The Inevitability of International Accounting Harmonization Essay

Introduction Along with the drastic development of world trade and the increase in international capital flow, the economy of the world is now in the process of globalization. Accounting, as ‘a major tool of business communication’ (Walton et al. , 2003), plays a crucial role in promoting the growth of the global economy. Therefore, a relatively harmonious and comparable accounting system which could be accepted and understood by all the countries is required for several reasons.

Firstly, accounting diversity represents an obstacle to the understanding of accounting information for both international companies and international investors (Walton et al. , 2003). Moreover, international accounting differences increase the cost of accounting systems in international companies for trans-border transactions as well as cooperation. A third problem related to accounting diversity is the lack of high-quality accounting standards in some countries.

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Although there are many obstacles in the process of the international accounting harmonization, such as nationalism, objective diversity and high cost, the argument for supporting harmonization illustrate that harmonization is beneficial for current economic environment. Consequently, international accounting harmonization is inevitable and necessary. This research will first define the international accounting harmonization. Secondly, it will illustrate the reasons for harmonization.

It will also bring about the obstacles facing the trend of harmonization. Finally, it will look at the arguments of supporting international accounting harmonization as inevitable and necessary. Definition There are two main terms used in the international accounting context in the literature and previous research: ‘harmonization’ and ‘standardization’. Harmonization means the attempt to make differences compatible or coordinated, while standardization aims to make them standard or uniform (Lawrence, 1996).

According to Nobes & Parker (2012), harmonization is a process, which is through defining the extent of differences to enhance the compatibility in accounting practice; standardization means the application towards a more exact and inflexible rule. A similar definition is given in Walton et al. (2003), who describes harmonization as a term used in international accounting by decreasing the variation in accounting across countries.

These definitions appear to show that harmonization has a wider and deeper meaning than standardization as it is based on the compatible or coordinated situations to make international accounting standardized and uniformed. Since accounting systems should be suitable for cultural environment, harmonization is generally thought to be more realistic and more achievable than standardization (Walton et al. 2003; Lawrence, 1996). Therefore, international accounting harmonization can also be defined as a coordinated process of reducing the differences and increasing the compatibility in accounting systems between countries.

The reasons for harmonization Walton et al. (2003) pointed out that accounting is ‘an economic language’ for business communicating. These ‘economic languages’ are varied across countries of different cultural, economic, and political backgrounds. However, with the globalization of the world, a number of problems are aroused because of the diversified accounting systems between different countries, such as lack of comparability and high accounting costs. There are several reasons for why harmonization is necessary to companies.

Firstly, accounting diversity represents an obstacle to understanding of accounting information for international companies and international investors (Walton et al. , 2003). Even one company under various accounting standards might lead to completely different financial reports. For instance, statistics showed that Daimler-Benz had made a profit of 615 million Deutschmarks (DM) based on German Generally Accepted Accounting Principles (GAAP), while under the U.

S GAAP statement, it showed that the company had incurred a loss of 1839 million DM in the year 1992. Analogously, under the UK GAAP, British Telecom reported a net income of ? 1767, whereas the net income decreased to ? 1476 during the same period under the US GAAP (Das, 2009). Therefore, it is reasonable that international companies are in favor of international accounting harmonization. Uniformed financial statements would make it possible to reduce misunderstandings and remove hurdles for users of financial reports between countries.

In other words, harmonization of international accounting could increase comparability of international financial statements. Moreover, international accounting differences increase the cost of accounting system in international companies for trans-border transactions as well as cooperation. “A survey of European international companies indicated that different national accounting systems caused between 10% and 30% of the total accounting costs” (Cecchini, 1998).

It is suggested that the international accounting differences make the trans-board transactions and cooperation more expensive as companies have to spend more money on accounting as the non-unified international accounting systems need more staffs and researches before business cooperation. For example, in 2008, German automaker Daimler-Benz wanted to list in the US stock market, and the company was required to prepare a set of financial statements by using the U. S. accounting standards.

It cost approximately $ 120 million for Daimler-Benz to prepare the U. S. financial statements in the first year and it was expected to cost exceeding $30 million each year onwards (Beke, 2010). A third problem related to current accounting diversity is the lack of high-quality accounting standards. Harvey Pitt, who is chairman of U. S. SEC (Securities and Exchange Commission), claimed at SEC Conference (2002) that investors need high-quality accounting standards which could help them in assessing risk adequately and making financial decisions advisably.

In order to meet this demand, companies should keep pace with the rapid development of the world economy and promote their competitive edges in the international market (Das, 2009). For example, according to Beke (2010), many banks closed their businesses in the East Asian financial crisis and three main elements contributed to it: highly leveraged operation of financial institutions, irrational foreign debt structures and ‘lack of accounting transparency’. The risk of international investment was estimated incorrectly due to the lack of high-quality accounting standards in financial statements. Beke, 2010) Obstacles to harmonization Harmonization of international accounting is a difficult progress as there are always obstacles that hinder the development of harmonization of international accounting. The first challenge to international accounting harmonization is nationalism. For some countries, there is an unwillingness to change their own accounting systems into those of other countries. This unwillingness might be an instinct that against accepting an accounting system which may not suit to local economic circumstance.

For some people, it is difficult to accept the accounting principles which designed by other people who might not share the same values as they do. Furthermore, nationalism also could results in lacking of concern or knowing little about accounting systems of other countries (Nobes & Parker, 2003). For example, some developed countries might use their own international accounting systems as standards, and claimed for other countries to drop their own systems to meet their needs.

