Globalization and Accounting Standards
Globalization and Accounting Standards

Globalization and Accounting Standards

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  • Pages: 11 (2862 words)
  • Published: December 3, 2017
  • Type: Case Study
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Introduction

With globalization on the rise, the economic ties between nations are growing stronger. However, the existence of different local accounting standards presents a challenge in the international finance sector. This results in incompatible financial data, insufficient regulations for multinational company behavior, and uncertainty regarding global investors' perception of financial performance.

The harmonization of international accounting standards, which was once seen as a distant goal, is now within reach. In 1973, the International Accounting Standards Committee (IASC) was formed by Canada, Japan, Australia, France, Germany, UK, Mexico, Ireland, the Netherlands and the US to develop global accounting standards (Payne ; Ranagan, 2008). To further this mission in 2001,the IASC established the International Accounting Standard Board with the aim of creating universally accepted accounting standards (Fajardo, 2007). Although every country is actively involved in this endeavor t

...

o create uniformity in accounting practices worldwide,
the voluntary adoption of these standards poses challenges in achieving a seamless and expeditious implementation. The diverse interests and objectives of each country will invariably impact the harmonization process.

This essay aims to demonstrate that the International Accounting Standards will eventually be universally adopted. It also examines the negative impacts, disadvantages, practical challenges, and differing perspectives of countries on this global issue. Are all stakeholders prepared for this revolutionary change in their financial world? Do they support progress while also placing obstacles in its way? By conducting an analysis, we will discover the answer. Achieving globalization of International Accounting Standards is possible. International trade involving a significant volume of goods and services transactions is rapidly progressing. Since 1950, the average annual growth rate in international trade has been 3.5%. Additionally, the value o

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trade in real terms has increased at a rate of 6.5% per year (Pennar, 1993).

60). The global increase in growth has caused countries to interact more, resulting in the expansion of multi-national corporations. To allocate resources efficiently and freely, accounting standards need to be globalized. This demand is backed by corporations, investors, and national regulatory bodies.

Corporations worldwide are confronted with the task of navigating through different cultures, legal systems, levels of inflation, capital market openness, and economic and political relationships with other countries (Spiceland et al, 2007). These discrepancies in various aspects lead to differences in accounting regulations. Multinational corporations face challenges in meeting the diverse requirements and rules of various nations to generate financial statements that are acceptable and beneficial for decision-making purposes. This process not only incurs costs and consumes time but also results in the wastage of valuable resources (Fajardo, 2007, p. 57).

Without adhering to the accounting standards of different countries, corporations cannot enter specific markets and secure sufficient capital for their future growth. Multinational corporations willingly support the convergence of International Accounting Standards in order to pursue profits. When unified game rules are established for economic and financial areas globally, companies can save considerable time and money by raising capital worldwide. This also enhances the reliability and comparability of financial statements prepared by subsidiaries.

A more informed decision-making can be achieved when investors have access to universal accounting standards. Investors play a crucial role in a corporation's development as they provide the necessary capital for projects and market expansion. Therefore, the success of a company heavily depends on the confidence and trust of investors. However, due to an increase in financial

scandals and the bankruptcies of major multinational corporations such as Adelphi, Enron, Worldcom, and Global Crossing (Jacob & Madu, 2004, p. 358), investors are hesitant to purchase shares from companies. This hesitation is primarily caused by the lack of comparable financial information resulting from different accounting standards. Consequently, investors face difficulties in making reliable analyses when making investment decisions.

Due to this, the lack of investor interest in the international market will impede global economic development and remove numerous investment opportunities. However, if there was a single set of accounting standards worldwide, investors would be able to compare financial information from different markets, reducing the risk of scandals and expanding investment opportunities. This would ultimately result in increased investor confidence. It is undeniable that investors will support multinational corporations in promoting the globalization of accounting standards.

3 Regulatory bodies’ need for universal accounting standards

Regulatory bodies, as governmental departments, require diverse financial data and information to oversee the market and assess the economic system. They aim to establish a fair and conducive environment for participants. Part of their responsibility involves establishing clear and reasonable accounting standards that enable participants to disclose their financial situations. Unfortunately, not all countries possess the capability to create suitable rules for this complex financial landscape. This creates an opportunity for companies to exploit weak accounting standards by manipulating data or concealing vital information to attract investments. However, with the assistance of developed and developing countries, the implementation of universal accounting standards can effectively address these shortcomings and promote a healthier financial environment.

Governmental departments and auditors from public accounting firms both play a significant role in market regulation. The auditors face challenges due to

the different accounting standards, which make it difficult for them to perform their job accurately and precisely, especially when dealing with auditing reports for international companies. Converging accounting standards would allow international auditing firms to provide standardized training and ensure the quality of their work on a global scale. Achieving the globalization of International Accounting Standards is a lengthy process, but many countries have already included it in their agendas. According to Deloitte and Touche (2005), 68 out of 132 reporting countries have adopted these universal standards, with over 21 countries allowing reporting under them, and 8 countries partially recognizing the implementation of the international standards. However, this doesn't imply that there are no obstacles in the harmonization process.

