Global financial reporting convergence: A study of the adoption of International Financial Reporting Standards by the Swedish accountancy profession

Abstract

International Financial Reporting Standards (IFRS) is a financial reporting standard for listed corporations in more than half of the world’s countries. This wide adoption combined with its influence on accounting in countries that have not formally adopted it makes IFRS a remarkable case of far-reaching convergence. This paper develops a framework that integrates institutional theory and political economy and employs a discourse analytical approach to address the issue of why the Swedish accountancy profession came to accept and adopt IFRS. The analysis covers the professional debates regarding the measurement of the value of assets and liabilities in the main professional journal over the nearly two decades in which IFRS was gradually integrated into the local accounting standards on a voluntary basis prior to its formal adoption. The analysis emphasizes the combination of a pervasive international development discourse that stresses the significance of financial markets developing into a sense of inevitability and an elite portion of the accountancy profession with a vested interest in change. IFRS can be seen as a strategic professionalization project for the elite members of the accountancy profession which, combined with financial interests, led to its endorsement of the changes and alignment with forces of financialization.

Keywords

Financial accounting IFRS convergence Sweden,discourse analysis corporate governance

Introduction

The adoption of International Financial Reporting Standards (IFRS), which is developed by the private regulatory body, the International Accounting Standards Board (IASB), as the standard for financial reporting by listed corporations around the world, may be one of the major processes of international convergence relating to corporate governance in recent decades (Chua and Taylor, 2008; Judge et al., 2010; Ramanna, 2013). One hundred and twenty-six jurisdictions around the world currently require the use of IFRS by domestic listed corporations (IFRS, 2017). There have also been conscious efforts to converge local standards with IFRS in countries not currently requiring the use of the standard (e.g. the US and China), although this convergence is far from complete, especially in the case of the US. Even though resistance exists, and there is variation in how IFRS is applied and enforced (Maroun and van Zijl, 2016; Preiato et al., 2015), the standard is arguably a remarkable success story of international convergence.

While the standard is currently mandated by law in most countries in which it is used, the introduction of legal provisions is closer to the end point than the beginning of a convergence process and is preceded by a process leading up to new regulation that generally takes place at a national level. Arguably, understanding these processes and how, in the case of financial reporting, they often lead to the adoption of IFRS is key for understanding how such a large fraction of the world could converge upon IFRS. This convergence was never self-evident; in many other cases of corporate governance harmonization movements that we have seen, there have been resistance and customization of rules and practices to fit local elites (e.g. Fiss and Zajac, 2004; Jonnergård and Larsson, 2007; Jonnergård and Larsson-Olaison, 2016; Jürgens et al., 2000; Rose and Meyer, 2003; Vitols, 2004). The success of IFRS becomes even more remarkable, considering that IFRS for most countries represented a fundamental change in the conceptual foundations and basic principles of financial accounting (Müller, 2014; Nölke and Perry, 2007; Palea, 2015; Whittington, 2008) and that it is developed by a private organization at a greater distance from local professional circles than the national standard setters that are at least partly replaced by IASB (Chiapello and Medjad, 2009; Perry and Nölke, 2006).

This paper addresses the issue of national-level IFRS adoption. I attempt to bring a perspective combining institutional theory (e.g. Chua and Taylor, 2008; Judge et al., 2010 and political economy (e.g. Müller, 2014; Nölke and Perry, 2007; Palea, 2015; Perry and Nölke, 2006) to bear on the issue using the process by which IFRS came to be adopted in Sweden as a case. The paper has two aims: First, it aims to develop an explanation as to why IFRS came to be seen not only as acceptable but also normatively appropriate in Sweden. Second, the paper aims to contribute towards developing a framework integrating the institutional and political economy perspectives for analysing the country-level adoption of international accounting standards, which can help to explain the relative success of IFRS on the world stage. Sweden, an export-oriented economy with a significant financial market relative to the country’s size (Stafsudd, 2009), but with no significant influence on international accounting development, formally adopted IFRS as a standard for listed firms together with the rest of the EU in 2005. However, it had by then already adopted most of its content in the previously used local standard (Hellman, 2011). Swedish accounting law only sets the basic outline for financial reporting, referring to so-called ‘good accounting practice’ (Sw. god redovisningssed) developed primarily by standard-setting bodies dominated by professionals to fill in the details. The paper therefore focuses specifically on how the local accountancy profession came to accept IFRS. The standard represented a significant shift in accounting thought, moving from a system emphasizing accounting conservatism and historical cost measurement (Hellman, 2011; Jönsson, 1994) towards the more capital-market oriented IFRS.

The paper’s findings suggest that the key for understanding the Swedish adoption of IFRS lies in the role of the elite members of the accountancy profession (senior auditors and preparers associated with multinational corporations, and academics associated with standard setters). This elite group had a vested interest in financial accounting convergence as a revenue-generating (De George et al., 2012), or cost-saving, professionalization project (cf. Hines, 1989). These actors mobilized a discourse of inevitable international development that was legitimated with reference to ongoing financialization and globalization, which created both pressures of deinstitutionalization of old practices and the legitimation of IFRS as the relevant solution, thereby paving the way for the institutionalization of IFRS. This illustrates the significance of considering both the dynamics of deinstitutionalization/legitimation of accounting standards and how it relates to broader changes in the institutional and political environment, and the local power relations among the actors that try to shape these dynamics, when attempting to explain the trajectory of the national-level adoption of accounting standards. The findings suggest that there is an interest in a common world standard by the elite members of the accountancy profession that, in most countries, is likely to have a large influence on policy development. This, combined with a generally prevailing optimism about globalization and financial market development around the time when most countries adopted it, helped make IFRS relatively successful as a convergence project.

