- Business and Employment
International Accounting: Standard Convergence
Growth of the internet and multinational corporations has given rise to an increasingly interconnected world economy, which was displayed by the 2008 global financial crisis. When countries become integrated on an economic level, accounting increases in complexity when the countries involved have a different set of rules and standards, which can present arbitrage opportunities. Different platforms also require accountants to know how to adhere to the varying rules and prepare the same statements in multiple different ways. A similar dilemma occurs for companies, investors, and analysts, who lose the ability to compare companies who are located in different countries if they are using different methods of reporting. Not only does a lack of universally adopted accounting standards make it difficult for the accountants, companies, analysts, and investors, but the countries involved as well, as they struggle to maintain control over multinational corporations.
As the complexity of the global economy increased, so did the demand for a globally universal set of accounting standards. The search for a uniform system led to the development of the International Financial Reporting Standards (IFRS), which are a set of standards meant to establish transparency, accountability and efficiency in financial markets worldwide. However, international accounting standards depend on their widespread adoption, otherwise their purpose cannot be achieved. Since the establishment of the IFRS, many countries have adopted and continue to gradually adopt the accounting standards. However, given that many countries still use their own accounting practices, the extent to which the level of transparency and uniformity that the IFRS aims to achieve is limited.
The IFRS will always face threats in a number of countries, due to the fact that some countries prefer relaxed regulations over their financial markets to keep a competitive environment in order to stimulate their economy. However, the lack of acceptance of the IFRS from the United States arguably poses the biggest threat to the objective of the standards. The Unites States has the deepest and most liquid capital markets, making their lack of participation detrimental to the mission of the IFRS. Instead, the United States still requires that firms use Generally Accepted Accounting Principles (GAAP), which are primarily rule-based while the IFRS are more principle-based and leave the potential for different interpretations of some of the same situations. As a result of these concerns and to uphold the comparability of financial statements from firms operating domestically, the SEC requires that foreign companies use GAAP in the United Sates, creating barriers to entry in the Unites States market for foreign firms and barriers for US investors wishing to purchase foreign securities.
The initiative to agree upon an international set of accounting principles has proven to be a difficult task, given that both bodies that worked to create both sets of standards have been negotiating for many years and have yet to come to a consensus. Convergence between the US GAAP and the IFRS that takes the most accurate components from each set would serve to remove many of the drawbacks of the current system. An ideal set of accounting standards would eliminate the subjectivity of interpretation associated with the IFRS and remove the components of the international standards that necessitate reconciliations under GAAP, while maintaining standards that would apply to companies in all countries. Given that a more general, principle-based system is almost necessary for universal application, it would be nearly impossible to completely eliminate all principles and focus solely on rules. As a result, a more successful approach may be to create a system that is based in enough principle to apply to each country while eliminating as much interpretation as possible. Once a general groundwork is set, the standards could allow for country-specific additions as long as they do not interfere with the necessary procedures and statements. In order to finally reach consensus, both bodies must locate and then reconcile all differences between standards so that a mutually agreeable rule is achieved. To unite the accounting standards between the largest capital market and the rest of the world, both bodies must realize that both standards come with strengths and weaknesses, so they must not resistant change.
Insurmountable benefits would be realized by many groups if a universal set of accounting standards were reached. They would provide all companies with the tools needed to carry out strategic planning and implementation. It also provides the potential for cost reduction and greater efficiency associated with redundant costs of carrying out both accounting methods. The barriers associated with the SEC requirement that firms adhere to GAAP decreases the flow of capital into the country, and hurts investors, who the SEC is mandated to protect, by limiting their options for researching and purchasing non-US securities. Because of this, the concerns should shift from gaining control over the international standards to connecting investors to the rest of the world.
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