Three pathways to global standards: private, regulator, and ministry networks.

Author:Gadinis, Stavros
Position:III. The Spread of International Financial Standards: Data and Patterns through V. Conclusion and Implications, with footnotes, p. 32-57
 
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  1. THE SPREAD OF INTERNATIONAL FINANCIAL STANDARDS: DATA AND PATTERNS

    Data Set

    The data set begins in 1980 and ends in 2012. The 191 jurisdictions, except for Hong Kong and Macao, are all sovereign states that enjoy significant independence in financial regulatory issues and provide separate data to bodies such as the Organisation for Economic Co-operation and Development and the World Bank. (112)

    This article's data set explores three different dependent variables, corresponding to the adoption of each set of standards. With regard to IFRS, a country is considered to have adopted the standards when it requires or allows its domestic publicly traded companies to use the standards for its quarterly financial statements and other reporting obligations under national securities laws. Countries that allow only foreign companies to list their stock using IFRS are not counted separately. The United States is the only country with a significant stock exchange to have allowed foreign issuers to use IFRS. (113) Because a partial adoption excludes domestic companies from IFRS compliance, it does not generate as much interest in IFRS from investors, regulators, and courts as a full adoption would have generated. Thus, while foreign companies are not formally required to reconcile their IFRS statements with U.S. GAAP, they must still convince investors about the quality of their financial statements. (114) Data regarding country adoption and implementation of IFRS are based on several sources, including the adoptifrs.org website, local laws, materials produced by large accounting firms (most importantly, Deloitte and PwC), and other news and online sources. (115) Countries are recorded as having adopted IFRS starting on the date on which they actually require domestic companies to comply. Typically, governments announce the decision to switch one to three years earlier, to allow companies to prepare.

    Countries join the IOSCO MMOU when the national securities regulator executes it. Upon execution, a regulator can receive or submit requests for cooperation from other regulatory authorities, and thus the execution date is akin to implementation. Execution dates were provided direcdy by the IOSCO secretariat. In countries with multiple securities regulators, such as Japan and the United States, multiple authorities are eligible to participate in IOSCO and to execute the MMOU. For a jurisdiction's joining date, the data set records the date on which the first eligible authority from that country joined the MMOU. In federal states, such as Canada, in which securities regulation belongs to the jurisdiction of the provinces, the joining date is the earliest date on which a securities regulator from that federal state joined the MMOU.

    Participation in FATF's anti-money-laundering network occurs either through joining either FATF itself or one of its FSRBs. In terms of implementing FATF Recommendations domestically, the difference between core FATF and FSRB membership is minimal, as all members are subject to mutual evaluation. Thus, the data set records the adoption date as the one on which a country joined either FATF or an FSRB. Some countries participate in both FATF itself and an FSRB (or even multiple FSRBs), in which case the earliest joining date is recorded.

    By 1990, all the key institutional structures for IASC, IOSCO, and FATF were in place. However, each network expanded along a very different path, as will be apparent from the sections below, with the pace and geographic patterns of adopting the standards varying significantly from one network to another.

    Adoption over Time

    Figure 1 indicates how many countries had adopted each set of standards by the specified times. Although at different pace, adoption was gradual in all three cases, with the exception of some important moments when each set of standards saw increased adoption activity, as discussed below. With regard to IFRS, Figure 1 suggests that adoption was very slow at first and accelerated only after market participants had voluntarily used IFRS for many years. Throughout the 1990s, many companies headquartered outside the United States used IFRS-based financial disclosures in private offerings of stock--that is, in largely unregulated offerings conducted under exemptions from securities laws that would result in no stock exchange listing. The first jurisdictions to formally permit or require the use of IFRS for stock exchange listings, such as the Czech Republic, Kuwait, and Mongolia, had only small financial markets. On their own, the national accounting rules of these countries would have little hope of attracting international investors' attention. By the end of the 1990s, seventeen jurisdictions had adopted IFRS. In 2000, the spotlight of global regulatory attention turned to accounting, as Enron and WorldCom collapsed under the weight of fraudulent off-balance-sheet transactions. Enrontype accounting misconduct was also behind the demise of the Italian giant Parmalat and the Netherlands-based Royal Ahold. Between 2001 and2005, IFRS spread to sixty-three jurisdictions (in total), including the then twenty-five EU member states. In particular, 2005 appears in Figure 1 as the year in which many countries actually implemented IFRS, although the legislative or regulatory measures were passed earlier, given the one- to three- year window that governments allow companies to prepare for IFRS implementation. The popularity of IFRS has continued to grow gradually through 2012.