Emergence of IASB as a global standard setter

The history of IFRS up to 2000 is extensively covered by Camfferman and Zeff (2007). In 1973, the International Accounting Standards Committee (IASC), the predecessor of IASB, was formed and set up office in London, UK. The purpose of the organization was to work for harmonization of international accounting, and it was originally funded by the principal accountancy bodies in nine countries (Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and the United States). The tool for this was to issue so-called International Accounting Standards (IAS) on various accounting issues that were developed in a transparent due process.

As Camfferman and Zeff (2007) describe, the IASC’s initial work consisted mainly of very flexible accounting standards that had little influence on financial reporting in the developed world. The year 1987 was a turning point when IASC started a process of reducing the number of choices in the standards and began cooperating with, and received support from, financial market regulators, such as the Securities and Exchange Commission in the US and International Organization of Securities Commissions. Following this, the work of the IASC began having a larger influence on national accounting standard setters as a benchmark also in the developed world. The adoption of (parts of) the standard, however, was still undertaken on a voluntary basis. This influence accelerated in the 1990s, forming the context for most of the empirical study reported in this paper.

The ascendency of IASC/IASB as the major global standard setter, however, arguably took place in the 2000s. In 2001, the IASC had been formally restructured into the now-existing IASB with a larger staff and permanent members, a body within the larger IFRS foundation. IASB adopted the previously existing framework of issued IAS, but the subsequently developed standards were termed IFRS (for convenience, the package of IFRS and remaining IAS are referred to as IFRS in this paper). In the following year, the EU enacted a law requiring all listed firms in the EU to use IFRS for their consolidated financial reports from 2005 in an attempt to integrate capital markets within the union and respond to pressure from large multinationals that wanted to use accounting standards acceptable to North American investors (Van Hulle, 2004). IFRS, often described as a financial-market-oriented standard (Palea, 2015; Virtanen, 2009), fit that ambition well.

The year 2005 thus ended the era in which policy makers in EU countries could choose to voluntarily adopt parts of IFRS. It also marks the end of the period covered by the study reported in this paper. EU adoption could also be seen as the catalyst that led IASB to become the world’s standard setter, as large parts of the world followed suit. One hundred and twenty-six jurisdictions around the world currently require the use of IFRS by domestic listed corporations (IFRS, 2017), with the US representing an important exception that retains a national standard that differs from the IFRS in many respects (Baudot, 2014). While, to some extent, this represented an ‘unprecedented privatisation of mandatory standard-setting’ (Chiapello and Medjad, 2009), the EU (and many other countries) reserves the right to ratify the use of new standards, which is acknowledged to create possibilities to influence IASB (Maystadt, 2013); an end to which it has been used (most notably regarding financial instruments). However, in principle, the rulemaking was outsourced to a private body outside national political control.

The IFRS project has been rationalized by the idea that a global, common accounting standard will further integrate and enhance the efficiency of financial markets globally, leading to increased growth. It is often described as permeated by thinking and ideas from financial economics (Müller, 2014; Perry and Nölke, 2006; Whittington, 2008) and as aligned with financialization (Nölke and Perry, 2007; Palea, 2015). It almost certainly can be argued that there has been a move in that direction over time (Botzem and Dobusch, 2012). The IASB (and previously IASC) describes its theoretical and normative foundations in a ‘conceptual framework’, of which the first version was published in 1989. The 2010 revision of the framework, which was part of a joint convergence project with the US standard setter FASB (cf. Baudot, 2014), changed the stated objective of financial reporting to became distinctly focused on providing information relevant for decisions by financial market actors at arm’s length from corporations (Pelger, 2016).

IFRS adoption – The Swedish case

The Swedish case is characterized by an initial voluntary, gradual (though not comprehensive) adoption of IFRS. The regulatory approach taken by the Swedish state is that the state legislates the basic structure and principles, but delegates developing the details on how structures and principles are to be interpreted to the standard setters and practice, with reference to so-called ‘good accounting practice’. Based on that, the local standard setter, the Swedish Financial Accounting Standards Council (SFASC; sw. Redovisningsrådet), integrated IFRS rules into the local accounting standards for listed corporations over the years 1991–2004 (Hellman, 2011) before they were replaced by IFRS through EU regulation.

The SFASC was formed in 1989 by organizations representing auditors, the government and preparers of financial reports but was reorganized into a private association in which the government was unrepresented by its first year (adding other members such as the owner of the Stockholm Stock Exchange). The SFASC had the explicit purpose of harmonizing Swedish accounting with international accounting. Its board consisted of representatives for auditors, preparers and users of accounting reports that appointed their representatives based on expertise, which meant that it, in general, consisted of accounting professionals in the form of senior auditors, accounting academics and high-ranking managers from business. Two other accounting standard setters of significance existed during the study period: Bokföringsnämnden (BFN), a governmental organization developing standards mainly for nonlisted firms, and Föreningen Auktoriserade Revisorer (FAR), the association of chartered accountants (currently, it also organizes tax and accounting consultants), whose influence as a standard setter was waning.

Historically, Swedish accounting had seen a strong German influence and was characterized by historical cost measurement, focus on the information needs of tax authorities and lenders, and accounting conservatism (Hellman, 2011; Jönsson, 1994), making the convergence of the local standard with IFRS a fundamental shift in accounting trajectory. Legal provisions allowing fair value measurement were not introduced until 2005, when the IFRS was formally adopted, which means that this aspect of IFRS was introduced later than the other parts of the framework. This was related to the fact that taxation is closely linked to accounting in Sweden, and fair value was considered an improper base for taxation purposes.

The study period was also characterized by an adaptation to the regulation in the EU, which Sweden joined in 1995. Membership to the EU led to the adaption of a new Annual Report Act (sw. Årsredovisningslag) in 1995 that introduced the concept of ‘true and fair view’, and a number of changes to the Companies act (sw. Aktiebolagslag) in response to council directives. The capital market was deregulated in the late 1980s and early 1990s. As part of this, the restrictions on foreign ownership of Swedish listed firms were lifted in 1993, resulting in investment by foreigners to increase from under 10 to over 30% at the Stockholm Stock Exchange (Högfeldt, 2005). Other deregulatory measures of the stock market continued in the following years, such as the lifting of the ban for investors to short sell shares and for firms to repurchase their own shares. In 2005, a corporate governance code was introduced that contained regulations about similar issues as the UK combined code, but the content of the rules was very much shaped by local vested interests (Jonnergård and Larsson, 2007).

