This essay examines the contemporary movement for the adoption of common accounting standards by different nations and the various local and global implications of such actions.
Contemporary times are witnessing an increasing emphasis by the accounting fraternity and policymakers of developed western economies for the adoption of a common set of accounting standards for the use of countries across the globe (Soderstrom & Sun, 2007, p 675). Leaders of the G 20 countries have called upon leading standard setters to work towards the furtherance of a common set of global accounting standards (Walker, 2010, p 137). This movement is being led by the UK based International Accounting Standards Board (IASB), an independent organisation formed by accountancy professionals and firms. The IASB has for the last two decades been pursuing convergence of global accounting standards. Its greatest success occurred in 2005 when member countries of the European Union agreed to adopt its International Financial Reporting Standards (IFRS) for preparation of accounts and financial statements for all publicly listed companies. The adoption of the IFRS by the EU countries has been followed by the progressive global spread of IASB standards and their acceptance by other countries (Epstein & Mirza, 2004, p 32). Australia for instance adopted the IFRS in 2005, even though it is not a member of the EU (Chalmers, et al, 2008, p 237). Approximately 88 countries across the world are expected to adopt IASB standards by 2011 / 2012, thus creating significant convergence between countries on preparation of accounts and financial statements (Soderstrom & Sun, 2007, p 675).
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Strenuous efforts are continuing on the achievement of greater convergence between IFRS and the US GAAP standards, which are set by the Financial Accounting Standards Board (FASB) of the United States (Lamareaux & Nilsen, 2010, p 43). With the United States being home to the biggest and most important of global corporations, effective international convergence of accounting standards will obviously not occur until the accounting standards followed in the United States converge in good measure with the standards followed by other countries (Lamareaux & Nilsen, 2010, p 43). Whilst significant progress has occurred in bringing about such convergence, much still remains to be done. The officials of the two standard setting bodies are coordinating and collaborating with each other to achieve progress in a planned and timely manner (McCarthy, 2003, p 54)
The introduction of IASB standards resulted in the need to carry out significant changes in accounting policies and practices, not just in the UK but across Europe (Bebbington & Song, 2007, p 67). Whilst these changes were numerous and dealt with different accounting areas, some of the important issues concerned the valuation and treatment of intangible assets, the adoption of market value accounting for tangible assets and the use of principles based accounting (Bebbington & Song, 2007, p 67). The wide and sweeping changes in accounting standards that are being brought in by the IASB go beyond convergence and extend to the introduction of numerous new accounting concepts and practices (Bebbington & Song, 2007, p 67). Such widespread and large scale change in accounting policies and practices is not easy to achieve for a single country with thousands of commercial establishments, and even more so for a number of countries that follow different accounting practices (Bebbington & Song, 2007, p 67).
The bringing in of convergence in accounting standards and the adoption of new accounting policies by so many nations is indeed difficult and the changeover is occurring slowly (Chen, 2009, p 43). Whilst the change process is difficult and complex, many countries have agreed to do so because of the numerous perceived advantages of adopting a common set of accounting standards. The steady progress of accounting convergence across countries undoubtedly indicates wide agreement between policy makers, business people and accounting practitioners on its merits, even as all concerned agree that the process is complex, difficult and bound to be painful (Chen, 2009, p 43).
The debate on convergence and the adoption of a common standard is now being enlarged by experts who are arguing cogently against the adoption of a single set of global accounting standards. Martin Walker of the Manchester Business School has published a persuasive paper, in July 2010, on the fundamental demerits of bringing in common accounting standards across the globe.
This study analyses Walker's reasons for opposing the adoption of global standards and tries to determine (a) their need and (b) whether they are fit for purpose.
Discussion and Analysis
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Countries across the world are in the process of adopting the IFRS, the set of standards developed by the IASB after years of thought, investigation and deliberation. Constant work is also continuing on the achievement of convergence between US GAAP and IASB standards (Chen, 2009, p 43)
It is thus important to define that the common set of standards proposed for adoption represents, for all practical purposes, the IASB standards. The FASB is also trying to adopt principles based accounting practices, the bedrock of IASB accounting philosophy.
The adoption of a common set of standards has some very important objectives. Studies have revealed that the accounting practices of different countries are significantly influenced by local social and cultural characteristics and often evolve separately and independently of the accounting practices of other nations (Napier, 2009, p 131). Whilst it can broadly be assumed that accounting practices are based on similar fundamental concepts and should thus be alike between different countries, the situation is, in actuality, significantly different. Substantial differences exist in accounting policies and practices between different countries, even if they are proximally located or have cultural similarities. There are very strong differences, for example, between the accounting practices of neighbouring countries like Japan and China or culturally similar countries like the UK and the United States.
Whilst such differences were largely accepted in the past, with multinational corporations with operations in different countries grudgingly reconciling the operational and accounting results of their businesses in different countries, they are now creating significant difficulties for all individuals and entities in the contemporary globalised economy who are engaged in international operations, businesses and investments (Casabona & Shoaf, 2002, p 18). The modern day society is witnessing continuously increasing integration between the business organisations and commercial and trading activities of different countries (Casabona & Shoaf, 2002, p 18). Business organisations very routinely have operations that span different continents and it is common for them to search for production and service centres in low cost regions and markets in others (Casabona & Shoaf, 2002, p 18).