It is evident that the adoption of International Accounting Standards worldwide is not easy. According to Godfrey and Chalmers (cited in Godfrey ; Chalmers, 2007, p. 60), the direct application of International Accounting Standards is currently deemed unreasonable. However, they believe in a long-term commitment to a convergence process. Economic obstacles hinder the globalization progress of International Accounting Standards as the economy serves as the foundation for everything.

The economic aspects play a crucial role in the acceleration or hindrance of project development. Economic drawbacks can significantly impede or even halt progress. Furthermore, the strong impact of the economy also presents a dilemma for the harmonization of International Accounting Standards. Japan initiated a convergence program in 2005 to align its national accounting standards with the International Accounting Standards. A research study was conducted to assess the potential benefits for Japanese companies in relation to this global matter.

According to Koga ; Rimmel (cited in Godfrey ; Chalmers, 2007, p.

60), the result revealed that 7% of the respondents from the largest 500 companies were dissatisfied with the convergence program, stating that its cost would outweigh the benefits. Additionally, in 2002, the Japanese Counselor for the FSA expressed the view that interpreting the actual state of the economy differently based on different accounting principles is like putting the cart before the horse (Misawa, 2005, p. 716). Similarly, the Indian government also recognized this challenge and therefore only permits the benchmark treatment of International Accounting Standards under Indian standards (Narayanaswamy, cited in Godfrey ; Chalmers, 2007, p.).

The coexistence of International Accounting Standards and local standards may negatively impact the comparability and relevance of financial reporting. This, in turn, can increase investment risk and capital costs, as seen in the case of IBEX-35 companies in Spain.

According to researchers, the comparison of accounting figures and financial ratios under International Accounting Standards and local rules shows no improvement in the performance of local stock market operators. This lack of improvement is attributed to the wider gap between book and market values that occurs when International Accounting Standards are applied. In the short term, there is no increase in the usefulness of financial reporting; however, there may be improvements in the medium to long term. The convergence process towards International Accounting Standards may be slowed down due to the absence of significant economic benefits and high costs associated with it. Furthermore, this convergence has a negative impact on tax and goes against the principle of "Cost versus Benefit." It should be noted that accounting standards are influenced by culture, economic factors, and political systems, which have resulted in these global

differences persisting for many years.

The law system always reflects cultural beliefs and values. Completing the convergence process of accounting standards, which is influenced by local tax law, is not an easy task. Evraert and Robert (2007, cited in Godfrey ; Chalmers, p. 860) have shown that French companies anticipate an expansion of the tax base due to certain provisions being rejected under global standards and changes in the fair value recognition of certain assets. African companies are hesitant to cooperate with the harmonization process due to increased tax burdens and lack of confidence in the ability of new global standards to address all issues in an aggressive tax system (Quinn, cited in Nino, 2007, p. 91).

Despite the economic setback and increased tax burden, the convergence of International Accounting Standards is deemed necessary. However, participants are not actively responding but rather waiting for an opportunity to achieve a mutually beneficial outcome. The progress of the globalization of International Accounting Standards is hindered by difficulties arising from various other aspects. It is not enough to solely address economic challenges in order to achieve the convergence of these standards. This complex and far-reaching endeavor is subject to influence from numerous factors, highlighting the intricate nature of these standards.

The use of International Accounting Standards is established for all countries worldwide. It is acknowledged that this will result in a complex set of rules and regulations to adhere to various cultures and legal systems. This inherent disadvantage is the main obstacle to achieving the harmonization of International Accounting Standards because the lengthy, intricate, and regulation-based standards are challenging to implement (Williams, 2004, p. 15). The difficulty lies in translating the

standards. As English is the official language globally, it is utilized in the drafting of International Accounting Standards.

Apart from a few major economic participants, most countries are not English-speaking. Translating and understanding an accounting textbook is both expensive and time-consuming, especially when it comes to complex accounting standards. The majority of countries in need of translations are smaller players in the global economy. Convincing them to invest time and money in the convergence of International Accounting Standards rather than developing their markets is a challenge. Even if the International Standards Board were willing to provide sufficient funds for translation, accurately conveying the true meaning of English in a set of high-quality standards would be incredibly difficult.

There is currently a shortage of professionals capable of effectively implementing international accounting standards. Without these individuals, the standards are simply pieces of paper. The complex nature of the standards requires a large number of professionals to participate in training programs around the world. However, the shortage of human capital is hindering the globalization of these standards. Additionally, different countries have varying attitudes towards adopting the standards, which has further slowed down their progress. Ultimately, all actions taken by countries in regard to international accounting standards are driven by their own interests.