Framework for understanding the national process of accounting standard adoption

The literature offers three broad theoretical perspectives on national IFRS adoption: the functionalistic, institutional and political economy perspectives. The functionalistic perspective emphasizes economic efficiency and argues that one single world standard would lead to greater efficiency in capital markets by enabling better comparison of corporations. This creates incentives for policy makers to adopt IFRS to compete in the global arena. The institutional perspective emphasizes legitimacy seeking on behalf of national standard setters (Chua and Taylor, 2008; Ding et al., 2005; Judge et al., 2010; Ramanna, 2013). The political economy perspective stresses power relations and has come to interpret the convergence on the explicitly capital-market oriented IFRS as an expression and reinforcement of an ongoing process of financialization in which the productive sector is undergoing subordination to the financial sector (Müller, 2014; Nölke and Perry, 2007; Palea, 2015; Perry and Nölke, 2006). Prior research has focused primarily on international comparisons rather than local dynamics in the adoption of IFRS. Moreover, the functionalistic thesis has been heavily criticized by, for example, Chua and Taylor (2008) and Judge et al. (2010), who suggested that future research should concentrate on the institutional and political economy perspectives. The here-developed framework therefore represents an attempt to bring the institutional and political economy perspectives to bear on the national level.

From an institutional perspective, financial accounting can be seen as an institution and, consequently, international convergence of accounting standards can be viewed as a process of institutional change. Scott (2001) argues that institutions can be seen as practices and assumptions taking on a rule-like status (DiMaggio and Powell, 1991) and they are upheld by three ‘pillars’: regulatory, normative and cultural-cognitive systems. The practices of financial reporting, for example, are governed by formal regulation, but also informal norms about appropriate accounting procedures and an underlying system of classification and concepts. A specific accounting choice by a company’s management comes to be seen as legitimate, that is, appropriate, when it is aligned with the rules, morality and underlying logic of the financial accounting institution.

With the three pillars of the financial accounting institution, accounting convergence can occur and can be analysed on three levels: convergence of regulations/accounting standards, convergence of norms and ideals about good accounting practices, and convergence on a cultural/cognitive level (cf. Scott, 2001). Convergence on IFRS in accounting research has often been explored primarily by observing regulatory change or changes in practices as an indicator of institutional change (e.g. Ding et al., 2005; Judge et al., 2010). However, if the interest lies in understanding the process by which IFRS becomes adopted, the interplay between these different levels becomes pertinent. The political economy literature focusing on IFRS (Müller, 2014; Perry and Nölke, 2006) has, for example, emphasized how changing modes of production and circuits of capital have given rise to a new normative framework that stresses the needs of finance that, from an institutional perspective, can be understood as legitimation of regulatory change introducing fair value accounting methods.

Intuitions are a source of stability that are resilient to change. Deinstitutionalization typically follows a weakening in the legitimacy of existing institutional arrangements, paving the way for new institutional arrangements (Scott, 2001). Oliver (1992) points to three types of pressures that can induce deinstitutionalization: (1) functional, for example, the emerging perception that existing arrangements do not perform adequately; (2) political, for example, changes in power structures leading to weakened support for existing arrangements; and (3) social, for example, divergence in beliefs among or within groups that lead to questioning of existing arrangements. The mainstream IFRS literature has mainly focused on functional pressures by suggesting how IFRS allegedly solves the problems of comparability among investment alternatives in a global financial market (Chua and Taylor, 2008), whereas the political economy literature has focused on political pressures arising from the subordination of the productive economy by finance in a process of financialization (Müller, 2014; Perry and Nölke, 2006). From an institutional perspective, it is not necessarily the case that substantive issues of functionality exist. Since legitimacy is a matter of perception (Suchman, 1995), a widespread acceptance of the view that local accounting standards do not perform undermines their legitimacy, regardless of whether this is in fact the case.

As old accounting standards lose legitimacy and deinstitutionalization is initiated, the conditions that make the convergence with an international standard possible are created. However, this potential for transition presupposes that the international standard becomes seen as more legitimate than the alternatives (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). For other corporate governance reforms in the Swedish context, this process has been the subject of contention and arbitration among vested interests to arrive at acceptable solutions. Jonnergård and Larsson (2007), for example, show how the interests of elite actors in the form of the major capitalists controlling the largest listed corporations, moulded the Swedish corporate governance code.

The institutional theory emphasizes the central role of professions in the spread of institutional norms (DiMaggio and Powell, 1983). This has some validity for the adoption of IFRS in Sweden, as the accountancy profession dominates policy development in the accounting area. The preparers representing multinational corporations and auditors representing the multinational accountancy firms that dominate the auditing market are often regarded as the elite members of this profession (cf. Jönsson, 1994) and Virtanen (2009) shows how in the neighbouring country of Finland, these vocal parts of the accountancy profession tended to have a positive attitude towards IFRS. One reason pertaining to the large accountancy firms is that the adoption of IFRS at the firm level is associated with a sizable increase in audit fees in the short run (De George et al., 2012).

IFRS may, however, be viewed not only from a short-term perspective, but can also be interpreted as a strategic resource for the accountancy profession. Hines (1989) argues that the profession used the early conceptual framework projects as a strategic resource for legitimating the profession, signalling the existence of a unique and scientific knowledge base underpinning professional activities. The IFRS convergence project could be interpreted analogously. The big, multinational auditing firms dominated IASB (and the later stages of IASC) by providing it with members and financial support (Botzem and Quack, 2009), which means that IFRS, to a large extent, can be viewed as a project by the global accountancy profession, although with an emphasis on its Anglo-Saxon branch (Perry and Nölke, 2006). Many smaller countries, including Sweden, have never had conceptual frameworks of their own or any strong position in the global financial reporting landscape. Adopting the theoretically sophisticated and complex IFRS framework (compared to prior local practices) provides the profession with new claims to knowledge that are respected for its complexity and are difficult to challenge at a national level.

