- Politics and Social Issues
The Impact of Globalization on United States Accounting Standards
Globalization has had a tremendous impact on our world since the new millennium. Technology has made it extremely easy for us to be interconnected. Clients, as well as large economic organizations, force the business world to address the interconnectivity more then ever. Goods and services are available from across the world, and this means that it has also become more difficult to account for global transactions that the accounting world has never seen before. I will take an in depth look at the major causes for globalization in the accounting world, and how globalization has directly impacted accounting standards in the United States today.
The client is the main driver of globalization across the accounting profession. As technological advances have opened up the opportunity to participate in more markets, purchase different goods, or offer services to entire nations of new consumers, the profession of accounting has had to determine how to effectively deal with these new transactions. Faulcounbridge and Muzio support this idea by stating, “By demanding national but also global advisory packages and consistent solutions across multiple jurisdictions, clients are key actors who promote potentially contradictory scales of governance and create demand for global approaches to professionalism.” (Faulconbridge & Muzio). Faulconbridge and Muzio acknowledge the new global demands of clientele, noting how difficult it is to operate within the framework of multiple governments at the same time. Client driven globalization has impacted the accounting profession vastly in this way. Accounting professionals must now understand how to properly do their jobs not only following proper United States accounting practices, but also those practices of other nations as required by their clients.
Clients are not the only drivers of globalization in the accounting industry. Large organizations such as the European Union, and the World Trade Organizations, force practitioners to use accounting on a global scale. These organizations are so large and powerful that accounting practices have had to adjust how they operate to correctly deal with things such as the European Union and World Trade Organization. Faulcounbridge and Muzio of the International Sociology journal note that, “Consequently, the professional association has in some cases acquired a supra-national dimension as it represents the interests of transnational professional elites and engages in a sustained dialogue not only with the nation-state and its institutions but also with agents of supra-national governance such as the EU or WTO as part of attempts to promote regulatory conditions designed to facilitate cross-border professional work.” (Faulconbridge & Muzio). They note that these large groups have changed conditions in order to more easily facilitate globalized accounting practices across borders.
The noted globalization drivers above have had a major impact on United States Generally Accepted Accounting Principles (GAAP for short). Formerly, this set of standards was the standard around the world. When compared with international accounting standards, U.S. GAAP has been slow to evolve to the ever-changing business climate that is caused by consumer and large organization driven globalization. Bruce Pounder notes the shift around United States GAAP by saying, “Its standards have been slow to evolve and improve as the business world has become increasingly complex and globalized. Consequently, it became possible for alternative standards to emerge and assume a level of importance that is likely to surpass that traditionally accorded to U.S. GAAP.” (Pounder 2). The alternative standards mentioned by Pounder are the International Financial Reporting Standards (IFRS), produced by the International Accounting Standards Board (IASB). According to the IFRS webpage, more than one hundred twenty nations acknowledge these standards, with ninety fully participating nations. In many nations abiding by these standards is a requirement to become publicly traded. More major economies are expected to begin following IFSB in the coming years. This means that as the world becomes more and more globalized, the differences that are clear between U.S. GAAP and international IFRS will begin to become smaller and smaller. In 2010, the Securities and Exchange Commission (SEC) issued a statement titled “Commission Statement in Support of Convergence and Global Accounting Standards”, in which they state that a single set of quality globally accepted accounting standards would benefit U.S. investors. This shows that the United States economic governing agencies have realized the need for accounting standards that can keep pace with the global economy of today. As the world becomes more globalized, accounting standards must become more aligned to make the world a fair playing field. Acknowledgement of the needed convergence of U.S., and international standards was made first, in the form of the Norwalk agreement. The Norwalk Agreement, reached in October 2002, is essentially an agreement between the standard setting bodies of the United States, the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB) to make their standards as similar as possible. In February 2006, the IASB and FASB issued a joint Memorandum of Understanding that essentially reaffirmed the two sides desire to reach common high quality standards that can be used around the world.
A convergence of GAAP and IFRS has many implications for accounting professionals in the United States. GAAP are beginning to look more and more like IFRS as time passes. As GAAP begin to converge with IFRS, the relevance of these standards will begin to decline, as the relevance of IFRS begins to increase rapidly. These changes put U.S. accountants at a disadvantage compared to those accountants around the globe that are already very familiar with IFRS. Although standard setting bodies have begun to acknowledge the need for convergence, U.S. accountants are continued to be mainly schooled in GAAP and lack detailed knowledge of IFRS, which could hurt the profession in this country down the line.
In conclusion, two main drivers of globalization in the accounting industry have been identified in the client, and large multinational organizations such as the European Union and the World Trade Organization. These two drivers of globalization have presented the industry with accounting issues that cross borders, and have become tough to deal with in a uniform way across different governments with different standards of how to deal with these issues. The impact of this on United States accounting standards has come in the form of the Norwalk Agreement/Memorandum of Understanding between FASB and the IASB. This is an agreement to make international and United States accounting standards more uniform, and therefor better able to handle the ever-changing demands of an economy that becomes more global by the day. On an individual basis, these changing standards could have a negative impact on U.S. accounting professionals that are familiar with GAAP, and not familiar with IFRS, which will be the main set of standards in the future when common standards have finally been agreed upon.
James Faulconbridge and Daniel Muzio
Professions in a globalizing world: Towards a transnational sociology of the professions
International Sociology 0268580911423059, first published on November 18, 2011 doi: 10.1177/0268580911423059
Pounder, Bruce. "How Globalization Is Affecting U.S. Accountants." How Globalization Is Affecting U.S. Accountants (n.d.): n. pag. 2 Feb. 2006. Web. 10 Nov. 2016.