2015 Cambridge Business & Economics Conference ISBN : 9780974211428
IFRS Adoption & Compliance Issues: Does One Size Fits All Really Work?
Raul Sanchez, The University of Texas at Dallas
Abstract
There has been much research on the initiative to implement IFRS as the official financial reporting standards of both developed and developing countries. This paper reviews the results of various articles that study the problems that affect the adoption and compliance of IFRS in developing countries.There have been many obstacles that have made adoption and compliance of IFRS in developing countries challenging. Poor education/curriculum, corrupt and weak government institutions, and cultural factors have played a role in the uphill climb towards IFRS integration (Adolf & Enthoven, 1983; Zehri & Chouaibi, 2013; Kantor, Roberts & Salter, 1995; Scott, 1975; Lasmin & Ritsumeikan, 2012; Bova & Pereira, 2012; Doh, Rodriguez, Uhlenbruck, Collins, & Eden 2003; Enthoven, 1976; Albu, Albu & Girbina, 2012; Berrios, 2012). So far, these articles look at how beneficial IFRS can be, what influences IFRS adoption, or the obstacles IFRS faces. Little has been done on asking whether IFRS really is the engine behind the financial success of developing countries?Omer and Wadhwa (2011) have come closest to questioning IFRS adoption arguing that harmonization of accounting principles should involve ideas among all participants. Is the improvement of those elements that plague developing countries the real difference maker in creating an environment that drives FDI and economic growth?Should the successful implementation of any accounting standard come only after these broken institutions are fixed?Is it better to assist developing countries in creating similar financial reporting standards that will also meet some of their specific needs?
IFRS Adoption & Compliance: Does One Size Fits All Really Work?
The International Financial Reporting Standards or IFRS as it is known, have been permitted or required by over 100 countries (Lasmin, 2012). Many studies have analyzed the different components that complicate and influence the transition and implementation of these standards in developing countries. Are these components and not IFRS the true answer to the economic success of developing countries and is implementing one set of standards to be used by different countries from different regions, cultures, historical backgrounds, political structure, the best option.
First, we will look at reasons why developing countries choose to adopt IFRS. Ezzamel and Xiao, 2011 mentions the substantial force imposed on emerging and transitioning market economies by advanced capitalist governments, the World Bank, the World Trade Organization, big Audit Firms, accounting institutions like the Financial Accounting Standards Board(FASB) and accounting professions, and venture capitalist, to harmonize their accounting standards to those of IFRS. There are economic and political sanctions these countries have to deal with if they decide not to comply with IFRS. There is little to no option for them to improve their standards in conjunction with developing countries in a way that allows them to have similar but slightly different enough standard to serve their specific needs (Ezzamuel and Xiao, 2011). By not allowing developing countries to develop their own unique techniques and methods within their own economies we could be actually curtailing global economic growth. This type of production blocking can end up hurting the international community as a whole or any group trying to accomplish a goal. Those methods that could be developed by emerging economies could also contribute to improving international financial reporting standards. Transitional and emerging economies like China are said to have been responsible for the recovery of the world economy in the most recent economic crisis (Ezzamuel and Xiao, 2011). This questions the importance of IFRS and whether there are other reasons behind developing countries and international organizations’ insistence on making IFRS mandatory.