In summary, this framework emphasizes a number of critical aspects for understanding the process of voluntary convergence with an international accounting standard in a country. In particular, it is critical to understand the nature of the pressures initiating deinstitutionalization of the local standard and how and why the international standard comes to be seen as the legitimate alternative. This process takes place within a framework of power relations both on a global and local scale, such as the global ascendency of the financial sector and powerful local elites among which, in the Swedish case, the accountancy profession has a particularly important role. Since deinstitutionalization, legitimation and institutionalization occur both on the regulatory and the normative/cultural level, methodological tools that can capture both are necessary to study these aspects.

Method

While convergence of regulatory systems is relatively easy to observe by studying explicit rules, it is more difficult to directly observe shifts in normative and cultural-cognitive systems, as these tend to be implicit and taken for granted. Phillips et al. (2004) argue that one way to capture institutional assumptions and processes of institutional change is through studies of discourse, which is the approach taken in this paper. Discourses, that is, specific ways of representing the world (Fairclough, 2005), can be seen as carriers of institutional values and world-views that becomes manifest in the flow of texts and utterances produced within the discourse. Discourse analysis thus provides the methodological tools for exploring the institutional assumptions prevailing at a point in time, as these assumptions become embedded in the ways in which the world is described and evaluated (Fairclough, 2003; Maguire and Hardy, 2009). For discourse analysis to be an effective tool for revealing normative and cognitive institutional assumptions, which tend to be taken for granted and therefore be used without reflection, it is important to study the data that is specific to the period under consideration. For this reason, I use empirical material produced at the time when the IFRS was gradually adopted in Sweden, rather than, for example, retrospective interviews and relate this to the actual standards created.

Empirical material

I focus on the professional debate regarding how to measure the value of assets and liabilities, taking special note of how methods prescribed by IFRS and the local accounting standard, respectively, are represented. As described above, the accountancy profession plays a central role in the development of Swedish financial reporting. In the concept of the ‘accountancy profession’, I include both preparers and auditors of financial accounting and accounting academics, who are often recruited to sit on the standard-setting boards that develop Swedish accounting.

The study covers the 17 years (1988–2005) preceding and during which the local accounting standard for listed corporations converges with IFRS before the EU-mandated formal adoption of the standard in 2005. The extended period of time allows for the gradual change in discourse to be captured, which thus can be assumed to reflect changing institutional assumptions.

The empirical material consists of 126 articles published in the professional journal Balans over the study period. All of the articles published over the period that are archived in FAR’s service, FAR online, were reviewed. The criteria for including an article in the study were twofold. First, the article relates to the issue of measurement of the value of assets and/or liabilities, as the approach to measurement is one of the issues in which the underlying ‘philosophy’ of an accounting system becomes manifest (Müller, 2014). Second, the article is not only a pure description of, for example, a new accounting standard or an event without any commentary by the author.

The journal, Balans, is the forum of the organization, FAR, but the journal also publishes articles on financial accounting matters by categories of actors other than chartered accountants, such as financial accounting experts, academics and representatives of governmental agencies. The journal is the main publication outlet for public discussion and debate about financial reporting matters in Sweden, and its content is both produced and consumed largely by the Swedish accountancy profession.

Analytical method

The empirical material was analysed in four steps. First, the articles were classified according to the measurement issue they addressed, as follows: accounting for intangible assets (10 articles), consolidated accounting and goodwill (29), financial instruments (31), taxes (7), leasing (7), property plant and equipment (7), ongoing construction contracts and inventory (12), and general accounting principles (23). This facilitated tracing changes in the way the views of IFRS and prior local standards on a specific subject are represented over time and, ultimately, the identification of typical trajectories of an accounting debate.

Fairclough (2003) distinguishes between three different levels through which discourse analysis typically alternate: the textual, discursive, and contextual/societal levels. In the second stage, individual texts were analysed from the perspective of critical aspects identified in the theoretical framework with respect to how they discursively represented the existing local standard and IFRS. Specifically, three main categories were used to designate the discursive representation of the standards used in the text: (1) Deinstitutionalizing representations of the local accounting practices, (2) legitimizing representations of IFRS, and (3) representations problematizing IFRS. The institutionalization of IFRS can be seen as a supplementary category. Since institutionalization implies that IFRS becomes increasingly taken for granted (cf. DiMaggio and Powell, 1991), fewer alternatives being mentioned or less motivations provided for why IFRS is a relevant point of reference were interpreted as evidence of institutionalization of the standard.

The third step of the analysis consisted of alterations between the textual and discursive levels. This meant that discursive representations of the standards that had been classified similarly in the second step were compared with each other and with representations classified into other categories. The comparisons allowed for identification of the variation within the category and how one category of representation is distinct from other categories. This, in turn, facilitated the identification and labelling of the various discursive themes shaping the textual representations. Clearly, delimiting and labelling a specific recurring tendency in the articles as a separate ‘discursive theme’ is a somewhat arbitrary task. However, as an analytical tool for capturing a recurring way of describing the accounting standards, it serves a purpose.

The fourth step of the analysis consisted of relating the findings to the contextual/societal level. This meant (1) relating the findings regarding representations to the actors behind them and (2) to the material activities taking place. This allowed for an analysis of whether certain categories of actors tended to promote certain representations and whether this could be related to their social position and interests and the contextualization of texts among the introduction of new accounting standards, controversial cases taking place and the wider macro economy. Expressed differently, it allowed for an analysis of how the representations, local vested interests, progression of accounting convergence and economic changes interacted. In line with the recommendations by Fairclough (2003), the findings were also more explicitly related to theory about accounting standard adoption at this step.

