Creating a universal set of accounting standards for every business and accountant In the world to utilize when making accounting decisions can be considered one of the greatest challenges facing modern accounting theorists. It might even be their greatest challenge. The very notion implies a set of standards that would be so complex as to cover every financial situation and yet in doing so remain simple enough to be useful to common investors as well as feasible to implement and teach.
It is imperative that accountants and standard setters remain useful to the public and not hinder the efficient market by creating standards that are not useful thereby Jeopardizing the future of the accounting profession. Also hindering the development of universal standards is another problem at the heart of accounting theory, namely the trade off between managers and investors when setting financial standards. There are many problems facing account theorists with respect to harmonistic of accounting standards Including convergence of International standards.
This paper would like to outline some of these problems and provide an analysis on said robbers. The first problem to be analyzed Is the actual integration of a set of international accounting standards and the many complications involved with that process. Another concern to be outlined is the effect of increased complexity of universal accounting standards on small businesses and their ability to keep up with new standards. Finally, the third major problem to be reviewed is how the investor/ manger conflict will affect harmonistic of accounting standards.
At the heart of the convergence problem faced by accounting theorists Is how to handle the trade off teen Investor needs versus the needs of the manager with respect to accounting standards. Before we begin a discussion of the problems facing harmonistic a brief review on the history of harmonistic is appropriate as well as an understanding of where the issue currently stands. “International convergence of accounting standards is not a new idea.
The concept of convergence first arose in the late sass In response to post World War II economic Integration and related Increases In cross-border capital flows. ” (International Convergence of Accounting Standards-? A Brief History) The Financial Accounting Standards Board’s website states that the idea of convergence began to emerge around the sass’s. It was meant to help reduce the differences between country’s accounting standards and to help open up world trade. It began more as a harmonistic of standards rather than a true combining.
However, the goal of accounting standards Is no longer to Just harmonize, but Instead converge standards to form one set of International standards. “By the sass, the notion of harmonistic was replaced by the concept of convergence-?the development of a unified set of high-quality, international accounting standards that would be used in at least all major capital markets. ” (International Convergence of Accounting Standards-? A Brief History) The new goal of standard setters was to develop high quality standards for all the major capital markets.
This was a massive undertaking International Accounting Standards Board the accounting community, as well as accounting standards setters around the world, have made great progress towards harmonistic of accounting standards and in some cases even convergence. “As of 013, the European Union and more than 100 other countries either require or permit the use of international financial reporting standards (Firms) issued by the SAAB or a local variant of them. (International Convergence of Accounting Standards -? A Brief History) FIRS has made considerable progress in both further developing international accounting standards to be more complete and reliable as well as promoting these standards and convincing major capital markets to adopt these standards. The FIRS also makes great strides towards having international standards adopted among some of the more “elusive” countries. The FAST and the SAAB have been working together since 2002 to improve and converge U. S. Generally accepted accounting principles (GAP) and FIRS.
As of 2013, Japan and China were also working to converge their standards with FIRS. ” (International Convergence of Accounting Standards-? A Brief History) FIRS and the FAST are also working towards a convergence of their respective standards although there is currently uncertainty on a deadline for the eventual adoption of ‘Fry’s standards. Ultimately the FIRS continues to steamroll ahead with its plans for global accounting standards Romanization, but there still remain considerable challenges as well as opposition towards international harmonistic.
Now to consider one of the most obvious problems of harmonistic, which is the implementation and integration of accounting standards. Despite general progress in many countries, including major capital markets such as the U. S. , Canada, Japan etc. , there is still considerable opposition towards adopting international accounting standards in many of these countries for different reasons. “In general, the United States, Japan, England and Canada have resisted transitioning o International Accounting Standards.
One issue with changing or integrating GAP into SIS is the issue of complexity. ” (Houston) A fundamental problem with these large, often well-developed capital markets is that they already have well-developed and complex financial reporting standards that dictate how to record financial dealings. These financial reporting standards are developed under the circumstances and situations that the developing country is facing as well as the political and cultural climates.
There are already institutions in place in most of hose well-developed capital markets that have authority over the setting of financial accounting standards such as SEC in the United States. This creates a massive problem for the integration of international accounting standards as these countries economies are already determined by the current standards being employed. The process of converging two very complex sets of accounting standards is no small feat and may prove to be impossible.
