Table of Contents
- Buy Do We Need to Have a Single Set of Accounting Standards for the Benefit of the Users of Accounting Information? essay paper online
- The Current Divergence of Accounting Standards and Related Issues
- Convergence of Accounting Systems and Related Benefits
- Related Free Economics Essays
Economic globalization is happening at an unprecedented rate. Technological advancements are playing an instrumental role in interlinking economies across the globe. As a result, investors are in a position to engage in cross-border financial transactions. Due to the global scope of investments, investors require transparency with respect to international financial reporting (Armstrong et al. 2010). One of the ways of achieving this transparency is adopting a single set of global accounting standards (Chen, Ding & Xu 2014). In the past decade, policymakers, standard-setters and regulators have advocated the convergence of accounting standards (Armstrong et al. 2010). The recent financial crisis highlighted the interconnectedness of national economies and the need for the world to converge towards a single set of standards for accounting. Various authors agree that a single accounting standard such as the International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB) is helpful to multinational business and investors as well as global markets (Ebimobowei 2012; Kieso, Weygandt & Warfield 2010). Moreover, the rationale for the move towards a single set of accounting guidelines is the need of users of accounting information to understand accounting reports and compare them (Baker, Biondi & Zhang 2010). Nevertheless, because of the diversity in accounting standards, an easy comparison is only possible in the context of a particular country. As Baker, Biondi, and Zhang (2010) point out, that the incongruities and complexities of national accounting guidelines are still significant.
Current paper performs a critical discussion of the statement, whether there is a need to have a single set of accounting standards for the benefit of the users of accounting information. To frame the discussion, this paper explores the issues associated with current diversity of the accounting standards followed by a discussion about the benefits of the universal accounting guidelines. Current paper argues that a single set of accounting standards is needed for the benefit of the users of accounting information.
The Current Divergence of Accounting Standards and Related Issues
The problems associated with the current divergence of accounting standards highlight the need to have a global accounting standard. Different countries across the globe use different accounting methods. These differences result in confusion when performing a comparison of financial statements of firms from different countries (Christensen et al. 2015). A number of factors have been identified in the literature contributing to the different accounting systems, including legal systems, taxation, political variables and inflation that differ across countries; hence, result in the variations in financial reporting (Christensen et al. 2015; Ebimobowei 2012). Moreover, with many private and public corporations operating globally, reaching a consensus on a global accounting standard is an exceedingly difficult task because it requires them to reach a compromise.
Two primary forms of legal systems used across the globe include the civil (code) law and common law (Chand, Patel & Patel 2010). In civil law systems, corporate laws determine the legal parameters governing the operations of businesses. In most cases, government formulates and enforces the accounting code. Managers having significant discretion in determining the accounting estimates usually characterize the civil law accounting (Sunder 2010). According to Rezaee, Smith and Szendi (2010), the accounting code under civil law systems provides a loophole for managers to underreport revenues, overestimate expenses and move funds to hidden reserves during good business cycles. In other words, this accounting system favours the manipulation of accounting reports, which results in the presentation of misleading information for users of accounting information (Hail, Leuz & Wysocki 2010b). Moreover, general accounting practices in civil law do not offer detailed information concerning the accounting practices (Rezaee, Smith & Szendi 2010). The accounting code in common law systems is completely different, since independent professional bodies set accounting rules. A notable example of such body is the Financial Accounting Standards Board (FASB) in the US, which sets the rules regarding the reporting of financial statements (Qu & Zhang 2010). Under common law systems, the accounting code places more emphasis on public information.
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Different national tax systems constitute another barrier for the transition towards a single set of accounting guidelines (Sunder 2010). In some countries, taxation is based on the financial statements. In others, firms adjust their financial statements according to taxation requirements, and, as a result, the government and stockholders receive different reports (Posner 2010). In addition, political factors, especially nationalism, hampers the convergence of accounting systems. Because of nationalism, countries are using accounting systems that are different from other countries. Posner (2010) points that recent attempts to adopt global accounting standards have been marred by nationalism, which makes countries wary about changing their accounting systems. For example, the US has been reluctant to join a binding global accounting system whereby it is not capable of influencing the accounting rules. The US has been unwilling to adopt IFRS because of the fear of losing control of the accounting standards (Leblond 2011; Posner 2010). The subsequent compromise associated with adopting a global accounting system is a significant hurdle towards the convergence of accounting.
