The Role of Financial Reporting in Reducing Financial Risks in the Market

Increased globalization of financial and product markets has raised the interest of both market participants and regulators in the quality of financial reporting worldwide. The rise in the volatility of stock returns across the globe in the past couple of years has also been a concern. Could greater transparency in financial statement information reduce volatility and produce more accurate stock valuations? Could more transparent financial statements of financial services firms (for example, banks) improve lending and credit evaluation decisions and contain the risks of a banking crisis? These issues are of central interest to all market participants and, in particular, to the U.S. Securities and Exchange Commission (SEC). The SEC is now considering whether to allow foreign corporations desirous of listing and raising capital in the United States to provide accounting reports prepared according to International Accounting Standards (IAS) instead of U.S. Generally Accepted Accounting Principles (GAAP). Greater openness to international accounting standards and other foreign GAAP would reduce the costs to foreign firms seeking to list their stocks on the U.S. exchanges and raise capital here. This would enhance the competitiveness of the U.S. capital market, thus enabling it to attract a greater share of the global market for financial services. The trade-off is the risk that IAS or foreign GAAP disclosures might be of low quality, which potentially could weaken the stability of U.S. financial markets. Increased risk would make the U.S. capital market less attractive to