Disadvantages Of Relying On Governments Or Private Sectors For International Accounting Harmonisation/standardisation

Provincialism

1.What are the disadvantages of relying on governments to be in charge of international accounting harmonisation/standardisation?

2.What are the disadvantages of relying on the private sector (e.g. accountancy firms, accountancy institutes or independent standard-setters) to be in charge of international accounting harmonisation/standardisation?

3.Compare China and the UK with respect to the amount of involvement of government compared to the private sector in international harmonisation of the accounting systems in those countries. Distinguish between: (i) consolidated statements of listed companies, and (ii) other types of financial reporting. 

1.Harmonisation refers to the process of creating a proper sync or harmonisation among the different accounting practices, which are present in different countries and parts of the world. It becomes necessary to bring all of these practices together in order to fulfil the most important criteria of creating any financial statement, which is, adhering to the principle of comparability. Although, this task of harmonising the process is never easy, as it involves bringing together the governments of different countries, accounting bodies onto the same page, which requires herculean efforts (Combs, Samy and Myachina., 2013). Here, the disadvantages of relying on the role of the government in the process of harmonising the international accounting practices has been discussed. The entire process of harmonising or putting all these countries or accounting bodies on the same page, following the same accounting provision, is nevertheless a very challenging job in itself. As a result of which, the process of relying on the government has some serious disadvantages, which have been discussed subsequently, in the following paragraphs:

The problem of provincialism: One of the most disturbing issues, which is created by the involvement of the governments of various countries is the problem of provincialism. Many countries in the world, hold provincial outlook within in many different spheres of professionalism and work. Unless the people or the government post holders are ready to shun the beliefs of superiority about themselves, when compared with other countries, no amount of harmonization can solve the differences. This problem, is in a more robust state, mainly in the developed countries of the world, where the accounting practices are very developed, compared to the other nations of the world. Nationalism, egoism and pride creeps in and impedes the entire process of cooperation and harmonisation (Oulasvirta. 2014). 

Licensing and Enforcement: The government’s world-wide have different set of rules of operating and conducting business in their respective countries, as a result of which, the harmonisation of accounting standards becomes a difficult issue. Each country’s government has some specific set of tax laws, licensing laws for different kinds of business from steel and mining to agriculture based business. The governments are not readily available to make changes to these laws, because of the fear of repercussions on their vote banks. Due to this accountants, CPAs tax lawyers are required to comply and follow the rules of licensing of the countries where they need to work.

Licensing and Enforcement

Sovereignty issues: Jennifer Carr, of the Arcadia University has said that in the US, the FASB is primarily responsible for the creation of accounting laws in accordance with the federal security laws and other CPA licensing laws. In other countries too, all the government strictly tell their accounting agencies to create the different kinds of accounting conventions and laws, on the basis of the specific security and tax laws of the country, also keeping in mind the various kinds of banking and financial laws and regulations. In addition to this, there are various state laws, which govern the banking and insurance activities. As a result of this, the harmonisation process becomes extremely difficult, more so with the involvement of the government.

Objectives of the government: In various countries around the world, especially in China, U.K and France, the information needs of the government play a vital role.  In these countries, especially in India too, many companies are believed to have a certain degree of public accountability, towards various interest groups. Fantl, (2012), argues that it is a common misconception to believe that the objectives of all the government is same, with regards to the creation of accounting practices and policies. According to him, only if the countries have the same set of objectives, will the harmonisation process become successful.

Parity in terms of development: There remains a huge disparity amongst different nations of the country of the world, in terms of development. In many areas, developing countries lack behind the developed ones in terms of their growth rate, business laws, and many work culture an working laws, which bears a major impact on the development of any country. Moreover Samuels and Oliga argue that the differences between countries can sometimes be very vast, which might compel the interpretation and application of the accounting standards of the respective countries play a huge role, which would vary from country to country. 

