The Effect of Globalization on Accounting

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

As today's companies become more globally oriented and expand into multi-national corporations, there is a growing need to compress financial regulations into a standardized unit. In order for this to be achieved, accounting practices in today's market must strive for a symbiotic relationship with globalization. Because consumer capitalism has spread to non-originating countries, and non-Americanized cultures, the practice of accounting and financial management must standardize their policies. Thus, accounting must be regarded beyond capital market settings, and the different effects that accounting has had in such sites must be examined.

Why Globalization is Changing Accounting

Globalization is the process forced by global flows of people, information, trade, and capital. The rampant pace of global competition, the speed of technological developments, rapidly changing demographics, and the incredible increase in information technology have resulted in a business environment that changes day by day and hour by hour (Globalization, 2010). To remain competitive in such a dynamic environment, businesses must continually improve upon all aspects of their operations. Businesses operating globally must also be able to improve upon the employee / employer relationships.

International Market Places

The major benefits that globalization has brought, has not come without costs. There are major policy challenges that remain to be resolved. These challenges include; the leverage that national governments have in a world where competition may lead to a race to the bottom on social, environmental and other policies (AICPA, 2010). International market integration, competition, and liberal international financial systems have been viewed as tools that could control the power of national governments to set rules and standards according to domestic public preferences and needs (AICPA, 2010). The mobility of capital and regulatory competition between countries can facilitate to discipline governments and increase the efficiency of public institutions (Nolke, 2005). It can be argued, that the political pressures created by the process of globalization could place national governments in a regulatory downspin where growing corporations would not be able to enter those markets and prosper. The accounting practices within these international market places are affected by very distinctive flows. These flows, which impact financing principles include: capital, product, information, policies and people (Nolke, 2005).

Flows of Capital

The extent of international flows of capital and of the information needed to make investment decisions can provide further evidence of international economic interdependence (Graham & Nue, 2003). Today, gross flows of short term capital in particular are vast by long term historical standards. In the gold standard era up until WWI, bonds were the dominant means of raising long term capital. This position changed in the 1990's when foreign direct investments (FDI) grew exceptionally in importance, with equity finance, bonds and bank lending also playing a role (Gebhardt, 2000). Different financial instruments have been used as indicators of international capital mobility, but financial crises arose on both of the periods mentioned above. New and improved financial instruments or systems will be created and looked upon as great tools of international flexibility (Malwitz & O'Rourke, 2009). History has however proved that nothing lasts forever.

Flows of Products

Flows of products, particularly those of consumer products, are often used to characterize globalization and to stress the need for standard accounting information (AICPA, 2010). The positioning of accounting in trade resolution processes can help solve trade and import disputes between countries (Graham & Neu, 2003). Accounting has a fundamental affect on cross border flows of products which is evident in natural resource trade disagreements such as the Canada and U.S. softwood lumber dispute (Graham & Neu, 2003). At the center of this dispute is the method of calculating producer costs which is a concern of both managerial and financial accountants. Because of the notion of cost within trade resolution procedures, accounting operates on an embedded technology to arbitrate and allocate the materials of such disputes (Graham & Neu, 2003).

Flows of Information

How accounting regulates and structures the flow of information is rather vague. Information transfer, more visible on the Internet is relatively unstructured and unregulated in current accounting practices (Nolke, 2005). However, accounting technologies are serving to legitimize certain sets of information and accord certain voices in the quest for global attention (Graham & Neu, 2003). One such voice, the Organization for Economic Cooperation and Development (OECD), assists international governments tackle the economic, social, and governance challenges of a globalized economy. The OECD places governments under scrutiny, and examines such performance indicators as aging and related pension issues, employment, growth, money laundering, taxation, and transportation (Gebhardt, 2000). Secondly, the OECD's peer review process uses performance measurements both to observe and to direct government performance (Gebhardt, 2000).

Flows of Policies

To regulate foreign policies, accounting practices are often imposed on distant sites. Through the terms of lending conditions the receiving country is coerced into adopting mainstream neo liberal financial policies (Gebhardt, 2000). Such was the case in Indonesia, when the Asian currency crisis spread there in 1997(Graham & Nue, 2003). In response to this event the government liquidated 16 private banks and either cancelled or postponed 70 major infrastructure projects (Graham & Nue, 2003). This action proved insufficient to avert the crisis, and the country next turned to the International Monetary Fund (IMF) (Graham & Nue, 2003. An immense financial aid package was then instituted to salvage the country from crisis. By adopting policy and adapting its indigenous measures, Indonesia was able to extract certain solutions to its crisis (Graham & Nue, 2003). Accounting technologies made visible certain problems, suggested certain solution, made these solutions operational, and thus encouraged certain consequences. Ultimately, this flow of policies produced economic survival.

Flows of People

Technological advances have dramatically reduced the costs associated with international travel. The lower transportation cost of today has had an abundance of people traveling around the world far more frequently. A large portion of all travel is not only for leisure purposes, but rather international business trips and short term stays in foreign countries (Nolke, 2005). This is yet another part of globalization that deals with the flow of people.

The short term business and holiday travelers, mentioned previously are faced with lighter travel restrictions in many countries. Long term international migration is not occurring on a huge scale by historical standard, in spite of the significant migration pressures that exist currently in the global economy (Taylor, 2009). Wages for workers with similar skills vary greatly between countries at different stages of economic development. Even though migration is not occurring on a vast scale, the number of workers from Mexico that have migrated to the US is elevated due to the fact that their wages increase ten-fold.

