To an observer like me, it would be easy just to question why accounting standards shouldn’t be harmonised globally, after all accounting is accounting; It is also a fact that there is no special accounting for the third world, second or even first world! However there are also significant obstacles to overcome if global harmonisation has to be achieved. Let me for a start look at the benefits that would be appropriated if the accounting world harmonised globally.
There are certainly many potential advantages associated with harmonization of accounting standards. The world economy could benefit through increasingly educated investment decisions which would lead to overall global economic growth. Accounting information could be easily interpreted by experts to reduce the risk of wrong investment decisions. One of the main tools used in financial analysis is the comparability of financial information for similar businesses in competition. Internationally adopted accounting standards would increase ability to compare results from similar industries and make investment decisions less risky through greater intelligence. A standardization of international accounting information would facilitate easier interpretation for financial experts all around the world seeking to invest internationally. This increase in ability to interpret information could potentially result in an overall increase in educated global investment. Another potential benefit from the harmonization of international accounting standards would be the reduced costs associated with multi-national corporations who must reconcile their accounting information for multiple accounting standards. (Diaconu, 2007)
Countries with scarce resources could also take advantage of international accounting standards, because they would not have to invest resources in creating and regulating national accounting standard-setting agencies. In order to be listed on credible stock exchanges, businesses must abide by the financial reporting requirements of the stock exchange it wishes to sell securities through. Stock exchanges around the world could profit from harmonised accounting standards, as more adopt the international standards, they would become eligible for listing. As the amount of listings grows on the stock exchanges, so would the volume of securities transactions. (Marion and Cengage 2001).
Bottlenecks to Global Accounting Harmonisation
I have outlined some of the advantages that could possibly arise from implementing globally harmonized international accounting standard. Now I will examine some of the barriers that prevent harmonization from proceeding.
Though there are many promising advantages of harmonization. However there are also many potential disadvantages. One possible impediment of harmonization can be seen through the role culture plays in developing national accounting standards. Countries may view compliance with international accounting standards as a threat to their national interests and view compliance as submission to the will of other countries.
A major condemnation of harmonization comes from underdeveloped countries who view harmonization as an obligation placed on them by countries with superior economies. Another downside of harmonization is the vast amount of disparity that exists between different countries accounting practices. The abundant differences in accounting practices world-wide would surely lead to substantial changes for any country adopting the international standard. These substantial changes would lead to many expenses for businesses in countries conforming to a new international standard. Another common criticism of harmonization is the argument that an international accounting standard will not be flexible enough to deal with all the dilemmas faced by nations with differing problems and circumstances. National accounting standards can be modified as situations change, and policies can be implemented without consent of all the nations involved in an international accounting system.
Many countries have different accounting methods which are regulated in different degrees by their governments. Some countries use professional organizations to set accounting standards, whereas others are regulated strictly by the government, and some countries such as the U.S. use both professional organizations and the government to set accounting standards. Paul Diaconu in a 2007 paper entitled “Impact of Globalization on International Accounting Harmonization” highlighted the differences seen in the accounting standard-setting bodies of the world giving rise to the question: Who will write and regulate the international standard of accounting? The U.S. is the largest economy in the world and could be an easy answer to this question, but there are many critics of the FASB standards used in the U.S. Many believe that U.S. accounting standards are overly complicated. Another barrier of harmonization is the argument that capital markets have already adjusted to international business without a set standard. Many believe harmonization is not necessary and present systems are working well enough already!
There are many potential advantages of international harmonization of accounting standards, as well as many obstacles restricting implementation. Many companies in the European Union submit to International Accounting Standards, and many other corporations reconcile financial information to provide IFRS financial statements as well as U.S. GAAP. Because the U.S. is the largest economy in the world many international companies adopt U.S. GAAP financial statement to increase ability to trade with the U.S. Companies in the U.S. must always conform to U.S. GAAP and reconcile any other financial statements to meet the GAAP requirements.
One possible solution to the problem of setting international accounting standards would be to provide a choice between the two most popular systems: the American GAAP or the European IAS/IFRS. As more companies favour one method over the other that method will eventually become the international standard. While the solutions to implement harmonization are many, achieving complete harmonization of global accounting principles for use across the world may probably never happen; there are too many variables to account for and too many groups of people in political power with too much to lose! It is a good idea with too many little pieces representing significant interests. There are big political and nationalistic variables (certainly not in the professional ambit of accounting) to take care of! So will it happen? I rest my case.
CPA Apollo Ekelot FCCA
Apollo Ekelot is a member of the Institute of Certified Public Accountants of Uganda CPA (U). He holds a Masters of Business Administration Degree. Apollo has been working in accounting and financial management roles for a period spanning over 14years now; first working as an accountant and growing through the ranks to being a Programs Financial Analyst and a Finance Manager to Africa Regional Financial Analyst and currently Finance for ChildFund International in Nairobi Kenya.