Private Enterprise and Financial Markets > Infrastructure and Financial Markets > Financial Markets
FINANCIAL DISCLOSURE: A First Step to Financial Market Development (Introduction)
Introduction
In supporting economic development throughout Latin America and the Caribbean, the Inter-American Development Bank has focused significant resources on the development of financial markets in this region. One of the primary building blocks of efficient and effective financial markets is the existence of and access to reliable information regarding the financial situation of individual firms. Without reliable information, investors are unable to analyze the risks and calculate the expected returns to investment opportunities. The cost of capital for companies will be higher, and many otherwise attractive investments will not take place.
One of the key tools for improving the quality of and investor confidence in financial information is the adoption by the private sector of high-quality accounting and auditing standards. To be fully effective in reducing the cost associated with uncertainty, the standards adopted must provide information that is comparable to international standards. Recognizing the importance of high-quality accounting and auditing standards, the Inter-American Development Bank, in association with the International Accounting Standards Committee and the Inter-American Accounting Association, organized a conference entitled Financial Disclosure and the Development of Financial Markets: The Impact of the Adoption of Internationally Acceptable Accounting Standards and Auditing Practices, held at the headquarters of the Bank in Washington, D.C., from September 29 to 30, 1997. This book offers several papers that the Bank commissioned for the conference.
The first chapter, by Kim B. Staking and Alison Schulz of the Inter-American Development Bank, presents the economic justification of high-quality accounting standards, which provide the basis for well-functioning financial markets and the allocation of investment resources. In addition, the chapter reviews the program to prepare a core set of high-quality accounting principles for cross-border listings of securities by the International Accounting Standards Committee (with support from the International Organization of Securities Commissions) and reports on a survey of accounting principles in Latin America and the Caribbean. The second chapter, by Fred Choi of New York University, develops a theoretical justification for better financial information and examines the impact of improved disclosure via stronger accounting standards on valuation of firms. Dr. Choi's analysis, using a variety of measures, indicates a strong relationship between improved disclosure and firm value.
The next two chapters provide case studies of countries in the process of reformulating their accounting standards to provide greater disclosure. In chapter 3, Armando Murguía, president of the Mexican Accounting Standards Institute (Instituto Mexicano de Principios Contables), discusses the process by which Mexico is attempting to bring its accounting standards in line with international standards while recognizing the unique characteristics of the Mexican economy. Mr. Murguía notes the progress that has been made to date, while recognizing that the economic and political resources needed to complete the process are difficult to come by. Alberto Krygier, in chapter 4, reviews the situation in Venezuela, a country that has not yet undertaken a reform of its accounting system. Mr. Krygier outlines some critical weaknesses in the country's current set of accounting principles (especially related to inflation and foreign exchange translations) and the loss in investor confidence that has resulted from the use of substandard accounting principles; it also offers suggestions for undertaking a comprehensive reform of accounting standards in Venezuela. Both case studies recommend an orderly transition in which a broad consensus is reached by preparers and users of financial statements, government financial market regulators, and members of the accounting profession.
In chapter 5, Alvin Carley of the Wharton School of Business, University of Pennsylvania, notes the importance of establishing a comprehensive transition plan aimed at adopting international accounting standards as well as international standards for external auditors. Professor Carley presents a variety of alternatives for making such a transition and discusses the benefits and costs of each approach. He strongly recommends that the transition be complete and accomplished over as short a time as possible and that all of the critical groups (external auditors, firm managers, investors and other users of financial information, and financial market regulators) be actively involved in the design and implementation of the transition process.
The authors of the individual chapters, as well as other participants in the conference, put significant time and thought into issues surrounding the adoption of internationally acceptable accounting principles and auditing standards. This book highlights some critical issues associated with the transition to high-quality, globally acceptable accounting principles and the value associated with improved financial disclosure. We hope that it will encourage the countries of Latin America and the Caribbean to begin the process of adopting and implementing comprehensive, high-quality accounting principles and auditing standards consistent with international practices. By highlighting both the benefits of such a transformation and the costs of inaction, the Inter-American Development Bank hopes that this publication, and the conference on which it is based, contribute to this important topic.
Kim B. Staking
Last updated: 06/01/07
