High-quality accounting standards are critical for efficient global markets. The most widespread – used in more than 150 countries – are International Financial Reporting Standards (IFRS). The International Accounting Standards Board (IASB) creates and maintains IFRS, which is challenging because countries have unique economic environments and financial reporting needs. As a result, the IASB recognizes the importance of obtaining robust global feedback on proposed accounting standards to ensure that IFRS remains high-quality and broadly applicable.
One of the primary ways the IASB obtains this feedback is by issuing proposed accounting standards (i.e., exposure drafts), which global stakeholders can comment on in writing (i.e., comment letters). Language barriers, however, may impede this process. Even though over 90 percent of the countries that use IFRS do not use English as their primary language, proposed standards are currently issued in English and, at most, three additional non-English languages, and all comment letters must be submitted in English.
If these linguistic frictions prevent the IASB from obtaining diverse, global feedback, they may impede the development of IFRS, resulting in sub-optimal financial reporting outcomes for some stakeholders. Further, these frictions may result in an apparent, even if unintentional, bias toward certain stakeholders. The perception of such bias may harm the IASB’s reputation as a globally-accepted standard setter that integrates global feedback through an inclusive process.
Language barriers may also result in comment letters from linguistically distant stakeholders receiving less consideration from the IASB staff and board members. The IASB received over 100 comment letters on average for each exposure draft, and it has finite resources to read and process them. Language barriers can reduce writing quality, making comment letters harder to understand and lowering evaluations of their quality and informativeness. Language barriers can also make it harder for non-English speakers to express unique ideas, meaning that their comment letters may be less likely to convey important jurisdictional nuances the IASB is unlikely to hear from other stakeholders.
We catalog over 10,000 comment letters related to 88 different exposure drafts to test our research questions. We follow prior research to measure the linguistic distance between English and the dominant language in each country, and we use both this continuous measure and a binary variable based on whether the distance is greater than the non-English-speaking sample median. We control for country-level cultural, economic, and governance characteristics that may correlate with linguistic distance and affect stakeholders’ willingness and ability to comment, including whether an IASB board member or the exposure-draft project manager is from a given country. We also include exposure-draft fixed effects to control for accounting proposal characteristics, such as the topical area, that may affect incentives to comment.
We find the existence and magnitude of a language barrier are associated with (1) a lower likelihood that any comment letters are submitted and (2) fewer total comment letters submitted from a given country. Thus, the IASB is less likely to receive feedback on proposed standards due to language barriers. Notably, geographic representation at the IASB board and staff levels reduces the effect of these language barriers.
To ensure these results are not due to omitted country-level variables, we exploit the variation over time in the availablilty of non-English language exposure drafts. Translated exposure drafts first became available in French, Japanese, and Spanish in 2007, 2009, and 2013, respectively. We predict these translations reduce linguistic frictions for the affected languages. We find that stakeholders are more likely to comment after exposure drafts are translated into their language. We also find some evidence that the ability to translate between English and a country’s dominant language through Google Translate increases the number of comment letters. Collectively, it is clear that language barriers impede the ability of global stakeholders to participate in the standard-setting process.
We also examine whether the IASB staff integrates comment letters into summaries of comment letters to measure whether feedback from linguistically distant stakeholders is less likely to have an impact and be seriously considered by the IASB. The comment letter summary is the starting point for deliberating over proposed accounting standards. We find some evidence that comment letters from linguistically distant stakeholders are less likely to be quoted in the summary document. To provide more insight, we use path analysis to test the effect of language barriers through their impact on the writing quality and uniqueness of comment letters. We find that linguistic distance harms both the writing quality and uniqueness of comment letters, and higher writing quality and uniqueness increase the likelihood of comment letters being integrated into the summary. Thus, comment letters from linguistically distant stakeholders are less likely to be included in the summary due to their lower writing quality and fewer unique arguments. As a result, even the comment letters that linguistically distant stakeholders submit appear less likely to affect the final accounting standards.
Our study contributes to two areas of prior research. First, no research has empirically focused on the role of language barriers in the accounting standard-setting process. Moreover, while prior research has focused on various aspects of comment letters, we are the first to focus on the barriers to submission. Second, the study contributes to research on the effects of language on accounting. Prior research found some evidence that language barriers slow the adoption of IFRS, and translations improve the application of IFRS. However, no research examines how language barriers affect the creation of IFRS itself.
Our study can also inform practice. On the one hand, our results reveal that changes made at the IASB, such as more geographic diversity at the board and staff levels and translations of proposed standards, have increased participation in global standard-setting. On the other hand, the IASB still appears to receive less feedback and less helpful feedback than it otherwise would from many stakeholders because of language barriers. Thus, our findings should be informative to the IFRS Foundation, which oversees the IASB, as well as other global policymakers and regulators.
This post comes to us from professors Eduardo Flores at the University of São Paulo – Brazil, Brian Monsen at The Ohio State University, and Emily Shafron and Christopher G. Yust at Texas A&M University. It is based on their recent article, “‘No Comment’: Language Barriers and the IASB’s Comment Letter Process,” which is available here.