2.There also exist some significant amount of differences and disadvantages, if the mantle of harmonising the international accounting practices and laws is on the private sectors such as the accountancy firms, accountancy institutes and the independent standard setters across the globe. The most prominent demerits of this exercise has been vividly discussed below:

Adherence to the local as well as international accounting standards and practices: One of the key demerits, which is faced by the accounting bodies and other accountancy standard setters is the fact that they have to take cognizance of different kinds of local as well as international standards. Whether it is Australia, U.K, France, China or even India, each of these countries accounting bodies or firms have to take note of all the local standards of the different countries of their operation. This is unfortunate for the international accounting bodies as well as international enterprises have to address the issues relating to their work to their home as well as abroad users. This also tends to reduce the credibility of their work towards their users abroad. This is common in case of USA, Australia, and European Union etc.

Sovereignty issues

Problems of segregation between international and national laws:  Difficulties might erupt from the activities of the accounting bodies and institutes and other standard setting institutes. In many countries, it has been seen that the accounting standards have been set up either by professional agencies or government agencies or through a joint effort. If looked into this, from an international viewpoint, it could be seen that there arises a problem. Many countries have detailed rules and regulations, which might cause a conflict with the international standards. Moreover, the national standard setters must also keep in mind the prevailing economic and environmental conditions of their own countries, while framing the various international laws for ensuring harmonisation of the different processes of accounting standards.

Existence of disclosure laws: Another major hiccup faced by the accounting bodies and institutes is the law which regulate the reporting of the financial statements among the different countries of the world. In some countries like Australia, India, USA, these laws provide a great deal of importance towards both the disclosure part as well as the measurement portion of the financial statements (Biondi., 2014). Here, in this situation the principle of true and fair reporting takes a back seat against the compulsion of complying with all the laws and regulations. In this case, for IASC, for example, the international accounting standards won’t be adopted unless, they are incorporated in the disclosure rules and regulations.

Existence of rivalry among international standards setting agencies: There exists a strong sense of competition and rivalry among the these standard setting agencies, and this has increased as is pretty evident from the fact that apart from the IASB, the UN and even the OECD are now actively engaged in the arena of financial reporting, and are especially hired by MNCs. 

OECD is more concerned with clarifying the guidelines for the disclosure of the various accounting and financial information and data. Moreover, even there has been a clarion call of letting the United Nations to create and issue various international reforms and new rules in order to initiate the international harmony of the different accounting conventions Ibarra, Suez and Sales,2012). However, a problem remains in this regard, which is the fact that the United Nations have large amount of political attachments towards some countries, which might create a biased kind of accounting reforms, which might be particularly biased towards some particular countries.

3.Accounting standards in China have developed through time in accordance with the transformation of the Chinese economy and the overall country’s way of working from a centrally planned and controlled nation to a mixed regime kind of government. Before 1978, China had applied the accounting standards from the erstwhile Soviet Union, which was basically based on the premise of providing important accounting information to the Central government. Subsequently, foreign ownership and the trend of private ownership had started creeping into the Chinese economy. Before ultimately convergence into the IFRS, China had basically applied a fully rules and regulations based accounting procedures.  It was more domestically focused (Choi, Peasnell, and Toniato, 2013). As a result of which, it was very difficult to make a robust consolidated accounts for various companies.

Objectives of the government

In the year 2006, the Chinese Finance Ministry, had officially announced the introduction of a new set of guidelines for financial reporting. This set of rules is backed and supported by the IASB. As the economy is mostly depended on its strong manufacturing industry and as a result of which, the competition between the Chinese manufacturing as well as foreign firms are too high. As a result of which the need for comparing the financial reports of the domestic players with the international manufacturing players was the need of the hour, in order to imbibe the success plans of the international manufacturing hub in the Chinese domestic manufacturing arena. So the need of a harmonising procedure was felt back then. Since then, the influence of the government of China has been pretty much more than the international standard setters in the harmonisation process. The government at Beijing, with its massive influence in the international arena, has been effective in harmonising the Chinese GAAP with the international accounting standards. Although, noticeable differences in between the Chinese GAAP and the IAS is still prevalent in recent times and efforts are being made to supplant those differences. The harmonising efforts of the Ministry of Finance of the Chinese Government along with the Chinese firms have been notable in this regard. The government had chosen some of the prominent Chinese firms because of their western way of working. Some of the important financial and accounting standards which had been adopted, were the Construction contracts (1999), Disclosure of Related Party Relationships and Transactions (1997) and the most recent ones as the Inventories and the fixed assets (2002). In fact, the Chinese Securities Regulatory Commission had also played a huge role in ensuring this harmonising process. 