This concept is demonstrated by Payne and Ranagan (2008, p. 18). Consider the scenario where you plan a visit to Walt Disney World, inviting your 18 closest family members to Orlando, FL. Surprisingly, everyone agrees to drive together in a convoy.

All countries are pleased to witness the aligning of International Accounting Standards. However, during your trip to Walt Disney World, you and your immediate family face difficulty in deciding

on the time and location for lunch and dinner due to varying budgets and lifestyles. Additionally, there is disagreement in selecting a motel to stay in. These conflicts arise from the diverse interests of individuals. Just as travelers prioritize their own desires, so do countries when it comes to globalization of financial regulations. Each country has its own distinctive objectives driving this movement.

However, many countries desire significant influence over the global issue of governing the international financial market. They aspire to be the sole power in this regard and will make every effort to expedite the convergence of International Accounting Standards if it aligns with their goals. Concurrently, they will strive to prevent others from attaining the position of governor. Once a stalemate is reached, the progress towards harmonizing International Accounting Standards will be impeded. Faced with the trend of convergence in International Accounting Standards, these countries will vigorously campaign to mitigate negative impacts on their national economy and solidify their financial standing in the world. They will not jeopardize their market dominance by hastily adopting new standards (Nino, 2007, p.

The US has a cautious but proactive attitude towards the issue of adoption of International Accounting Standards. It is not surprised that the US has not provided any commissioning or detailed discussion about the adoption process until now. The US prefers to wait for the adoption result in the European Union before deciding how and to what extent it will adopt the standards. However, if the EU's adoption is favorably received, it may impact the US position. This could lead to investors transferring their money to the EU market due to the strong reliance on

International Accounting Standards. Additionally, foreign companies may choose to move out of the American Exchange in order to decrease compliance requirements and associated costs.

Attitude from the European Union will hinder the convergence of International Accounting Standards. The European Union is the first one to step into the test of International Accounting Standards. Its success or failure has a significant influence on the further adoption of the rules worldwide. Additionally, its attitudes towards the issue itself will impact the confidence in the convergence of other countries. If the EU slows down the adoption process, other countries will begin to doubt the success of the campaign. On the other hand, if the EU accelerates the course, it will greatly support the globalization process.

Despite the distortion of attitudes towards the world, it is uncertain if the European Union can maintain its advantageous position and become a leading force in the global financial market by misleading other nations. The convergence of International Accounting Standards is impeded by the attitudes of developing countries, also known as Third World Countries. Compared to developed countries like the United States, Europe, Australia, and Canada, these nations have a significantly lower level of education and a scarcity of accounting professionals. The global education in International Accounting Standards is still in its infancy. Even developed countries require substantial time and resources to train a large number of professionals to meet global requirements, let alone Third World Countries. In addition, the majority of companies in these regions are medium or small-sized businesses (Nino, 2007, p.).

In terms of performance history, attractive projects, and strong competitive advantages, these representative companies lack development. If they were grouped with companies

from developed countries in the global exchange, they would have no chance of raising capital from investors. Due to these weaknesses, Third World Countries are not motivated to adopt International Accounting Standards. Regardless of the efforts they put in, they are unable to gain a share of the global market.

Why not wait for help from developed countries when they view the globalization of International Accounting Standards as essential? In conclusion, the convergence of International Accounting Standards greatly benefits the global economy, as evidenced by the response from numerous countries. There is no doubt that this international standard will eventually be adopted worldwide.

However, there are weaknesses that hinder the process of globalizing International Accounting Standards. These weaknesses include negative influence on the economy and tax burden, difficulties in translation and training. Additionally, the campaign for globalizing these standards is influenced by the interests of different countries, which contributes to its long-lasting nature.

References

  1. Callao, S., Jarne, J.
  2. I. and Lainez, J. A. (2007). Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting.
  3. Journal of International Accounting, Auditing & Taxation, 16. 148-178 Deloitte Touche Tohmatsu. (2005).

IFRS in your Pocket 2005. http://www.iasplus.com/dttpubs/pocket2005.pdf Fajardo, C. L.

(2007).

  • In the Journal of American Academy of Business, Cambridge, there is an article titled "The Move towards Convergence of Accounting Standards World Wide" by Godfrey, J. M., and Chalmers, K. (2007). The article is published in volume 12, issue 1 and has pages 57-62.
  • Additionally, there is

  • another article titled "Globalization of Accounting Standards".

    Monash Studies in Global Movements, 859-861 Jacob, R. A., and Madu, C. N.

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    711-745 Nino, S. L.

  • (2007). Capitalization of Major Markets and the Progress of Adoption of the International Accounting Standards.The Business Review, 9(1). 86-93 Payne, W.
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  • To Converge or Not to Converge? A Question for Modern-day Standards-setters. Journal of Government Financial Management, 57(1). 14-20 Pennar, K. (1993).
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  • Intermediate Accounting. 4th Ed.
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