International Harmonization of Accounting Standards:

International Harmonization of Accounting Standards: Real Benefits and Drawbacks

Over the last several years, globalization has been having a profound impact upon daily life. As the advancements in technology and communications have meant that the distances have become much smaller. At the same time, the reduction in trade barriers and the focus on free market principals have meant that it is becoming increasingly competitive. As the way businesses operate are facing increasing amounts of scrutiny from: the various activities that they are involved in. (Cultural Revolution 20007) in some cases, this could mean that shareholders are questioning the effectiveness of management's ability to achieve different financial objectives. While at other times, this could mean that companies are facing a careful examination of: their business models and practices from government agencies. As a result, the way that corporations are accounting for financial transactions has been brought to the forefront. Where, businesses want to address all of the concerns and adapt to the changes that are taking place from globalization. One tool that is being utilized, to achieve these objectives is International Financial Reporting Standards (IFRS). Simply put, this is an international standard of accounting principles that are most commonly used around the world. The idea is that by establishing these different standards, you can be able to address the various concerns and improve transparency. However, given the fact that many countries have their own traditions and principals, means that these kinds of standards may not be accepted. (Maree 2007) to determine how some kind of basic foundation can be established requires examining: the effects of cultural / national standards and if the free markets can most effectively address these issues (based upon the efficient markets hypothesis). Together, these different elements will provide the greatest insights, as to the total impact that international accounting standards is having on the world of business.

If accounting is culturally based and national cultures are different, will international harmonization be possible?

To determine the impact of cultural-based factors on accounting standards means that we must examine the history of accounting throughout the world. As the basic principles of tracking the resources of an organization and its finances has always played an important part in their survival. This was necessary for all future planning and to determine where to effectively focus the limited amount of resources. As a result, the practice of entering these numbers into a ledger, following a standard format was continually being utilized. Where, businesses would inadvertently follow a basic format of calculating the overall profits and losses. Over the course of time, this would mean that the basic format was developed to the point, that it was continually embraced by a host of entities around the world (in one form or another). This is important, because it is showing how there was always an international form of select accounting standards around the world. The reason why, is because when you are working with numbers, there are only some many ways that you can effectively account for the overall profits and losses. Thus, the best standards were embraced by organizations, because they were effective tools. Once this began to occur, it would have a ripple effect on other entities, as they would use the same kind of tools. At which point, a certain amount of accounting practices were utilized by various organizations around the world. (a Brief History of World Accounting 2010)

When you step back and look at what was taking place, it is clear that there were a certain amount of standards that were most preferred by organizations. Once trade began to improve, is when these principals would be shared with other individuals (who would communicate these ideas as well). This is highlighting, how there was need for basic accounting principles. As a result, when they were passed on from one person to the next, this would create the standards that are utilized to this day. In many ways, one could argue that harmonization is possible, because it has been taking place for many centuries around the world. Where, certain practices have been embraced, as the most appropriate way for, monitoring how an organization is utilizing various resources to achieve their objectives. (a Brief History of World Accounting 2010)

A good example of this can be seen with double entry accounting method that was developed in 1400's. Where, two different thinkers would openly discuss how similar standards should be utilized, to address the different challenges facing all organizations. As this method, would allow for an effective way to tackle the issues that they were wrestling with. This is important, because the double entry accounting method was developed by (the Italians and the Chinese). Even though these cultures were vastly different, the necessity in this basic principal would force businesses to embrace these ideals. What this shows, is how all cultures were following a loosely-based format in one way or another. Therefore, adjusting to various international accounting standards should not be too difficult. (a Brief History of World Accounting 2010)

However, despite the common practices that were being used in accounting, various cultural traditions were often embraced as part of these basic principles. This is because each region of the world had common ideas and influences that were most important to them. Where, they wanted to instill these traditions in the way business is conducted in a particular region. Part of the reason for this, is because various countries had different: legal, governmental and reporting procedures. This meant that when you would go from one region of the world to the next, the basic formula was embraced within the industry. Yet, they were also augmented with others ideas, reflecting the traditions of a particular country. (International Differences in Accounting 2005)

For example, in the West the basic accounting principles that are being utilized are based off the Roman Standards. As the ideas of ancient Rome would have an influence upon: the legal system, the government and the way that information was recorded. This is important, because this basic standard would be embraced by Western countries, as the most acceptable practices for business. However, in other areas of the world (such as China), they were not influenced by the ideas of the Romans. Instead, they were influenced by the ideas of Confucius. This would have an impact upon: the Chinese legal system, government and the way that business was conducted. As a result, you would see a situation develop, where these basic principals were utilized. While at the same time, they would be embracing the same basic standard used in other countries. The only difference is that they were augmented to reflect different cultural factors. (International Differences in Accounting 2005)

Over the course of time, these different standards would continue to evolve with an increased focus on improving reporting and disclosure. This was a main emphasis within the accounting industry in many developed countries during the 20th century. Part of the reason for this, is because various events (such as the 1929 stock market crash), would have an impact upon the economy. Where, it became obvious that increased amounts of disclosure and transparency were necessary for the public to have confidence in the financial system. As a result, there were various regulations implemented that would require organizations to increase the overall amount of disclosures. The idea was that by disclosing any kind of material changes in balance sheet would help everyone, to make more informed decisions about what was taking place with a company. At the same time, it would make it easier for regulators to monitor the different activities of businesses.