Findings

Table 1 provides an overview of the material, displaying the total number of articles on a given subject per year, and the prevalence of discursive representations of IFRS and the prior local standard in terms of deinstitutionalization of the local standard (D), legitimation of IFRS (L) and problematizing representations of IFRS (P). A single article can contain multiple representations; hence, the sum of representations is larger than the sum of articles, although no single passage of text is categorized into more than one category. Since some representations that could be interpreted as containing elements of both deinstitutionalizing and legitimating representations were placed into the first category, the table to some extent, therefore, understates the prevalence of legitimating representations of IFRS, as will be elaborated below.

Table 1.

Overview of the material.

		Intangible assets					Goodwill and consolidated accounting					Financial instruments					Taxes					Leasing					Property, plant and equipment					Inventory and construction contracts				General principles				Total
		#	D	L	P		#	D	L	P		#	D	L	P		#	D	L	P		#	D	L	P		#	D	L	P		#	D	L	P	#	D	L	P	#	D	L	P
1988		1	1	1			1	1		1		9	8	1																										11	10	2	1
1989							2		2			2	2	1													1	1												5	3	3	0
1990							1		1																															1	0	1	0
1991						*	10	1	8	4		1	1									1			1							4	4	4		3	1	2		19	7	14	5
1992							3	1	2	1		4	3	3			1		1			2	2	1	1		1	1				2	1	1		2	2	1		15	10	9	2
1993		1	1	1								5	3	3	2		1		1												*	3	2	3		6	3	1	2	16	9	9	4
1994		1	1		1		2	1	1	1		1			1		1		1																	1	1	1		6	3	3	3
1995		1		1	1							1	1	1							*	2	1	1	1		1	1				2	1	1	1	2	1	1	1	9	5	5	4
1996		1		1		*	1			1		2	2														1	1	1	1		1	1		1	2	1	1	1	8	5	3	4
1997		1		1																		2	2		2															3	2	1	2
1998		1	1		1		1		1		*						3	1	2	1																1		1		6	2	4	2
1999							1	1		1		1	1		1	*					*					*					*									2	2	0	2
2000	*	2	1	1	1	*	1	1		1				1												*										3	2	1	2	6	4	3	4
2001		1	1		1		2		2		*																									1	1		1	4	2	2	2
2002							1	1		1	*	1		1												*					*									2	1	1	1
2003							2		1	2		1		1			1	1	1	1							1			1										5	1	3	4
2004							1	1				1		1													1		1	1						2	1	1	2	5	2	3	3
2005												2	1	2	1												1		1											3	1	3	1
		10	6	6	5		29	8	18	13		31	22	15	5		7	2	6	2		7	5	2	5		7	4	3	3		12	9	9	2	23	13	10	9	126	69	69	44

Note: Asterisks represent year of new standard. D: deinstitutionalisation of the local standard; L: legitimation of IFRS; P: problematizing representations of IFRS.

It is difficult to discern a clear sequence in which legitimation follows deinstitutionalization from the table. Rather, deinstitutionalization and legitimation are parallel processes in the material. The pattern of how representations appear relative to how standards are issued is not fully consistent, but different issues follow different trajectories. For example, consolidated accounting is one of the more discussed topics, which peaks around when the SFASC issued its first standard on the topic. However, it is also a topic on which practically all commentators were in consensus that the existing local practices are inferior and have to be replaced somehow (although there are a few examples of commentators that problematize the approach of IFRS). Accounting for financial instruments followed another idiosyncratic path. It was frequently debated in the late 1980s and the early 1990s. However, while the SFASC issued three standards of pertinence during the study period, they never issued a standard addressing the more controversial issues on the measurement of common financial instruments. The IASC followed a similar path and the contested IAS 39 on the measurement of financial instruments was not released until 1998.

In contrast, a number of other issues are addressed in the material in a more predictable way, with a peak of discussion just before (the same year or the one preceding it) a new standard is decided upon. This reflects that there is usually some debate about the draft standards released by the SFASC that is open for commentary before the standard is finalized. Accounting for taxes and inventory and construction contracts could be seen as examples of that, in which construction contracts attracted a lot of debate about the introduction of a previously unused and, in certain camps, controversial accounting method into Swedish financial reporting (the percentage-of-completion method).

Overall, this suggests a pattern in which there are two main ways in which an issue is introduced on the agenda: through functional pressures in the sense that there is a consensus that an accounting practice in place is not ‘working’ from the outset, or by an initiative of the SFASC. It can also be observed that in many cases (especially intangible assets, taxes and inventory and construction contracts) a new standard settles the debate, taking it off the agenda. Another observation is that the number of articles discussing measurement issues enters a declining trend from 1993.

Deinstitutionalization of existing accounting practices

Deinstitutionalizing representations of the local financial reporting practices took two main forms: one representing the local practices as incapable of capturing the reality of corporations and the other characterizing them inferior from a theoretical view. The following example from an article about financial instruments written by a representative of one of the big auditing firms stationed at the New York office illustrates both of these types of representations (all examples are translated from Swedish by the author):

The development of the financial risk management instruments called derivatives has exploded in recent years, which together with the complexity of the instruments have caused the development of accounting principles to lag behind. The few standards that exist are often in conflict with each other, and in some cases, they also lead to a financial accounting that does not reflect the nature of the derivatives. There are differences of opinions about how the instruments should be accounted for, and many have also questioned whether established accounting concepts, such as the principle of prudence, really reflect the nature of the derivatives./…/

As is obvious, accounting for options is a complex area, where accounting preparers and auditors have a lot of problems to consider. This is all the more pertinent in Sweden, where existing standards are few and, also, in critical ways deviate from present and probably future international practices. (Malmström, 1995)

The representation of the accounting principles as unable to reflect the ‘explosive’ increase in ‘complex’ derivatives could be seen as a typical example of, in the terminology of Oliver (1992), functional pressures towards deinstitutionalization (creating the perception that existing arrangements do not perform adequately). The questioning of the principle of prudence, which is characteristic of traditional Swedish accounting, can be described as an example of social pressures towards deinstitutionalization (disagreement about the normative and conceptual foundations of proper financial reporting).

