Due to multiple reasons (e.g. culture, legal system, economic development), there is a huge differences between different national accounting standards. Taking as an example, The News Corporation (an Australian firm) reported 1992 earnings of $502 million. Under US GAAP, earnings would have been about $421 million. The difference is about 16% of income under Australian GAAP (Jeffrey, 2009).
There are severe issues raised by those differences in accounting standards as an increase in global trading and it is widely debated that whether a set of global accounting standards is the key to those issues. By critical analysis impacts of global accounting standards, this essay tried to answer the question that to solve those issues, whether a set of global accounting standards is needed and whether the current international accounting standards are fit for purposes.
National accounting standards' differences has incurred a huge costs to the global market
From the companies' point of view, transferring financial statements to meet multiple requirements can be a huge cost. For instance, as WSJ described the costs incurred by an international firm which sought to sell an offering of securities in the US, Canada, and the UK are amounted to $2.8 million to get the $55.5 million offering registered (Jeffrey, 2009).
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Proponents of global accounting standards argued that a set of global accounting standards can save the preparation costs of financial statement for multi-national companies since they do not need to prepare their financial statement under different rules (Stolowy & Lebas, 2002). Additionally, there are some possible reduction in training and auditing cost (ACCA, 2003). Given a uniform international accounting standard, auditors can save a large amount of efforts in auditing financial statements under different accounting standards. Due to a decrease in the workload of accountants, fees of training may be saved
However, some of those arguments above may not be entirely true. Like for the auditing fees, literatures find out more audit effort is required because of IFRS' reliance on increased fair value reporting (Diehl, 2010).
More importantly, the costs incurred by imposing global accounting standards are ignored in those arguments. To implement the global accounting standards, companies have to invest in training, reforming and even redundancy. Those investments are significant and unaffordable to most small businesses. Take the European leasing industry as an example. As reported by EU business, since changes to international lease accounting standards, European leasing business have to change to an extremely complicated approach to lease accounting and smaller firms in particular could have a much harder time in corporate finance. (Eubusiness, 2010)
The cost of capital is increased because differences in accounting standards confuse investors and decrease capital supply.
Uncertainties of companies under different accounting standards will increase since the decrease in understandability and comparability of financial statements. Additionally, differences in accounting standards also decrease the supply in the capital market. As a result, differences in accounting standards increase the cost of capital for companies.
It is argued that adoptions of global accounting standards decrease the cost of capital. This argument is examined by a large amount of literatures both from the investors' view and the supply-demand view. From an investors' view, due to an increase in understandability and comparability, investors feel less risky and then decrease the required rate of return. From supply-demand view, For instance, as Korok Ray (2010) shown that uniform accounting standards can increase the capital supply for firms.
However, this argument is based on the assumption that global accounting standards will increase the understandability and comparability of financial statements. In fact, this assumption is highly doubted and debated. There are literatures arguing that global accounting standards may bring confusions to stakeholders. For instance, Roberts et al (2005) pointed out that stakeholders may not be able to understand changes caused by imposing global accounting standard.
Take the fair value measurement as an example. By introducing a four - level of fair value measurement, IASB tried to improve transparency of financial statements and contribute to investor understanding of the risk profiles of these institutions. However, A large number of literatures (e.g. ACCA, 2007; Tim, 2008; King, 2006) doubted the reliability and understandability of fair value measurement. Problems with understandability are severe when there is no active market for some kind of assets. Additionally, allowing determining fair value by valuation techniques gives managers possibility to "cook the book", which actually reduced the investors' faith in the financial statements. Fair value is also blamed for contributing to the recent credit because of its negative effects during economic turmoil (Zhou, 2009)
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Furthermore, it is reasonable to doubt that not all firms can benefit from the reduction in cost of capital, especially those firms with less access to financial market. This argument is supported by a range of literatures. Sunder (2007) suggested that even voluntary IAS adoption do reduce the cost of capital; those findings are not necessary generalizable to mandatory IAS adoptions. Those arguments are supported by evidences on the capital market effects (cost of capital) of global accounting standard. Daske et al(2007) found the capital market effects are positive, Leuz (2003) found they are neutral while Shibano (1990) found they are negative.
There is no agreement on what is a good set of accounting standards.
Given there is no individual standard setter can provide the best solutions to accounting issues and there are no worldwide accepted accounting standards, an acceptable accounting practice under one set of accounting standards might be viewed as unacceptable under another accounting standards (e.g. LIFO inventory in the united states).
