Integrating prediction markets into the due process of international accounting standard setting: A possible path to achieving legitimate accounting standards?

Abstract

The authors present the idea of integrating prediction markets into the IASB’s due process of accounting standards development in order to assure the legitimacy of IFRS. They refer to the constitutional economics concept of hypothetical consent and further substantiate literature claims that the legitimacy of any regulation with a lack of governmental control should be linked to adequate processes of rule development. The authors argue that standard-setting procedures which integrate market solutions into the search process for legitimate standards outperform pure discourse solutions that dominate contemporary accounting regulation. The prediction market approach is of particular interest because it addresses the identified major legitimacy concerns regarding the IASB’s current due process. Compared to other market solutions, prediction markets could be integrated relatively easily into the current institutional setting of global accounting regulation. The authors therefore suggest a basic design of a due process for the IASB that utilises a prediction market. The main contributions of the article are as follows: (1) it expands literature on the legitimacy of global standard setting in accounting; (2) it offers a new market approach to international accounting regulation and (3) it generally furthers the theoretical foundation for proposing prediction markets for regulatory purposes. The authors finally provide arguments as to how a prediction market approach could (re-)align standard setting and academic accounting research.