International Gaap For Financial Reporting Standards – Challenges Faced By Global Organizations

Literature Review on Challenges of Accounting in Global Organizations

Discuss about the International Gaap for Financial Reporting Standards.

This paper focuses on reviewing literature on the challenges of accounting for global organizations. The paper reviews past academic literature that has been written on this subject and compares the ideas and concepts of different writers on the challenges that face global organizations when it comes to marketing. Apart from identifying relevant literature on accounting challenges for global organizations, the paper also compares the ideas of different writers and critically analyzes the concepts discussed in the literature. There are clear comparison and contrast between the ideas of different writers so as to help in identifying gaps that may exist in research of this topic. The aim of this paper is to evaluate and analyze the research that has been done in the past on the accounting challenges faced by global organizations and identify the findings, research methods and data collection tools that were used by various researchers to conduct their research. The paper then identifies gaps in the past literature that will provide us with an opportunity to carry out further research on the topic. The final part of this paper identifies the research topic that will be the subject of further research in order to reduce the gap between the present situation and the desired future situation.

Accounting is a very crucial component of any business organization. This is because, accounting helps businesses in keeping records of business transactions as well as tracking the assets, capital and liabilities of the business. It is therefore very important for companies to put up well organized and experienced accounting department especially when a business is operating internationally. Accounting at the global level is controlled and regulated by the International Financial Reporting Standards which is also commonly known as the International Accounting Standards (IAS). The IAS was issued in the year 1973 and it operated until the year 2000 (Pagell&Halperin, 2009). The IAS at the time was issued by the International Accounting Standards Committee. These standards were set with the aim of improving international standards of accounting in order to be able to provide better understanding of financial information by all companies. The standards helped to ensure uniform accounting procedures across the globe so as to make it easy for companies to operate globally and to make comparison of financial information easier by ensuring uniformity in financial reporting. The IASC was replaced by the International Accounting Standards Board (IASB) in April 2001. The board took the responsibility of building international accounting standards and formed the International Financial Reporting Standards (IFRS).

According to Cch incorporated (2008), the formation of IFRS is an indication of the increasing popularity of globalization which is being experienced in all parts of the world. The IFRS helps multinational companies to generate financial information which is uniform in order to make it easier to manage the finances of such companies. Currently, there are more than 170 countries across the globe that requires companies setting up business in these countries to have IFRS certificates. These countries includes major world economies such as EU, Japan, South Korea, Australia and Russia. Internationalization of economic activities with the world becoming a global village due to continued innovation means that a company that presents its financial information using the national accounting standards cannot adequately satisfy the needs of the users of financial information. Adoption of IFRS helps in protecting the investments of multinational companies which have operations in many countries since the standards are very strict and they prevent exploitation of shareholders of the companies. However, despite the adoption of IFRS by many global companies, there are still many challenges that these companies face in their accounting function. Most of these challenges are faced by all companies that operate globally while other challenges are unique to companies operating in a different external environment.

One of the major accounting challenges that global organizations are facing is that there are different accounting standards and regulations that govern accounting in different countries. Many global companies operate in countries with different cultures and legislation s. According to Previts, Walton, &Wolnizer (2011) all companies or organizations have to follow the laws of the country in which they are operating irrespective of whether or not they are local or multinational companies. This therefore presents a challenge for companies that operate in countries that have a unique accounting system from the international one. The company has to present their financial reports according to the rules of that country and therefore, it becomes difficult for the multinational company to standardize and achieve uniformity in their financial reporting. These views of Previts, Walton, &Wolnizer (2011) are similar to that  of  Kimmel&Weygandt (2008) argues that countries that do not allow the use of IFRS standards in preparing and presenting their financial reports present a big challenge for multinational organization that operate in those countries. This is because, it becomes difficult for the company to objectively analyze and compare financial reports from different countries. This is because, different accounting systems are used and therefore it would not be logical to act on this information since its not uniform. According to Wahlen, Jones,& Pagach (2013) having different accounting standards in different countries is not a challenge for the multinational organizations. He argues that it is easy to interpret, evaluate and analyze accounting information prepared using different accounting systems and standards since most of the items in the financial reports are similar irrespective of the accounting system used. He is of the idea that this company’s just need to translate the values and figure reported to the basic accounting system used by the company.

