Attitudes Toward Harmonization of International Accounting Standards

Transcription

1 Overview Attitudes Toward Harmonization of International Accounting Standards Over the past 40 years, the accounting profession has undergone a series of events that is of the magnitude of the initial publication by Luca Pacioli in 1494 when he documented the concept of double entry bookkeeping (Damant, 2000). These events will cause changes to the way business enterprises around the world account and report their financial transactions and will impact every facet of the world s economic infrastructure (Damant, 2000). This series of events is the globalization of accounting standards, begun in 1973 when the International Accounting Standards Committee (IASC) was established. As business expanded globally, the need for a harmonized set of accounting standards became obvious (Baker & Barbu, 2007). Globalization of financial activities results in financial markets becoming dependent on each other (Mehanna, & Pettersson, 2011). This requires a consistent communication capability so that transactions can be processed efficiently between markets. Financial accounting in Europe was divided in three groups: one influenced by U.S. and British accounting philosophies, one influenced by Central European accounting approaches (specifically those of Germany), and the third group-sweden and the other Nordic countries (Baker & Barbu, 2007). Then there are the Asian nations with a hybrid of accounting philosophies merging their own approaches with those of the U.S and Europe (Sjölander, 2009). The Anglo-American approaches are based on standard setters, the Central European approach is impacted by legislation and code law (Baker & Barbu, 2007), the Nordic countries accounting approaches are regulated by law and are focused on the creditor s interest (Sjölander, 2009) and the Asian accounting principles are impacted by tax considerations (Sjölander, 2009). There has been serious debate over the years by professionals and academics about the benefits of harmonization (Barniv & Fetyko, 1997). It has been found that generally, though there are exceptions, both CPAs and accounting executives accept harmonization. And, actually, they see the need for harmonization to be able to compete internationally and to provide an efficient flow of capital on a global scale (Barniv & Fetyko, 1997). It is a fact that accounting standards are more a voluntary basis than a regulatory enforced approach (Eberlein, & Richardson, 2012). Accounting standards rely on the acceptance of those for which the standards apply and that reliance is only as strong as the perceived benefit derived from following the standards. The following discussion will review the level of commitment of the CPA and the financial executive from various parts of the world regarding harmonization of accounting standards. CPAs attitudes toward harmonization Barniv & Fetyko (1997) refer to several studies concluding that standard setters should move towards standardization and harmonization. They observed that CPAs operating internationally are generally more supportive of harmonization than those that are operating on domestic activities. International CPAs see significant benefit of

2 consistent accounting standards for cross border transactions, however significant differences occur between domestic CPAs and international CPAs regarding national tax issues and the reporting of deferred taxes (Barniv & Fetyko, 1997). A study conducted by Mehanna, & Pettersson (2011) on British CPAs found that most agreed with the transition to international accounting standards and noted that for those companies already conducting business internationally, only one set of accounting standards would be necessary to follow (Mehanna, & Pettersson, 2011). Globalization and the development of the international investor, it was argued by some of these CPAs, created the need for harmonization so that an efficient comparability and analytical process could be accomplished (Mehanna, & Pettersson, 2011). Japanese CPAs were cautious about moving to international accounting standards as it was believed there would be some significant adjustments, both financially and culturally, that would have to be made (Sjölander, 2009). Additionally, concern was raised about the ability of global entities to interpret the principle-based international accounting standards in the same way. It was believed that inconsistent treatment because of different interpretations and professional judgment will negatively impact comparability, a cornerstone to the argument in favor of harmonization (Sjölander, 2009). In Australia, even though the Australian standard setters have adopted the international accounting standards, there has been significant criticism about the loss of autonomy and concern that the international accounting standards are of lower quality than the Australian accounting standards (Jones & Higgins, 2006). CFO attitudes toward harmonization Financial executive attitudes regarding harmonization, though positive, were not as positive as CPAs (Barniv & Fetyko, 1997). In the Barniv & Fetyko study, financial executives with multinational responsibility favored harmonization more than nonmultinational financial executives. The cost/benefit relationship appeared to be the primary basis for the difference as domestic focused financial executives felt the cost of converting to international standards would not result in a significant return. A study of British companies noted that publicly traded companies had to make significant changes to the financial reports when they transitioned to international standards. Even so, as noted by Mehanna, & Pettersson (2011), a study by Ernst & Young of 290 British companies showed that a majority supported the move to adoption of international accounting standards. Japanese financial executives were found to be concerned about harmonization as it was perceived that international standards would be more difficult to follow given the principle-based concept rather than the rules-based concept currently practiced (Sjölander, 2009). Additionally, it was expected that there would be significant changes to the ways revenues and expenses were presented in the financial statements resulting in a negative impact on reported financial condition (Sjölander, 2009). In Australia, the transition to international accounting standards occurred in 2005 (Jones & Higgins, 2006). There was a general feeling of skepticism by financial executives regarding the benefits to be derived by following international accounting standards (Jones & Higgins, 2006). The study conducted by Jones & Higgins (2006)

