Introduce Regulatory Competition to Simplify Financial Reporting
6 Pages Posted: 13 Mar 2007
Date Written: February 26, 2007
Financial reports make significant contributions to corporate governance, capital markets, government, and the economy. US approach to financial reporting has led the way for the rest of the world, but it needs rethinking now. Over the past seven decades, a social norms based approach to financial reporting has been replaced by enforcement of written rules by authority. This approach generates endless requests for clarifications, shifts accounting education from analysis and discussion to memorization of rules, and drives talent away from the profession. Introduction of regulatory competition among sets of accounting standards, and the organizations who write them, will help simplify and improve financial reporting by permitting market feedback to enter rules, and by forcing rule-writers to make difficult trade-offs when they are asked to clarify their rules. Since regulatory competition is used in many aspects of US economy without ill-effects, the fears of race-to-the-bottom are unwarranted.
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