For one thing, it is chauvinistic to use their accounting systems as the only standard, and at the same time, some other international accounting systems might be more reasonable and practical. For another, the developed countries might also become so self-centered that might lead to losing a large potential market of other countries. In addition, another obstacle for global harmonization is that the main objectives of financial information are different from country to country. For example, the main users of financial reporting of the U. S. nd the U. K. are investors and creditors. Thus, the accounting practices in the U. S. and the U. K. are emphasized on profitability. In contrast, the main users of the accounting practice in Germany and other countries are taxing authorities. As a result, the accounting practices in Germany and other countries tend to minimize profits. The requirements of accounting information are varied by different objectives. Consequently, how to satisfy all demands from different countries is also an obstacle which cannot be ignored (Walton et al, 2003).

Finally, the cost of harmonization could be quite expensive. For instance, companies have to spend much time and money in adopting new accounting systems, such as investments on employ experts, train staffs and purchase new financial software. The cost of harmonization would be high, especially for small companies. However, it is generally true that the profits gained from harmonization are much less for small companies than that of large companies, which might also be the reason for those who against harmonization as they do not have enough money.

Arguments supporting harmonization The advantages of harmonization of international accounting never failed to attract various users of accounting. Nobes and Parker (2012) indicated that “the pressure for international harmonization comes from those who use, regulate and prepare financial statements”. This shows that accounting users embrace international harmonization, and shoulder the responsibilities of realize them. The main argument of preferring international accounting harmonization is that it could increase the efficiency of trans-boarder transaction.

It would be easy to understand the advantages of harmonization for multinational companies by analyzing the following simple example. Assume a multinational company located in the U. K. has two subsidiaries, which are Austria and China respectively. In the meantime, the parent company is listed on the NYSE (New York Stock Exchange). This company has to keep four sets of financial statements, and one of them is in the U. K. GAAP for reporting to the home-country capital market, two in Austria and China for local GAAP, and the fourth one in the U.

S. GGAP in order to list on the NYSE (Epstein and Mirza, 2001). However, if the accounting systems in above four countries can be harmonized, the advantages for this multinational company would be significant. First, the task of preparing each part of company’s financial reports and consolidating all group company financial statements would be greatly simplified. Secondly, a set of harmonious accounting standards gives the chance of comparison and fewer misunderstanding between subsidiaries and parent company.

As a result of comparable financial statements, the work for assessment of performance of subsidiaries from different countries could become more convenient. Finally, if accounting practices are using the same standards, the audit requirements might also be similar as well. What’s more, it would be easier to transfer accounting staffs between group companies. Similarly, the cost of training accountants and audit fees would reduce accordingly (Nobers & Parker, 2012). Secondly, the arguments of supporting harmonization in investors stand are persuasive. Walton et al. (2003) have drawn attentions to the fact that a ension fund of Austria once wanted to invest in a Spanish securities company. However, this deal failed because greatly differences in the national account systems between Spain and Austria. The pension fund claimed that “they has difficulty in evaluating historical performance of Spanish company over past years when it does not understanding the nature of the accounting choice typically made in Spain and the other cultural biases in the accounts”(Walton et al. , 2003). The diversity of accounting systems has become a significant barrier to the cross-border investment.

Investors and creditors would like the financial statements of foreign companies which they would invest to be comparable and reliable. Therefore, harmonization of accounting could help the investors have ‘better understanding, lower risks and more efficient selections of investments’ (Beke, 2010). A third group interest in harmonization is international accounting firms. The international accounting firm is one of the most vital participants in the progress of harmonization. It not only benefits from harmonization of international accounting, but also pushes forward the progress of harmonization.

On one hand, harmonious accounting system could make international accounting firms transfer their employees between branches of different countries much easier. Moreover, it could also help companies saving costs on staff training. On the other hand, international accounting firms provide accounting services by researching and applying accounting rules of different countries. Thus, they could present professional suggestions about practice of harmonization. (Das, 2009) Consequently, harmonization of international accounting is required by a number of groups such as multinational companies, investors as well as international accounting firms.

The trend of globalization determines the inevitability and necessity of international accounting harmonization. Conclusion This research has shown the inevitability of international accounting harmonization. International accounting harmonization is a coordinated process of mediating differences and increasing the compatibility in accounting systems between countries. As a result of the different cultural, economic, and political backgrounds, accounting systems in different countries also differ.

However, with the development of the world globalization, a number of problems, such as lack of comparability and high accounting costs are aroused by the diversity of accounting systems. Therefore, harmonization of international accounting is required by a number of groups such as multinational companies, investors as well as international accounting firms. Although the process of international accounting harmonization faces many obstacles such as nationalism, objective diversity and highly cost, the increasing global world determined the trend of international accounting harmonization is inevitable and necessary.

The obstacles in the progress of harmonization will be removed and international accounting will achieve harmony in the long run (Walton et al, 2003). Bibliography Baker, C. R. & Barbu, E. M. (2007). Trends in research on international accounting harmonization. The International Journal of Accounting, 42 (3), 272-304 Beke, J. , (2010). International Accounting Harmonization: Evidence from Europe. International Business and Management, 1(1), 48-61 Chand, P. & White, M. (2007). A critique of the influence of globalization and convergence of accounting standards in Fiji.

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