Discuss critically the need for international accounting harmonization and assess the success of the attempts at international harmonization and standardization that have been made up to the present time
For decades, entities across the world have been using a range of different accounting standards derived from various accounting models. Weber (1992) states that there have historically been four accounting standards models from different areas of the globe: the United Kingdom, Continental Europe, the United States and Latin America. These variations in standards create a number of issues for users of accounts, including those preparing, consolidating, auditing and interpreting. For example, an investor needs to be able to understand and compare financial statements in order to gain confidence to buy shares in a business. It is believed that harmonization of accounting standards can eliminate these issues by “increasing the compatibility of accounting practices by setting bounds to their degree of variation” (Nobes and Parker, 2008, p75). Organisations such as the International Accounting Standards Committee (IASC) have formed with this objective in mind, but their success has been limited.
It is claimed by a number of sources that international accounting harmonization will bring a number of benefits to stakeholders. Roberts, Weetman and Gordon (2008) claim that harmonization would eliminate dual reporting costs for multi-national companies. Regulators of a foreign stock exchange may require statements to be adjusted in order to match the local standards or at least produce a reconciliation statement highlighting the variations in standards. Harmonization would remove this problem and ensure all statements are valid worldwide. However, less developed countries will predictably have less influence on the standards that are put into place. The principles may not be appropriate for these nations, especially if they have a developing economy or no capital market transactions (Larson and Kenney, 1995).
The lack of worldwide accounting harmonization can also hamper investors. Miles and Nobes (1998) state that whilst standards are varied, professional fund managers find it difficult to understand statements prepared in certain countries. Investors often avoid trading in these companies, potentially leading to them missing a profit making opportunity. Harmonization of standards would reduce the chances of misunderstanding, thus reducing the likelihood of poor decisions being made (Roberts et al, 2008). Although comparability may be improved, other features of a business may be hidden, such as the differences in business activity. The original changeover to the new standards may also cause confusion for newly adopting nations, especially if the standards are viewed to be decreasing the accuracy of the company accounts (Barth, Clinch and Shibano, 1999).
In each country of the world, accounting standards need to be set either under law or by an independent body. This means that various costs are generated in order to implement and monitor standards. If certain countries are implementing practices that are similar or even the same as another country, it makes little sense for both nations to be incurring these costs (Roberts et al, 2008). Although global standards would minimise these implementing related costs, they are not relevant for companies only operating in one country. There is also a danger that, if one body monopolises standards, the quality of practices will reduce because of a lack of competition from other accounting bodies (Sunder, 2002).
It is claimed that international accounting harmonization would enhance the global economy by providing a “level playing field” (Weber, 1992, p1). Those regulating and auditing accounts will all gain access to the same information, enabling a smoother evaluation process. Without free trade, international standards would allow trade restraint systems to be exact, reducing...
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