INTERNATIONAL ACCOUNTING: AN ACCOUNTING TOOL FOR HARMANISATION OF ACCOUNTING STANDARDS
Accounting is a proficient knowledge with unstable social, political and economic perspectives. These contexts are generally on international and national, but with the onset of globalization, narrow national views are no longer persistent. Globalization in today's world is becoming the economic need for the society especially for the corporations which are operating globally. Accounting system followed by these companies has to be of international level because these companies go to other nations for capital and the external users' needs financial information which is reliable and comparable, and that is only possible if financial statements are prepared according to the international standards. This process of globalization is forcing companies to adopt international accounting. International accounting is the accounting for all international transactions, harmonization of various accounting standards globally and comparing accounting principles in diverse countries. It is basically the process of providing valuable financial information which is available on multinational base. International accounting try and acquire all the technical problems related to accounting in managerial, auditing, financial and tax areas abide with the measurement, disclosure and conduct of foreign operations. Internationalization and harmonization of accounting is trying to achieve pinnacle from last two decades. The followers of international accounting have shown interest in introduction of new accounting standards and have also helped to privatize economy. (Lehman,2009) In Sydney (1972), global Congress of Accountants gave a proposal for International Accounting Standards Committee. Later proposal was lifted along with the representatives of various countries including Germany, the Netherlands, Australia, Mexico and France. Altogether nine countries granted to be a part of IASC, thus in 1973, IASC came into existence in London. These countries had the voting right in the IASC board. IASC board was authorized to establish International Accounting Standards. In the course of expansion original nine supported bodies grew to 112 countries in 2000.Until, in 2001 International Accounting Standards was restructured to International Accounting Standards Board, 41 standards were developed. Many standards were revised once or twice. (Lehman,2009) (APPENDIX-1)
In the present scenario, cultural and business environment plays a vital role in the lives of people. Businesses are operating both nationally as well as internationally. Although cultural environment is changing gradually, people are more concerned with economic, legal, financial, political and social changes. As a result international factors are becoming essential. This come up for accounting change. Global trade has helped in creating competition, jobs and advanced technology. Because of the economic, cultural, legal system and political differences businesses have their own accounting system. For instance Laws that are easy and suitable to recognize in UK might be useless for some other country. Accounting system varies from country to country. Thus, it is important for big businesses to be aware of the activities round the globe in order to survive and be competitive.
Several factors have influenced the development of accounting. One of the most significant determinants of accounting practices is the political and economical structure of the country. Political system may vary with how an economy is controlled as well as organized, which will in turn influence the objective of accounting. Political factors have an influence on accounting through degree of freedom and its system. Political system is capable of determining the nation's economic system and thus its accounting criterion. Political systems even import and export accounting principles and standards. For example: British accounting was exported to other commonwealth countries. Political freedom is essential for the development of country's reporting, accounting and most importantly disclosure. (Robert ,et al,2008).
Economic environment is crucial for the advancement of accounting. There are broadly four economic systems: capitalist; capitalist-statist; capitalist-socialist; socialist. Capitalist states are based on the operations of the market and also on the secret condition for the welfare of individuals. Capitalist-statist states have legislative enterprises, because of the restricted development philosophy of highly dependent on the key resource like oil. Capital-socialist offer social services on big scale by means of government or nonprofit organization, with the effect that confidential control on property is forgone for democratic purposes. Socialist states continue to exist programmatically in order to place complete national economy under direct control or indirect control. Capitalist system may be more approving than the other economic systems for accounting development as in capitalist system survival of private enterprises not only depends on creation of goods or services but also providing with sufficient information to several interest groups from creditors and shareholder to capital market. Nature of economic system might decide upon the country's course of economic system, involvement of government in the financial segment and the role of accounting. (Robert ,et al,2008).
Laws are usually codified. They have rules and regulations that need to be followed. Classically, commercial codes control the behavior of all the profitable institutions together with the parameters of accounting. Code law is associated to creditor protection and common law is associated to Shareholder protection. Thus the legal system affects on how accounting regulates.
