The FASB wrote a comment letter to the SEC on the roadmap to  international convergence, accompanied by a tour-de-force literature review by Luzi Hail, Christian Leuz and Peter Wysocki. The upshot of the research is that the US is unlikely to to see strong benefits to a formal convergence process, in part because our accounting standards are already pretty strong, and in part because common financial standards aren’t that effective in generating similar reporting outcomes–variations in the legal environment are too influential.

But what if we turned our attention from whether convergence is a good idea (a normative question) to whether convergence is likely to happen.  Enter Beantown researchers Karthik Ramanna (HBS) and Ewa Sletten (MIT), who find in their recent working paper that “more powerful countries are less likely to adopt IFRS (International Financial Reporting Standards).”  My reading of the results is that adoption is driven by a combination of three forces:

  1. Ability. Countries need to be functional enough to actually make a policy decision like this.  Adopters have stronger legal protection for creditors, fairer courts and and greater adult literacy.  Strength of the local government is actually nonlinear, with bigger effects at the lower end of the scale, so this seems to be a ‘minimum competence’ effect.
  2. Economic Benefit. The more adopters in the local region, the more likely a country is to adopt.  Also, adopters tend to be much bigger exporters….another measure of the type of economic interdependence that drives the convergence discussion in the first place.
  3. Political Cost. Politically powerful countries give up some of that power by signing on to someone else’s standards.

It’s possible that the authors are hanging too much story on too little peg–the measures of political power are wealth, population, land mass and years in the UN.  It would be nice to see this analysis shored up by some more direct measures of political power.  But I wouldn’t be at all surprised if the story held up, in part because it supports by own personal prediction:  the US is never going to cede power over its accounting standards to France.  (Of course it wouldn’t be France, but for whatever reason the France-bashing formulation seems to be standard for US political debaates on health care, welfare and other policies.  Why not accounting?