Accounting and Convergence in Corporate Governance: Doctrinal or Economic Path Dependence?

Convergence in corporate governance has been debated for more than 20 years. This paper seeks to explain convergence – and the lack thereof – in accounting laws and standards, within the context of this debate. One could argue about whether accounting has undergone international convergence. On the one hand, the two major accounting systems, IFRS and US GAAP, share the same goal of providing timely and useful information to investors. On the other hand, differences between the two sets of standards remain, and the SEC still does not permit domestic issuers to use IFRS. Moreover, while EU publicly-traded firms are required to use IFRS for their consolidated financial statements, many Member States, continue to require or permit the use of domestic accounting standards for private firms and for entity-level accounting.

This paper seeks to explain this persistent divergence with path dependence. Path dependence is often driven by interest groups. However, there is also the possibility of doctrinal path dependence, which can be explained with the difficulty of making fundamental changes given that legal professionals aim for certain and seek to preserve the value of their specialized human capital. A major factor in accounting reform are the interests of accounting professionals, particularly in large international firms (the “Big 4”). Divergence may in part be because the interests of this key constituency differ between the US and Continental European countries. In Europe, the internationalization of accounting has generally been favored by large firms because of the possibility of increasing their market share at the expense of purely domestic firms. This explains the compromise implemented in the Member state options of the IFRS Regulation. By contrast, the US already had a fully developed set of accounting standards focused on capital markets when IFRS became an option, which means there were no rents to capture for large firms as a result of changes in the audit market. In addition, a key feature of US corporate governance distinguishes it from other systems, including the UK, namely the prevalence of investor litigation. Consequently, a rules-based system serves the interest of the accounting profession better than the arguably more standards-based IFRS.