Different countries have different legal systems; countries can be put in two categories according to the legal system: Common law and Roman (civil) Law. Civil law is the governmental system in which company law must prepare rules need to establish rules in a detailed manner for accounting and reporting purpose. For Instance: In Germany, company's accounting system to a large extent a part of company law. Common law is the non-governmental system in which rules seek out in order to answer to the specific matter instead of formulating universal rule for the near future. This has an obvious influence on the company law. England is one of the examples of a common law country. Company's Acts is mainly concerned with disclosing the information for the purpose of protecting the owners of the company i.e. shareholders. The government has quite less important role in few other common law countries. For instance, in USA while the government body as congress has crucial power in favor of federal regulation of accounting, still it has been utilized in few cases. (Zhang,2005)
Accounting is influenced by the culture of the country in which it functions. Hofstede came up with a model of culture with the collective encoding of the mind that differentiates the member of one soul group from other. Four Cultural dimensions identified by Hofstede: I
ndividualism versus collectivism where in individualism means prediction for a freely bonded social scaffold in a society in which individuals are expected to take care of their own and their close ones only. Collectivism means predilection for a freely bonded social scaffold in a society in which individuals look ahead to their family and relatives to take care of them in exchange of obedient royalty. Elementary concern dealt by this dimension is the level of interdependence that societies sustain among individuals. (Zhang,2005)
Large versus small power distance where in, Power distance is the level at which people of the society accept that the power in organizations and institutions is distributed unevenly. People in societies with large power distance agree to a hierarchical arrangement in which each one has a position and which requires no additional justification. People in societies with small power distance try hard for power equalization. Elementary concern dealt by this dimension is how a society holds inequality among the people when they arise. (Zhang,2005)
Strong vs. uncertainty avoidance where in, Uncertainty avoidance is the extent to which the members of a society do not feel comfortable with vagueness and uncertainty. Societies with Powerful Uncertainty avoidance retain strict codes of conviction and conduct and are prejudiced towards deviant ideas and people. Societies with Weak uncertainty avoidance follow a calm atmosphere in which practice is counted more than the counts more than the beliefs and are easily tolerated towards deviation of ideas and people. Elementary concern dealt by this dimension is how a society responds to the truth that time gone is gone and it will never come back and that the future is not known. (Zhang,2005)
Masculinity versus femininity where in, Masculinity is the preference in society for assertiveness, achievement, material success and heroism. Femininity is the preference in society for relationship, quality of life, modesty and caring for the weak. Elementary concern dealt by this dimension is how a society distributes societal roles to the different sexual category. (Zhang,2005)
Gray connected hofstede's cultural differences to explain international variations in the deeds of accountants and thus in the nature of accounting practices. For instance, Gray proposed that a country with strong uncertainty avoidance and weak individualism will be more liable to reveal conventional measurement of revenues. Gray predicted that culture and societal values nationwide are pervaded by organizational as well as occupational sculptures, however with unstable integration. Further gray represented his model into international accounting perspective. Gray connected the accounting values to precise accounting system distinctiveness and anticipated four hypotheses on the basis of relationship between recognized cultural differences and the advancement in accounting systems. (Zhang,2005)
First value is Professionalism vs. statutory control. This value imitates the upholding of professional control and a preference for implementation of individual professional judgment against observance with statutory control and legal requirements .So, Gray developed the hypothesis, lower the countries ranking expressing the power distance and uncertainty avoidance and higher the countries ranking expressing individualism, more the country will rank in professionalism. Second value is Uniformity vs. flexibility. This value imitates the enforcement of uniform practices between companies against flexibility according to the apparent conditions of individual companies. So, Gray developed the hypothesis, lower the countries ranking expressing individualism and higher the countries ranking expressing power distance and uncertainty avoidance, more the country will rank in Uniformity. Third one is Conservatism Vs Optimism. This value imitates the careful approach to measurement which helps in coping up with the upcoming uncertainty against risk taking approach. So, Gray developed the hypothesis, lower the countries ranking expressing masculinity and individualism and higher the countries ranking expressing Uncertainty avoidance, more the country will rank Conservatism terms fourth value is Secrecy vs. transparency. This value imitates the disclosure of information, only to the ones closely involved in management against the open accountable approach. So, Gray developed the hypothesis, lower the countries ranking expressing masculinity and individualism and higher the countries ranking expressing power distance and uncertainty avoidance, more the country will rank in Secrecy terms. Zhang,G(2005)
The culture has an significant influence on accounting. Culture modifies the influence of environmental and external factors. It also influences the values of accountants and the institutions of society. Most studies of accounting rely upon the works of gray and hofstede. (Zhang,2005)
Accountany profession is one of the business causing international differences. This might be a dependent variable but not explanatory. The size, vigor, importance and competency of accountancy profession in a country results from the interplay of the various factors and may follow financial coverage they have helped to generate. Though, nature of the profession notifies the accounting type practiced. For instance, the task auditor does and the method in which profession regulates is influenced by the nature of legal system. In terms of number of audits carried out and to whom it audits, the significance of the profession is based on the number and type of the existing corporation. Auditor's skills to influence the conduct of a company or their reporting system are affected by the approach in which profession is planned and the people's outlook towards auditors and accountants. There are differences to the extent of the profession,. The maximum variation is between Germany and UK. There are about 11,000 accountants with German qualifications and 2,50,000 with UK.(APPENDIX-2) (Robert ,et al,2008).
