In June 2020, the World Bank published its latest Global Economic Prospects Report. The conclusion is staggering: 

The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020—the deepest global recession in eight decades, despite unprecedented policy support. Per capita incomes in the vast majority of [emerging market and developing economies] are expected to shrink this year. The global recession would be deeper if bringing the pandemic under control took longer than expected, or if financial stress triggered cascading defaults.¹

With Gross World Product (GWP) in 2019 at 87.75 trillion USD,²  the 5.2 percent loss is around 4.5 trillion USD.  And this is the just the baseline forecast.  As we have progressed through 2020, our success in controlling the pandemic has been mixed.  How deep the economic harm caused by COVID—and for how long—remains to be seen.

From Cost to Opportunity

Sharply falling GWP provides the context in which IFAC reiterates our Call to Action to the G20 leadership to resist regulatory fragmentation and to redouble efforts for regulatory harmonization.  The response to COVID has not been uniformly global; rather there have been hundreds of national responses.  This national response “framework” has exacerbated existing pressures further resulting in national and fragmented regulatory initiatives. 

IFAC, as the global voice of the accountancy profession, wants to emphasize to the G20 leadership that regulatory divergence costs the global economy more than 780 billion USD annually.³ Society could not afford that before, and we certainly cannot afford it now. 

But this distressing figure also represents an opportunity to return that cost to the economy through regulatory harmonization.  Here, our message to global policymakers is clear.  Harmonized regulations have positive economic impacts similar to those of global trade agreements.  To date, international regulations have rarely been approached with the same attention to global growth and societal good as these trade agreements.  The COVID pandemic and related economic crisis must serve as a wake-up call that this status quo is no longer tenable. 

This is not an anti-regulatory message.  Not in the slightest. Smart regulation mitigates market failures, information asymmetries, and uneven power dynamics to support confidence and increase economic activity.  Smart regulation is an economic amplifier.  The issue is that regulatory requirements—and even what is regulated—in jurisdiction A may be entirely different to those in jurisdiction B.  It is difficult and costly for business, particularly small business, to understand and comply with different requirements in different markets.  The escalating cost and complexity of compliance supports oligopolies among the largest enterprises that can afford to keep up, and it disadvantages small- and medium-sized entities (SMEs).

Impact on SMEs

SMEs represented over 90% of the pre-COVID business population, 60-70% of employment, and 55% of GDP in developed economies. SMEs are not just a large contribution to the economy; they are the economy.⁴  And they face existential threats on two fronts: COVID and an uneven playing field. 

On COVID,  a July 2020 survey by the Organization for Economic Co-operation and Development (OECD) found that one-third of SMEs fear that they will be out of business without further support within one month, and up to half of SMEs fear the same within three months.⁵  Connect this with the size of the SME sector and the threat to the global economy is evident—there is no economic recovery without an SME recovery.   

The impact of regulatory divergence will remain—even when COVID subsides.  Complying with multiple regulatory regimes is likely to be more material and to consume a larger portion of annual turnover for SMEs.⁶  By disproportionately affecting the bottom-line, regulatory divergence creates an uneven playing field between larger businesses and SMEs, making it harder for SMEs to compete.  Regulatory divergence not only hurts the global economy but also perpetuates economic inequality and embeds unfairness into the system.    

Many successes, but much more to do

The theme of regulatory divergence has been central to IFAC’s G20 Calls to Action for years.⁷  This is not a new issue, and significant effort has been put into regulatory harmonization in certain areas as business and society have become increasingly globalized.  IFAC itself was born over 40 years ago out of a desire to develop high-quality international standards in auditing and assurance, public sector accounting, ethics, and education for the accountancy profession – in other words, the foundation of a truly global profession.  In the years since, IFAC and organizations like the IASB, IAASB, IESBA, and IPSASB have made tremendous progress in creating global standards for the accountancy profession.⁸ This has proven incredibly valuable and continues to pay dividends to the global economy.⁹

Likewise, institutions like the International Organization of Securities Commissions (IOSCO), International Forum of Independent Audit Regulators (IFIAR), the Financial Action Task Force (FATF), and the Financial Stability Board (FSB) have done a great deal to bring regulators together across their respective fields and should serve as examples for other sectors.  Moreover, much of the work of the European Union, as well as other regional blocs, has driven meaningful harmonization across their member states.  It is safe to say that the USD 780 billion cost of regulatory divergence would be much higher were it not  for these initiatives.  Yet progress towards regulatory harmonization at the global level has been limited.  This is understandable, as the challenges of coming to a consensus at a table—whether it be a table of 25 or 225 diverse members—should not be discounted.  But so are the costs borne by the economy and, in particular, SMEs.  The journey towards regulatory harmonization is a difficult one, and IFAC calls on the G20 leadership to rise to the challenge.   

