Why Competitive Standards

1. Why Competitive Standards Shyam Sunder Yale University AAA Doctoral Consortium Lake Tahoe June 13-17, 2007

2. Standards Competition • Let the authorities in each jurisdiction choose two or more SETS of standards that companies are allowed to use in preparing their reports. Reporting companies pay a royalty to standard setting organization they choose, and these royalties are the sole source of revenue of the standard setting organizations (i.e., no SOX fees for FASB)

3. Fifteen Reasons for Competitive Standards • Problem too complicated for a Cartesian solution; criterion for choosing standards unclear • GAAP started as common law, bottom up evolution of practice, not GIAS • Experimentation with alternatives will allow research data, comparison, discovery of better methods and learning • Competition places bounds on complexity • Introducing economic tension to help standard setter decisions • Language works through variation of meaning (Esperanto failed) • Examples: bond rating, auditing standards, university accreditation, appliances, state charter of corporations, stock exchanges, US and PA Deptts of Agriculture with no evidence of race-to-the-bottom

4. Fifteen Reasons for Competitive Standards • One size does not fit all in a country or the world: clientele • Relief from undue pressure from interest groups on standard setters • Choice of standards set as an additional information signal • Protection from special interest capture of regulatory body • Uniform standards insufficient for uniform reports without uniform economies • Competition blocks endless progression towards detail in a fractal world (infinite detail) • Judgment as essence of a profession • Cancerous impact of standards on accounting education and quality of people

5. www.som.yale.edu/faculty/sunder Shyam.sunder@yale.edu