Pressure from developed countries is not the only reason for developing countries choosing to adopt, allow, or make IFRS obligatory. IFRS is believed to provide more detailed financial reports that also offer a higher level of transparency and comparability. If it is clear that IFRS the optimal representation of a format that can give foreign investors that sense of security than why is it hard for U.S G.A.A.P and IFRS to settle on a set of guiding principles? Is it because they are trying to do the impossible in making these standards acceptable to all parties(Omer and Wadwa, 2011)? Countries see IFRS as an opportunity to attract more international investment and trade (Lasmin, 2012). The clarity and completeness of the financial information is believed to bring about more economic growth (Lasmin, 2012). This sounds very clear and undebatable, but why is it that countries like Botswana, Haiti, Nepal, Panama, Papua New Guinea, Tajikistan, and Venezuela, which have adopted IFRS, have not enjoyed any of the economic benefits that are guaranteed (Lasmin, 2011). Zhegal and Mhedi, 2006 found that Gross Domestic Product growth and Foreign Domestic Investment actually have little to do with developing countries’ decision to adopt IFRS. Foreign aid was actually found to be one of the factors that has more influence on countries adopting IFRS.Various Latin-American countries, in the past few years, carried out reforms in their public accounting systems with technical cooperation provided by the U.S Agency for International Development. These countries also receive financial aid from U.S and different international bodies through various programs that focus on their economic development (Perez and Hernandez, 2007). Without foreign aid could countries even implement these new standards or follow through with effective economic programs? Berrios (2012) mentions the recommendation of calculating the resources they need in order to be able to comply with IFRS. The cost to comply with IFRS is often too much for these countries. The issue is that they will are forced to develop IFRS compliant financial reports in order to continue to have access to the global capital markets (Berrios, 2012).
Foreign aid in the form of financial assistance, but more importantly governmental agencies and organizations like the Agency for International Development will be important when developing programs to improve education, training, and courses in developing countries. These three fundamentals are essential in creating well-thought-out financial management standards. In the analysis made by the Committee on Accounting in Developing Countries (1973-1975), many deficiencies were found in these areas. To start off there was a limited number of accounting subjects being taught at college level. Solutions recommended by gurus included creating different seminars and meetings to train teachers. Improvements to curriculum were also seen as very important. Recommendations included offering more specialized courses and bringing in curriculum experts. Instructor compensation was seen as a key factor in inadequate teaching. They often had to supplement their teaching pay by holding other jobs. This leaves little time for them to plan and organized their lectures or help in improving the educational programs in their respective schools. Enthoven (1983) mentions a list in a report entitled Accounting Education in Third World by the Committee on International Accounting of the American Accoutning Association. This report lists the main setbacks of accounting education, training as expressed by accounting experts and instructors in developing countries.
· Accounting is still taught as if it was a technical skill instead of as an intellectual discipline.
· Special fields of accounting, for example, farm accounting, bank accounting and industrial development accounting, for which a great need may exist may not be taught at all.
· Attention to operational and managerial auditing tends to be limited.
· Generally no clearing house for information and publications exixts.
· An upgrading of teachers—the development of adequate staff and better pay for teachers—is needed.
· Teaching aids, for example, texts, labs and projectors, tend to be deficient, and not enough funds are budgeted for them.
· Workshops are needed for accounting educators, practitioners and students.
· Interest in activities, such as conferences and seminars, that expose students, staff and practitioners to developments in accounting may be limited, and accounting training may lack content and motivation.
· Most governments take a limited interest in accounting training and upgrading.
· Educational institutions, in conjunction with governmental agencies, may have to assess the number of accountants needed and their education requirements.
Developed countries like U.S, Canada, the United Kingdom, Germany, the Netherlands, France, Sweden and Australia have participated in education and training of developed countries (Enthoven, 1983). Still there is room for improvement. So far, it has been mainly private investment and multinational enterprises that have affiliated with domestic firms in developing countries and implemented more efficient financial management systems. Most of these firms have already adopted IFRS so they basically train and help these domestic firms or subsidiaries transition to IFRS. The problem is that domestic firms seldom participate. Governmental and international agencies like the Agency for International Development or the U.N can work together to study what the best plan of action could be to further help emerging countries improve education which, subsequently, can help improve accounting standards.
A clear example of the benefits of working in conjunction is explained by Enthoven (1983) who looks at the government of the Republic of Zaire. Located in Central Africa, Zaire suffered from Inflation which had impeded capital formation, productivity, foreign trade and economic development. Approached by Zaire for assistance, the U.S helped develop a there phase program. The first was a preliminary evaluation where the severity of inflations and its impact on accounting was assessed. From that, they were able to come up with options to correct the issues caused by inflation. Second, a workshop took place to discuss the different methods that could be beneficial to Zaire, the accounting system that could be implemented, and the possible education and training that could be provided. Finally, the process of implementation took place. Developing countries can certainly work together to improve accounting standards through education, training, and improvement of curriculum. While doing this, developing countries have to keep in mind the special needs and development stage of that specific country. Simply trying to impose a set of standards which might not completely fit the country could lead to poor implementation even with proper education and training.