A good example of this can be seen with implementation of the Securities and Exchange Act of 1934 (in the United States). This law would require all companies to disclose to the public changes in: their earnings and report them on quarterly basis. The idea was that forcing everyone to follow these different standards would help to improve transparency. At which point, investors can make an informed decision about what was occurring. (Securities and Exchange Act of 1934-2011) This is important, because it shows how this regulation was embracing the Western ideas of disclosure. Where, there was the cultural belief that this would help to: improve the stability of the markets and the economy (which it did). As a result, this principal would be embraced as time went by, as part of the basic standard operating procedures in an organization. Globalization would spread this basic idea around the world during the 1990's, by incorporating these views with the advances in technology and communication. What this shows, is that different cultural standards can become a part of international accounting principles. Therefore, this is highlighting how these different accounting standards can effectively be harmonized over the course of time.

When you step back and analyze what is taking place, it is clear that there are basic principles that have been embraced by all organizations around the world. However, they have been adapted to various cultural factors within a particular country. This is important, because it shows how there is the potential for both harmonization and division. Yet, once you look at what is taking place around the world, it is obvious that a common set of ideas are being readily accepted in different countries around the world.

A good example of this can be seen by looking no further than China, where they announced that the country would follow IFRS standards. As they are going to be phasing in the different provisions one step at a time. This is significant, because it shows how globalization is causing a single form of accounting standards to be embraced. At the same time, the U.S. And EU have begun working together to integrate the different accounting standards in line with IFRS principals. This is important, because it shows how there is an emphasis to slowly integrate these ideas into one basic standard that can be used around the world.(Fritz 2006) Therefore, even with the various cultural differences, the acceptance of accounting-based principals has become an integral part of business. As a result, harmonization is possible, because these basic ideas are being accepted in a number of countries around the world. (China's Move on IFRS 2007)

If the efficient markets hypothesis holds, then could it be interpreted as meaning that harmonization of international accounting standards is unnecessary?

The efficient market hypothesis states that it is impossible to beat the equity markets. The reason why is because they are reflecting the current and future expectations about the business itself. As stock prices in relation to the major market average will reflect these expectations at all times. This is important, because this theory is basically saying that anyone who is involved in the equity markets will have no way of outperforming the averages. Therefore, many individuals have concluded, that it is impossible to beat the markets, which makes creating various accounting standards an exercise in futility. The reason why, is because if you cannot have a better understanding of the situation (through accounting principles), then there is the possibility that this will not provide any kind advantage. Where, the markets and investors are reflecting their expectations about profits in the price of the underlying stock. (Efficient Market Hypothesis 2011)

When you step back and analyze what is taking place, it is clear that even if the efficient market theory is correct there is still the need for universally accepted accounting standards. This is because accounting is necessary in providing clarity to the organization. As it is indentifying, where to most effectively place the different resources; so that you can to the greatest impact upon the organization's overall bottom line.

As a result, the implementation of these different standards can have an effect upon: the all entities and the activities that they are involved in. Where, they will provide the public with additional information including: presenting reliable information and making additional disclosures. Presenting of reliable information is when the different procedures will evaluate the overall strengths as well as weaknesses of an organization, based upon the allocation and use of various resources. This is important, because all entities are given a limited amount of resources that they can use, to achieve their different financial objectives. In some cases, this could be in the form of various financial based instruments such as: cash, stocks, bonds and insurance policies. While at other times, this could be utilizing various natural resources in the production of: different goods / services and the total amount of labor available to address the situation. These different elements will help managers to determine how they can be able to increase their overall profits, by allocating resources where they are most effectively needed. (Efficient Market Hypothesis 2011)

At the same time, it will allow investors and regulators to monitor the activities of the business. Where, investors could use the information from the different reports, to decide if the company has the ability to remain financially solvent (based upon the allocation of the resources). This is because the basic function of all businesses is to make a profit. When an investor can be able to determine, if the actions taken by managers will affect the bottom line, is the point that the information being disclosed is useful. For example, the efficient market theory states that it is impossible to time the market, due to the fact that all current and future assumptions are being reflected in the price of the stock. However, investors such as Warren Buffet will use the different pieces of financial data, to determine if the company is a good long-term investment (in relation to the price of the stock). This is important, because utilizing the data that was provide, has help Buffet be able to experience a larger return, in comparison with other investors (who subscribe to the efficient market theory). In this case, the use of common accounting standards would help Warren Buffet, to determine if particular company could provide him with superior returns. As a result, the harmonization of international accounting standards would be useful for investors, in determining if purchasing a particular company is advantageous. (Efficient Market Hypothesis 2011)

