Latin American Capital Markets

ACCOUNTING AND AUDITING STANDARDS 219The economic crisis in Mexico in 1994 shows why accounting rules and practicesconstitute a relevant tool for financial stability. At that time, Mexican accountingrules permitted banks to recognize as past due amounts only those payments thatwere past due and not the outstanding loan balance. In addition, it was also widespreadpractice to roll over loans as well as to lend money to distressed creditors tomake interest payments. These two accounting practices created severe underestimationof problem loans that were in excess of shareholders' equity.The case of Mexico is just one example that shows the importance of effectiveaccounting standards and monitoring by an auditing committee and the need foradoption of common global standards that are universally understood. Increasedglobalization of financial markets will require uniformity of standards for disclosureand release of information to pave the road for financial stability as a global publicgood. However, this abstract notion has to be powerful enough to convince emergingeconomies that effective accounting standards would help them not only toachieve financial stability but also to produce the political will and support and economicincentives to undertake reforms. A motivating factor is that financial crises areextremely expensive and create poverty and other negative outputs.As a given country makes decisions about the effective implementation of accountingstandards, the authorities of that country will have to take into considerationthe domestic political economy in selecting the appropriate set of standards. Withrespect to the latter, the authorities must select from among competing accountingconventions—the U.S. GAAR the International Accounting Standards (IAS), and nationalstandards. This plurality has an impact on transparency because a single eventcan have two or more accounting interpretations and therefore can lead to differentconclusions. This, in turn, involves a type of transaction cost, in adjusting the two accountinglanguages and making them comparable and acceptable to a wide range ofmarket operators and agents. In other words, it represents the cost of transparency,given the different accounting methods.The use of competitive methods increases thecost of capital for those companies willing to undergo the reconciliation exercise. Forexample, some countries do not permit companies to use IAS without a reconciliationto domestic generally accepted accounting principles and may also discourageother companies from going the same route to tap capital markets for financing investmentsand innovation.Evidently, the equilibrium of diverse sets of accounting standards is not efficient.Therefore, it should be helpful to explore the differences between the sets of standardsand the actions under way for harmonization among standards and convergence.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub