In the past few years the accounting profession has come under greater scrutiny as a result of high-profile corporate scandals such as Enron, WorldCom and Arthur Andersen. One result of this has been the introduction of the Sarbanes-Oxley Act in the USA. Mainly arising from increased globalisation, and even before these cases came to light, moves were being made towards greater international harmonisation of accounting practice. The main model for this to be introduced is through the greater use of International Financial Reporting Standards.
Whether or not greater internationalisation of practice throughout the profession is likely to prove more or less beneficial for practitioners and/or end users of published accounts. The emergence of multinational companies and globalisation has brought about an increasing pressure for there to be an internationally accepted and recognised set of accounting standards. At present, most developed countries have their own Generally Accepted Accounting Principles (GAAP). Many lesser-developed countries have adopted these standards in whole, or, as the basis for, their own GAAP’s, particularly US and UK GAAP. However, in recent years a set of International Accounting Standards (IAS) has been adopted by a number of countries, with others adjusting their own GAAP piecemeal to include certain of the standards.
The EU has ruled that the majority of large firms in member states must adopt IAS from 2005, with other industries to follow in 2007. Also, in the US the recent spate of corporate collapses following the Enron scandal has damaged the public perception of the accountancy profession and added further calls for internationalisation of practice. As under IAS rules Enron would have been forced to report in greater depth concerning its special purpose vehicles (The Economist, 2002), which led ultimately to its downfall.
However, there is still a huge level of debate surrounding the issue of IAS and a number of major issues must be overcome if they are to provide genuine globalisation of accounting practice. If the introduction of international accounting standards is to lead to an internationalisation of the accountancy practice then what are the potential costs and benefits and upon whom will they impact? Any alterations to accounting standards will primarily impact upon two groups; those who use companies’ published accounts for their own purposes, the end users; and, those whose responsibility it is to prepare the accounts, the practitioners.
So, who comprises these two groups and what are the issues facing them? End Users The end users of published financial accounts primarily consist of; shareholders, lenders, national governments, and companies themselves. Globalisation, and the subsequent growth of the multinational has forced many companies to prepare accounts of foreign subsidiaries in local GAAP, then restate them using their own standards, for inclusion in the parent company’s accounts. Introduction of IAS would remove this issue, thereby, saving companies the cost of preparing multiple sets of accounts.
However, the primary benefit to companies will be the potential ease with which they will be able to raise finance outside their home market, through flotation on other nations’ stock exchanges. At present companies wishing to do this are: Faced with the need at best to reconcile their own local accounts with the… [GAAP] of country in which they were listing and at worst to produce a whole new set of accounts… (Taylor, 2003 p. 1)
This relates in particular to non-American companies wanting to list in the US, and has led to German companies in particular, having to suffer the cost of producing full US GAAP accounts. It is hoped a universally accepted set of accounting standards will put an end to this. However, despite promises to the contrary, the Securities and Exchange Commission (SEC), the gatekeeper to the US markets, has so far, not authorised the use of IAS, without at least a reconciliation to US GAAP (The Economist, 2002). This refusal to “play ball” has been seen by some as a deliberate attempt to delay the introduction of IAS, as with each delay, increasing numbers of companies choose to use US GAAP as their accounting preference (Jones, 2002). The fear of the US standards becoming the international model was the driver behind the UK’s encouragement of the EU to implement IAS from 2005, in order to provide a credible alternative (Taylor, 2003).
Following Enron, and the subsequent rash of accounting scandals which have shaken investor confidence in the superiority of the US system, the SEC has increased its efforts to work with the International Accounting Standards Board (IASB) to converge US GAAP with IAS (Bryan-Low, 2003). Access to US markets is particularly important for French and German companies, as it represents a source of finance that is not available to them at home.
Historically, French and German businesses have relied upon the banking sector for investment loans, unlike the UK and US where the stock market is the primary source of capital. Subsequently, the markets in Paris and Frankfurt are not as strong as their London and New-York counterparts (Jones, 2002). In the modern globalised world this represents a competitive disadvantage to European firms, compared to their US competitors. The move to IAS is intended to tackle this issue and give firms the benefit of a level playing field.
The banks on the other hand, will have to pay close attention, as the new standards are a significant change from the current systems in France and Germany which: Adopt a conservative approach previously regarded as “prudent”, protecting creditors. (Darmant, 2000) The current criteria used to assess loan applications may need to be reassessed, if they are to be used with information provided using international accounting standards. This will apply throughout Europe, including the UK, and not just France and Germany.
There are also a number of potential problems arising from the different results obtained using IAS in terms of profits and losses compared to the existing GAAP’s used by most companies. Profits or losses could appear to alter dramatically seemingly overnight, with the introduction of IAS, depending upon whether the previous GAAP was comparably conservative or not. This may lead to the triggering of bonus payments and the like, simply due to the change in accounting standards. Apart from this, other aspects may require attention and contracts may need to be redrawn throughout Europe.
The insurance industry in particular, is generally unhappy with the IAS’s focus on “fair value” accounting. They believe market value is not an accurate measure of their long-term liabilities. Hank Greenberg of American International Group said in his speech to the annual International Insurance Society meeting in July 2003: Fair-value accounting has no place in the industry… …We are firmly opposed to the International Accounting Standards. (Reactions, 2003 p. 1)
However, even within this industry there is some support for the introduction of IAS, in particular from the Association of British Insurers who say they agree with the fair value approach. This backing is qualified however, by Leonie Edwards their spokeswoman who says: But we do have concerns about the implementation of these principles. The IASB has not yet determined how the new principles will be applied in practice. It will take time to work this out. (Reactions, 2003 p. 1)
Even once the standards have been introduced it will take time for businesses to become used to the way their accounts portray them. As Sawers points out: One of the biggest problems is that IAS profits are certain to be much more volatile than under UK GAAP… (Sawers, 2003 p. 2) Business leaders will have to be aware of the potential problems the change away from local GAAP’s to IAS may cause their businesses.