The standards, especially because accounting standards have recently attained

The primary objective of accounting is to give external and internal users the right, actionable financial information at the appropriate time. In this field, financial statements and reports are prepared in accordance with the generally accepted accounting principles. However, it is imperative to note that beyond the industry standards and principles, there are several other accounting practices and policies which may be used to serve the same purpose. These standards may, however, lead to huge differences when the same object or item is subjected to varied standards or approaches in the financial reports (Schipper, 2005). As a result, it is critical to standardize the various accounting practices and policies so that items or transactions are treated similarly. Even though it is all-important to have standard accounting practices and policies, it is not possible to make it compulsory for organizations to follow one common accounting practice. To this end, the focus among stakeholders in the accounting industry has been on how to prescribe the standards for reporting and measure the financial statements. Countries which have taken the lead in the standardization of the accounting policies including the United States, the United Kingdom, Canada and Australia. Some of the bodies which are involved in the harmonization and convergence of the accounting practices include the Institute of Certified Public Accountants and International Accounting Standards Body.

In the accounting field, harmonization and convergence of accounting standards have attracted the attention of different players in the industry. These include investors, implementers, accounting associations, and investors. This attraction is often inspired by the need for the stakeholders to fulfill their obligations. Just like in other areas, the integration of the economies of the different countries across the world has meant that countries are now more dependent on each other than ever before. The globalization trend in the modern world has led to the need for compared financial data and reports at both the national and international levels. This has resulted in the need for the harmonization of the accounting standards and applications. Other factors which have fueled the need for the harmonization process that goes around the varied accounting standards in the business world include the increasing number of international operations as well as the developments of the international capital markets.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

1.    Differences between countries

 

            Throughout the history, the accounting principles and standards of different countries were growing solely independent, and in most of the cases different.

2.    Trends towards Harmonization and Convergence

 

It is imperative to note that harmonization in the accounting field has tended to concentrate on the accounting standards, especially because accounting standards have recently attained great importance. To this end, organizations have been making every effort to integrate and harmonize their accounting practices and standards with others that operate in the same industry and sector. On the other hand, countries have been making the necessary adjustments for the harmonization as well as the convergence of all relevant accounting standards to the international accounting standards.

There are several benefits which organizations and countries gain by harmonizing their accounting standards. These benefits include the fact that the cost of collecting accounting data is decreased. Harmonizing accounting data leads to simplicity when comparing accounting information. Harmonization has also led to the development of the capital markets. It also facilitates the movements of funds between companies that are geographically diverse. For companies that use international accounting standards which are harmonized, they tend to have a competitive advantage as compared to other firms that do not (Van der Tas, 1988). The convergence and harmonization of the accounting information also decrease the audit costs as well as increases the efficiency of the audit process.

In accounting, harmonization refers to the application of the numerous methods for accounting practices with the aim of integrating the purposes of the information which is obtained. It may also mean that use of identical accounting practices and policies by all enterprises throughout a country or sectors (Karapinar, Ayikoglu, & Bayirli, 2007). As more countries and firms adopt various accounting practices, it is critical that these policies are harmonized with the aim of ensuring that harmonization increases in the organization. Typically, it has been demonstrated that harmonization may occur in two main ways. These are the legal harmonization otherwise known as formal or de jure harmonization and the material harmonization which is also known as the jure de factor harmonization.

When the accounting practices are influenced by the regulators, this is referred to as the legal harmonization or convergence. This, therefore, demonstrates that the concepts of convergence and harmonization are directly related to the accounting practices and policies. It also means that the regulations which guide the accounting practices and applications in an industry or country are often of great importance. In the recent past, a lot of harmonization and convergence in the accounting field has come through legal regulations. Therefore, legal harmonization sis the basis of harmonization and convergence in the field achieved through decreasing accounting policies as required in one jurisdiction. As a country stops using its accounting policies, they start to use internationally recognized accounting policies. In some cases, harmonization or convergence in the accounting field occurs where other firms start to follow on one leader in the industry. Such as firm which sets the stands may also be the standard setting body such as a country or an organization. All other companies in the industry must align their accounting practices with those of the leader or the organization setting the standards.

On the other hand, in convergence, there is no single body which sets accounting standards. By definition, convergence refers to the setting of high quality as well as best accounting standards by two bodies which set standards. When these high-quality standards are set, the highest quality ones are determined, and the other company must change their standards accordingly. In a case where there is no any high-quality policy or standard, new standards are often formed.

