Platt Perspective on Business and Technology

Reexamining business school fundamentals – reading between the microeconomics lines

Posted in macroeconomics, reexamining the fundamentals by Timothy Platt on July 29, 2010

This is a posting about Generally Accepted Accounting Principles (GAAP) in its varying nationally standardized forms, and International Accounting Standards (IAS), also called the International Financial Reporting Standards (IFRS) to use its more current name. I find myself thinking of one of Akira Kurosawa’s movies, Rashomon as I write this and how the same basic events are turned into four differing narratives as to what happened and how, but with each supposedly accurately describing the same empirical reality. Microeconomics as a hands-on practice and this movie with is multiple visions of reality have a lot in common.

The United States has its version of GAAP and so do many other countries (e.g. Canada) and every country that seeks to set a standard for accounting and financial reporting seems to have a GAAP standard that it at least officially adheres to.

GAAP as formally defined and standardized in the United States is developed and maintained by the Financial Accounting Standards Board (FASB), Canada formally manages its GAAP through its Accounting Standards Board (AcSB) and the United Kingdom also has a body set up to manage its GAAP standards called the Accounting Standards Board though its acronym is ASB. Many countries codify their GAAP standards into law and usually into their common law.

There is an international body that seeks to resolve differences in this: the International Accounting Standards Board (IASB). This organization seeks to provide an overall framework of standards and interpretation of GAAP for international commerce, which it organizes and presents as their International Financial Reporting Standards (IFRS). This is an independent, privately funded organization based in London, UK and it only offers nonbinding suggestions and recommendations. Both historically, and currently, the IASB is an influential voice in the international accounting and microeconomics community, but that is all it is. And presumption of standards convergence notwithstanding, there is no active, comprehensive move underway for the world in general to adapt a North American or any other single unifying approach to GAAP as a consistently followed standard (see for example http://accounting.smartpros.com/x57688.xml.)

What are the implications and consequences of this as our global economy becomes more and more enmeshed and interdependent with more and more significantly complex supply chains and value chains that can and do cross virtually any national boundary?

A professional economist could, I am sure write virtually endlessly on this but I am not an economist and I am only writing a blog posting here so I want to focus on one issue, that I would argue informs all of them. Disparity and disconnects in standards and practices creates opportunity for uncertainty, of a nature that can and will raise due diligence concerns and that should call for risk remediation efforts and on the part of any business that sees its value and its stream of value received as dependent on the global marketplace.

A simple and perhaps fascicle rejoinder to that would be that our shared and increasing reliance on online and ecommerce forces a measure of international consistency and reliability, but from the user interface and the user experience side of ecommerce, we as customers, personal or business, deal primarily with specific and individual businesses when we do business online, that we directly make our product and service purchases from.

Back-end standardization through adaptation of financial and accounting XML and XLST standards may help to coordinate terms used, but a set of GAAP standards is more than just a vocabulary. I would argue that pressure to coordinate and reconcile national and regional GAAP differences will not necessarily come primarily from need to standardize financial transactions per se, at least at this level. I see the real pressure to develop systems uniformity and global standardization as coming from a growing need to find ways to consistently, reliably monetize information and across any and all national and regional boundaries, and whether information on individual consumers, anonymous demographic information, or any other type of business intelligence. That is, after all, the developing coin for organizing value chains between organizations and our current standards do tend to leave business intelligence, no matter how crucial to the organization, out of consideration when organizations are evaluated for their monetizable valuation.

I have written a bit on this in my occasional series, Macroeconomics and Business and I am sure to come back to this again and not just tomorrow when I turn to a more explicitly macroeconomic context in this series on reexamining the fundamentals to pose a question.

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