Latin American Capital Markets

^CHAPTER 7Accounting andAuditing StandardsPietro MasciIvan SotomayorInformation disclosure plays an essential role in capital market development and inthe valuation of assets by market operators and agents—investors as well as researchanalysts and rating agencies—according to the risk-reward paradigm.This function isregarded as a form of market discipline. 1 That is, bondholders, depositors, and stockholdersuse information disclosure to evaluate changes in the firms' risk and the actionsof their management, shareholders, or other players to undertake correctivemeasures to control the risk level. However, to achieve market discipline, financialmarkets need essential information that allows market operators and agents to understandthe performance and risk-reward functions of going concerns and decide acourse of action. Confidence in capital markets begins with the quality of financial information,that is, its timeliness, accuracy, and availability to the various market players.Disclosure of information according to agreed parameters, which makes it easilyaccessible and understandable, allows investors to make decisions and in turn servesthe overall objective of allocating resources. Thus, generally accepted accounting andauditing standards permit widespread participation in capital market activity, build theconfidence of participants, and create the conditions for growth and the appropriateallocation of capital. The effective implementation of accounting standards in a givencountry is one of the factors that enhance disclosure of information. Moreover; theconvergence and ultimate harmonization of the standards will facilitate the integrationof capital markets and the cross-border flows of capital and foreign direct investment.In December 2001, Enron Corp, one of the largest companies in the UnitedStates, filed for Chapter I I protection from creditors under the U.S. bankruptcy code.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub1Market discipline is a relatively new concept in the financial literature. It constitutes one of the three pillars of thenew Basle Capital Accord (the so-called Basle 2).