Accounting Theory

Topics: Enron, International Financial Reporting Standards, Accounting scandals Pages: 5 (1486 words) Published: March 24, 2013

The globalization of economic activity has an increased demand for higher quality of accounting standards to enable investors to understand the financial statements and make comparison the financial information of companies from different countries. According to Nobes and Parker 2004 p.77, ‘harmonization’ is defined as ‘a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation. ‘Standardization’ of accounting is expressed as a term that ‘appears to imply the imposition of a more rigid and narrow set of rules. Accurate and consistent information is essential to help investors use financial statements to invest in companies from diverse countries and make investment decision (Deegan, 2009). Extra costs in form of lost potential capital or investment opportunities will be incurred if investors are unable to obtain sufficient and transparent view financial statements on their selected companies (Beier, 2008). According to Healy and Palepu, 2001, an efficient capital market can be achieved by regulators, standard settlers, auditors and information intermediaries. The credible accounting reporting may assist them to make the correct choice. As the capital markets are becoming global, global standards have emerged for institutions to enforce adherence to standards and provide information needs across the world. International Financial Reporting Standards (IFRS) is widely adopted by more than 100 countries for preparing financial statements. The primary objective of IASB is to develop and promote ‘a single set of high quality and principle-based financial reporting standards’ that are used throughout the world’s capital market (IASCF, 2006). The advantages and disadvantages of such a widespread IFRS adoption, the underlying theories of accounting, and some real life events pertaining to the practice of accounting standards are discussed below.


Some theories favor the adoption of IFRS. Others possess the anti-IFRS perspective. Firstly, the widespread implementation of IFRS committed to providing more accurate and timely financial information to improve financial reporting quality (Ball, 2006). Hence, it allows investors to receive informative reporting. Besides, the change in accounting and reporting under IFRS enhances comparability among listed companies and improves financial transparency (Ball, 2006). Without standardization of accounting, the different accounting standards in various countries may be viewed as a barrier to cross-border on the understandability and interpretation of financial information. Therefore, standardization will enable investors to understand the financial reporting standards from different countries. Moreover, improved transparency reduces agency costs between managers and shareholders as timelier loss recognition provides incentives for managers to undertake more positive-NPV investment hence enhance corporate governance (Ball 2001; Ball and Shivakumar 2005). The efficiency of contracting between lenders and firms can be increased with an improved transparency promised by IFRS as lenders may identify debt covenants violation of firms rapidly with the timelier loss recognition of loss in the financial statements (Ball 2001; Ball and Shivakumar 2005). Hence it can minimize the loss of outstanding debt. There will also be cost-savings in the accounting-standard function rather than duplicate financial process from different countries to understand and interpret financial statements. For example, accounting firms from different countries can avoid double work when interpret different countries’ financial reporting standards, which in turn would save costs of using a single reporting standard. Next, IFRS make it easier for companies to implement cross-border acquisitions, which may encourage increased takeover premium for potential investors (Bradley, Desai & Kim, 1988). Therefore, it is expected that the impact...
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