3 concluded that international standards would have such serious economic effects that increased communication with stakeholders would be required. Additionally, 32% of the respondents to the Jones & Higgins study listed the transition to international standards as their top business issue and another 30% noted the transition as an important issue. Another outcome of the study was that 48% of the financial executives surveyed believed that there would be a negative impact to earnings after transition to international accounting standards. Only 38% of the respondents believed that there was a positive cost/benefit relationship and small businesses were more concerned by the transition to international standards than larger businesses. And finally, the majority of Australian financial executives in the study concluded that their companies would not reap any meaningful economic benefit by adopting international accounting standards (Jones & Higgins, 2006). Quality of International Accounting Standards The International Accounting Standards Board (IASB) follows a different approach in developing accounting standards than the Financial Accounting Standards Board (FASB). Consequently, different results will occur (Barth, Landsman, & Williams, 2006). For example, the IASB approach is more principle-based providing guidelines as to treatment of certain types of financial transactions whereas the FASB s approach is more rules-based providing specific steps as to how to record a specific financial transaction (Barth, Landsman, & Williams, 2006). Principle-based approaches allow for flexibility and encourage professional judgment but can lead to decisions not based on economic reality. The rules-based approach is more rigid and less influenced by manipulation but is limited to the specific issue being addressed. Consequently, the flexibility of the IASB standards has been a concern of securities markets for some time (Barth, Landsman, & Williams, 2006). Obviously the question arises, which standard setting approach produces the higher quality financial report? Numerous studies have been performed to answer this question. To determine quality in financial reporting, researchers have developed the following three attributes to measure quality: 1. Degree of earnings management (the less earning management the higher the quality). 2. Timely loss recognition (the sooner a loss is required to be recognized the higher the quality). 3. Value relevance (the higher the perceived value of the information by the user, the higher the quality). A study conducted by (Barth, Landsman, & Williams, 2006) concluded that financial reports prepared under U.S. GAAP were generally of higher quality than those of international GAAP. This finding is consistent with previous studies (Barth, Landsman, & Williams, 2006). In a study conducted on German businesses, it was concluded that German accounting regulation was of lower quality than International Financial Reporting Standards (IFRS) (Christensen, Lee, & Walker, 2008). Christensen found that the voluntary transition of German firms to IFRS reduce earnings management and resulted in more timely loss recognition. However, for those businesses that were

4 forced to transition, there appeared to be no improvement in quality because in Germany, the businesses resisting the transition were higher leveraged and did not use the equity markets as much. Consequently, the banks were already aware of the operating environment of the entity and there was minimal demand for additional information (Christensen, Lee, & Walker, 2008). The conclusion was that IFRS may not be sufficient to reduce earnings management and improve loss recognition timeliness because it can be manipulated by the operating environment under review (Christensen, Lee, & Walker, 2008). A study by Iatridis (2010) noted that British GAAP businesses were more likely to managed earnings under British GAAP than IFRS. In the study, Iatridis observed that firms transitioning to IFRS reduced the use of accruals thereby reducing earnings management and increasing value relevant accounting measures (Iatridis, 2010). In other studies of European companies transitioning to IFRS, it was observed that all three dimensions of quality assessment were improved as a result of implementing IFRS (Uyar, 2013). In Turkey, the transition to IFRS was found to improve earnings conservatism, increase value relevance, and improve timeliness of loss recognition resulting in improving quality of financial reporting (Uyar, 2013). Conclusion The benefits of harmonization of accounting standards are numerous and will benefit companies, investors, analysts, creditors, and other interested parties by producing financial statements prepared under one set of global accounting standards rather than under standards developed by a company s home country. The task will not be easy as cultural and economic differences around the world (as noted by the Australian experience (Jones & Higgins, 2006) will undoubtedly play a role in the development process (Damant, 2000). But once achieved, the flow of capital will be made more efficient as the comparability between entities will be made more reliable by minimizing the impact of national regulatory influences, cultural philosophies, economic differences, and political agendas. As relates to the quality of international accounting standards, numerous studies note that U.S. GAAP produced higher quality financial reports than international GAAP. However, when one begins to focus on specific countries other than the U.S., studies reveal that by transitioning to IFRS, quality of financial reporting improves for the non- U.S. company. The conclusion is that IFRS improves the quality of foreign company reporting. That is not the case for U.S. companies. And now we understand the reason behind the reluctance of the Securities and Exchange Commission in authorizing the transition to international standards.

5 References Baker, C. R., & Barbu, E. M. (2007). Evolution of research on international accounting harmonization: a historical and institutional perspective. Socio-Economic Review, 5(4), Barniv, R., & Fetyko, D. (1997). Attitudes of CPAs and financial executives toward harmonization of international accounting.. Journal of International Accounting, Auditing & Taxation, 6(2), 149. Barth, M. E., Landsman, W., Lang, M., & Williams, C. (2006). Accounting quality: International accounting standards and US GAAP. Manuscript, Stanford University. Christensen, H., Lee, E., & Walker, M. (2008). Incentives or standards: what determines accounting quality changes around IFRS adoption?. AAA. Damant, D. (2000). Harmonising world reporting: Global financial reporting standards come closer. Balance Sheet, 8(4), Eberlein, B., & Richardson, A. J. (2012). Accounting for Implementation: International Standards in Accounting. In The Interdisciplinary Perspectives on Accounting Conference (pp ). Iatridis, G. (2010). International financial reporting standards and the quality of financial statement information. International Review of Financial Analysis.19 (3), , ISSN , e/article/pii/s ). (accessed November 5, 2013) Jones, S., & Higgins, A. D. (2006). Australia's switch to international financial reporting standards: A perspective from account preparers. Accounting & Finance, 46(4), doi: /j x x Mehanna, M., & Pettersson, R. (2011). What do British accountants think of the accounting and financial harmonisation which applies to listed companies in the EU? (Doctoral dissertation, Halmstad University). Sjölander, T. (2009). Harmonization across borders. A study of Japanese views on accounting from an international perspective. rapport nr.: Externredovisning och företagsanalys M. Uyar, M. (2013). The Impact of Switching Standard on Accounting Quality. Journal of Modern Accounting and Auditing, 9(4), November 8 th, 2013