3.    Factors influencing Global Harmonization and Convergence

 

The harmonization of financial accounting standards is promoted as an important step towards greater economic stability and integration of the global economic systems. The choice between harmonization and convergence with the international standards requires evaluation with a focus on some of the underlying factors within the existing economic system. The majority of countries across the globe can be categorized as either implementing accounting standards that are in harmony with the international framework hence the trend towards harmonization (Shima & Yang, 2012). In contrast, there is a group of countries that are implementing adjustments to the existing local accounting standards to incorporate aspects of the international standard, i.e., convergence. In some cases, the countries are creating local standards that are modeled after the International Financial Reporting Standards (IFRS) as a move towards convergence. This section discusses the factors influencing the harmonization and convergence of the accounting standards.

3.1 The Prevailing of accounting standards

 

A general overview of most accounting standards across the globe indicates that there are extensive similarities between the IFRS and the local accounting standards. However, unique economic and social contexts that exist within the individual countries have a significant impact on the implemented standards which may have a variation from the IFRS. It can thus be assumed that if global diversity is to continue, then variations in the local standards will always cause a measure of deviation from the proposed international standard. While the proposed IFRS aims to provide a set of quality standards that are applicable across the world, it is evident that the local factors including the business ownership models and taxation systems that are specific to regions and countries will continue to determine the features of the IFRS that are actually adopted and implemented (Herz & Petrone, 2005).

The local accounting standards are influenced by two factors, i.e., the economic system and cultural context of a country which are both not flexible with regard to adoption of new systems and standards. The prevailing economic systems are likely to have more influence over how investors and companies relate to other business units within their environment and such relationships often determine the processes of information disclosure. The legal systems that are in force in the individual countries also shape the accounting practices that are likely to be followed, i.e., the IFRS does not take into account the variations in legal systems among the individual countries. The countries that use common law are likely to have extensive differences from the countries that use code laws in terms of the information disclosure requirements. The specific accounting needs of the countries and business organizations within them vary and may only be met by applying modifications to the IFRS as a form of convergence.

3.2 The availability and experience of accounting professionals

 

The accounting professionals within a country are major players in the harmonization and convergence process. It is the professionals who can study and understand the accounting principles outlined by the IFRS and evaluate their applicability in the local context. Therefore, a country with a large community of accounting professionals can be expected to implement and adapt to the international accounting standards. The accounting professionals will be expected to deliver advisory services to business enterprises within their countries with regard to the creation of financial reports, tax services, and financial audits as outlined by the IFRS (Zakari, 2014). This requirement establishes the availability of accounting professionals as one of the critical success factors in the harmonization process.

The convergence of local and international accounting standards requires a comprehensive understanding of the local accounting needs as well as the global expectations of quality as outlined by the IFRS. The experienced accounting professionals can be expected to have a clear understanding of the local economic environment, its key players, and their accounting needs. The experienced professionals can then offer a guideline through which the needs of these key players can be effectively satisfied under a converged system. A tradition of accounting within the local economic environment is thus a significant advantage for a country at it can achieve convergence over a relatively short time.

3.3 Education and professional training

 

The harmonization and convergence of a local accounting standard with the IFRS require the establishment or access to a standardized training platform. The developed and a large number of the developing countries are likely to have updated education curricula for the accounting professionals, and in these cases, it is relatively easier to harmonize the local practices with those outlined by the IFRS. In countries where the accounting curricula and the syllabuses used are widely divergent from the international standards, the adoption of the IFRS may require large capital investments in the education sector. The large investment, as well as the extended duration required to harmonize the local standard with the IFRS, means that it may take a comparatively longer duration to implement (Lahmar & Ali, 2017). The capacity of a country to direct its resources towards relevant education and professional training is a major consideration while choosing to harmonize with the IFRS or to modify its local accounting standards with convergence as the primary objective.

Professional societies in the accounting vocation also play a critical part in the harmonization and convergence process. The professional societies serve as the knowledge base for the needs of the local economic system and how the international standards can be applied to meet these needs. In the case of convergence, the professional societies can authoritatively advise on the specific elements of the local accounting standards that need to be modified or eliminated in order to achieve convergence with the international standards. Therefore, countries with strong and active professional societies are better positioned to achieve harmonization and convergence compared to those who have comparatively less active societies. The level of public knowledge in the role of accounting also plays a role in the speed at which the international standards are adopted. In the cases where the international standards better serve the public interest, a well-informed public is likely to push for faster adoption of such standards.

3.4 Presence of Multinational accounting firms

 

The Big 4 accounting firms have a global footprint and collectively can be regarded as the best agents for the adoption of the international standards such as the IFRS. These firms have a well-established knowledge of the local environment in terms of the accounting regulations, information disclosure requirements and the economic systems that work within regions and individual countries (Belal, Spence, Carter, & Zhu, 2017). This comprehensive knowledge base can be useful in the event that a country has expressed interest in harmonizing its accounting standards with the IFRS since it is these Big 4 that are likely to facilitate the major organizations in adapting to the new standards. The presence of these large accounting firms is likely to be a significant advantage to the country in its convergence efforts as these firms have a high-level view of the accounting requirements across the globe.

