Accounting Scandal

I should be guilty of dissembling if I were not to refer to the economic difficulties which have affected Japan recently along with several other countries. I assume that these difficulties have come as a shock to people in Japan because of their contrast with the prolonged period of economic success which preceded them. But they show, as history has shown so often, that the enjoyment of steady uninterrupted growth, over the very long term, is beyond the capacity of nations. Every country, no matter how successful, seems bound to experience setbacks. The history of the changing wealth of nations is the subject for a different speech by a different speaker. But accounting has a part to play, an important part, because of its role in making markets work effectively. And this is very much the subject for this speech and this speaker.

The Value of Accounting Standards

Today, the central focus of accounting is surely the measurement of business performance. Over the last 200 years or so, the broad trend of economic development has been towards specialisation, large scale production, enabled by increasing domestic and international trade. Large scale production has depended on the growth of capital markets. Hence, although other purposes remain important, the modern focus of accounting has come to be to serve the capital markets, to make those markets work efficiently. This process is not finished in any country of the world, much less internationally.

I want to emphasise the importance of this purpose of accounting. People who provide capital do so for a return and they wish to have reports of performance to help them decide how much to invest in particular businesses and on what terms. They wish performance to be reported in a manner which helps them to assess future prospects. Investors generally dislike risk. The higher they perceive the risk to be, the higher the return they seek for providing capital to a particular business. Perceived risk comes partly from economic fundamentals: from technologies, from demand factors and from competition. But it also comes from accounting. If accounting information is failing to meet the needs of investors, perhaps because it is perceived by them to be unreliable, the investors will feel more uncertainty in judging economic prospects than is warranted by the economic fundamentals. Investors will require to be compens...

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...urrently experiencing a time of economic stress. I wonder whether people in Japan will think that this is the ideal time to accept international standards for cross border listings in Japan, whether they will think that acceptance of international standards would provide the clearest possible signal of Japan's determination to be in the mainstream of international accounting developments. I wonder whether people in Japan might think that this is the ideal time to undertake a review of all Japanese accounting rules to incorporate the best of international accounting so that, like Australia, Japan could say that compliance with national standards would produce compliance with international standards without the two sets of standards necessarily being identical. People might think that this would remove inhibitions for international investors in investing in Japanese companies and would enable Japanese companies to obtain their capital on the most favourable possible international terms. People might think that everything possible would then have been done to ensure that accounting was playing its part in the economic recovery which your overseas visitors so warmly wish you to enjoy.