Issues of Globalization
In the business world, Globalization tends to be thought of as a revolutionary idea with tremendous benefits to profit maximization and overall competitiveness. Globalization has connected so many economies and benefited consumers due to trade & specialization tactics. While these beliefs are typically true, it is rare that corporations examine the potential drawbacks associated with Globalization. One of the biggest drawbacks that accompanies Globalization is the potential ethical dilemma of accounting fraud due to the immense competition. As forensic accountants do, we will investigate the ways in which companies are/can commit fraud to make their company appear superior in an ever competitive world. Another part of the accounting issues associated with Globalization is the discrepancies between GAAP and IFRS and we will see how Globalization is moving accounting standards more towards IFRS. In addition, as globalization continues to prevail there becomes a debate of a need for a universal tax system.
As of right now, GAAP (Generally Accepted Accounting Principles) is the sovereign standard for accounting methods. However, IFRS (International Financial Reporting Standards), becomes more and more relevant as the global economy expands. There are many accounting standards and issues which vary from GAAP to IFRS and creates a problem in terms of how to account for certain items. With so many companies being global nowadays it would probably be beneficial to create one agreed upon standard of guidelines. However FASB claims that there are several complications delaying this from happening. Here is their statement on the issue: “Different starting points, different business cultures, different regulatory environments, different financial reporting objectives, and different legal systems can make it difficult for standard setters around the world to agree on the same accounting alternative (FASB.org).” This is certainly not great news, but on an encouraging note FASB claims that a growing number of countries are beginning to require the use of IFRS. Hopefully in the near future this will become uniform across every country which will make financial statement comparison far simpler.
First, it is important to understand the importance of financial statements for publicly traded corporations. These statements are the most essential component for current and potential investors to examine the overall well-being of a company they may choose to invest in. A potential investor is always going to be more skewed towards a company with a higher net income in comparison to an identical company with a lower net income. This idea creates a moral dilemma for managers of corporations as they (rightfully so) feel the need to maximize their profit margin. For purposes of financial statements, a manager may feel that by creating fake journal entries to boost their revenue they can attract new investors and these investors would be willing to pay a higher price for the stock. A terrific illustration of this fraudulent idea in use is the Worldcom scandal. According to Joshua Kennon, “The company's CFO, Scott Sullivan, fraudulently took billions of dollars in operating expenses and spread them out across so-called property accounts, which are a type capital expense account. This allowed Worldcom to charge the expenses off slowly, and in smaller amounts, instead of reporting them immediately to investors. In 2001, the company reported a $1.4 billion profit. Had the operating costs not been incorrectly hidden, Worldcom would have lost money for fiscal 2001 as well as first-quarter 2002.” While their motive may not have ultimately been to inflate revenues to intrigue investors, they still committed a serious white-collar crime with stern repercussions. Had it gone undetected this could have made Worldcom appear better than their largest competitor (AT & T) which is an incredibly large global industry.
Lastly, is the way Globalization could potentially affect taxation rules for the global economy. This is discussed by Petkov in his work titled, Scholastic Views on International Accounting “In the future, we should see more movement towards greater transparency and universality in the taxation rules. We would not be surprised if within this decade, we see the introduction of universal tax system.” He talks about how this tax system would create common rules for taxation for each country. While this theoretically sounds like a great idea, I feel as though it does not thoroughly consider the range of economic factors that vary from country to country.
All in all, Globalization greatly impacts the economy and the way things are accounted for in the economy. Overall Globalization is of tremendous benefit to our world in the way that it provides an interconnectedness of skills/goods and assists with trading. However, it is still important to examine the issues that are unfortunately associated with globalization. Without a uniform standard of accounting guidelines it makes global companies hard to compare to other companies within the industry who may use other accounting guidelines. Also, the added competitive pressure from globalization can create some unwanted accounting moral issues. In addition, the potential need for a universal tax system is a growing part of Globalization. The positive part of this dilemma is that the benefits still greatly outweigh the drawbacks and the drawbacks can ultimately be corrected going forward.
Kennon, Joshua. Worldcom Scandal Explained. 28 July 2016, www.thebalance.com/worldcom-s-magic-trick-356121.
Comparability in International Accounting Standards. www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663.
Petkov, R. Scholastic Views on International Accounting. www.bing.com/cr?IG=7955C7304ADD47599D81817C8841B475&CID=1E83E43DC18D60E72BC5EF06C08B61C7&rd=1&h=hJsHfgKmNWlrs7G2ofhx6tw8ABe9-1oAjVzkHswIOXw&v=1&r=http%3a%2f%2ftru.uni-sz.bg%2ftsj%2fVol.10%2c%2520N%25204%2c%25202012%2fR.Petkov.pdf&p=DevEx,5066.1