Accounting Essays - International Accountancy Standards

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International Accountancy Standards


The EU at presents intends to impose international accountancy standards on its member states. The present study suggests that the arguments the EU puts forward in favour of this proposal are specious.

"The European Commission has welcomed the Council’s adoption, in a single reading, of the Regulation requiring listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with International Accounting Standards (IAS) from 2005 onwards. The Regulation will help eliminate barriers to cross-border trading in securities by ensuring that company accounts throughout the EU are more reliable and transparent and that they can be more easily compared.

This will in turn increase market efficiency and reduce the cost of raising capital for companies, ultimately improving competitiveness and helping boost growth. The IAS Regulation was proposed by the Commission in February 2001. It is a key measure in the Financial Services Action Plan, on which significant progress has been made in the last few weeks. Unlike Directives, EU Regulations have the force of law without requiring transposition into national legislation.

Member States have the option of extending the requirements of this Regulation to unlisted companies and to the production of individual accounts. Although the Commission put forward the IAS proposal long before the Enron affair, this is one of a series of measures which will help to protect the EU from such problems [sic] others include the Commission's recent Recommendation on Auditor Independence and its proposal to amend the Accounting Directives." (Press Release)

Evaluate the Arguments for Harmonisation Put Forward in This Extract and Assess the Extent to Which They Can be Extended Internationally Beyond the EU.

The term harmonisation means, literally, in international law, the adoption by different states of the same law or laws. Thus harmonisation means the same as law.

The European Commission’s (EC) press release makes four points:

  • Imposing universal standards of accountancy (by law) will help eliminate barriers to cross-border trading within the EU-this by ensuring transactions are “transparent”.
  • Because the law will help eliminate barriers, the regulation will make EU businesses more efficient, and hence more profitable.
  • The harmonisation will be law, although the elected assemblies of national governments do not have a mandate to question it.
  • The harmonisation will help eliminate business and accounting malpractice as exemplified by the Enron scandal.

Point 1: Eliminating Barriers

The EC states that its proposed regulation will help eliminate barriers to commerce. This assumes there are barriers to commerce. It also assumes that accountancy is one of the barriers. It further assumes that harmonisation by, in effect, diktat will improve the situation.

There are barriers to commerce. A European Commission (2004) report on barriers to trade with the U.S.A. highlights tariff barriers, import prohibitions, diverse sanitary standards, export restrictions, and government subsidies. Of known barriers to trade, arguably the most important is subsidies to farmers, as exemplified by the European Union’s (EU) Common Agricultural Policy; such subsidies subvert the economies of Third World countries and conspire to keep EU taxes high (see, e.g., Avery, 1995).

However, it is unclear whether differences in accountancy practice comprise serious barriers to commerce. The EU report, comprising over 47,000 words, does not mention differences in accountancy practice. The only mention of accountancy in the report concerns labour mobility-it’s difficult for non-U.S. accountants to work in the U.S.A. This suggests that differences in accountancy practice comprise at most a trivial barrier to trade.

Equally important, is unclear whether, even if one allows that differences in accountancy practice comprise a barrier to trade, regulation will be a good thing. This is because commercial practices, including accountancy practices, are complex phenomena.

The historical development of accounting in each country is different. Some countries use accounting standards provided by independent private sector bodies, others use standards set by government guidelines. Moreover, different organisations (public and private) have different goals, needs, and expectations, and this may affect their style of accounting. At present, for example, most U.S. accountants use generally accepted accounting principles (GAAP). (The accountants are not forced to do so by law, but the U.S. Securities and Exchange Commission requires that GAAP is used in publicly traded companies.) GAAP as used by such companies is different from that used by local and state governments, the standards of which are set by the U.S.A.’s Financial Accounting Standards Board. The needs of private companies appear different from the needs of government; therefore the two sectors use different accounting systems.

To further complicate the issue, multinational companies have to consider the particular needs of each country in which they operate. This may be especially problematic when dealing with Third World countries-the standards of Third World countries may be very different from those of western countries. Imposing a “correct” form of accounting may necessitate that multinational companies have, not one form of accounting, but several. This, obviously, would lead to inefficiency within the companies.

Table 1 illustrates different standards in five countries.

Table 1. Use of National and ‘‘International’’ Standards in Five Countries 1999–2000.


Financial statements lodged with regulators

Consolidated financial statements provided for the public

United Kingdom

National GAAP used

National GAAP usually used.


National GAAP used.

‘‘International’’ standards are sometimes used in conjunction with national standards. Some firms provide a convenience translation to US GAAP.


National GAAP used for individual company accounts. US GAAP or IAS can be used in consolidated financial statements.

National GAAP or ‘‘international’’ standards are used.


National GAAP used by most firms. Specific firms have permission to lodge US GAAP consolidated financial statements.

‘‘International’’ standards are sometimes used either instead of national GAAP or in a convenience translation to US GAAP.


National GAAP used

National GAAP usually used.

Source: Tarca (2004, p. 63).

All the countries use some form of GAAP, but each has its “national” version. Australia is the only country that uses a standard form of accountancy for everything, and, even then, it uses the Australian version of GAAP. This is despite the International Accountancy Standards Board’s (IASB) having worked on international accountancy standards (IAS) for 26 years.

In this, the IASB is trying to standardise accountancy practice of 140 countries. Standardising the accountancy practices of the five countries-all highly developed-has proved a problem. It could easily prove even more of a problem elsewhere. Much of East Asia, for example, shows little compliance with IAS (Tarca, 2004). This could well be because different countries have different needs. In any event, there appears resistance to standardisation.

The above is a familiar problem, and it is not peculiar to accountancy, or even economics. The ecologist Paul Erhlich, for example, writes:

“Complexity is an important factor in producing stability. Complex communities . . . persist year after year if man does not interfere with them. . . . A cornfield, which is a man-made stand on a single kind of grass, has little natural stability and is subject to almost instant ruin if it is not constantly managed by man.” (Quoted in Barrow and Tipler, 1988, p. 141).

Erhlich’s point is that complex systems are stable so long as nothing major interferes with them. As Barrow and Tipler (1988) observe, his point is exactly the same as that made by such economists as Hayek and Friedman, namely that government attempts to regulate economies invariably fail because economies, being complex systems, have their own stability whereas regulated system, being simple systems, are fragile. Barrow and Tipler go on to observe:

“A complex system like an ecology or market economy cannot have a goal in the sense that a single individual can, and any attempt to impose one leads to disaster.” (pp. 141–142; emphasis added).

One may disagree with Barrow and Tipler. However, if one does so one is not only disagreeing with two leading figures in economics (Hayek and Friedman); one is also disagreeing with current understanding of ecology. In short, it is far from obvious that the EC’s effort to improve the efficiency of accounting-by diktat-will not produce worse effects than the disease it attempts to cure. This is not to say that IAS is a bad idea. It’s to say that passing laws to impose it might not be the best way of going about it.

Point 2: Improved Efficiency

The worth of the EC’s second point depends on the worth of its first point. Therefore it is intrinsically suspect. One need only provide examples of where regulation has had counter-productive effects. Table 2 provides some examples of the costs of the U.S.A.’s environmental legislation.