Working Towards a Global Convergence of Accounting Standards

Although some would consider the U.S system of financial reporting one of the most efficient in the world, many would also point out that we have many inefficiencies. This can be seen through the multiple scandals in major US companies such as Enron and WorldCom, and with rapidly increasing technology and the ability to communicate across the world in seconds, it is clear that a global standardized set of accounting principles will soon be a necessity. Though a convergence of accounting standards to a “one-size-fits-all” method of financial reporting is enticing, there are multiple road blocks that prevent us from instituting a universal system. However, despite the problems, there are many who are working to initiate a global convergence of accounting standards and principles

Though the Generally Accepted Accounting Principles (GAAP) have acted as a suitable and reliable set of standards, it is comprised of items from various organizations that vary in format, unity, and structure, and at times GAAP has been considered inconsistent and difficult to interpret. As financial reporting has been becoming increasingly more complex, stock holders and non experts have expressed concerns about how foggy some company’s financial statements are. Similar to some of the issues expressed by the stock holders, companies have let their concerns with the inconsistency of our current financial reporting system be known. Additionally, they have stated that often times it is very difficult to ensure accuracy in their financial statements given the complexity of the GAAP requirements. The GAAP also tends to be more conservative compared to financial accounting standards in other countries. This is due to, in part, the legal implications that come with issuing a financial statement. In short, accountants are worried about being sued. This differs somewhat from the International Financial Reporting Standards (IFRS), which is primarily based in Europe. Because financial accounting laws are different across the way, it is more difficult to sue accountants. With this conservatism consistent with GAAP, coupled with the lack of clarity of financial requirements, comes multiple public companies restating their previous years financial reports as to prevent lawsuits. In 2007 nearly 10% of US publicly traded companies restated their prior financial reports. Not only is the restatement of financial reports costly to companies, but it also can shake the confidence of their current investors and deter future stock holders.

One major issue in the convergence of accounting standards deals with the detail that financial reports should be presented. While the majority of people in the US who hold stock would prefer a broader more abridged format of financial statements that are easily understood, there are users of financial accounting statements, such as market analysis and other financial professionals, who would prefer a more detailed account of financial reports. Users of financial accounting statements simply have overlapping and conflicting needs for financial data of a variety of types.

We are getting closer to a two system world accounting standard every day. The majority or Europe and developed Asian countries use the IFRS, and the US GAAP is currently the most widely used set of accounting principles throughout the global capital market. Despite the problems that face a global convergence of accounting principles, with today’s rapidly increasing technology, it is looking like more and more of a possibility. In fact, the Accounting Standards Board of Japan (ASBJ) met with the Financial Accounting Standards Board (FASB) in Norwalk, CT on October 22, 2009 to discuss their common goal of instigating a set of global accounting standards. This was their eighth time meeting, and it is clear that a global convergence is a priority. However, that is not to assume that we should expect a universal accounting standard in the near future. There are many cultural and legal implications that must be taken into consideration before a complete and total convergence of principles can be achieved. In order for a universal set of accounting principles to work, the stock holders, market analysts, and accountants must all evolve with the changing market and quickly learn to adapt the new principles. In addition, the legal system must also adapt to this new standard. Initially a set of universal accounting standard will leave the accountants open to significant subjectivity. (Fortunately, this should subside as people become more and more comfortable with a universal system.) Therefore, a modification of the legal standards concerning accountants is a necessity. It would be ignorant to assume that a convergence of accounting standards will be an easy thing to achieve, and financial reporting will remain complex. However, we will see a global convergence of accounting principles in the future. The question is simply whether that future is five years or twenty years away.

Sources:

Kemp, Robert. "A Closer Look At Convergence of Accounting Standards: The Reality of Our World - GLG News." Gerson Lehrman Group - The Expert Network. Web. 21 Oct. 2009. .

"View Point: Convergence of IRFS and US GAAP." Www.pwc.com. Ed. Edward Smith. PricewaterhouseCoopers, 7 Apr. 2007. Web. 23 Oct. 2009. .

"Accounting Standards Board of Japan Meets with Financial Accounting Standards Board to Discuss Global Convergence." Public relations, press release distribution, investor relations, SEC filing | Business Wire. Ed. Christine Klimek. 22 Oct. 2009. Web. 25 Oct. 2009. .

Conrad W. Hewitt, “Opening Remarks Before the Initial Meeting of the SEC Advisory Committee on Improvements to Financial Reporting,” US Securities and Exchange Commission, Washington, DC. (August 2, 2007)

Keiso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate Accounting. Thirteenth ed. Madison, Wisconsin: John Wiley & Sons, 2007. Print.

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I am currently a Junior Accounting Major at West Chester University