Educational characteristics have a significant impact on the role of accounting system. Educational characteristics include literacy level, orientation on educational system and the educational match. Improvement in the literacy level will lead to better accounting system. Orientation also plays a vital role in determining accounting practices. It would depend on whether basics of mathematics are covered and the study of numerical data. Moreover are basics of accounting taught in the education system? Thirdly educational match, with the industrialization there are more compound arrangements so complex procedures and more people (accountants) are required in order to be competent. (Zhang,2005)
Influence of religion can be best explained by considering the example of Islamic banking. Islamic banking has significantly increased ever since it started in 1960's in Egypt. Global Banks like Citibank and Deutsche Bank provide their customers with Islamic banking services. Islamic banks differ from western banks under the criterion of riba which is considered to be wrong in Islamic law i.e. Islamic banks are not allowed to charge interest. They do not lend or invest in banks which are non -Islamic and the corporations that are involved in rearing pigs, alcohol and betting. This will have an obvious impact as there will be investment accounts and participants instead of loans and interests.
Accounting rules and practices are derived accidents of history i.e. shocks to the system. For example: The breakdown of Enron the US company led to the considerable changes in audit firms in various countries relating to rules and regulations of corporate governance.(Robert et.al.2008).
From the initial days of bookkeeping accounting practices are always exported and imported. Exporting is done because of several reasons. One of the sources is profession. For instance Price water house began in 1849 in London, and further opened administrative centers in Chicago and New York before starting 2nd centre in UK. UK skilled accountants opened several accounting a firm in US. This concludes that quite often accounting and auditing standards are exported. Colonialism is another factor in export of accounting .France and UK exported their educational, legal and administrative structures to their colonies. Developing accounting rules and regulations is time consuming as well as expensive. So, It is cheaper to observe other countries and then select the rules which fulfill your needs i.e. importing rules and regulations. One of the fine examples of importing accounting are the countries of eastern Europe. With the overthrown communism they sought associations with EU and took the challenging task of renovate their accounting system. (Robert ,et.al.2008).
Inflation is related to the economic growth and it's a foremost influence on accounting where hyperinflation is prevalent to level that alternative methods to the conventional historical approach are favored. With the increase in inflation rate problems of historic costs also increases. (Robert ,et.al.2008).
There are certain pressures on organizations to meet society's needs.
Social accounting covers financial as well as non- financial information and deals with the requirement of stakeholders. Stakeholders has three categories, internal stakeholders consisting of workers and managers, External stakeholders consisting of debtors, creditors, shareholders and banks, lastly related stakeholders consisting of government and pressure groups such as Greenpeace.(APPENDIX-3)
Corporate Social Responsibility is the hot issue today amongst companies and their CEOs discussing of what their company is giving back to the society.CSR includes the company's commitment to be economical and environmental, keeping in view the interest of stakeholders.
Social audit is a subsidiary to social responsibility of a business. It is the tool used to verify and measure the social act of the organization. For example Nike's social Audit:
Nikes labor practices is the case describing the Child labor ,safety and health problems, physical harming of employees in Nike's factories and thus Nike broke labor laws which is unethical. Nike was not paying bare minimum wages, was providing unethical conditions of working and was not even taking safety measures. Working conditions are still not improved but have stopped maltreatment of employees.
Processes like social audit help in bringing up issues affecting society in the concern of public where corrective measures can be taken.