    Jurisdictions instrumental in establishing FATF also adopted its recommendations, leading to a faster pace of adoption in the early 1990s, as Figure 1 shows. The Asian financial crisis of 1997 illustrated the volatility of global financial flows and the role of regulation in creating stable, robust financial systems. Many Asian countries adopted FATF's recommendations in that year and established a FATF-style regional body that continued to accept members in later years. Also in 1997, European countries created another FATF-style regional body, Moneyval. Sponsored by the Council of Europe, a 47-member international organization, Moneyval included all European countries that were not core FATF members.

    Although IOSCO was established in the mid-1980s, it did not launch its MMOU until 2002. From the beginning, MMOU signatories included the regulators of important markets such as France, Germany, the United Kingdom, and the United States. MMOU membership continues to grow at a steady pace, but it still remains at levels far below those of FATF or IFRS.

    Geographic Reach

    Figures 2, 3, and 4 map the spread of IFRS, the IOSCO MMOU, and FATF around the world. While all three sets of standards show some geographic clustering, the patterns of clustering are distinct for each set. More specifically, Figure 2 shows that countries adopting IFRS are widely scattered around the world. As noted above, early adopters are countries with small financial markets, like Egypt, Kuwait, Mongolia, and Peru. Outside the EU, IFRS's popularity within regions grows gradually, with some countries adopting first and their neighbors joining later.

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    Figure 3, which presents the spread of the IOSCO MMOU, offers a stark contrast to the IFRS map. The IOSCO MMOU encompasses the biggest and most-developed financial markets. It quickly expanded in both Europe and North America, as well as in important markets in Asia and South America. In the developing world, the IOSCO MMOU is especially popular among a specific subset of jurisdictions: important emerging economies, such as Brazil, China, and India. The IOSCO MMOU is not popular, however, among smaller developing economies.

    While IOSCO and IFRS expansion patterns show that the standards are more popular in some regions than in others, the FATF map, in Figure 4, presents a much stronger clustering pattern: countries in a particular region move to join FATF at exactly the same time. Successive blocks of neighboring countries join FATF and FATF-style regional bodies simultaneously, with only a few countries left in each region to follow at a later date. This pattern indicates that FATF expands through a well-orchestrated effort that involves the creation of regional institutions.

    Countries Adopting Multiple Standards

    While all three standards discussed in this study address securities regulation concerns, their popularity among countries varies significantly, as Figure 1 above has shown. Table 2 below explores whether some countries are more likely to adopt two or all three standards, perhaps because they are more connected to international financial regulation templates, or because they pay more attention to money laundering, enforcement cooperation, or financial disclosure.

    As this table shows, high-income countries are overwhelmingly likely to adopt all three standards discussed in this study. These high participation rates demonstrate how important international soft law has become for domestic financial regulation in these countries. Many middle-income countries, including important emerging markets such as Brazil and China, have also adopted all three standards discussed here, as have key regional financial centers such as Hong Kong and Singapore. But some important middle-income countries, like Russia, have not joined the IOSCO MMOU, and others, like India, have not adopted IFRS, although they have joined FATF and the IOSCO MMOU. Among low-income countries, very few have adopted all three standards. In fact, the majority of low-income countries have either adopted none of the three standards or have joined only FATF.

  2. ANALYSIS AND FINDINGS

    Analytical Design

    This part employs statistical methods to explore the adoption of international standards by countries around the world. (116) Prior empirical studies of the spread of international financial standards--which are very few (117)--fail...

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