The UK’s exit from the European Union might have consequences for the conduct of accounting and financial reporting around the world. Or not. Whichever, this is a good time to examine the possibilities.

First, some brief history.

The International Accounting Standards Board

The International Accounting Standards Board (IASB) has its genesis in the 1960s when the three major users of accounting standards in the Anglo-American tradition — Britain, the United States and Canada — met and agreed to work towards a core of common accounting standards for financial reporting. Its goal was to facilitate the flow of capital across national borders through a common set of standards.

The early years of this century saw a rapid growth in commitments by countries to at least harmonise their accounting standards with the IASB standards and later adopt standardised IASB standards. Harmonising means that there are no substantive differences, while standardising meant that there would be no differences. Around 2005, the European Union and Australia had signed on and commitments grew out of Asia and South America.

The US would not sign up. Its accounting standards remain significantly different to the IASB standards.

So currently, the makeup of the International Accounting Standards Board, and its governing body the International Financial Reporting Standards (IFRS) Foundation, broadly reflects the makeup of its membership, being dominated neither by Britain nor by the EU.

What happens now?

Britain now faces an uncertain future. On one hand, there is an expectation that nothing much will change for them, and they might turn to the old British Commonwealth for trade deals. Others say calamity is knocking, with Scotland and Northern Ireland seeking to leave Britain, leaving only England and Wales behind. The argument goes that by retreating back across the Channel and abandoning the EU, Britain has become small. Perhaps this will force a re-evaluation of the value of globalised accounting standards — especially in Europe — now that Britain is leaving the EU.

International accounting standards can and do facilitate capital flows around the world. Accountants are now global knowledge workers, finding it easier than ever before to find work around the world.

Commerce has now become so global that most countries have worked out that this is not the time to go small and hide behind fences. Even China knows that its economy must become part of a global conversation and they have committed to harmonisation.

Unfortunately, as in most things in life, benefits don’t come free. There is pain involved in adopting international standards. The key issue is the loss of your local identity. Countries gradually lose the ability to respond to important local issues their own way as they move towards a world view of accounting standards. They lose sovereignty over how they tell their accounting stories via financial reports.

For some countries, especially those who were part of the British Commonwealth (like Australia), the international standards have not been too different from what would be done, anyway. For those removed from the British tradition, the change has been more troublesome.

Big changes. Or not.

And this brings us to the EU. Continental Europe does not have a British tradition, yet the EU has signed on to adopt British-centric accounting standards. They were lured by the promise of improved access to capital and easier cross-border trade, something at the centre of the European Union ethos. Now Britain has left them. For Europe, this is the first serious check to the ideal of open borders and the free flow of capital.

What could happen? For international accounting, it is quite possible that absolutely nothing will change. Or something dramatic could happen over time. The EU might insist that their standards now reflect a more Euro-centric view of accounting. Britain might retreat into its old Commonwealth, which might in turn become its own trading bloc.

The ideal of a single set of international accounting standards is still just that: an ideal. It will remain so as long as the United States remains removed from the IFRS.

The reality for the accounting world is a “two towers” model: the USA versus Everyone Else. Now Brexit could splinter this into pools of common accounting standards: The USA, the British Commonwealth and a more Euro-centric IFRS. Might Australia’s accountants have to choose which pool to belong to?

Gerard Ilott is affiliated with CPA Australia.