In the case of the U.K accounting historically, actually has always given due importance on the true and fair view of the reports, with less focus on the compliance of the laws, which only do the job of providing guidelines. The U.K has a long tradition of strong equity market, where the required capital for the big entities are provided by numerous number of shareholders (Christensen et al., 2015). In the case of the United Kingdom, it has strongly followed the Anglo-Saxon accounting philosophy, which has focused on the equity shareholders since the past days.

Moreover, in the United Kingdom, more focus had been laid on the harmonising process from the perspective of leading accounting based in the UK, such as the ACCA, CAI, CIMA and the CIPFA. Here, the major role in the harmonisation process of reconciling the British based accounting laws in accordance with the international accounting bodies such as IFRS and the IASB. The government had also established the Financial Reporting Council through the ASB and the FRRP with the objective of overseeing the operations of the companies in the sector of providing authentic annual reports. It has over the years, helped the other standard setters to initiate the harmonisation process with the international norms of the country (Acca.uk, 2017). Thus, it can be seen that the Chinese economy had seen the maximum involvement of the government in the process of international standardisation than the U.K.

The differences between the consolidated statements of listed companies and the other types of financial reporting are as follows:

Consolidated statements of listed companies	Other types of financial reporting:
Consolidated statements of listed companies refer to the comprehensive presentation of the financial statements of both the parent as well as the subsidiary company.	Other types of financial statements include the normal individual financial statements like the statement of income and expenditure of the company, the statement of equity changes and the statement of balance sheet of the company.
It is done and complied in the case of holding companies.	It is done for the normal individual companies as there is no need of putting the financial data of the subsidiaries, if there aren’t any.
This includes the intra company transactions which take place between the subsidiary and the parent company	No kind of intra company transaction is present here. Only the transactions of the concerned company is made over here.
There are different legal requirements of the FASB, which needs to be followed by the parent companies due to the presence of subsidiaries.	There are no such elaborate legal requirements of the company, because of the absence of any kind of subsidiary company.

References:

Biondi, Y., 2014. Harmonising European public sector accounting standards (EPSAS): issues and perspectives for Europe’s economy and society. Accounting, Economics and Law, 4(3), pp.165-178.

Choi, Y.S., Peasnell, K. and Toniato, J., 2013. Has the IASB been successful in making accounting earnings more useful for prediction and valuation? UK evidence. Journal of Business Finance & Accounting, 40(7-8), pp.741-768.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Combs, A., Samy, M. and Myachina, A., 2013. Cultural impact on the harmonisation of Russian Accounting Standards with the International Financial Reporting Standards: A practitioner’s perspective. Journal of Accounting & Organizational Change, 9(1), pp.26-49.

Ibarra, V. Suez-?Sales, MG(2012). A comparison of the international financial reporting standards (IFRS) and generally accepted accounting principles (GAAP) for small and medium-?sized entities (SMES) and compliances of some Asian countries to IFRS. Journal of International Business Research,10(3).

Ji, X.D., 2017. Development of accounting and auditing systems in China. Routledge.

Landsman, W. R., Maydew, E. L. and Thornock, J. R. (2012), ‘The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS’, Journal of Accounting Research, 52 (1–2): 34–54

Mussari, R., 2014. EPSAS and the unification of public sector accounting across Europe. Accounting, Economics and Law, 4(3), pp.299-312.

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Olesen, K. and Cheng, F., 2017. Convergence of accounting standards does not always lead to convergence of accounting practices: The case of China. Asian Journal of Business and Accounting, 4(1).

Oulasvirta, L.O., 2014. Governmental financial accounting and European harmonisation: Case study of Finland. Accounting, Economics and Law, 4(3), pp.237-263.