In The Long and Winding Road to Financial Reporting Standards we reviewed the history of how accounting standards came to exist in the U.S. as Generally Accepted Accounting Principles (U.S. GAAP) issued by the Financial Accounting Standards Board (FASB) and international Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). We showed that it took years and was simultaneously tedious and contentious. Such is the world of standard setting of any kind. Here we examine the state of financial reporting standards today to draw some lessons for the work of the International Sustainability Standards Board (ISSB) which has just begun.

As our previous piece made clear, standards are social constructs, not something grounded in the laws of physics. While there may be technically worse answers there is never a single “scientifically correct” one. Standards enable and influence the dialogue between the companies who use them for reporting and investors who use the reported information for decision making. Human judgement and compromises are involved. The process takes place in a broader regulatory context which is itself nested in a political context of competing interests.

People who are unfamiliar with financial reporting assume it’s all pretty cut and dried. Their belief is that the clear standards which have been around for decades make it easy for companies to know how to report and straightforward for auditors to know how to audit. Most of all they assume that reported figures like revenue, profit, liabilities, and assets are absolute, and that a true and calculable measure of company “value” exists.

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