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Challenge to accountants

Lax and flexible accounting standards might be tempting for those seeking refuge from the tax man's gauntlet. But for Latin American and Caribbean economies as a whole, the cost of such permissive bookkeeping is high.

The region is forced to pay a premium on the cost of capital because accounting standards used by local governments and companies are below internationally accepted levels, according to investors and accounting experts attending a recent conference at IDB headquarters in Washington, D.C. As a result, the region risks being left on the margins of international capital flows, they warned.

Countries worldwide are opting for greater financial disclosure and tougher, more uniform accounting standards. One reason is that in the global economy, universal standards are providing a common financial language for accountants, investors and regulators. Also, more stringent rules reduce the risk of financial panics and business and bank failures.

While agreeing on the need for change, some Latin American regulators at the conference pointed out that tightening standards will have a high cost, which must be judged against the benefits of a tougher regulatory regime. Some panelists predicted resistance from companies that fear increased disclosure will lead to more taxes.

Critics of the current laxity in Latin America, including private sector analysts, pinpointed a wide range of problems. Some were minor, such as tardiness in providing data and lack of e-mail addresses and phone numbers on the Internet. More serious flaws were the absence of necessary financial information and confusing and differing accounting standards in the same country.

IDB economists Kim B. Staking and Alison Schulz warned that unless the region improves its financial disclosure and accounting standards, the region will have "a comparative disadvantage in gaining access to capital, and will be forced to pay a higher price." This disadvantage will be especially felt by small and medium-sized companies; large firms are more inclined to adopt international standards so they can raise capital on European and U.S. stock markets.

Staking and Schulz said that the IDB stands ready to finance programs to help smaller firms make the transition.

Many larger Latin American companies now comply with the U.S.'s Generally Accepted Accounting Practices (GAAP), because it is a condition for being listed on U.S. exchanges. Some European firms have also adopted the GAAP standards.

The International Accounting Standards Committee, meanwhile, is developing its own worldwide set of rules. At the conference, the committee's secretary general, Sir Bryan Carsberg, promised that the new standards will be tough, inflexible, and uniform. "They might cause pain to businesses accustomed to flexibility," he warned. But he called the movement toward such strict rules "irresistible," because of the increasingly international scope of doing business.

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