In the case of regulators, the use of financially accepted accounting principles helps to improve their enforcement of different regulations. This is because, the information that is being provided, can gives bureaucrats more clarity about the nature of an organizations activities. At which point, they compare these numbers with public statements that were made by executives, to determine if they are trying to mislead investors. A good example of this can be seen with the Enron investigation. What happened was, no one understood the overall scope of the fraud, much less how it would affect investors (until it was too late). At which point, various executives began to play a game of finger pointing and denial of their involvement. To determine who was responsible for what took place and their roles, investigators would look at the statements that were made by executives (to the public), their personal sales of company stock at the time and the reported financial information in comparison with the off the book special purpose entities. As a result, the former CEOs Ken Lay and Jeffrey Skilling were charged with being the ring leaders of the fraud. This is because both men would make public statements about the financial strength of their company. While at the same time, they were privately selling their shares in the company and continuing to hide the overall extent of the losses. Once regulators were able to unravel the fraud, they would charge these two as the main culprits for what took place. This is important, because it showing how regulators would utilize financial information, to take down the veil of secrecy surrounding what took place. At which point, they would charge the two with securities fraud and making misleading statements to the general public. In this aspect, the use of accounting-based standards was important, in creating a basic foundation for the investigation that took place. Therefore, the harmonization of different international accounting standards is necessary, as the efficient market theory will overlook key aspects of elements that may not be known to the general public (such as fraud). As a result, the various standards help to prevent this from occurring, by leaving a paper trail of what activities took place and when. (Thomas 2002)

Making additional disclosures is when the company is providing added information that can be used, to determine if there is any kind of changes, in the underlying financial condition of an organization. This is important, because this basic standard has been utilized to: keep the public and investors informed about the changing market conditions. Where, it will tell them if there have been changes to the balance sheet of company, based upon particular events. As a result, this is providing information that has been used as part of understanding the financial condition of an organization. When you compare this with the efficient market theory, it is obvious that the improved accounting standards will help to inform the public about what is taking place. Where, this is providing additional information that may not have been known about something that could be occurring internally.

For example, in 2008 UPS was being affected by a sharp increase in energy prices to their business model. Under the traditional market theory, the increase in oil prices would be reflected in the price of the stock. As it was a total evaluation of the current run up to: record highs and the impact that they would have upon the overall bottom line of the company. Yet, in July 2008, the company would report a sharp reduction in quarterly earnings. As they were being hit by record high energy prices and declining demand from customers. (UPS Lowers 2 Q. Earnings 2008) This would have an impact upon the price of stock, as shares would fall from $55.00 to below $40.00 per share in less than two months. (UPS 2011) in this case, the efficient market theory should have reflected these different views in the price of the stock. However, because UPS made this disclosure, meant that analysts and investors would reevaluate the underlying earnings. Where, they would begin to see shares reflecting these changing views about what was occurring. In this aspect, one could argue that the efficient market theory is ignoring key facts that may not be known about: the company or various challenges that could be affecting their overall bottom line. This is important, because it shows how having some kind of internationally based accounting standards, helps organizations to be able to identify key changes that are occurring in: the economy and communicate this information to the public. Where, there are obvious facts and figures that may not have been known (when looking at the prevailing news headlines). Therefore, having a universal accounting standard will have an impact upon how quickly an organization will respond to different challenges.

When you step back and analyze this information, it is clear that even if the efficient market theory holds true, there needs to be some kind of universal accounting standards. This is because, the efficient market theory is assuming that all relevant information is reflected in the price of the stock. However, international accounting standards are helping to help an organization be able to identify, changes that are occurring and adapt to them. At the same time, they can improve communication with the general public and regulators about these changes that. This will improve transparency and help to increase the confidence that investors will have in the activities of management. Even if the efficient market theory is correct, it will not be able to objectively tell managers, about the changing conditions of supply and demand. In this aspect, the use of universal accounting standard will help to address these issues. At the same time, it can be used to communicate with: the public, investors and regulators about how these changing conditions will have an impact upon the overall bottom line. This is important, because the use of an effective accounting system has helped to support the rapid increases in economic growth (due to improved accounting standards). Therefore, harmonization is necessary to address the constant challenges facing all organizations on a regular basis.

Globalization and the Need for Harmonization

When you look at the information that has been presented, it is obvious that some kind harmonization needs to take place in international accounting. This is because globalization has been having a profound impact upon commerce and communication. Where, the reduced trade barriers and improved communication (from the advances in technology) would have an impact upon: how companies are obtaining and analyzing financial data. This is important, because effectively using the data that has been provided and performing an analysis will have a direct impact on what actions will be taken by: the public, investors as well as regulators. As they will use the information that is being provided to them, to determine if there are changes that they need to be preparing for in the future. As a result, this basic principal is highlighting the need for some kind of harmonization of international accounting standards.