Aphra Behn, the 17th century dramatist and arguably the first professional woman writer in English, once said that “Money speaks sense in a language all nations understand.” Most accountants would probably disagree, because when it comes to finding a common vocabulary for measuring corporate activity, the reality is more complicated than Behn might have imagined. Today, as American investors seek to diversify into global markets and international companies try to tap Wall Street for capital, a common accounting language—which measures gross profits the same way in London and Paris as in Los Angeles—is fast becoming necessary. As Arthur Levitt, chairman of the Securities and Exchange Commission (SEC), observed in a speech last year to German executives, financial reporting standards that cross national borders “are not merely an ideal for a better global marketplace. They are fundamental to its very existence.”

With that in mind, the SEC has for some time been considering ways to reconcile U.S. Generally Accepted Accounting Principles ( U.S. GAAP) with the International Accounting Standards (IAS) widely used in Europe and other parts of the world. The International Accounting Standards Committee (IASC), a Britain-based organization that has been trying to harmonize international accounting principles since 1973, would like the SEC to approve its norms so that international companies no longer have to reconcile them to U.S. GAAP to be listed on American stock exchanges. For that to happen, the two agencies would have to move closer in agreement about the kind of information that public companies should include in their financial statements and how such concepts as assets, liabilities, and profits should be defined and valued. The SEC recently issued a so-called concept release, asking for input on the quality of the IAS standards.

Debates have often erupted between proponents of U.S. GAAP and IAS accounting standards. U.S. GAAP backers argue that the IAS standards are less demanding, they require fewer details, and they allow companies too much flexibility in deciding what information to disclose. IAS supporters, on the other hand, want their principles to become the global standard. They maintain that the IASC has substantially improved its standards over the years to the point where they are now close to U.S. standards while being less costly and time-consuming for companies.

As one might expect, support for IAS is widespread in Europe. A PriceWaterhouseCoopers survey published last week indicated that the European Commission plans to require companies listed in the European Union to report on their performance in line with IAS by 2005. This proposal has tremendous support among European businesspeople, according to PricewaterhouseCoopers.

Another survey of CFOs of large European businesses by KPMG came to similar conclusions. The CFOs said IAS standards offer financial disclosure of similar quality to U.S. GAAP while being cheaper to implement. While the CFOs admitted that adherence to U.S. GAAP norms makes it easier for companies to access capital markets, KPMG believes this is almost entirely because of the SEC’s requirement that international companies reconcile their accounting standards to U.S. GAAP before they can raise capital in the U.S.

So who’s right? Can investors and regulators make equally well-informed judgments about corporate performance with IAS as they can with U.S. GAAP? That was the question that Wharton accounting professor Christian Leuz tried to answer in recent research that sought to compare the two accounting standards. His paper, “IAS Versus US GAAP: A ‘New Market’ Based Comparison,” reports the results of his study of firms listed in the New Market, a segment of the Frankfurt Stock Exchange launched in 1997. (The New Market, sometimes described as Europe’s NASDAQ, lists high-growth companies.) Because of the inherent uncertainty about the prospects of these new, mostly German businesses, the New Market has tough listing requirements. To be listed, a firm must prepare financial statements in accordance with either IAS or GAAP. For Leuz, this made the New Market a fitting laboratory for his study.

Leuz decided to run a horse race between the two standards to see whether using one or the other made a difference to companies in capital markets. His comparison is based on the idea that higher quality accounting standards result in a more level playing field among investors, which improves liquidity and reduces firms’ cost of capital. Thus, all else being equal, differences in the quality of the accounting standards should be reflected in capital markets.

To study this, he looked at two key measures: The difference between the bid-ask spread and trading volume of firms using IAS and U.S. GAAP standards. Ideally, neither the buyer of a security nor its seller is supposed have a big information advantage with regard to a company’s financial performance and consequently in buying or selling its shares. An imbalance, or “information asymmetry,” will be reflected in the difference between the price buyers are bidding for a stock and the price sellers are asking. Such an imbalance will also be seen in (reduced) market liquidity of a company’s shares, which is measured by the total value of shares turned over each day relative to its total market capitalization. Thus, both measures offer insights into the market’s confidence in a company’s financial statements – an issue that is of prime concern to regulators around the world.

Using data from 1998 annual reports, Leuz examined the spread and turnover for 80 firms listed on the New Market as well as a subsample of 66 firms that were not also listed abroad or incorporated outside Germany. Roughly, half of the firms used IAS while the other half used US GAAP. Because they were all listed on the same market, all sample firms were subject to the same capital-market and disclosure rules as well as accounting standards enforcement.

So which standard won the race? Neither one—because Leuz found that New Market firms using U.S. GAAP had on average about the same bid-ask spread and turnover as those using IAS. That is, the differences were economically and statistically insignificant. This suggests that financial disclosures under IAS and U.S. GAAP tend to produce information of similar quality. The conclusion: There is no evidence—at least based on an analysis of share turnover and bid-ask spreads among New Market firms—that U.S. GAAP is any better than IAS.

According to the SEC, more than 1,000 foreign firms are listed on U.S. stock exchanges, mostly large multinationals. Thousands more could enter American capital markets, if U.S. accounting requirements were not so daunting to them. For those that are willing to adopt IAS principles, Leuz’s findings offer a good reason to celebrate.

Leuz points out that his conclusions need some qualifiers. For example, New Market firms may not be strictly comparable to companies in more mature industries. And he concedes that more research on the subject is needed to confirm his findings. Still, Leuz’s analysis provides new evidence that the quality, completeness and clarity of U.S. GAAP and IAS financial statements are converging. Maybe Behn was right after all.