New York Senator Charles Schumer and New York City Mayor (and ex-Salomon bond trader) Michael Bloomberg co-wrote (er, co-signed a ghost-written WSJ article here) that suggest the following issues are why London is gaining on New York in new equity issues:

1. globalization of the capital markets,
2. overregulation,
3. frivolous litigation and
4. incompatible accounting standards

What caught my eye was the latter point. Incompatible accounting standards? It takes two to tango, so who's fault is that? Basically, it's a jibe at the FASB (US) vs the IASB (non-US), as if the US is being a cowboy here as in Iraq. Like international law, international accounting standards are more theory than reality. The IASB was created in 2001, and thus far hasn't closed the gap in accounting quality of the US vs the Rest of the World. In fact, one area where the USA is still far ahead of the world, is accounting, where the information is more timely and accurate than any other major country in the world. I know, there are many example of fraud in the US (Enron, WorldCom, MCI), but this happens everywhere in every time period, and it's statistically worse overseas. I would say The UK/Australia/Singapore is next, then Western Europe, then Japan/Korea in a far third place.

Less developed countries like China still have zero value in their financial statements because ultimately one need the discipline of the market, regulators and criminal prosecutors to make financial statements accurate. Their government, and thus regulators, are still too close to public companies for these statements to mean anything.

Most of my intuition comes from proprietary work at Moody's, because basically things like profitability or leverage are more related to default in the US than in Germany or Japan. My conclusion is that profitability and leverage are measure more accurately in the US (one can adjust for the different absolute frequency of default via a statistical adjustment). But this shows up today in my day job in portfolio management. Any relation between financial statements and future equity returns is more pronounced in the US. The US has the most informative accounting statements, and most of the rest of the world doesn't even generate quarterly statements, let alone audited semi-annual ones.

My interpretation is that the mention of international accounting standards is just happy 'let's all get along' talk for European consumption. Joining the IASB wouldn't cost much. But let's not kid ourselves: accounting informativeness is hardly an American problem, if anything, it is our one shining comparative advantage. The US should focus on amending Sarbanes-Oxley, discouraging 'stupid' lawsuits, and lessening the monopoly control of the listed exchanges on trading [surprisingly, the monopoly control over trading was not listed as an issue, perhaps because the monopolists reside in New York-NYSE and AMEX. Loosening up the exchange to an electronic market would face reality and serves mostly US companies].