Proponents of global accounting standards argue that an accounting standards setter with monopoly power is needed to end the controversies and provide ultimate solution to accounting issues. In fact, current global accounting standards setter, IASB is dedicated to win assent for a joint conceptual framework for financial reporting (Martin, 2010)
For instance, whether the stewardship should be included in the decision - usefulness objective or separated as an essential objective of a financial statement is widely debated and causing confusion to both companies and their stakeholders. Actually, separating stewardship as an essential objective of financial statements suffers from high costs and it is argued business should narrow the focus to the present and potential investors. Furthermore, decision - usefulness is board enough. s. To prove that, Stoner et al. (1997) stated that capital providers are interested in the two elements while making decisions, namely profitability of entity and stewardship responsibility of management. As international accounting standard setters, IASB/FASB made the decision to subsume the stewardship under the decision - usefulness, which is believed to be right and beneficial to the accounting world.
However, maybe there should not be a monopoly in accounting standards setting at first place. It is not logical to give a set of global accounting standards monopoly power simply because no one has it. Since no one is sure what is good, forcing a single global consensus will end up with not better according standards but a logical mess (Martin, 2010).What is more, variations in accounting standards encouraged competition, which usually is a good thing in terms of development. By contrast, a single uniform global accounting standard may end up as poorer standards than any national accounting standards.
More importantly, As Beaver and Demski (1979) suggested, "Choice of an income rule cannot be resolved by applying fundamental measurement argument." The variation of accounting standards is a result of successful adaptations to the needs of a particular economy. Importing global accounting standards is risky because they may not be suitable to its new institutional environment. Additionally, As Lewis and Pendrill (2004) pointed, the performance of taken the standards is rely on countries' own executive power and it may be viewed as a reduction in the national sovereignty if countries are forced by monopoly accounting standards setters to give up their own accounting standards. Opponent also argued that an alternate way, harmonization, may be easier to accepted. As Nobes (2002) suggested, intrinsic benefit of harmonization is that it does not force the elimination of national standards, which could be met with significant nationalistic opposition.
Furthermore, Studies of Ball (2009), Wong(2002), Walker (2008) shown that even when firms adhere to the same standards, there is significant variation in reporting practices across countries. It proved that even a set of monopoly global standards cannot stop controversies and variation in reporting practice. Actually, it is argued that the motivations firms have to make high quality financial reports, which are influenced multiple factors (e.g. laws, competitions), is more important than accounting standards.
Individual national accounting standard setters are not powerful enough to work against political and law pressures.
Since there are many areas of financial reporting in which a national standard setter finds it difficult to act alone. According to Blake (2003), constituents often complain that "tough" standard would put local companies at a competitive disadvantage relative to companies outside of their jurisdiction. Actually, since the pressures from policies, laws and funds, individual national standard setters often face trade-off between high-quality standards and highly accepted standards.
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Proponents for a set of global accounting standard argue that since global accounting standard setters have a multi - country authority, independence can be ensured and since it is applied to all companies in all jurisdictions, it can eliminate perceived disadvantages. Take as an example, current international accounting standards setter, IASB is designed to be an independent, private organisation.
Fundamentally, single standards may not fit for requirement for the different governments. According to Chapman, Cooper, and Miller (2009), the possibility that accounting may both shape and be shaped by institutional developments. In some cases, the government or the market's control is beyond the economy or the political persuasion (common-law or code- law) (Black, 2003)
Arguably, global accounting standards setters will also suffer from external pressures. Current accounting standard setters, IASB is not independent funded. In 2008, American companies gave 2.4 million dollars to IASB, more than those of any other country (IASC, 2008) and the collapse of major US banks in 2010 lead to IASB's funding woes, forcing the body to dip into its reserves (accountancyage.com, 2010). So it is reasonable to believe global accounting standards setter will be influenced or at least receive pressures from its donors.
More importantly, the differences in accounting standards are so deep and numerous that they are structural in nature. Take the differences in principle-based accounting and rules- based accounting as an example. Generally, rules - based accounting suffers from complexity, overload and delay while Principles would be easier to comprehend and apply to board of situations. (Chalmers K, 2007) Shortridge and Myring (2004) researched that a principles-based system would lead to standards that would be less than 12 pages long, instead of over 100 pages for investors and other users to read. However, rules - based accounting provides more comparability and consistency because its enforceability. By contrast, principle accounting encourages more dynamic and innovation in accounting world. So there is no right choice between principles-based or rules-based accounting.
Summarized by Martin (2010), Choices of accounting standards are highly influenced by the market context for accounting standard setting, the market completion role of information, the nature of firm, the nature of financial systems, varieties of capitalism, the contractual and informational agreements and institutional evolution.
"A small set of high-quality standards offers the most feasible and flexible setting to cope with increasingly global capital markets." (Wagenhofer, 2006)
To conclude, it is unfair to ignore the benefits of a set of global accounting standards bring to the world economy and current international accounting standards (IFRS) does provide solutions to some of issues raised by different accounting standards. While, it cannot be the reason for the adoption the uniform accounting standards globally, especially given the significant damages current international accounting standards have caused and the high costs it will incur in the further.
However, there is no reason to adopt a single set of global accounting standards does not mean uniform accounting standards are not acceptable. Actually, a number of sets of uniform accounting standards may be a possible way to obtain benefits from both standardization and variation.