Benefits of Globalized Accounting Standards
Benefits of Globalized Accounting Standards
Many aspects of the world over the years gravitate towards a central point of reference. These cut across three many pillars of society namely social, political and economic aspects of human beings. This is because no one can exist as an island. It prompts people from different cultures social and convictions to exhibit greater degrees of resemblance in many practices that underlie their way of life. The most notable social change in leadership has been the advocacy of democracies in countries that previously were characterized by single persons exercising absolute control. Another case in point is the globalization of the world through an interconnection of computers; an innovation that has transformed the world into a small digital village. Coming back to the word of business, there has also been constant efforts to upgrade country policies and legal frameworks in line with international practices. In accounting, for instance, the establishment of the London-based International Accounting Standards Board (IASB) is a testament to this reality. Its membership has been growing steadily as many countries adopt their International Financial Reporting Standards (IFRS). However, there are still many more countries that are not for a wholesale abandonment of their financial reporting policies for the adoption of a unified standard across borders. Some like Australia, through the Australian Accounting Standards Board (IASB), resort to piecemeal alterations to their existing policies (Leuz, Nanda, and Wysocki, 2003). Consequently, much as their standards largely conform to those prescribed by the Internal Accounting Standards Board, some sections remain unchanged to suit prevailing Australian business conditions. It is against this backdrop that this study seeks to unearth the merits of adopting a unified financial information reporting standards.
As the introduction demonstrates, there is a lot of controversy around the need for eliminating existing country standards for a unified global system. This section will enunciate some of the benefits of adopting a standardized financial reporting system across borders. First, it simplifies the ease of doing business across different countries (Ball, 2006). In the recent past, there have been a growing number of business conglomerates that have gone global by setting up satellite multinational companies in other countries. One of the challenges they always face is with regards to the need of understanding the laws dictating the business practices of the new territory together with existing financial regulations which are country specific (Walker, 2011). This inevitably results in unnecessary feasibility studies on such requirements. The understanding which is usually outsourced is also again subjected to existing comparisons in the parent company headquarters to aid in the decision-making process. In this fast changing world, time is of essence to any entrepreneur as it may make the difference between the success and the failure of a business idea. This complication can, however, be rectified through the adoption of standard financial reporting standards which guarantee uniformity easing on the pressures of making decisions about startups, acquisitions and mergers that may strengthen the performance of business overseas.
Second, there are variations in cultures across the borders and these peculiarities inform the code of practice therein (Walker, 2011). Since business borrows and abides by the dictates of the culture in their environments, the precise level of timeliness, accuracy and comprehensiveness of the reports also exhibit variations solely dependent on country policy decisions. As earlier on intimated, time is of essence for all businesses because a slight delay in decision making can have far-reaching impacts on the profitability of the venture. There is, therefore, need for urgency in reaching decisions about volatile markets. The globalization of world economies largely credited to the ever expanding Information Technology has opened up many markets for investors worldwide. Let us take the example of an entrepreneur in Australia who invests in stocks both in Australia and China. To reach a decision on whether to invest in the shares of China Development Bank or China Telecom, located in China, he or she needs to get hold of up to date comprehensive financial reports which must further be genuine and accurate to mitigate the risks associated with volatile stock ventures. It is, therefore, paramount to have global standards tested and approved by all stakeholders that will provide the much-needed information in the precise manner desired within the requisite time limits (Walker, 2011).
Third is the efficiency with which investors who form the core of users of those financial reports are likely to benefit from standardized financial reports. As previously elaborated, the more universal the standards of reporting are, the lower the costs incurred in understanding the data. Cost efficiency is crucial for any establishment as it guarantees higher profit margins which are the single most driving impetus for investors in the market (Ray, 2011). Therefore, the global standardization of financial reports undeniably guarantees better returns for the investors.
Fourth, the business world is a complete cosmos of different investors. Depending on their access to resources and information, the ramifications of their decisions are far reaching. Considering the reality of the existence of professional investors and small-scale operators, it is advantageous for both of them to access high-quality information about the financial performance of different players in the industry. However, it is expected that their financial power to obtain quality information elsewhere favors professionals than small investors owing to the costs to be incurred. Consequently, it is crucial for countries to adopt standardized reporting systems to level out the playing field for both parties to bolster the disposable income of its population.
Seventh is the ability to forecast future performance of firms (Ball, 2006). Businesses that that utilize the standardized financial reporting systems can present quality data as was intimated earlier on. This information is crucial for investors, revenue collection agencies, and government planners as they base most of their plans on expected estimates. Whereas a potential investor can use such quality reports to predict a company’s profitability, the government Finance Ministry together with the Revenue authority can reliably use the data to speculate on the revenue expected at the end of a particular period in time for businesses in the country and those outside the borders whose revenue streams back to the country.
Besides, Ball (2006) asserts that it creates the perfect environment for flexible mobility of professionals across borders to other conglomerates situated elsewhere. This is mostly found in multinational corporations with the intention of motivating their staff by sending them to different company branches to serve them while enjoying the fun of a new environment. The move could also be triggered by the need to mentor staff members by bringing in outstanding talents from other subsidiaries to share their knowledge and experience. This will boost the morale of workers and increase their sense of belonging to the business thereby significantly increasing their productivity translating into increased profits for the firm
Lastly, it is the guaranteed intervention strategy that will ultimately give strength to country auditing and accounting reports (Daske & Gebhardt, 2010). The high standards imposed uniformly are critical in the efforts to eliminate failures in corporate reporting which see the manipulation of reports through omissions and commissions by unscrupulous players in the industry as a publicity stunt to dupe unsuspecting investors.
This paper has adequately demonstrated the state of affairs with regards to the ongoing debates on the need for adopting unified standards of reporting financial data globally. It is evident from the review of available literature that there exist immense benefits for world economies going global. However, for this transition to be fruitful there needs to be a thorough evaluation of existing systems in the country. Such an assessment will expose cracks that need mending to guard against an accounting shift whose face value does not reflect deeper structures.
Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.
Daske, H. and Gebhardt, G., 2010. International financial reporting standards and experts’ perceptions of disclosure quality. Abacus, 42(3‐4), pp.461-498.
Leuz, C., Nanda, D. & Wysocki, P.D 2003, ‘Earnings Management and Investor protection: An International Comparison’, Journal of Financial Economics.
Ray, K., 2011. One size fits all? Costs and benefits of uniform accounting standards. Costs and Benefits of Uniform Accounting Standards (September 11, 2011).
Walker, M., 2010. Accounting for varieties of capitalism: The case against a single set of global accounting standards. The British accounting review, 42(3), pp.137-152.