Another major accounting challenge experienced by global organizations is that there are rules governing cross boarder transfer of capital. These rules are not uniform among all countries in the world and this makes it very difficult for the multinational companies to coordinate the transfer and movement of capital between and among countries. According to Rikhardsson (2015), capital transfer laws have a very huge bearing on the activities of organizations that operate in different countries. Some countries have very stringent restriction on the maximum amount of capital that can be moved out of the country to be used as investments in another country. This therefore means that the operations of the company will be affected by these laws since the company is subject to these rules. The rules on capital transfer also affect the capital structure of the company and this is a challenge for global companies. It affects the profit share section of the financial reports as well as the amount of retained capital in the company. This also affects the share allocation and profit sharing of the company.  Ferran &Salim (2008) argues that capital transfer rules affect operations of many multinational companies but do not have a significant effect on the accounting processes of the organization in general. He explains this by arguing that movement of capital between countries is not part of the accounting processes of the company since this takes place after financial reports have been prepared.

Accounting for global organizations is very complex and tiring. This is due to the fact that accounting in most organizations is still done manually and requires paper work. According to Wahlen, Jones, & Pagach (2017), despite the advancement of technology to help in making accounting easier the accounting processes have not been fully streamlined and computerized and therefore handling of bulk of information is required. Organizations that operate globally face this challenge more than those operating nationally. This is because the scale of operations for multinational organizations is much larger than that of a local company. It means that the multinational companies have to handle a lot of bulky accounting information which at times may lead to misappropriations and misrepresentation of financial information. Kates &Galbraith (2013) is also of this view. He argues that the global organizations or of very big size meaning they handle more complex and detailed financial information. Accounting for a global organization is therefore more complicated and requires a lot of attention to detail. Therefore accounting for a multinational organization requires very modern methods of preparing financial a report in order to improve accuracy and hence reliability of the financial information.

Lack of technical and inadequate knowledge of accounting systems among accounting professionals in some countries is also a challenge for most organizations operating globally. According to Previts, Walton &Wolnizer (2011), this problem of inadequate knowledge on international accounting standards and systems exist mainly in developing countries where skilled labor is a scarce resource. It therefore means that the employees in these countries who are not adequately trained on international accounting standards and practices will not be able to prepare financial report as expected. Failure to prepare reports that meet international accounting standards and procedure presents a problem for the management of the company since the report will not be reliable and hence cannot aid in decision making.  Scupola (2009) also agrees that lack of proper training of accounting staff in some countries contributes to the problems faced any global organizations when it comes to accounting. He explains that an it is important that a global organization ensures that its employees are always updated on trends and international procedures that should be followed when preparing financial statements. By doing this, organizations will be able to reduce errors and misappropriations resulting from this problem. Training will be the main solution to this.

Another challenge faced by global companies when it comes to accounting is that the financial reports of different segments from different countries are as a result of different environmental factors. The financial results of a company are affected by very many factors that vary depending on the country of operation.(Fusaro, &James,2013) argues that it is therefore not appropriate to rely on financial information from different countries since the results have been achieved under different environmental conditions. Comparison of information from different enterprises of the global company is therefore inconclusive since it does not factor in the differences in operating environment. It may therefore be difficult to make accurate and effective decisions using such information. 

Internal auditing for global companies is difficult and very complex. The internal control and auditing department in most global companies is governed from the top. This therefore means that the companies use a uniform internal auditing and control systems that is uniform across all countries.(Hooke,2010) argues that internal control system for a multinational company is very complex and time consuming. This is because of the large size of the organization which means that more items will need to be controlled and audited. Internal control function of a business organization helps in monitoring and ensuring that the accounting information is recorded, measured and reported in an ethical and professional manner and detecting any problems in the accounting department of the company.  Camfferman & Zeff (2015) also argues that it is very difficult for a global organization to centrally coordinate its internal control since different countries have different regulations and legislation s relating to internal auditing and control. This therefore limits the ability of the top management to have a direct influence on the internal control systems of the company. The company operating globally is so large such that it is almost difficult to manage the internal control systems of the company centrally.(Saudagaran,2009)explains that the global companies have to decentralize the function and this may lead to lack of uniformity and this may eventually result to financial mismanagement of the company.