Economic activity creates a firm deprivation of the environment resulting in rise of pressure on firms in order to continue their operations green and turn liable for environmental organizational practices. Administrators exert pressure from shareholders so that they can increase the worth of the firm. Stakeholders like customers, government, ecologists, employees and communities claim that they struggle for environmental protection. Such contradictory pressures are not identical in various sectors and industries, but still are dependent on environmental parameters. The competence stakeholder group has to exercise pressure depends on ownership of authority. Stakeholders concern in green management issue creates a long-lasting impact on organization's decision and assert that constitutes not necessarily put unambiguous pressures on business since organizations frequently monitor their environments to discover demands from prevailing stakeholders.
Five levels of external factors of ethical pressure faced by international firms while following ethical codes. First one is national law which is obligatory for national firms. Example : The Constitution of the United States. Second level is international law and agreements which is obligatory for listed member states and firms. Example: United Nations Environment Program. Third level is Civil activist groups (NGOs) has an impact on civil opinion but is not obligatory for a firm. Example: World Wildlife Fund. Fourth level is Voluntary standards and actions which provides voluntary membership for firms. Example: Global Reporting Initiative and the last i.e. the fifth level is impact on competitor's behavior or ethical codes which is not legally necessary for the firm. Example: Nokia. Nokia as its tag line speaks ‘connect people' is profoundly anxious of ethical business practices considering the importance of maintaining integrity in long-term in organization whether with employee's stakeholders or customers. Organization is on the track of development and supporting various charitable organizations globally. Its main focus is on corporate giving, disaster reprieve and education. Nokia has also joined hands with NGO to help children with disabilities. Environmental Law is a body of regulations, conventions, treaties and policies which seek out to save environment, which will possibly be affected and endangered by human. For Example: Clean Air Act set targets and principles for purity along with the quality of air; Clean Water Act sets goals meant for water quality as well as purity and Pollution prevention act set targets to prevent pollution by decreasing the production of pollutants from the origin. (Zhang,2005)Body shop's first outlet was started in 1976 with 25 home -made and natural body and health products. It was observed that people were satisfied with eco-friendly products. And thus company planned to expand and now it is the leading brand. Body Shop campaigned social, ethical and environmental issues. It conveyed five basic messages: protecting the planet, supporting community trade, against animal testing, activating self-esteem and defending human rights. (Kent,et.al,2007)
MNCs are not only restricted to interact with market players like shareholders, customers and suppliers. They are even rendered by the pressure of political stakeholders such as NGOs, government and the media. Unawareness of some of these stakeholders is a reason for ruthless clashes and moral criticism leading to financial losses. As a result, political activities have become a significant factor of success in international business. Political stakeholders influence can be illustrated well, by taking the example of sports industry. In 1990's, companies like Nike, Reebok, Adidas -saloman were being blamed because of unethical behavior. Accusations were like countries having poor labor conditions and unfair government. Image loss and pessimistic newspaper headline were a result of protests by NGOS like Amnesty international, Greenpeace etc which lead to decline in sales and boycotts. As a result, companies implanted a code of conduct to follow ethical behavior and adopted global monitoring system.
Ethics is crucial in international business. Ethics of different countries differ. Business ethics is the focused study of right and wrong. It focuses on moral values as they pertain to business policies and activities. Ethical issues faced by professionals on international basis include bribery, sexual discrimination and intellectual property protection. (Agarwal, 2004)
In the current scenario it is essential for leaders to know values and to convey business ethics in the organization. Most importantly to the top level managers as they create the organizational environment which encourages them for ethical decision-making. To ensure that the managers take ethical decisions, they need to develop a code of conduct, appoint ethical officer and involve employees in making a mission statement. The fact is not even an organization can operate good with unethical norms.
Kautilya put forward the ethical measures to the king so as to improve the ethical climate. kautilyas teaching says , that a king must support as much ethical standards as possible and rule by leadership quality but not by his authority. As in the case, king was responsible for framing ethical standards for his kingdom .the same goes for the top management of an organization. It is their duty to set procedures and regulations, and set a proper code of conduct for the organization. (2009) KFC (Kentucky fried Chicken's) in India is the case highlighting ethical issue. Regulatory powers found that KFC's chickens do not hold well according to the Prevention of Food Adulteration Act. Chicken of KFC contained a taste enhancing ingredient known as MSG in the quantity three times more as allowed by the act. KFC faced ruthless criticisms by people against animal protection. Although undeterred by the objections by animal right organizations, KFC designed for an expansion program.
