In today’s financial world many companies rely on the globalization to find success. This is no secret as more and more companies are operating internationally. With this in mind, each country has different accounting standards for which the company must follow. This poses a problem to these international corporations, as they now have to issue reports based on the accounting standards of the countries in which they operate. The solution to this problem is called accounting standard harmonization. This harmonization is defined by, “a political process which aims to reduce differences in accounting practices across the world in order to achieve compatibility and comparability” (Hoarau 1). This solution would provide a standardized set of accounting standards that each country involved would have to follow. On the surface this seems like the perfect solution to this problem, but unfortunately this is not the case. While there is a clear upside to international accounting standard harmonization, there is also a downside. This paper will describe the advantages as well as the disadvantages to accounting standard harmonization.
The advantages of harmonization include providing comparability of financial statements across international companies and countries. This provides many benefits to the companies operating and the countries that adopt the standardized rules. The first of these benefits is that investing in international companies is now easier. Companies can be compared to each other with ease and the risk of investing is reduced. This will lead to more investment and an economic boost to both the country and companies. Another benefit is that now emerging third world countries can adopt the new standards without going through the process to create their own. This process can be expensive and time consuming but with harmonization this is not a problem. It also decreases the expenses of international companies since they would not need to, “consolidate divergent financial information when more than one set of reports is required to comply with different national laws or practice” (Turner 1). This allows companies to take the money they would have spent on making these different financial statements and invest them back into their company.
As good as the idea of harmonization seems there are also some disadvantages to this concept. The first is the language and culture barriers of each country. Translating a standard set of accounting principles to each different language would be extremely difficult since each language doesn’t translate exactly to each other. Another downside to harmonization is trying to get every country to agree on the set standards. Since each country believes that harmonizing accounting standards will, “dilute the quality of their financial reports” (Roy 1) this becomes an increasingly difficult task. Currently each country with different standards has different views on certain topics such as amounts of disclosure. Getting each country to come to an agreement would be very challenging. Also, adoption of a new set of accounting standards would be costly to smaller companies in smaller countries that now have to figure out how to adjust to the new standards.
The idea of creating one set of accounting standards for every country to adopt seems like an extraordinary idea but as we’ve seen there can also be some disadvantages and drawbacks. The advantages include creating comparability among financial statements of companies in different countries as well as allowing smarter and better investing. However, the drawbacks are that creating these standardized rules would be extremely difficult. The translation between different languages and the priorities of different countries is what makes it so difficult to accomplish. It is obviously apparent that a globalized set of accounting standards would benefit everyone but creating the actual standards that benefits everyone is the major problem.
Hoarau, Christian. “American Hegemony Or Mutual Recognition With Benchmarks?.” European Accounting Review 4.2 (1995): 217-233. Business Source Premier. Web. 19 Nov. 2014.
Roy, P. Norman. “International Accounting Standards – Why Bother?.” Financial Executive 11.6 (1995): 1. Business Source Premier. Web. 19 Nov. 2014
Turner, John N. “International Harmonization: A Professional Goal.” Journal Of Accountancy 155.1 (1983): 58-66. Legal Collection. Web. 19 Nov. 2014