Accounting forms an essential aspect of any business enterprise and for this purpose, it becomes extremely important for any business organization indulging in international business to ensure that the business should be successfully able to follow all the accounting standards which are present around the globe. Many critiques around the globe argue for a single accounting system to be implemented (Deegan 2013). However the implementation has its own advantages as well as disadvantages. The given report will be discussing the case for the single accounting standards system, the obstacles and the challenges which are faced by countries alike to make the single system a success and lastly the application of the institutional theory will be used for the same.
Accounting standards differ from one another around the globe and this disparity in the various accounting methods among the different countries tends to have a huge impact on the various companies whether they are small or large in size. Hence, for this purpose very often in order to embrace globalization and increase the profitability of the investment, the companies may be required to match different accounting statements. Through this may be suffering accounting obstacles. In order to address the given issue, a series of global accounting standards have been formed in order to ensure that all statements have similar format for ease of comparison. The given arguments for a single set of accounting standards have been given as follows.
Increased comparability
The most important benefit of adopting a unified accounting standard is that it increases the ability of comparability. It helps to work seamlessly amongst different countries. For example, at present the accounting standards differ from country to country and thus the investors tend to face a large amount problems as it lengthens their procedure and the decision making takes a toll. Even the creditors tend to face a similar issue with respect to comparability in order to determine the creditworthiness of different companies operating in other counties (Schaltegger and Burritt 2017). Large as well as small organizations face these kinds of issues when they are operating in different countries. Hence, a single comparable method would go a long way in assisting the firm. Comparability plays a key role in determining the success of a business as compared to other businesses in the given industry. Furthermore, it also helps in comparison of intra-company performance of different years.
Reduction of barriers
With the advent of globalization, various companies have expanded beyond their original boundaries however there are certain barriers which they face. Under the current method, the companies who tend to expand internationally have to keep two separate books for their accounting standards whereby they are required to abide by the new country`s compliances. Although this might be easier for the large enterprises, the small business enterprises generally face problems (Hung 2000). They then have to take external help, which then would add up to additional costs which might not be beneficial in the long run of the organization (Ifac.org. 2018). A single set of standards would help to decrease costs by eliminating the requirement of copying and duplicating the work. This would allow for increased expansion opportunities and thus, business will prosper. It is the duty of the authorities to help in reduction of barriers as an economy should be allowed to prosper.
International Expansion
This given aspect is largely related to the previous concept whereby it was stated that converting to a single system would act as barriers. Movement to global financial standards would ease the process of international expansion for the companies. The companies usually have to plan various international costs of compliance, adoption costs and statutory costs in a different country. Hence the costs highly increase, many small companies tend to put their operations on hold for this reason (Christensen et al. 2015). Hence, a single accounting system would act as a factor in encouraging the firms to expand internationally.
Streamlined Administration
When a global accounting standard will be followed, this will also allow the administration and the different policy making authorities to have one single authoritative body. In contras of this, when each country has a separate accounting standard then it becomes difficult for different administrative organizations to manage the accounts of the different companies (Ball 2006). This system often leads to misunderstanding between different countries and the external regulators. Through this process, time, money and aggravation is added to the process. This often leads to confusion with respect to the rules and the best practices (Barth, Landsman and Lang 2008). If a single authority is present then, there can be cordial relationships between one another, which also leads to reduction in the costs (Leuz and Wysocki 2016). The money which they generally spend in the duplicate work, shall go away.
When the operations are put to a single authoritative body then the rule making power gets transferred to one single body of authority. This authority would then make management of relationships between the various countries and between the different companies much easier and simpler (Teixeira 2014). There are many instances whereby the companies need to pay reporting fees which then will have to be paid twice. In the same manner, this tends to have an impact on small firms. The small firms would benefit largely if a single system is adopted.
The difference in the accounting methods between the different countries tends to have a large impact on various companies whether they are large or small. As every organization is taking a progressive step towards ensuring that they are able to take their stand and increase their profitability, they are faced by barriers like the differential accounting standards. Although the offer seems fairly attractive there are certain challenges faced by the companies when they want to adapt to the new global standards.
The challenges which face the possibility of having a single accounting system are many (Ahmed, Neel and Wang 2013). Although the advantages of have a single accounting system are quite large, there are certain challenges which often have to be faced while implementing the single system. These are as follows:
Increased work pressure on accountants
A new global accounting standards system would mean that the current accounting systems and processes would be required to undergo a change (Jorissen et al. 2013). Hence, the primary responsibility of carrying out the given changes may fall on the shoulders on the company`s accounting department. The given shift in the procedure will not only require extra amount of work on the already busy departments which gave additional responsibilities while they are changing the systems and seeing international accounting systems. They will also be required to undergo additional training and avenues in the field of the education system would also increase considerably. Hence, in a way the costs for the given firm would increase in order to make way for the accounting leaning.
Extended adjustment period
When the companies will be required to shift and adjust to the new standards and move away from their existing standards then the chances for mistakes will turn out to become more costly than the previous mistake costs. It might also lead to ground work for the increased and tumultuous adjustment period (Hoyle, Schaefer and Doupnik 2015). Any country operating in the international finance business has a complex set of rules and regulations of the financial reporting system which is different from the accounting standards. These differences act as a barrier and although it is possible that a single accounting standard is adopted, the divergences between different country’s financial reporting regulations may cause a problem and hinder the companies on their path to compare and check the compatibility of the financial statements comparison between the two countries (Bentley et al. 2013).
