This paper examines the purpose and relevance of accounting standards developed by bodies such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Drawing on Fischer, Taylor, and Cheng (2011), Wahlen, Jones, and Pagach (2012), and Arner (2007), the paper argues that accounting standards serve three primary functions: enhancing the comparability of financial statements across national boundaries, enabling multinational companies to manage global operations effectively, and improving the credibility and reliability of financial reporting for a broad range of stakeholders including investors, creditors, regulators, and employees.
The paper demonstrates effective use of cause-and-effect reasoning: for each accounting standard function, the author explains both what the standard does and what negative outcome would result in its absence. This "without X, Y would occur" structure strengthens each argumentative claim by making the stakes explicit.
The paper follows a straightforward expository structure: a brief introduction establishes the topic and thesis, three body sections each address a distinct benefit of accounting standards (comparability, multinational management, and credibility/reliability), and a short conclusion restates the overall argument. Each body section opens with a topic sentence and closes with a supporting citation, making the logical flow easy to follow.
Over time, a significant number of accounting guidelines and rules have been developed by bodies such as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Do these standards serve any meaningful purpose? This paper concerns itself with accounting standards and their relevance, with particular attention to why such standards are necessary. As Wahlen, Jones, and Pagach (2012, p. 1–20) point out, "the FASB and the IASB operate so that they can develop new accounting standards in a thorough, thoughtful, and efficient manner, with due process, and in open public forums."
Accounting standards play a critical role in enhancing the comparability of financial statements. National, regional, and international boundaries no longer present barriers to trade and commerce — the world has effectively become a global village. For this reason, there is a need to ensure that some degree of uniformity is observed in financial reporting.
Fischer, Taylor, and Cheng (2011) illustrate this point with a practical analogy: just as travelers are inconvenienced when South America and the United States use different power plug standards, so too are financial statement users disadvantaged when two countries apply different accounting treatments to identical economic transactions. Accounting standards bring the much-needed uniformity to the financial reporting field. Ideally, when an economic transaction in America is identical to one in Japan, the two transactions should receive the same accounting treatment. This would make the financial statements of business entities in different countries directly comparable.
In such a scenario, an international investor based in Japan would be able to place the financial statements of an American company and a Japanese company side by side and make sound investment decisions based on that comparison. Other users of financial statements who may require comparability as a basis for their decisions include, but are not limited to, customers and suppliers (Fischer, Taylor, and Cheng, 2011).
Accounting standards also help multinational companies manage their global operations in an efficient and professional manner. As Fischer, Taylor, and Cheng (2011, p. 504) note, multinationals "must have comparable accounting standards with which to measure the effectiveness and efficiency of their various international subsidiaries, branches, and/or other equity investments." Without the ability to undertake such comparisons seamlessly, these entities would find it extremely challenging to prepare consolidated financial statements.
It can also be noted that accounting standards allow businesses to compare their performance against that of competitors, helping them assess how competitive they are in the marketplace. In the absence of such standards, each business would present its financial statements in a different format, rendering meaningful cross-company comparison impossible.
Accounting standards enhance not only the credibility but also the reliability of financial statements. When there is inexactness and ambiguity in the interpretation of financial statements, scandals and inappropriate accounting practices are more likely to arise. Accounting procedures that can introduce such ambiguity include depreciation methods, stock valuation, and similar areas of judgment.
The smooth conduct of global business is largely dependent on the successful adoption of standardized accounting standards. As noted throughout this paper, the world is increasingly becoming borderless. For this reason, business entities need to present their financial statements in a format that not only enhances accuracy but also simplifies interpretation for diverse users. In the final analysis, the relevance of accounting standards cannot be overstated.
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