Figures don’t lie, but liars sure can figure.
That’s what I thought when I read about the proposed merger between the New York Stock Exchange and Deutsche Bourse AG. Apart from any new names—Wall Strasse, anyone?—the combination will strengthen the trend towards accounting convergence.
What’s convergence? Up until now convergence has mostly been a theoretical exercise for senior accountants and academics that served as an excuse for five-star junkets to London, Tokyo, and Zurich. It’s an attempt to harmonize accounting rules around the world. There were some questions about how to deal with stock options and mark-to-market, but most of those could be handled via email. The real convergence came when foreign stocks wanted to raise capital in the US. When they trade in our markets, they need to follow our rules.
But that may change with the merger. US companies need to file quarterly financials. Most foreign firms only file twice-a-year. The US generally has much stricter rules. It may be that US standards will prevail, as Michael Bloomberg recently predicted on a New York radio show. But it’s also possible that the Germans may want a say.
And accounting ambiguity creates opportunities for mischief. We’ve seen it before: Enron, Ahold, Parmalat—the list goes on and on. Promises of unfettered earnings growth were fulfilled by fraudulent paper profits. Accounting matters. This merger isn’t just about global markets. Regulators need to know who’s going to do the counting.
Douglas R. Tengdin, CFA
Chief Investment Officer
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