Importance of Financial Reporting

Investors now routinely scour the globe looking for diversification and investment opportunities. At the same time they seek new and profitable opportunities, the economies in

which they invest directly benefit from greater access to capital for development and growth,

and from a lower and more competitive cost of capital. Because of the benefits to cross- border

investors and economies alike, the increasing globalisation of securities markets and capital is

likely to be a defining hallmark of the twenty-fi rst century.

Although globalisation has been gradually increasing for many years, the final building

blocks—the infrastructure necessary to ensure both free and unfettered movements of capital

across borders and the investor protections required to support the flows are just now being

put in place. They include cross-border stock exchanges, financial institutions with global reach

that can facilitate the efficient movement of capital from investors to companies, and the gradual development of cooperative arrangements among global regulators essential for the monitoring, oversight, and enforcement of consistent regulations and standards for investment.

However, among the most critical and urgent of these changes is the development of a

common financial reporting standard, really a common language applicable and understandable across the globe, and the importance of a single, high-quality standard cannot be overstated.

The effective functioning of capital markets and the economic benefits that they could

bring depend largely on the investors who participate in those markets. It is investors who

must interpret financial information, who evaluate the potential risks and rewards of investments, and who ultimately make investment decisions.

In the absence of such a standard, the barriers to free movement of capital to those who

most need it and can most efficiently use it can be formidable. Investors, both large institutions

and individuals, are required to invest large sums of resources to try to compensate,

if they can do so at all. Their efforts must include not only understanding the language in

which the financial reports are prepared but also gaining expert knowledge in the local

standards and their idiosyncrasies, as well as attempts to try to transform the various reporting

systems into a consistent and comparable format for the comparison of various investment

opportunities with the limited patchwork of information available. The attractiveness

of a single, high-quality standard is immediately apparent.

Although accounting standards are written with these global investors in mind, historically

they have varied widely across borders because of the existence of differing accounting

and enforcement regimes.  The International Accounting Standards Board (IASB)

develops accounting principles that span borders and require a company, whether in

New York, London, Tokyo, Mumbai, or Shanghai, to report a transaction in the same way. To enable investors and other decision makers to make informed judgements and to allocate capital efficiently, wherever they are based.

The establishment of a single set of high-quality accounting standards used throughout

the world’s capital markets would greatly assist in the analysis and comparison of financial information.  

International Financial Reporting Standards (IFRSs) are now permitted or required

by over 100 countries around the world, with the remaining major economies following a

path toward convergence and adoption. The adoption of IFRSs, combined with rigorous

audits and effective enforcement regimes, should serve as the basis of a sound financial

reporting infrastructure for increasingly integrated capital markets.

However, despite this excellent progress, much work remains to be done before the dream

of globally integrated financial markets with a single financial reporting system becomes reality.

First, financial statement preparers worldwide must have the tools they need to understand

and be able to apply IFRSs correctly and uniformly, regardless of the jurisdiction or the

regulatory regime.

Second, auditors in all countries and of all companies that choose to apply IFRSs must have the tools to gain the technical competence they need to perform audits of financial statements prepared according to the standards and to be able to demonstrate that knowledge through formal coursework in university curricula as well as rigorous examinations.

Third, investors must have the necessary tools to gain the expert knowledge of IFRSs required

to understand, analyse, and interpret financial statements prepared according to IFRSs.