The example illustrates not only the two main deinstitutionalizing representations in the material, but also the main discursive theme that recurrently is drawn upon for constructing them: a discourse about rapid international development of financial accounting, making existing Swedish practices irrelevant. The discursive theme of international development not only emphasizes development of international accounting, but also recurrently links this to corresponding development in the economy of the corporations preparing accounting reports (e.g. new forms of assets, such as derivatives) and the increasing globalization and importance of the financial markets, that is, what can be described in terms of an ongoing financialization. This is, of course, not merely a question of representation; the previously heavily regulated Swedish stock market was indeed opened up for foreign capital in 1993, causing foreign ownership of the Swedish stock market to surge (Högfeldt, 2005). Linking these aspects creates a discursive theme carrying the notion of cutting-edge international and parochial Swedish accounting practices.

This discursive theme is used for creating a representation of how accounting practices must cater to an increasingly international stock market, as opposed to creditors and the state, which was previously emphasized more (Hellman, 2011). Indeed, accomplishing this was one of the explicit purposes of forming the SFASC (Hellman, 2011), and it aligns with the notion of decision usefulness emphasized in the IFRS (Pelger, 2016), as in the following example written by an academic working for one of the big auditing firms.

Financial reporting of Swedish construction companies’ earnings is, as is well known, characterised by a very conservative view on realization of the earnings. … This leads to analysts having difficulties in obtaining an objective image of how, for example, a construction company has really performed during a recent period. The earnings reported are typically dependent on how many projects that have been delivered to customers during a specific period, not by how the earnings have been generated by production. This fact makes it difficult to compare construction companies with regards to, e.g., performance indicators. (Lagerström, 1995)

The example is part of an argument for using the more aggressive IFRS-mandated percentage-of-completion method rather than the then-used more conservative completed contract method in accounting for construction contracts. What is interesting about it is that the old method is discredited on the grounds that it gives poor information to investors on the (global) stock market, whereas other stakeholders’ interests of a more conservative measurement are disregarded. In fact, this is an explicit departure point for the article, that consistent with IASB’s conceptual framework establishes that ‘financial reporting is seen as one of many sources of information, in particular for actors on the capital market’ (Lagerström, 1995).

Another less common discursive theme distinct from the international development theme is a legalistic discourse. Given that financial reporting is regulated both by law and standards and that taxation of corporations is based on accounting earnings in the Swedish system, it might not be surprising that a legalistic theme emerges. The following example, which is also about the percentage-of-completion method (which leads earnings to be reported earlier than the local standard prescribes), written by the chairman of SFASC, a retired accounting professor, illustrates.

We reckon that an adaptation of FAR’s present recommendation to IASC’s standard for this type of project, can be in conflict with the current bookkeeping act. The reason is the international rule requiring the mandatory use of the percentage-of-completion method. We also believe that there will be great opposition towards following these rules if they are also made mandatory for tax accounting. We thus see an example of how the adaptation to an international standard can come in conflict with both civil law (at least a restrictive interpretation of it) and the objectives of companies regarding taxation. (Johansson, 1993)

The example illustrates how the legalistic discourse is used for making deinstitutionalizing representations of the existing legal framework by presenting it as a hindrance to a desired convergence.

Taken together, this group of discursive representations of the local accounting practices produces both functional and social pressures for deinstitutionalization, drawing primarily on an international development discourse that is linked to the increasing importance of an international capital market with its specific informational needs. The emergence of this discourse can, in line with Müller (2014) and Perry and Nölke (2006), be seen as an expression of a larger tendency for the ascendancy of financial markets (i.e. financialization) at the expense of other societal sectors. This, in turn, can be seen as an expression of indirect political pressure towards deinstitutionalization. Another group of discursive representations, occurring parallel to deinstitutionalizing accounts, position IFRS as the solution, to which we turn next.

Legitimation of IFRS

The legitimation of IFRS as the solution to the problems raised (either by deinstitutionalizing representations or simply by assumption) takes a number of forms. Two types of representations presented above – local practices based on inferior accounting theory and the decision usefulness theme in the international development discourse – can be interpreted as overlapping with the legitimation of IFRS. Representing local practices as based on inferior accounting theory is typically (though not always) combined with an explicit or implicit stand in favour of theory associated with IFRS, and a framing in terms of decision usefulness for financial markets typically points to IFRS as better suited for such end. Hence, while these theoretical debates can be interpreted as expressions of disagreement about the normative and conceptual foundations of proper financial reporting, one ‘side’ is simultaneously in the process of legitimating the use of IFRS. This way of legitimating IFRS is also in line with the interpretation that IFRS, with its more sophisticated theoretical underpinning than the prior local standard, can be seen as a professionalization project for the accountancy profession (cf. Hines, 1989).

The main discursive theme in legitimating the use of IFRS early in the study period is, however, international development. Against the backdrop of a world represented as fast-changing and fast-globalizing, aligning with international developments is described as bringing multiple advantages for investors and multinational corporations, as illustrated by the following example written by the consolidated accounting officer of the multinational corporation, Volvo.