Looking forward

While it is important to stay focused on regulatory harmonization for existing regulations, it is just as important, if not more important, to build in harmonization in emerging areas of regulation.  New forms of regulation are emerging out of necessity.¹⁰ There is a need to bring a sense of certainty to professional and commercial dealings in environments in which there is rapid change, much uncertainty, considerable financial and legal risk, and a sharpened focus on how organizations are and should be governed.¹¹  For the coming decade, non-financial reporting and data and artificial intelligence stand out as two key areas of future regulation.  IFAC encourages policymakers to look at these as areas for global cooperation rather than competition before divergence and the costs associated with it become embedded into the system.  Similarly, new regulations should be subject to impact assessments that evaluate effectiveness along with financial and time costs. The OECD’s Regulatory Impact Assessment (RIA) provides a potential model.¹²

The issue of sustainability, or environmental, social and governance (ESG), reporting is front and center in IFAC’s agenda.  It has become clear in recent years how important reliable and comparable non-financial information is to deliver on critical targets such as the United Nations’ Sustainable Development Goals (SDGs) and the Paris Climate Agreement.  Such objectives can only be achieved when all relevant stakeholders have confidence in the information that entities report publicly on ESG and on other relevant non-financial information.  But despite this understanding, we have yet to develop a properly functioning global system for the creation and use of this information. 

Recent initiatives have sought to make up for precious lost time. We applaud the World Economic Forum (WEF), the European Commission (EC), and others for their work.  However, we are now at an inflection point.  We can just as easily contemplate a world with a global system for reporting non-financial information—with all of the positive implications for efficiency, cost-minimization, and perhaps most importantly, more sustainable long-term capital allocation—as we can a world with a patchwork of local standards and requirements. 

That is why IFAC applauds the recent publication by the IFRS Foundation of their landmark Consultation Paper on Sustainability Reporting. This marks a critical step on the path towards a global solution to sustainability reporting, and we look forward to responding. 

The path laid out by the consultation is consistent with IFAC’s recent publication, Enhancing Corporate Reporting: The Way Forward, which sets out an achievable vision for delivering a global system for interconnected financial and non-financial reporting under the IFRS Foundation.  This builds on our Enhancing Corporate Reporting Point of View, World Economic Forum Consultation Response, Submission to the European Commission’s Non-Financial Reporting Directive Consultation, Response to Accountancy Europe’s Cogito Paper, and Comment on the US Department of Labor’s proposed ESG rulemaking. 

Simply put, we call on the G20 leadership to put their weight behind this vision and set us on an expedited path to a global system for non-financial reporting.  IFAC is happy to see that this issue has been taken up by the B20 in 2020 as part of Recommendation 5 to the G20.   

Call to Action

The G20’s agenda has progressed, and the Financial Stability Board has evolved into a permanent entity, but sufficient global influence to create a meaningfully harmonized system is still lacking. The need for consistent, high-quality global regulation is urgent.  Regulation should enable markets, not stymie them. Strong and effective regulation represents a compact among government, business, the political sphere, and the community at large. 

The global accountancy profession must take a leading role in developing and presenting the case for more effective regulation of accounting, and more broadly, by identifying new regulations, new ways of regulating, and new compacts between regulators and other stakeholders. IFAC, on behalf of its professional accountancy body members, can and should frame the debate on regulation into the future.  That is exactly what we are doing with this call to action. 

We have made great progress at the global level, but there is much more to do.  With economic challenges so severe and widespread, every cent counts.  We need to bring that USD 780-plus billion of deadweight loss back into the economy.  Accordingly, IFAC calls for policymakers across the G20 to prioritize regulatory cooperation and harmonization so that all enterprises can thrive, and to enhance mechanisms for continuous and systematic cross-border dialogue between national regulators to improve consistency in international regulations and standards.