It is also then very difficult to decide on who has the proper authority regarding the issuing of standards and, ultimately, the punishment of offenders who do not follow the standards. Deciding who has ultimate authority then becomes a very complicated mess due to the already complex nature of the countries financial systems. The author of this paper believes that the implementation of global accounting be a gradual transition as the world continues to become more interconnected.
The idea of harmonistic is in the stage of infancy when compared to the long history of financial accounting. It is a challenge more broad in scope than the accounting community has ever faced. The true key towards harmonistic may be unlocked as the world continues to become more connected overall. It may prove too difficult to fully integrate one international accounting system for the world without reaching an absurd level of complexity when considering the complexity and contrast of all the different countries financial and capital markets.
They key to integrating universal accounting standards may not be to develop standards to converge all of the worlds different financial accounting policies, but to develop accounting standards that are appropriate for a world that is ever becoming more connected. As the world continues to harmonize with the aid of avenues such as the World Wide Web and increased satellite usage then accounting standard setters may be able to use this general cultural convergence to their advantage and further make progress towards a universal set of accounting standards.
It is clear to see that any international accounting standards will be complex and ultimately costly to implement. This will have a direct affect on small businesses as the increasing complexity makes it harder for them to stay competitive with respect to the costs of preparing financial statements. “U. S. Small businesses are already at a competitive disadvantage against larger multinational companies. As a percentage of revenue, small companies spend more on regulatory compliance than do large corporations. (Houston) The increasing complexity of financial accounting is having an obvious affect on the operations of small businesses. Larger multinational companies already have considerable advantages with respect to their size and power, so a further competitive disadvantage is presented when financial accounting standards become more complex. “A Lafayette University study found that regulatory compliance costs small companies, with fewer than 20 employees, $10,585 per employee vs.. $7,755 per employee for companies with more than 499 employees. (Houston) This shows a painful difference for small businesses trying to compete. Further increases in complexity will widen that competitive disadvantage as larger companies have a larger resource pool to pull from and can spread accounting costs across more employees. With the increasing complexity of financial accounting small businesses will turn to outside accountants to prepare financial statements which may further their competitive disadvantage when compared with larger firms. “The Sage Small
Business Accountants Usage 2013 Study which looked at how small businesses use accountant services, found that the majority of small businesses that utilize the services of an outside accountant (74 percent in the United States and 68 percent in Canada) do so, in part, because of the complexity of regulations and tax code. ” (Deny) If small businesses are already turning to outside accountants for the complex accounting now then they will need to rely even more on outside help when more complex international accounting standards are adopted.
The ‘Fry’s mission statement is as follows ” The FIRS Foundation is an independent, not-for-profit private sector organization working in the public principle objectives of the FIRS foundation one of which is as follows ” to take account of the financial reporting needs of emerging economies and small and medium-sized entities (Seem)” (About the FIRS Foundation and the SAAB) The FIRS does want to help Seem expand and grow but the growing complexity of international accounting standards with respect to harmonistic may end up hurting small business development and profits.
The final problem to be reviewed is the conflict between investor and managements interests. In many ways this conflict hinders harmonistic of accounting standards. Referring back to the ‘Fry’s mission statement it is clear to see that the FIRS visualizes the market according to the public interest theory, meaning that standard setters are focused on the public interest only. However, the truth is the market does not appear to work as that theory suggests.
The truth is that the real market is more accurately reflected under the interest group theory. William Scott presents in Financial Accounting Theory Sixth Edition the theory of both public interest and interest groups. This second theory, interest groups, basically asserts that an industry operates in the presence of a number of interest groups (stakeholders) and that these interest groups lobby standard setters for various amounts and types of regulations.
This introduces another critical problem and further complexity into the harmonistic of accounting standards. Any international set of accounting standards must be able to please all the different interest groups in some capacity. This presents a very difficult obstacle for global accounting standard harmonistic as accounting theorists are still struggling to find lotions to the investor/manger conflict. Any feasible set of international accounting standards would have to appeal to all the interest groups as well as remaining reliable and relevant.
It is hard to see a solution to the problem currently as different countries financial systems are still so different from other countries. A true set of international accounting standards may be unachievable until the world’s different countries have aligned their interests more closely. While this research paper has covered some of the most pressing problems facing the attempt to harmonize accounting standards globally it has still only scratched the surface in terms of the problems facing harmonistic.