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Running head: CASE STUDY: GLOBAL ACCOUNTING HARMONIZATION 1
CASE STUDY: GLOBAL ACCOUNTING HARMONIZATION 5
Case Study: Global Accounting Harmonization
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Define the term “global accounting harmonization.”
The term global accounting harmonization attracts different meanings subject to the country where it is used. The term is used to mean the establishment of common accounting standards that are used globally in different scenarios. This is the basis of the establishment of global accounting standards that accepted in different parts of the globe. The global governments come up with these standards as a way of established common standards that will harmonize trading activities that meet desired economic standards. This means that all the accounting processes have to be aligned with the formalities established under the International Financial Reporting Standards (IFRS) and the International Organization for Standards (ISO) (Dhaliwal et al., 2019). These standards established in line global accounting harmonization enables businesses from different regions of the globe to function properly by establishing a standard measure of performance. More importantly, harmonization of the accounting standards enhances the level of agreement in accounting standards and related practices in different parts of the world. The number of organizations that operate internationally is on the rise, which calls for harmonization of accounting standards because they apply those standards specified in the country of operation. This means if different standards are used in different country for the same company, it will be difficult to harmonize their financial statements, thus the need to harmonize these accounting standards in different parts of the globe.
What are the economic arguments that support global harmonization?
Businesses operate in a world without boundaries, but at the same time there are specified business practices that need to be established for these enterprises to operate effectively. Besides, there seems to be irregularities when businesses operate without standard of control, which makes it easy to compare economic performance of businesses in different parts of the globe more easily. Besides, harmonized accounting standards enables those in business to acquire quality information necessary for decision making. Some of the arguments for this harmonization are market efficiency, economic development, and financial regulations (Kudrna & Müller, 2017).
Market Efficiency
Adoption of IFRS standards improves the efficiency of markets through enhanced liquidity in the capital markets, thus lowering the cost. The mandatory adoption means that organizations have to disclose their accounting information which enhances comparison of different markets. As a result, share prices reflect the effectiveness of the markets in different parts of the globe.
Financial Regulation
Regulation of financial activities is proving to be an important economic issue. The establishment of global accounting harmonization enables organizations to come up with regulations that enhance market stability and instill discipline in institutions to avoid the issue of liquidity trap.
Economic Development
The relationship between the legal framework and financial infrastructure of a country cannot be overlooked. The maturity of capital markets is dependent on financial regulation. As a result, if investors are not protected, countries will have a poorly developed capital market. However, where countries have proved investor protection to be effective has had a strong capital market, translating to good economic performance and overall development.
What are the main obstacles to global harmonization?
One of the biggest issues with global accounting harmonization is legal environment. Legal framework plays a critical role in the development of accounting standards in different countries. Besides, legal systems differ from one state to another. These legal frameworks influence the accounting and reporting practices, which means that the goal of harmonization cannot be achieved uniformly unless there is legal uniformity. This results in different accounting practices and requires the legal system to be harmonized before harmonizing accounting practices (Brusca & Martínez, 2016).
Another hurdle is the spirit of nationalism among accounting professionals making it hard for them to compromise and change their accounting practices. As a result, some may believe that their accounting principles are superior to those being proposed making it hard to accept the change.
Different countries have different motives of conducting financial reporting. These results in variations in reporting practices because the reporting standards in every country are targeted to a specific audience, which include investors, revenue generation and government organs.
Another obstacle to the achievement of harmonized accounting practices is economic gap between developed and developing countries. This makes it hard to bring common accounting practices in these countries and requires accounting professionals to understand the interactions between economic and accounting systems.
Ways overcome these obstacles
These obstacles can be overcome through balanced economic development. One of the major problems in accounting harmonization is the economic gap that exists between developed and the developing world. To overcome this obstacle, developed economies need to introduce development incentives such as foreign direct investment to promote balance so that they can have common accounting practices (Vidal-García & Vidal, 2020). Besides, this will shift the focus of financial reporting.
Another challenge is the legal obstacles because different countries have different legal frameworks. There is need to harmonize legal systems before there is harmonization of accounting practices. This will ensure that accounting practices are influenced by similar legal principles, therefore making it easier to harmonize accounting practices.
References
Brusca, I., & Martínez, J. C. (2016). Adopting international public sector accounting standards: A challenge for modernizing and harmonizing public sector accounting. International Review of Administrative Sciences, 82(4), 724-744.
Dhaliwal, D., He, W., Li, Y., & Pereira, R. (2019). Accounting standards harmonization and financial integration. Contemporary Accounting Research, 36(4), 2437-2466.
Kudrna, Z., & Müller, P. (2017). Harmonizing Internationally to Harmonize Internally: Accounting for a Global Exit from the EU's Decision Trap. JCMS: Journal of Common Market Studies, 55(4), 815-831.
Vidal-García, J., & Vidal, M. (2020). IFRS harmonization and foreign direct investment. In Foreign Direct Investments: Concepts, Methodologies, Tools, and Applications (pp. 436-453). IGI Global.