Another reason for poor implementation and the inhibition of expansion of market share of wealth in developing countries could be the corruption that can run rampant in these types of environments.Here we will concentrate mainly on government corruption and its effect on firms trying to enter into these emerging markets by looking at research done byDoh, Rodriguez, Uhlenbruck, Collins, and Eden (2003).They generate two tables where they list the direct and indirect cost.
Table 1Direct Costs of Government CorruptionType / Explanation
Bribes / Monetary and non-monetary payments to those with some degree of public power as a response to extortion or in exchange for somemisuse of public power.
Red Tape/Bureaucratic Delay / Non-monetary and opportunity costs of dealing with corrupt officials or of complying with the illegitimate bureaucratic requirements of corrupt regimes.
Avoidance / Efforts to avoid and limit the firm's exposure to extortionary behavior by corrupt officials, including hiding output and opting out of the official economy.
Directly Unproductive Behavior / Investments in channels of influence to gain advantage in dividing up the benefits of economic activity; includes lobbying and more direct vote and influence peddling.
Foregoing Market Supporting Institutions / Costs imposed on the firm as a result of foregoing the use of courts for the enforcement of contracts, local financial operations, etc.
Engagement with Organized Crime / Monetary and non-monetary costs imposed on firms as a result of willing or unwilling engagement with organized crime.
Corruption can be very difficult to control even in developed countries. Multi-national firms are often are caught in the middle and often become part of the problem. Xerox confessed in 2002 to having made over $250,000 worth of illegal payments to India in order to drive sales (Doh et al., 2003). In places like China it is seen more as the expected way of doing business. It is not necessarily seen as being corrupt as long as you do it dicretionately. Firms doing business in China will hire relatives, make donations, and provide “favors” as explained by Doh et al., 2003.In Russia, because of the ineffectiveness of corrupt government to provide protection, firms are forced to take part in the underground market(Doh et al Eden, 2003). They spend high amounts of cash for protection (Doh et al Eden, 2003). These are only a few of the reported examples.
Table 2 Indirect Costs of Government CorruptionType / Explanation
Reduced Investment / Reduced public and private investment flows. Lower rates of foreign direct investment for the formation of a robust commercial environment.
Reduced and Distorted Public Expenditures / Reduced taxes as a result of the deterrence of business activity and recourse to the unofficial economy. Selection of privately benficial and publicly costly expenditure projects.
Macroeconomic Weakness and Instability / Reduced rates of macroeconomic growth, weak commerical environment, and greater susceptibility to financial crises.
Weak Infrastructure / Inadequate, expensive, and intermittently supplied infrastructure services such as telephony, electricity, and transportation. Weak infrastructure foments opportunities for small bribes and may indirectly reduce public trust.
Squandered/Misdirected Entrepreneurial Talent / Engagement of entrepreneurial and otherwise talented individuals into the socially unproductive avenues of advance afforded by corrupt environments.
Socio-Economic Failure / Increased poverty, income inequality, and reduced income growth for the poorest in society. Increases demands on already weak central governments.
Direct costs seem to affect the firms and investors trying to tap into the potential wealth that can be created in these countries. They often have the capital to navigate the system a little better or manage to still remain profitable. The ones having to end up taking most of the hit are the people living under these corrupt administrations. They suffer from high unemployment due to struggling economies, poor infrastructure, and stalling of improvements in educational and public health programs. Without first creating strategies to greatly minimize the ability for government officials and firms to be involved in unethical and unlawful activities we are not able to further improve a country’s financial system whether it is IFRS or U.S G.A.A.P.