The cost burden may have a large impact on small to middle sized organizations
Although the single global accounting standards which may be adopted might be been able to reduce some burdens, businesses who will be adopting to the single accounting method may still occur significant costs doing this phase as well (Onlinedegrees.nec.edu. 2018). For instance, if an organization performs a transition from the United States Generally Accepted Accounting principles to the other IFRS principles or some other accounting principles then they will still be required to spend a certain amount of money initially to ensure that the given transition is smooth.
The large businesses may find that this transition cost which is initially associated with the establishment of new practices and with the training of the employees a bit heavy on their shoulders, however the large corporations which will be still not finding the given costs prohibitive (Nobes 2014). However in the case of small to middle sized enterprises, the costs associated with the given transition may prove to be burdensome. Changing the accounting system to a globally identified system is not an easy tasks and the impact of the new regulations on the smaller businesses may be more adverse than their impacts on the larger ones.
Hence, it can be stated that worldwide globalization has been affecting the economy of our globe in various ways and the accounting standards changes may be considered to be just one facet of these changes. Whether a new system may be adopted or not all companies have various barriers to face. There are various small organizations who make use of a perfectly good system and due to this they would be needing to make various changes in their accounting system which would then have a huge impact on the operations of the given organization. Although all the accounting standards may be equalized, there will still be some countries which may not have the given system. Hence, although the opportunity is a successful one, there lies the above discussed challenges.
The institutional theory can be defined as a theory which deeply rests on the resilient aspect of the culture. The institutional theory is concerned and considers the processes through which the structures which comprise of the rules, norms and routines tend to establish the basic guidelines for the social behavior of the economy. The primary components of the institutional theory tends to determine the creation of the given elements. It also tends to explain the diffusion, adoption and the adaptation of the institutional theory over time and how some moves tend to decline.
The underlying belief of the institutional theory is that different economies tend to have different reactions towards the challenges faced by them (Brown, Preiato and Tarca 2014). The different social, economic as well as political factors, comprise of an institutional structure the business environment which tend to have an impact on the activities in that specific environment. If the business is able to achieve the institutional support, they tend to perform well (Lequiller and Blades 2014).
The International Accounting Standards Board (IASB) has acclaimed worldwide acceptance along with the formation of the International Financial Reporting Standards. However countries like United States which is the largest capital market around the globe, tend to be reluctant in operating the single new system and like the institutional theory suggests that various countries around the globe will face certain problems while accepting the new global accounting system (Wang 2014). Although the single system will bring about equality in the comparison, the given set of factors act as a barrier in the feasibility aspect of the Single Accounting standards system.
The litigious business environment
The business environment all around the globe is quite litigious and hence, if any component in the business goes wrong, it will be having a direct impact on the accountants and the auditors who are responsible for the maintenance of the financial reports. In serious scenarios, this also has an impact on the investors and creditors (Teixeira 2014). Hence, it is for this purpose, that many countries are not willing to take up the new challenges and accounting systems.
As the liability of several business in countries like the United Standards is quite high, for this purpose they will not be able to adjust with the single accounting system, they require a highly reliable set of rules. The current systems around the globe have set very strict standards for their operations unlike the IASB and the IFRS which as quite a limited number of rules.
FASB Priorities in the US
The major countries like the United States has issues of its own with respect to the strict guideline of the FASB which is the accounting board of the given country. The FASB continues to issue the country`s own technical guidance issues and each issue in the business seems to follow different guidelines without taking into consideration the standards stated by the IASB. The GAAP standards which are used by the countries like the States have specific rules with respect to the following:
Employee Benefit Plan Simplifications (Christensen et al. 2015)
Disclosure of Investments with respect to Certain Entities
Application of the Normal Purchases with respect to electricity contracts
These set of rules seem to be missing for IASB, which may prove to be a problem from the technical point of view.
Politics
The third primary factor which might have an impact on the feasibility of the single standards is the political aspect of the different countries which tend to differ from one another. It can be understood that the IASB are principles which have been formed with the purpose of international expansion and was formed in London. The guidelines thus formed have been formed with the view of protecting the companies from fraudulent investors and uphold the United States’ investor interests.
Hence the Political scenario and the motive of the IASB stand different from one another for which it would not be feasible for it to adapt the single standard system. It has been suggested that if the SEC actually believes that a single set of globally recognized standards is required and that it would be benefitting the investors in the future, it is essentially required to maintain and form a timeline which would take the given system towards its goals. If not done so, there are high chances that the work done over the years by different organizations would turn out to be not usable and a waste.
Conclusion
Therefore from the given analysis it could be witnessed that although the concept and the motive of the Single Accounting Standard globally is an intelligent one and it would go a long way in saving the costs of the different firms who engage themselves in the international business, the given set of rules have different barriers to cover during their implementation.. The report considered the different barriers that lie in the way of the proper implementation and also explain the institutional factors determining its feasibility.
References
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