Is harmonisation of accounting standards a good idea?
At the moment most countries have different accounting standards, which have developed over time to work well in each country respectively; harmonising standards may well disrupt the functioning of each country’s standards. The issue here is about communicating information between cultures and languages and how it is interpreted.
Generally most countries have the same goals such as presenting a realistic image of the economic situation of the company. Most countries in Europe tend to use the principle of prudence to undervalue their company rather than overvalue it, which would not be fair. In mainland Europe as income tax is also calculated from a company’s accounts this means that these companies use this principle to pay less tax, however the UK and USA regard this as too important an issue and thus have separate rules for calculating tax.
Why do we need harmonisation?
Since the growing internationalisation of the world, it is taken for granted that accounting differences hinder financial users, but it also provides problems for economic unions, such as the EU, especially as it aims to develop a single currency and a single market.
What is harmonisation?
It is the “reducing of differences in reporting between countries” (Haller and Walton 1998). It is generally agree that standardisation would not be useful or possible (i.e. applying exactly the same rules to all countries) because of their cultural and economic differences, but harmonisation would be useful in removing obstacles to international comparability.
What are the problems at the moment?
Multi-national companies often have to keep accounts for the parent company and for the subsidiaries, depending on local GAAP, they often have to produce separate accounts to apply with different rules for other stock markets. All these need different auditors and can be expensive due to extra staff, training and software costs as well.
At the moment there are problems in cross-border investment, leading to investment companies having a lack of understanding of local accounting rules and practices which limits the information they can usefully understand. This affects the choices that are made, which may not then be the best ones. It would be a better union if there were a ‘level playing field’ for all the different companies in the different countries. As different rules may encourage companies to register in a country with slack procedures, which would affect the other countries.
As each country uses financial reports differently, harmonisation of environments would be necessary too and this would be impossible and controversial.
Why may it be a bad thing?
Firstly, it upsets social balances that have been worked out over time. Secondly any changes may be costly to implement and involve extra changing. Thirdly, most benefits are mainly for the larger companies, the smaller ones cannot afford to make them, or will not find them beneficial.
Should harmonisation be applied to all companies or just those on certain stock exchanges or some other limitation….if so would this be unfair?
Is it a good thing?
Yes: it leads to easier comparisons allowing buyers and sellers and investors better access to information.
It would be more efficient, saving manpower, money and resources. It would also facilitate economic and political integration.
There is growing competition for funds either for survival or expansion and suppliers need the best and most detailed information to allow them to chose.
This is also true for the international organisations which offer aid, for example the IMF, which would be aided if all those competing for their funds had a standard set of statements.
At present many companies tend to obey US standards as well as their own country’s because the US is the largest single market and this makes it easier to get investors and borrowers from there. It does not mean that the US’s methods are necessarily the best.
No:it is not possible because of the differences between nations in their education, social and industrialisation policies. They mean that it is hard to agree on a common set of rules.
Nationalism means that each country would seem that theirs are the best and would want them to be the global standard. Clearly this is not possible.
Different countries have different economic policies which affect how they want companies to act, for example the Swiss system allows for more secrecy.
Even in the United States there is not complete uniformity, but state differences.
Who wants it to happen?
ICA, ICCAP, IFAC:
IASC: the main one
EEC:
UN:
OECD:
IAA, CAPA, UEC:
Overall their efforts have been commendable but disappointing. This is due to the considerable size of the obstacles in their way.
IOSCO-International Organisation of Securities Commissions
IASC:
Since its inception in 1973 it has not had much success but has started working with IOSCO recently with the objective of forming a standard set of rules applicable to all the world’s stock exchanges. Its standards are widely used as a basis and are adapted by local countries to their situations. Many individual companies use them though for their international consolidated accounts. The IASC has a steering committee which proposes any IASs (International Accounting Standard) which are put to the Board and then submitted for public exposure. The IAS are similar to US GAAP, due to the Anglo-Saxon influence on their creation; “it is probable that they will become the international benchmark standards for cross-border publication of financial information” (Haller and Walton, 1998)
The IASC has a small secretariat based in London and some unpaid representatives from member organisations, which means largely the ‘Big Six’, as they are large enough to be able to afford this. They provide a strong Anglo-Saxon base to IASC’s rules.
In 1982 IASC formed a partnership with IFAC (International Federation of Accountants). This was an agreement which provided financial support and encouraged developing countries to adopt their standards as their national standards.
In 1993 after five years of trying to lay a set of standards for the world stock exchanges, IOSCO rejected some of them, refusing to allow IASC to be its official standard-setter. So in 1995 IOSCO announced it would try and work again with IASC to achieve its goal. If this succeeds then it will go a long way towards the process of harmonisation, and improve IASC’s status. This would mean most multi-nationals would use these standards as a base and thus increase cross-border investment. As they would have to comply with their national standards as well it would encourage the convergence of national standards.
Unfortunately SEC does not want to relax its stringent standards for U.S. companies, which is a major obstacle; hopefully market forces will encourage it to back down.
IASC now encompasses 112 countries directly, and others use its IAS as well.
The European Union (a rare law-based example of harmonisation):
The Treaty of Rome (1957) established (amongst other things) the European Commission which launched a company law harmonisation program to provide a ‘level playing field’ for all companies. This was to create a single market and to prevent any extra regulations springing up which were nation-specific. Certain directives like the fourth, seventh and eighth have been implemented, but the fact that it took 20 years to draft the fourth one shows the problems which the EU has encountered with the harmonisation process. The final draft involved a mixture of the major contributors’ laws and involved either compromise, providing options in the regulations, additions to previous rules. These directives, though, were 20 years out of date when they were implemented!
Has it been successful?
This is debatable: yes they have rationalised the presentation of accounts. No as they have effects on each country’s economy and society which are closely intertwined with each country’s separate accounting framework, which have different recognition, measurement and disclosure requirements. Each country has had to adapt the directives to suit their systems so there are still variations around Europe, but it is smaller than it was. It has been agreed that all member countries would accept any financial statements prepared in any of the other as comparable and consistent.
These directives apply to more than just the large companies, which as argued above are really the only ones which benefit from harmonisation, which means the smaller companies have to waste resources to comply with these new conditions. Now the commission wants to concentrate on consolidated accounts, and working with IASC. It does this with the advice of The Contact Committee and the Accounting Advisory Forum. In June 2000 a Communication was issued by the EC proposing that all listed companies in the EU would be required to prepare their consolidated financial statements using IAS…it seems that IASC is successful at the moment.
United Nations:
It has an accounting policy secretariat in Geneva (under UNCTAD) which aids developing countries and reviews current issues. There is also the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) which provides research to individual governments. The ISAR has published an advisory report entitled: Conclusions on Accounting and Reporting by Transnational Corporations (1994). Overall the UN tries to help individual countries rather than harmonize international standards.
The OECD:
This possesses a Committee on Accounting Standards working like UN on advisory matters but has little power and only acts for its members (roughly the thirty wealthiest nations in the world).
What is likely to happen?
Overall it seems there are more advantages but it will not be possible for complete harmonisation to occur. Accounting uniformity will occur but only in certain blocks of similar countries with similar conditions and similar aims.