Another challenge that global companies face in regard to the accounting function is that global organizations are composed of employees from different cultural and social backgrounds and this may result to poor communication and relations between employees in the accounting department. Bonham (2008) argues that the fact that differences in culture, educational backgrounds, traditions and beliefs among workers in the accounting department of a global organization may become strength or a weakness for the company makes it important to consider this point. According to Miyamoto (2008), having employees from different countries , races or even regions may impact negatively to the accounting of the company especially if the management of the company fails to ensure proper communication and understanding between people working in this department. Hook (2010) also supports this idea and in his article, he argues that large multinational organizations need to manage their workforce properly and in particular those in the accounting department to ensure optimization of their productivity. 

Conclusion

From the analysis of the literature review on accounting challenges facing global companies, it is easy to identify gaps in research. The gap identified in the research on accounting challenges facing global companies is that the research does not explain these challenges have impacted on companies that operate on a global scale. This therefore sets the topic that will be researched on on order to fill the gap in knowledge that has been identified from the review of literature.

References

Cch incorporated. (2008). Top accounting issues for 2009: Cpe course. Chicago, cch.

Bonham, m. (2008). International gaap 2008: Generally accepted accounting practice under international financial reporting standards. Chichester, west sussex, england, j. Wiley & sons. Http://www.books24x7.com/marc.asp?Bookid=29846.

Camfferman, k., & zeff, s. A. (2015). Aiming for global accounting standards: The international accounting standards board, 2001-2011.

Ferran, c., & salim, r. (2008). Enterprise resource planning for global economies: Managerial issues and challenges. Hershey, pa, information science reference.

Fusaro, p. C., & james, t. (2013). Energy and emissions markets: Collision or convergence. Hoboken, n.j., wiley. https://rbdigital.oneclickdigital.com.

Hooke, j. C. (2010). Security analysis and business valuation on wall street + companion web site: A comprehensive guide to today’s valuation methods. Hoboken, john wiley & sons, inc. Http://www.slq.eblib.com.au/patron/fullrecord.aspx?P=514349.

Kates, a., & galbraith, j. R. (2013). Designing your organization: Using the star model to solve 5 critical design challenges. San francisco, calif, Jossey-Bass. https://rbdigital.oneclickdigital.com.

Kimmel, p. D., weygandt, j. J., & kieso, d. E. (2008). Accounting: Tools for business decision making. Chichester, john wiley.

Miyamoto, k. (2008). International management accounting in japan: Current status of electronics companies. Hackensack, nj, world scientific.

Previts, g. J., walton, p., & wolnizer, p. W. (2011). A global history of accounting, financial reporting and public policy. Studies in the development of accounting thought volume 14c, volume 14c. Bingley, emerald.

Wahlen, j. M., jones, j. P., & pagach, d. P. (2013). Intermediate accounting: Reporting and analysis. Mason, oh, south-western cengage learning.

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Wahlen, j. M., jones, j. P., & pagach, d. P. (2017). Intermediate accounting: Reporting and analysis. 

Pagell, r. A., & halperin, m. (2009). International business information: How to find it, how to use it. New york, amacom.

Rikhardsson, p. M. (2015). Implementing environmental management accounting: Status and challenges. Dordrecht, springer. Http://public.eblib.com/choice/publicfullrecord.aspx?P=303252.

Saudagaran, s. M. (2009). International accounting: A user perspective. Chicago, il, cch.

Scupola, a. (2009). Emerging e-services in accounting: Emerging e-services in accounting. [place of publication not identified], idea group inc. Http://public.eblib.com/choice/publicfullrecord.aspx?P=3309450.