It becomes difficult for such firms to work in different geographical jurisdictions and comply with different local accounting processes and practices (Chalmers, et al, 2008, p 239). With cross border capital flows increasing steadily and investors searching across countries, markets and destinations for attractive investment opportunities, investment decisions become complex when accounts of companies situated in geographically different areas are produced with dissimilar accounting practices and processes (Chalmers, et al, 2008, p 237). The most important objective of the adoption of a common set of accounting standards is to bring about comparability between the operations of different companies across the globe (Ernst & Young, 2010, p 14). Such convergence will allow investors in the UK or the USA, for example to clearly assess the comparative performance, resources and financial positions of business firms and subsidiaries in distant parts of the globe (Ernst & Young, 2010, p 14). Another important objective of the process is to allow business firms with operations in different countries to adopt a common set of accounting practices for all their operations and eliminate cumbersome duplication and reconciliation of accounts (Ernst & Young, 2010, p 14).
The adoption of the IASB standards across the globe will also entail the universal adoption of accounting policies and practices that are based on principles and not on rules (Ernst & Young, 2010, p 36). The accounting policies and practices of many nations, including those of the United States, have developed on the basis of rules and not principles. Such systems have become unnecessarily clumsy, bureaucratic and cumbersome, as new rules have been brought in to replace or correct old ones felt to have become obsolete or redundant (Ernst & Young, 2010, p 36). The adoption of IASB standards across countries is thus expected, not only to bring in comparability with regard to accounting practices, but also develop a global accounting culture that is essentially based on principles and is thus flexible and essentially just (Ernst & Young, 2010, p 36).
Martin Walker, in his essay on the case against the adoption of a single set of global accounting standards, argues that the recent widespread failure of financial banks and institutions has exposed the standards of bodies like the FASB and the IASB, which are possibly not even fit for the purpose of providing transparent and reliable information to investors. The very fact that thousands of investors were unable to gauge the enormous risks being taken by banks is sufficient reason to doubt the efficacy of their widespread adoption across the world.
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The G20 heads of state have called for international accounting standard setters to strive for the creation of a single set of global accounting standards of high quality (Walker, 2010, p 140). Walker states that whilst such a statement implies that the existing accounting standards are not good enough for use, the call for the development of a single set of accounting standards is inherently questionable because of a number of reasons (Walker, 2010, p 140).
The right to set global accounting standards, he feels, would give such standard setters significant monopoly powers and allow them to introduce standards that may not be acceptable to many business and industry participants in different parts of the world (Walker, 2010, p 140). There is already significant disagreement among accounting practitioners and other experts on issues like fair value accounting, accounting conservatism, concepts of entity v equity and the role of disclosure v recognition and measurement. The granting of monopoly rights to a single standard setting body would enable such an organisation to ride roughshod over the opinions of other individuals and entities (Walker, 2010, p 140).
Walker furthermore states that the conceptual framework of FASB and IASB is rudimentary and based on a number of unrealistic assumptions in areas of corporate finance, corporate governance by the market, ownership of corporate securities and others (Walker, 2010, p 142). He also makes the point that considerable differences exist at present across the world in financial systems. Such financial systems are complex and interdependent and importing components into such systems that were adapted for other systems could lead to emergence of risks and difficulties in their adaption in new environments (Walker, 2010, p 142).
Walker also argues that the existing set of accounting standards developed by the IASB are primarily meant to serve the interests of liberal market economies (LME) like those of the UK and the USA and may be quite unsuitable for the coordinated market economies of Western Europe (Walker, 2010, p 145). With there being different forms of capitalism in this world, it would be patently unfair and inappropriate to foist the accounting standards that have been developed for one form of capitalism on all other countries (Walker, 2010, p 145). He thus recommends the development of two sets of accounting standards, one for the use of the UK and the United States and the other for the use of West European countries (Walker, 2010, p 145). With the countries of West Europe, especially those with coordinated market economies, having essentially different legal, political and trading structures from LME countries, the foisting of accounting standards designed for LME environments would lead to accounting difficulties and lack of transparency and not serve the basic purpose of adoption of a common set of standards (Walker, 2010, p 145).
Walker's arguments, whilst patently reasonable, suffer from a number of flaws. The adoption of a common set of accounting standards is in the first place not restricted to the advanced countries of North America and West Europe. These standards encompass the whole world, encompassing a host of different accounting cultures like those of East Europe, China, India and Japan. The extension of Walker's concept to the rest of the world, would thus lead to a reversion to the status ante and undo the whole process of convergence.
Whilst differences in cultural, social and business approaches can undoubtedly result in different ways of keeping accounts and preparing statements, the evolution of accounting standards that are essentially based on principles should provide enough flexibility to accommodate different accounting cultures and systems and at the same time bring in the desired comparability and transparency in the financial statements of organisations in different parts of the world.
Walker's suggestions, though well intentioned are essentially narrow in approach, divisive in nature, regardless of the world outside North America and West Europe and are essentially retrograde and irrelevant in the fast globalising economic environment.
This essay deals with the soundness of establishing a common set of accounting standards across the globe, with particular regard being given to the objections raised by Mr Walker against the issue.
A common set of accounting standards will help in furthering comparability between the functioning of business organisations in different countries and help companies with operations in different countries to apply a common set of accounting practices for all their operations. The adoption of a common set of accounting standards will not just bring in comparability but will also facilitate cross border economic transactions, ease international trade and help global economic integration. Whilst Walker's apprehensions about the adoption of one set of accounting standards across countries are justified, such concerns have been recognised in the past and are the primary reason behind the slow and laborious process of global accounting convergence.
Such challenges to accounting harmonisation have to however be overcome and the adoption of principle based accounting policies and practices provides the best way to achieve accounting convergence. Walker's arguments, whilst raising valid concerns, do not however provide enough reason to abandon accounting convergence. Such concerns must however be considered by the standard setters in their pursuit of principles based and inclusive accounting standards.