounting standards: A good investment

A corporate finance expert explains why better accounting standards boost confidence and attract investors

By Daniel Drosdoff

Antonio Vives is deputy manager for private enterprise and financial markets in the IDB’s Sustainable Development Department. An IDB veteran who has served the Bank for 20 years in many capacities, he has a Ph.D. from Carnegie Mellon University in corporate finance and capital markets and has authored a Spanish-language textbook on the uses of accounting information.

Adhering to internationally accepted accounting principles is just one tool among many that can reduce risk and bring economic and financial benefits. Even more important than the information reported is the disclosure that comes along with it. Hopefully, banks will do a better job at lending than they do today if they have information available that is more accurate and is better disclosed. Remember, some of the global financial contagion has in the past been precipitated by banking crises. The application of internationally accepted accounting principles can have a positive impact on banks, resulting in better accounting for the capital base and better compliance with the Basle principles.

IDBAmérica: Redesigning a national accounting system to conform to the standards of the International Accounting Standards Board is expensive for many countries, but apparently the IDB thinks the cost is worth it?

What the Bank does is suggest the advantages, such as reducing the cost of capital for the firms, and improving the stability of the financial system.

When you have better transparency and better accounts, you will find more people willing to lend to you. Uncertainty is reduced. Your firm is perceived as less risky. Hence, creditors will ask a lower risk premium on your capital.

Attracting investment is an obvious benefit. Attracting loans is another. Then there is a question of access to overseas capital markets. A firm eventually will be able to issue stock anywhere in the world if it adheres to the international accounting standard.

IDBAmérica: What can the IDB Group do to assist countries that want to reform their national auditing and adopt the principles of the International Accounting Standards Board?

The Multilateral Investment Fund is the ideal vehicle for assistance in this area by the IDB Group, because it focuses on private sector development and this issue now concerns the private sector. There is work being done on an international standard for accounting in the public sector, and this is very important, but this is not ready yet. The private sector international standards already exists. MIF has already approved an auditing and accounting program for Nicaragua, and another is being prepared for Panama. The IDB Group can support the dissemination and training efforts, conduct diagnostic studies of changes and assist in the implementation of the required changes in regulations and institutions.

IDBAmérica: What kind of road map can you provide a country that wants to adopt the international standard but doesn’t know how to go about it?

First you have to do a diagnosis of the legislation and regulations in your country: taxation code, commercial law, securities regulation, banking regulations. You have to determine what impact the adoption of international standards will have on the operation of all of those systems. You need to know the cost of adjusting any regulations you may have to change. Admittedly this can be difficult and expensive, but we feel the benefits are worth it.

IDBAmérica: Is it more difficult for a smaller country to adopt the internationally accepted accounting principles than a larger country?

I wouldn’t generalize, for the following reasons. What happens is that the smaller countries may not have the required resources to accomplish some of the reforms. In the larger countries you face another problem: special interests are more powerful, and that makes overcoming opposition to more costly reforms.

Brazil has made a lot of progress in corporate governance, but to implement the international accounting standards, the country may have to change the commercial code, and this is difficult.

Changing the accounting practices has an impact on taxes and dividends. New laws and regulations are needed to take this into account. Changes will be required for the regulatory and tax systems. You have to do it all. Halfway measures won’t work.

IDBAmérica: Tell us a little bit about the textbook you published, Evaluación Financiera de Empresas. Was there a point you wanted to make?

The book was written at a time when Latin America was undergoing mild inflation. I wanted to show that even that mild inflation was distorting the accounts. In the process I showed how to correct those misstatements and biases people had, or the mistakes that people could make, in preparing financial statements, be it either according to local accounting principles, or according to the U. S. Generally Accepted Accounting Principles (GAAP). I also pinpointed many of the pitfalls arising out of the different assumptions that are implicit in any accounting principle. Unless you know the assumptions, you can’t do a good analysis.

IDBAmérica: You mean the numbers may be right, but the information wrong?

When you see a financial statement, there are many assumptions that have been made. The numbers do not necessarily reflect all the information. So you have to go behind the numbers to find out the assumptions that were made in the preparation. Many more items that may have an impact but do not necessarily translate into the financial statement, like future events that are being planned.

A financial statement is a very small part of all the financial information that you need to know. There are different options allowed even within a given accounting principle. You have to know which option has been used. The international standard will still have options.

And that’s why we insist so strongly on disclosure, not only on the financial statements, but also on the methodology used for the configuration of the financial statements.

Date posted: June 2001