The Accounting Tower of Babel: Language and the Translation of International Accounting Standards

Abstract

I assess whether translations of IFRS published by the IASB are effective at improving financial statement comparability for non-English-speaking firms. I estimate how comparable non-English-speaking firms are to (1) matched English-speaking firms, and (2) other non-English-speaking firms that speak a language that differs from the focal firm. Using stacked OLS estimation, which takes into account the staggered issuance of translations into new languages, I find that translations are associated with significant improvements in both measures of comparability, suggesting that translations are effective at helping non-English-speaking firms account for equivalent economic activities similar to other English- and non-English-speaking firms that follow IFRS. I also find evidence that translations are more effective at improving comparability among non-English-speaking firms as the distance between the translated language and English (linguistic distance) increases. In cross-sectional analyses, I find that translations may be more effective when a country’s governance mechanisms are low, its local GAAP is further from IFRS, and when the non-English-speaking firm is small. Overall, my analyses suggest that translations have a measurably positive economic effect on firms domiciled in non-English-speaking countries, providing some of the first empirical evidence that translations published by the IASB are meeting their stated objectives.

Keywords: IFRS, translation, financial statement comparability, linguistic distance, language barriers