Recent accounting scandals in the United States have shaken stock markets around the world and focused public attention on the technicalities of accounting standards and corporate financial reporting. Journalists and lawmakers have begun to examine the inner workings of national standards bodies such as the US Financial Standards Accounting Board, and to question whether these bodies serve the best interest of investors and citizens. However, few people have yet realized that American accounting standards are just the tip of a huge standards iceberg that profoundly influences governments, economies and the environment all around the world.
What are standards?
Most people are surprised to learn that almost every product they buy adheres to national and international standards. Most standards are technical standards, designed to ensure that products made by different companies are compatible and interchangeable. For example, national technical standards make certain that all appliances in South Africa run on the same electrical current, while international standards ensure that a credit card issued in Vancouver can be used in Paris, Shanghai or Sydney. Similar standards cover all kinds of products, from chemicals, to car parts, to computer languages. Without technical standards, economic activity - especially international trade - would be severely limited.
Some technical standards govern more than just product specifications, however. Accounting standards, for example, amount to a set of procedures companies follow when calculating their expenses and revenues. Similarly, procedural standards have been developed for other aspects of corporate management, such as quality management and environmental management. However, the standards most often familiar to ordinary people could be called performance standards. These cover measurable aspects of product or corporate performance, such as occupational health and safety, food safety, or pollution emissions.
Who sets national and international standards?
Standards designed to protect people's health and welfare (e.g. food safety standards, pollution standards) most often are set by governments and carry the weight of law. In contrast, the vast majority of technical standards serve primarily to facilitate trade, not to protect the public. As such, they are most often set by industry associations, not by governments, and companies have economic incentives to follow these standards but are not legally required to do so. For this reason, they are often referred to as voluntary standards.
To coordinate the setting of national voluntary standards, most countries have a national standards body, such as the American National Standards Institute (ANSI) and the Norwegian General Standardizing Body (NAS). These bodies sound like government agencies, but many are not. Many national standards bodies - especially in developed countries - are industry associations that largely act independently of their national governments. On the international level, the International Organization for Standardization (ISO) is the largest standards-setting organization. Its membership consists of national standards bodies from 143 countries.
How do people know when a company meets a standard?
Companies can demonstrate in a number of ways that they have met a standard. In many cases, employees simply follow the standard's guidelines and company management checks that the standard has been met. In other cases, companies may hire an independent auditor to certify that it has met the standard; this is called third party verification. For standards that have been set as part of a law, there is often a legally mandated certification process or a government-run monitoring program. For most standards, however, it is up to the company to decide whether to get third party verification, to have their customers formally check that they have met the standard, or to "self-certify", in which case customers, investors and the public just have the word of the company.
How is the role of standards changing?
Historically, it has long been advantageous for manufacturers to work together in setting standards to facilitate trade. ISO, for example, emerged from the technical cooperation of British and US arms manufacturers during World War II; they needed to coordinate such things as the calibration of weapons and ammunition. Now, however, standards making has entered a new era. Voluntary standards are moving away from purely technical specifications, into areas of standardization where the public has a much stronger interest. For instance, in the 1990s, ISO created a series of standards for environmental management, called the ISO 14000 standards. Today, ISO is creating a number of voluntary standards with likely impact far beyond the facilitation of trade. These include standards on corporate social responsibility, worker health and safety and greenhouse gas emissions. (Please see ECOLOGIA's information sheet "An ISO Greenhouse Gas Standard: Opportunity or Barrier to Sustainable Development?").
In addition to changes in what is being standardized, the relationship between voluntary standards and government law and policy is also changing in two important ways. For one, the WTO has indicated that it will give significant weight to international standards, such as those produced by ISO, when resolving trade barrier disputes. Thus, as ISO expands its standards-making to cover corporate social and environmental behavior, national laws holding imports to higher environmental or humanitarian standards may face challenges from trade partners whose goods meet a related ISO standard. Second, many governments increasingly rely upon voluntary standards when setting national policies. In some cases, companies can earn relaxation of regulatory restrictions by certifying to a related voluntary standard; in other cases, governments incorporate aspects of a voluntary standard into their own regulations. Such uses of voluntary standards may contribute to more efficient, market-based government policies, but when third party verification is not required, they also may make it more difficult to assure that governments are safeguarding the public interest.
Should the public be concerned about standards making?
As voluntary standards move beyond their traditional realm of technical specification, and as standards increasingly influence government policies around the world, the power of standards-setting bodies is growing rapidly. However, the standards setting bodies have been slow to adapt to their new power. They are still largely industry associations outside of government authority, they remain dominated by corporate representatives from developed countries, and the public often has trouble understanding or monitoring their decision-making.
The ISO 14001 standard on environmental management systems demonstrates what can happen when the industry-dominated ISO creates standards in the public interest realm. ISO began developing its 14001 standard in response to the 1992 Earth Summit's call for sustainable industrial development. However, industry-dominated negotiations within ISO simplified the standard and shifted its focus away from sustainable development. The resulting ISO 14001 standard does not require companies to improve their environmental performance, it merely requires them to set up a system that should, if well-designed and implemented in good faith, improve environmental performance. Companies can hold up their ISO 14001 certification as evidence that they are "good actors" in the environmental realm, but the public cannot know whether certified companies are in fact performing better than those without certification.
What can citizens do?
The good news is that opportunities are opening up for broader participation in standards-making. ISO is actively encouraging developing country involvement in its work and has created mechanisms for including environmental groups, consumer associations and other non-governmental organizations (NGOs). In fact, ISO's bylaws require its members (the national standards bodies) to take into account all relevant interests when formulating their national positions within ISO. For more details on these opportunities for public involvement, please see the NGO guide developed by ISO at ECOLOGIA's information sheet "An ISO Greenhouse Gas Standard: Opportunity or Barrier to Sustainable Development?" highlights an example of a new type of ISO standard and describes specific opportunities to engage in its development.
This information has been prepared by ECOLOGIA, an international non-profit organization that promotes public participation in environmental decisions. August, 2002.
Last modified by: H. McGray on 28-Nov-02
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