The Pros and Cons of Global Accounting Standards
The disparate accounting methods among countries have a huge impact on companies large and small. As organizations attempt to embrace globalization and the potential profitability of increased international investment, they may encounter large accounting obstacles. To address these issues, a series of global accounting standards, developed in 2006 under the banner of International Financial Reporting Standards (IFRS), were released. A number of countries have adopted the IFRS’ best practices, but many others (including the United States) continue to follow alternate reporting standards.
However, many powerful individuals have been vocal about their desire to see a shift to this global accounting standard occur in the U.S. The outgoing Securities and Exchange Commission Chairman, Mary Jo White, recently stated that promoting a standard set of global accounting rules should be one of the agency’s “highest priorities.” The debate on whether to move to a unified set of global accounting standards is thus ongoing, and the discussion hinges on the proposed plan’s benefits and drawbacks.
Increased comparability across companies and between countries
Perhaps the single largest benefit of adopting unified global accounting standards would be an increased ability to work seamlessly with and across different countries. For instance, because accounting standards currently vary from country to country, potential international investors are confronted with a number of obstacles that lengthen processes and require a great deal of up front work.
Right now, if potential investments are to be compared, the investor must reconcile the books of both companies to create a unified picture before making any decisions. Creditors face similar issues when evaluating and comparing the creditworthiness of companies in different countries.
These issues with comparison are not only difficult for larger corporations, but also leave small businesses at a significant disadvantage. More small businesses would likely be able to effectively consider international investment options if there were a single global set of accounting standards to follow.
Reduced barriers to global expansion by businesses
Globalization has encouraged many companies to expand beyond their countries of origin, but the barriers to doing so are often difficult to overcome. Under the current system, companies that expand internationally are often forced to keep two sets of books to comply with a new country’s statutory accounting requirements. In particular, this can be a difficult task for small businesses, which are then faced with high costs of international compliance. This added cost can make a planned international expansion too cost prohibitive to be profitable.
A single set of global accounting standards would likely meaningfully decrease costs for these businesses by eliminating the need to duplicate accounting functions. They could allow for increased expansion opportunities for businesses of all sizes across a multitude of sectors and countries.
Streamlined administration by one central authoritative body
Adopting a single and unified set of global accounting standards would also allow rule- and policy-making authority to be vested in the hands of one central authoritative body. In contrast, the current rules and standards for the various accounting systems are set by each separate country’s rule-making body alongside the IFRS’ international standards committee. The current system often leads to discord between individual countries and the international regulators. This adds a great deal of time, money and aggravation to the process.
Confusion regarding accounting rules and best practices would have a clear avenue for resolution with a central authority. This would further reduce the costs that businesses currently incur as they attempt to decipher varying international accounting standards.
The Potential Drawbacks Associated with a Unified Set of Global Accounting Standards
Increased work and continuing education for accountants
A new system of global accounting standards would mean revising current accounting processes and strategies. The responsibility of implementing this significant change is likely to fall to a company’s accounting team.
This task will almost certainly require a tremendous amount of work for already-busy departments that must still continue on with day-to-day work. Moreover, because these new global standards will undoubtedly vary from the current system in place, accountants will be required to seek further training, and the avenues for continuing education in new standards are not clear.
Tumultuous adjustment period
As companies move from their own country’s accounting standards to the new set of global accounting rules, the opportunity for costly mistakes and delays will lay the groundwork for a tumultuous adjustment period. Moreover, every country maintains a complex system of laws and regulations that touch upon financial reporting without being directly involved with accounting standards. Even as a single set of accounting standards is adopted worldwide, this divergence in countries’ regulations could prevent complete comparability and compatibility of financial statements between countries.
Cost burden may disproportionately affect small to mid-sized companies
No matter how sensible the new global accounting standards adopted may be, businesses will still be required to incur significant costs as they transition from the United States’ current generally accepted accounting principles (or GAAP) system to the IFRS or other alternate global accounting system. Large businesses may find the transition costs associated with training employees and establishing new practices to be burdensome, but most corporations of significant size will not find such costs prohibitive. Small and mid-sized companies, on the other hand, might easily find the cost burden associated with transitioning from their current working accounting system to a new globally-compliant system overwhelming. New regulations almost always impact smaller businesses more than larger ones.
Ultimately, globalization is affecting the world’s economies in myriad ways, and accounting standards form just one facet of many systems impacted. Whether a set of unified global accounting standards is adopted or not, U.S. companies will have to face the pros and cons of globalization in relation to their own accounting practices.
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