Accounting diversity has resulted in several problems for users of accounting information. The first problem associated with the divergence of accounting systems involves multinational companies, which often prepare consolidated financial reports (Hail, Leuz & Wysocki 2010a). Because of diverse accounting practices in various countries, multinational firms are compelled to develop two sets of financial reports, one in accordance to the host country standards and another in accordance to the standards used in its parent country (Judge, Li & Pinsker 2010). Consider Barclays, it provides financial services in at least 50 countries. Each subsidiary must prepare financial reports consistent with local standards and another report consistent with the UK Generally Accepted Accounting Practice (UK GAAP) that is not only costly, but also inefficient (Hail, Leuz & Wysocki 2010b). Moreover, this poses the need for accounting staff to learn how to prepare two sets of financial reports. These complexities will be eliminated if a single set of global accounting standards is adopted.
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The divergence of accounting systems also confuses international investors. Preparing financial statements using different accounting systems poses comparability problems for investors and other users of accounting information (Chand, Patel & Patel 2010). From the perspective of an investor, evaluating financial reports from a country using dissimilar accounting practices can result in uncertainty, which is likely to hamper the decision-making process, leading to market distortions. Various authors agree that accurate accounting information plays a crucial role in affecting investment decisions locally and internationally (Baker, Biondi & Zhang 2010; Rezaee, Smith & Szendi 2010). With numerous accounting systems, there is the possibility for a company to report profits based on the accounting standards of a country they operate in or report less in financial statements using the accounting standards of another country (Chen, Ding & Xu 2014). In addition, diverse accounting systems increase the risk for global investors and affect decisions of companies with respect to overseas acquisitions. A likely solution for addressing this confusion and inconsistency is the adoption of a universal set of accounting standards. The divergence of accounting systems also hinders investors from gaining access to foreign markets based on the demands posed by creditors (Kieso, Weygandt & Warfield 2010). Consider in scenario when a firm seeks to access capital by borrowing funds overseas or selling securities, it must present financial reports prepared in adherence to the accounting systems of the country in which it seeks capital. For example, foreign companies face this challenge if they want to trade their stocks in the US, they have to prepare their financial statements using US GAAP standards.
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Convergence of Accounting Systems and Related Benefits
The current problems associated with the divergence of accounting systems serve as an incentive for having a universal set of accounting rules. Various authors believe that convergence of accounting systems is a potential solution to the problems arising because of numerous conflicting accounting systems (Baker, Biondi & Zhang 2010). The first notable benefit of convergence of accounting systems relates to enhanced comparability of financial statements of companies from different countries. The ability of an investor to compare different companies is hampered when companies utilize dissimilar accounting standards (Armstrong et al. 2010). As a result, using universal standards would help managers and investors in making sound decisions (Christensen et al. 2015). This means that financial statements of a firm are not only valuable as a data source, but as a reference framework for evaluating other companies in the same industry (Ebimobowei 2012). With enhanced comparability, users of accounting information benefit from the reduced costs of businesses because of the eliminated need for additional information. Comparable information enhances the analysis of financial reports by users (Ebimobowei 2012). Moreover, comparable financial reports contribute to their credibility and enhance the efficiency of auditing financial reports. According to Ebimobowei (2012), comparable financial information would minimize the risk for investors, and increase investors’ confidence.
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Another benefit of global accounting standards relates to network externalities, which refer to a scenario whereby the benefit to each person from utilizing a certain set of guidelines increases with the increase in the number of people using the same set of guidelines (Ebimobowei 2012). As a result, when several users adopt the same accounting system, the aggregate benefits for all users will surpass individual benefits. An example of a direct positive externality is the fact that the use of a global standard saves accounting information users both energy and time needed to learn and interpret numerous standards (Ebimobowei 2012).
From the discussion, the need for a universal set accounting guidelines is obvious. Currently, it is overly difficult and sometimes impossible to perform fair comparisons of financial reports of firms operating in different countries. Moreover, the problems associated with the diverse accounting standards are vast; especially the integration of economies, which further increases the pressure for the adoption of a single set of accounting standards. A single set of accounting standards will be helpful in addressing the reconciliation barrier that hinders foreign investors and other users of financial information from gaining access to local markets. The move towards the convergence of accounting systems has gained momentum in recent past. Although the convergence towards a global accounting standard may not address all the accounting issues in the global business environment, it is a crucial step in the appropriate direction.