Of more importance than the different detailed rules is the consistent effort to adapt Swedish consolidated accounting to international norms by the SFASC. The most important advantage is, of course, that the financial information reported by Swedish business groups becomes more accessible to foreign audiences. You also gain from the differences in viewpoint and philosophy becoming smaller. This makes it easier for Swedish accountants to read international literature and find answers to problems not covered by Swedish standards and Swedish literature (which for natural reasons is less comprehensive than, say, the American). Contacts with foreign subsidiaries will be simplified when you no longer need to force Swedish idiosyncrasies upon them. (Svenberg, 1992)

It is relatively unusual that preparers take a stand in the empirical material, but several legitimating tendencies that are used also by others are illustrated by the excerpt, such as mobilization of the already-described theme of relevance of international accounting standards for the global financial markets. However, the main point is that local standards are parochial, whereas the international practices are rational and efficient and therefore good for multinational corporations and generally good for professional development. While public interest is used as pretext for convergence, it would, of course, primarily reduce the costs of such corporations by simplifying group accounting.

Throughout the study period, comparisons with various international standards, especially IFRS and US GAAP, but also other national standards, are self-evident in the pieces about a specific accounting issue. Over time, standards other than IFRS are not given as much attention, with IFRS emerging as the legitimate reference point of international best practice. The standards and draft standards by the SFASC are compared with IFRS and criticized for deviation. Naturally, such criticism should, to a certain extent, be read against the backdrop of the SFASC having an explicit intention to issue standards harmonized with IFRS. However, in the early 1990s, it was still an open issue as to whether this is desirable. As late as 1995, SFASC representatives see a need to legitimize the choice of IFRS as a reference, as in this excerpt written by an executive member of the SFASC on their draft standard on leasing.

The mission of the SFASC is to issue standards in financial accounting issues that primarily have significance for listed firms. The SFASC’s guiding principle is that the standards, to the extent possible, shall be consistent with leading international practices and, then, in particular, with the standards of IASC. A standard in line with the content of IAS 17 is obvious for that reason. A decision to issue such a standard must, however, be preceded by an assessment regarding the Swedish circumstances. (Axelman, 1995)

An interesting aspect of this stream of legitimating texts is who is writing them. The texts are mainly written by highly skilled representatives of the big auditing firms, representatives of listed, multinational corporations or academics associated with standard setters (SFASC or IASC/IASB). Hence, what arguably could be seen as the elite members of the profession (cf. Jönsson, 1994) is generally not in opposition, but instead mobilizes discursive resources legitimating IFRS and emphasizing how it can develop professional knowledge and sophistication (cf. Virtanen, 2009). Against the backdrop of studies showing how imported regulation and practices are redefined to fit the local customs and elites (e.g. Fiss and Zajac, 2004; Jonnergård and Larsson, 2007; Jonnergård and Larsson-Olaison, 2016; Jürgens et al., 2000; Rose and Meyer, 2003; Vitols, 2004), this finding is arguably of significance. Compared to many processes of convergence, there is little resistance from local elites.

The presence of accounting academics in the debate deserves special attention. Obviously, a group of accounting academics are very much a part of the group legitimating IFRS and can be seen as part of the professional elite due to their positions in standard-setting bodies. However, it is also clear that this group largely transcends the academic world. They are in various ways associated and interlock with representatives from business in standard setting bodies or through their work for large audit firms. To what extent this means that they have come to adopt the worldview of practitioners or the other way around (IFRS is, after all, more theoretically sophisticated than the local standard) is not clear from the material. There is, nevertheless, a stream of representations that problematize IFRS in the material that is mostly produced by accounting academics that are not as clearly associated with industry, to which we turn next.

Problematization of IFRS

Some of the discursive representations problematizing IFRS mirror the deinstitutionalizing and legitimating representations. This is the effect of them mobilizing the same discursive themes and, in general, accepting the normative premises while disagreeing on the facts. The following example, written by the chairman of the local standard setter, BFN, draws on the discursive theme of relevance for capital-market users, questioning whether fair value measurement leads to relevant reports, creating a problematizing account of IFRS.

The standard setters’ motivation for introducing market values of financial instruments is similar to that for the percentage-of-completion method. They hope that market valuation will give the readers of financial reports better information about the financial development and that this outweighs the disadvantage that market values are not as objective as historical costs./…/

The risk of manipulation is not the only disadvantage. Another is that the income statement can be more difficult to interpret. Market valuation simply leads to profitability changes that do not say anything about the company’s earnings capability. (Edenhammar, 2004)

The legalistic discursive theme is also used for problematizing IFRS. When used for problematizing IFRS, however, the local legal infrastructure is used for putting IFRS into question. Hence, the ideal of legal consistency remains, but with a different take on the issue of which regulatory framework should be awarded primacy.

The mainstream of problematizing texts, however, are the product of accounting academics writing either critical or what might be called balanced (containing both deinstitutionalizing/legitimating and problematizing elements) articles. Often these have a focus on accounting theory, criticizing the theoretical foundations of the IFRS standards that the SFASC was about to adopt. In general, the academic writers discuss more broadly, transgressing the two poles of prior local practices and IFRS, but this seems to have little impact on the development of practice. An illustrative example of this is by an assistant professor discussing the newly issued first standard on consolidated accounting:

The standard about consolidated accounts … has according to me, large flaws. The standard will hardly contribute to making consolidated accounts more informative and understandable to users. I am, in particular, critical of the ‘paradigm shift’ comprising a specification of equity in ‘legal categories’ rather than ‘economic categories’. Current practices, including a specification in ‘economic categories’, is more consistent with the idea content of the acquisition method [of consolidated accounting]. (Eriksson, 1991)

As is typical of problematizing texts by academics, the example addresses theoretical issues (in this case a ‘paradigm shift’) of IFRS adoption. Critical or balanced texts by academics are, however, a waning genre over the study period; after approximately 1999, there are few of these in the material. The academics discussing measurement issues later in the study period, tend to be those that are associated with the standard setters (SFASC and IASC), and generally write legitimating texts. A clue as to why this became the case is offered from the response to the recently cited problematizing text by an accounting professor and chairman of the SFASC.