Should there be Changes in Accounting Practices

Throughout the years businesses have grown and have evolved. With all the new technology coming out every day, the way business was done years ago, has completely transformed. Networking globally is very important for large businesses. Businesses are going overseas to obtain resources and other items to fulfill their needs and wants. Working with other companies overseas can be a good thing as foreign employees work the same job as Americans at a lower wage. For example, while companies in the US close their businesses at night, by doing small investments in other countries who are working at those hours, the US companies can still make money. Working with other countries saves money, helps businesses make money and it offers a whole new array of products and services. This is where accounting comes into play.

How challenging and how difficult would the adaptation to a single accounting standard be? Several believe that countries in which institutions are not deeply rooted would accommodate a shift much more easily than those countries with established business models (Shelby, 2008). Additionally, the usefulness of learning a country's general accounting principles would depend upon how many people choose to become experts. Thus, it would seem that accounting standardization would be dependent on need and ambition.

Currently the two major sets of accounting standards being applied are the US GAAP and the IFRS. The International Accounting Standards Board (IASB), which is a private sector organization, is working to replace the many sets of national accounting standard in existence with a single set of common, global standards (About, 2010). To date, its major success has been an agreement with the European Union (EU), which states that as of January 2005, public companies in Europe are legally required to use IFRS to draw up their corporate accounts (Global, 2010).

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the IASB that may someday become the global standard for accounting (Taylor, 2009). IFRS has some objectives and goals that it wants to achieve. The objectives are:

To develop a single set of high quality, understandable, enforceable and globally accepted reporting standards.

To promote the use and rigorous applications of those standards.

To take account of the financial reporting needs of emerging economies and small and medium sized entities.

To bring about convergence of national accounting standards and IFRS to high quality solutions.

The goals of the IFRS Foundation and the IASB are to cultivate, in the public interest, a single set of high quality global accounting standards (Global, 2010). In pursuit of this goal, the IASB works in close cooperation with stake holders around the world this includes; investors, national standard setters, regulators, auditors, academics, and the others who have an interest in the development of high quality control standards (Global, 2010).

IFRS is in over 120 nations who are now required or permitted to use them. Approximately, 90 of these countries have fully conformed to IFRS. Numerous countries will be transitioning soon, for example, Canada and Korea are expected to transition to IFRS in 2011 (Global, 2010). Also many European and most Asian countries are adopting IFRS. The United States is even contemplating a transition within the next five years. It may eventually be mandated for everyone to use IFRS as their primary accounting standards (Shelby, 2008).

As of now, U.S public companies do not have to adopt IFRS since the SEC has not issued a rule allowing or requiring them to do so (Shelby, 2008). There are so many multinational corporations who have started to use IFRS and some US subsidiaries of foreign owned companies are also using IFRS. So even if the United States does not adopt IFRS, it will need to have knowledge of what IFRS is so that it can understand other countries and corporations financial statements.

According to the IASB website, the IASB and the FASB have been working together since 2002 to remove differences between international standards and GAAP (About, 2010). Also, the shift from US GAAP to the principles based IFRS is intended to improve transparency and comparability in global markets (Malwitz & O'Rourke, 2009). The biggest difference between US GAAP and IFRS is that IFRS provides much less overall detail and it also contains relatively little industry specific instructions (Shelby, 2008). IFRS also does not permit debt for which a covenant violation has occurred, to be classified as non-current or use of the LIFO inventory method.

Some benefits to using IFRS are (About, 2010):

A business can present its financial statements on the same basis as its foreign competitors, making comparisons easier.

Companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company wide.

Companies may also benefit from IFRS if it wishes to raise capital abroad.

Along with benefits of change there will always be drawbacks. The drawbacks of using IFRS are (About, 2010):

Despite a belief by some of the inevitability of the global acceptance of IFRS, others believe that US GAAP is the gold standard, and that a certain level of quality will be lost with full acceptance of IFRS.

Certain US issuers without significant customers or operations outside the States may resist IFRS because it may not have a market incentive to prepare IFRS financial statements.

They may also believe that the significant costs associated with adopting IFRS outweigh the benefits.

It is an immense responsibility to convert to IFRS because everything would have to change, since everything would be more innovative. Most of the money would go to staff preparation and implementing IT support (Malwitz & O'Rourke, 2009). The conversion can also lead to an ultimate reduction of costs for capital and financial reporting related to operations. The SEC has estimated the largest US registrants to adopt IFRS early, will incur $32 million per company in additional costs for their IFRS prepared annual reports. The SEC also estimated that the average US companies would incur costs of between .125% and .13% of revenue (Taylor, 2009). There is a great deal of money involved to get the process of changing to IFRS implemented. If the US does adopt IFRS it could potentially cost a small business owner their company.


So analyzing all the information and the facts that have been presented, it seems that globalization will make all employees work more effective and cost efficient. IFRS might be costly and have its disadvantages, but think how much easier things will be in the future. It will be easier for investors and everyone to review the financial statements of multinational companies. Everybody would be using IFRS, so everyone will know all the same standards and there will be no more confusion. IFRS will also save time and money once it is fully adopted globally. A million positives and just as many negatives can be concluded on whether globalization will help or hinder the U.S. One thing is certain however, employees will need to continuously step outside the box and work in such a means to be constantly learning. That is truly what it will take to succeed as a modern day employee.