McDonald's product French fries was endorsed falsely as 100% vegetarian; however, it contained a beef flavor enhancer in fries. Vegetarian customers were cheated as they were being offered French fries containing beef, which is unethical. Although later it issued conditional apology confessing for using beef in fries. Some of the McDonalds restaurants in India were initially smashed. (APPENDIX-4)(2006)
One of the examples international pressures is human trafficking. Human trafficking is the exploitation of people. Sexual exploitation and forced labor are the most common forms of human trafficking. United states along with other countries are facing no. of problems related to human trafficking and thus have taken initiatives in order to combat trafficking. Globalization has led people to move across borders, thus has increased trafficking. (APPENDIX-5) (Miko,et.al.2003)
Under peer pressure, organization behave ethically with their peers i.e. suppliers and customers. Code of ethics was formed for Indian customers for their misleading and unfair practices which included fairness, after sale-services, respect of privacy etc.(APPENDIX-6)Weyerhaeuser also formed codes for suppliers in order to be fair with them and will not reveal suppliers pricing.(APPENDIX-7)
Comparison of international accounting standards and Indian accounting standards done by two ways of examining national standards one is national requirements do not match with IAS and other being national practices are not accepted by IAS.
Accounting standards issued via Institute of international accountants of India have not included leases. Whereas according to IAS 17 both capital as well as operating leases are included. Statement of cash flows is the essential component of financial statements under IAS. According to ICAI either statement of cash flow or funds flow is adequate. Under IAS completed contract method is not been used further , method required for accounting is percentage of completion .ICAI standard permits for both completed contact and even percentage of completion method. Even IAS under the shade of completed contact is borrowing costs. Alternative capitalization of interest is allowed .IAS allows using tax liability method and tax deferral method for the purpose of income tax. ICAI allows using tax liability method and tax payable method. of the tax Furthermore, IAS has fixed three years of reversal period whereas in India ICAI has prescribed 5 years reversal period. Under IAS 19, actuarial valuation is allocated to income in a systematic manner. Accounting for pensions requires accrued benefit valuation. ICAI have no specific criteria on how to evaluate actuarial valuation. According to IAS, historical cost method is used to value plant , equipment and property. Under ICAI appraisal method is used. (Perumpral,2009)
According to UK accounting standards, value based and matching-based approach are used. In UK three methods of deferred accounting are used namely: full, nil and partial methods. Stocks valuation should be done at net realizable value .UK Accounting standards do not cover related party disclosures whereas international accounting standards cover 4 categories: the outstanding balance, provision intended for doubtful debts, amount of transaction, expense documented from related parties with respect to bad debts. ASB is one of the important factor of GAAP in UK. Accounting Standards of UK for intangible resources contains Goodwill and intangible asset, accounting for Subsidiary Undertakings, and reporting financial performance.( Høegh-Krohn,et al,2000) . In UK, mainly accounting firms have put in efforts to maintain their corporate social responsibility. For instance: KPMG claimed for a community investment of £ 4.2 million in UK.( Duff, et .al,2007)(APPENDIX-9)
Under US standards LIFO is being used widely because it is standardized by the tax authorities. Whereas according to international standards LIFO method, is allowed to use alternative. In US accounting standards both percentage of completion method and completed contract method are permitted, while in case of international standards completed contract method is not allowed but for construction contracts, percentage of completion method is required. (Ijiri,2005) (Ashbaugh,2001)
The internationalization of accounting has advanced with the globalization. Rapid globalization is posturing challenges to the world. Challenges include human trafficking and unfair practices operating beyond the boundaries .There are various factors influencing the accounting system including cultural influences, legal system influences, tax system influences etc. There are several pressures on organizations so they need to obey the rules to meet the society's requirements. There are differences in the national and international issues. In India, political and social barriers need to be embarked upon to enhance the comparability of financial account users. Seeing the current scenario it is quite difficult to say anything about IAS future but it can be said that due to globalisation pressure countries will slowly and steadily adopt IAS and will be able to attain harmonisation in accounting standards. (Parker,2006)
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