LE may be regarded as an authority on consolidated accounting, but as long as his perspective, which I incidentally question on several accounts, does not gain international impact, the perspective is of peripheral interest in a world characterized by aspiration towards harmonisation of different national accounting standards. (Johansson, 1991)

The international development theme is mobilized and is arguably so dominant in the material that problematizing representations cannot gain momentum. What might be the most interesting observation about problematizing texts, however, is who is writing them. The typical author of such texts is an independent accounting academic, neither preparers nor auditors of financial reports. Accounting academics associated with SFASC or IASC/IASB are not involved either. These groups instead write legitimating texts, as discussed above. Hence the opposition against IFRS largely is derived from what may be regarded as a periphery of the accountancy profession, and it wanes over time.

Institutionalization

Institutionalization of IFRS as the point of convergence for Swedish accounting, that is, when it becomes taken for granted as a largely indisputable fact (cf. DiMaggio and Powell, 1991), is a gradual phenomenon and it is, of course, difficult to identify a specific date. Gradually, the choice of the IFRS as the model for the Swedish accounting standards is no longer debated, as it was in the beginning of the study period. This is reflected in a number of ways in which legitimating representations change character into taking IFRS increasingly for granted. This excerpt from the mid-1990s by two research-active employees at a major auditing firm from an article describing the IFRS’s view on intangible assets is a good example of how IFRS convergence has become a fact that needs to be pointed out but not necessarily motivated any longer.

When developing Swedish standards, the SFASC takes the work of IASC into serious consideration. Moreover, many larger Swedish companies apply IASC’s standards. Hence, it should be of interest now to become acquainted with IASC’s draft standard. (Wennestam and Nilsson, 1996)

Toward the end of the 1990s, this fact need not be emphasized any longer. From thereon, the writings about the measurement of the value of assets change in character. They no longer contain discussion but are rather educational texts that explain the content of new IFRS standards, or reports of IASB occurrences and how this currently affects the SFASC. Surely, this, to some extent, reflects that the SFASC by then had adopted much of the IFRS’s framework, but even so, the genre of evaluating and comparing new developments in IFRS with existing practices seemed to have disappeared, reflecting increasing degree of institutionalization. The lack of discussion about measurement issues in IFRS in the country’s prime outlet for discussing financial reporting nevertheless suggests that, by then, ‘substantial’ accounting debate occurs elsewhere; the Swedish accountancy profession is left with the problem of implementing what it arrives at.

Discussion

The Swedish case displays a pattern in which the local accounting standard is deinstitutionalized and IFRS is legitimated primarily drawing on a discourse of international development. This theme presents international accounting practices as rational and Swedish practices as parochial with reference to, among others, ongoing globalization of the financial market and the needs of its investors. This discourse, which is reflective of a general trend of financialization (Müller, 2014; Perry and Nölke, 2006) and integration of the Swedish stock market with the global market (Högfeldt, 2005), granted legitimacy to the capital-market oriented IFRS.

Similar discourses of international development are likely to have been a pervasive feature also in other contemporary convergence processes, leading to lesser degrees of convergence. Explaining the remarkable success of IFRS hence requires reference to something more. Jonnergård and Larsson (2007), for example, show that when developing the Swedish corporate governance code, a similar discourse was mobilized by international investors, in particular, but these were less successful in gaining sympathy for their suggestions and the code was eventually moulded to better fit the interests of the local business community elite. The elite members of the accountancy profession, however, produced representations supporting IFRS, whereas resistance comes mainly from peripheries of the profession, especially from academics not associated with the standard setters. This suggests that the support of the local elite of the accountancy profession may be what sets the IFRS adoption apart from other reforms in the corporate governance area.

The professional debate about IFRS involved primarily highly skilled auditors and other experts representing the big multinational auditing firms, representatives from industrial multinational firms and accounting academics (associated with standard setters or not). The framework of the study suggests that the elite of the profession have an interest in a common world standard, such as IFRS, both for economic (De George et al., 2012) and strategic professional (cf. Hines, 1989) reasons. While it is clearly difficult to observe motives, the study does not contradict such an interpretation. While economic issues are sometimes mentioned and perhaps taken for granted, emphasis on the alleged superiority of the conceptual foundation of IFRS compared to the local standard is a recurring theme addressed by representatives of the big auditing firms, industrial multinationals and standard setters, which can be linked to a strategic professionalization project. The main critics remain independent academics that have less to gain from this professionalization project. Auditors from smaller firms, which do not audit listed firms, are silent in the debate.

By contributing with a national-level study of IFRS adoption, the study substantiates the contention of Chua and Taylor (2008), Judge et al. (2010) and Perry and Nölke (2006) that global convergence on IFRS is best explained by a combination of institutional theory and political economy, rather than the dominant functionalistic explanation. The framework developed suggests that the key to understanding the adoption of an international accounting standard lies in the dynamics of deinstitutionalization of old practices and the legitimation of the international standard as the relevant alternative, which are shaped by the interests of local elites and global economic trends. While institutional theory describes the main mechanisms of institutional change, the picture becomes more complete by integrating the political economy tradition, which places attention on (changing) power relations. Such relations exist both on the global scale (i.e. financialization in the form of ascendency of the financial markets) and in the local setting (i.e. who the main groups of actors are and what influence and interests they have) and plays out to shape institutional change.

To the extent that the Swedish case is representative of other countries, the explanation for IFRS adoption advanced in this paper has implications for how we understand the remarkable success of IFRS as a point of convergence for international financial reporting. This can at least partly be explained by the fact that the elite of the accountancy profession in most countries are likely to have a vested interest in a common world standard of financial accounting, and that the diffusion of IFRS occurred at a time when the financial market was undergoing globalization and appreciation relative to other societal sectors, which helped legitimize the standard. Further research should investigate whether this explanation also holds for other countries and whether the framework integrating institutional theory and political economy developed in this study can be brought to bear on other issues of national adoption of international rules apart from financial accounting.

Footnotes

Acknowledgements

The author wishes to thank Ulf Larsson-Olaison and anonymous referees for very helpful comments on earlier drafts of this article.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research has been supported by Handelsbanken’s Research Foundation.

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