 

 

3.5 The prevailing regulatory framework

 

Individual countries have special regulatory provisions for accounting and the disclosure of financial information. The IFRS is declared as a means of achieving standardized higher quality in accounting across the globe, but a large number of countries require concrete incentives to adopt its principles. The IFRS demands that the accounting standards apply uniformly whether a business organization is local or foreign within its environment of operation. This is challenged by the common regulatory frameworks that include special provisions for the foreign companies. Countries have an interest in controlling financial flow within and across their borders. Therefore, the political pressure to implement a separate set of regulations for the foreign companies is high in most of the countries and such pressure may limit the rate of harmonization or convergence to the international standards (Chand, Patel, & Day, 2008).

The presence of an effective regulatory framework is fundamental towards harmonization and convergence of the accounting standards. The international standards such as the IFRS derives its authority from the individual governments that are willing to adopt it into their countries. The effectiveness of the international standard thus depends on the effectiveness of the government regulatory agencies that are mandated to enforce the elements of the IFRS. In countries with long histories of effective financial regulation, the IFRS is more likely to take effect and converge with the local systems over a shorter period of time. The harmonization or convergence process is expected to take longer when the regulatory agency within a country is less effective.

4.    Impact Assessment

 

In the modern world, one of the institutions which are responsible for setting accounting standard is the International Accounting Standards Board. This body has for a long time been developing and recommending the standards and policies for the harmonization and convergence of accounting practices and standards between states. Its main objectives are to develop as well as set singe high quality, enforceable and understandable global accounting standards in the interest of the public. These standards ensure that there is comparability and transparency when interpreting data and information in the financial statements. It also helps companies when doing financial reporting so that the company can participate in the capital markets of the world. The International Accounting Standards Body is also responsible for promoting the use as well as rigorous applications of internationally recognized accounting standards (Vellam, 2004). Lastly, the body is responsible for bringing about the convergence of the national accounting standards as well as the International Accounting Standards. As a result, high-quality solutions are made.

Following the harmonization of the different accounting standards and almost complete convergence of the accounting standards has led to the following impacts. Firstly, it has led to the reduction of the cist that investors incur when trying to harmonize the various financial reports and statements especially when the companies they intend to invest in operates in different countries (WysÅ, 2008). Previously, this cost was high, and therefore investors often shied away when they wanted to make investments in companies having cross-border operations.

Previously, it was also shown that the costs incurred trying to harmonize the financial reports and statements often acted as a barrier towards cross-border movements of capital or funds. It is expected that companies, investors, as well as markets will benefit greatly from the harmonization and convergence of the accounting standards. This is because it will become possible to understand the real value of the transactions being made especially for the global transactions which for a long-term did not have transparency. Previously, for similar transactions even among firms of similar size operating in the same industry, managers would treat them differently (Callao, Jarne, & Laínez, 2007). It will also make it easier external auditors to scrutinize the financial statements and come up with the best assumptions about the financial stability of the company. Typically, high quality audits are possible when the financial reports are standardized and therefore investors will tend to view them as more reliable representing the true affairs of the market. Previously, audits across the world would often led to different conclusions making them useless. As a result, it became almost impossible to understand the usefulness of the financial statements. Through harmonization and convergence of the accounting practices, it becomes easy for the users of the accounting information to make informed economic decisions.

 

 

 

 

 

 

 

5.    Conclusion

 

Today, it has been shown that accounting plays a critical role in the market economy. This especially at the time where globalization of the markets has become common. Other factors which have led to the importance of accounting and the harmonization of the financial reports and measuring include the need for transparent, comparable, and presentable economic sameness. These needs have led to the formation of various organizations which facilitate the harmonization of the accounting standards. These include the International Accounting Board in 1966. On the other hand, most countries such as those in the European Union region have recommended companies operating within their jurisdiction to adopt the International Accounting Standards. This is aimed at ensuring that there is only one common method of preparing and reporting financial reports in this jurisdiction making it easy to distribute the financial statements. The key aim of the International Accounting Standards Board is to reduce the cost which an enterprise tends to ensure while they are preparing financial statements. It also helps in the increasing the degree of the comparison of financial statement that will help investors when making decisions concerning their organization.

 

BACK TO TOP
x

Hi!
I'm Al!

Would you like to get a custom essay? How about receiving a customized one?

Check it out