FMIB #8

Volume 13, Issue 1, March 2012 Review of International Comparative Management 158

International Accounting Standardisation Effects

on Business Management during the Global Financial Crisis

Gyorgy CSEBFALVI 1

Keywords: value based management, accounting standardisation, economic

effects, financial crisis, Hungar.

JEL classification: M11, M41, M48

Introduction

Nowadays, especially during the current global financial crisis, companies

in Hungary are striving desperately to remain competitive and achieve sustainable

levels of economic development. The highly competitive environment requires

companies to create a clear business strategy, and accounting has to be part of this

strategy since it helps individual enterprises to achieve their strategic objectives.

International accounting standards are new global methods for business

information systems and they are able to harmonise financial regimes both world-

wide and in Hungary also. The increased globalisation of markets, the complexity

of commercial trading and the concentration of business in global competition have

led to a still greater need for international harmonisation.

1 Gyorgy CSEBFALVI, University of Pecs, Faculty of Business and Economics, Hungary

E-mail [email protected]

Abstract

This study examined the impact of the adoption of international accounting

standards on the management performance of businesses listed on the Budapest Stock

Exchange in Hungary. The financial data are taken from accounts published on the

Budapest Stock Exchange and in the Hungarian Business Information database. The

adoption decision model tested if the demand from internal performance evaluations

is a factor in businesses decisions to adopt international accounting standards during

the global financial crisis situations.

The results show that those businesses which have adopted international

standards achieved higher and statistically significant positive coefficients than those

following local accounting rules. We found that larger firms (those with more

leverage, higher market capitalization and substantial foreign sales) were more likely

to have adopted international accounting standards. This suggests that the increase in

the sensitivity of turnover to accounting performance post-adoption is primarily

driven by heightened turnover sensitivity to accounting losses.

Review of International Comparative Management Volume 13, Issue 1, March 2012 159

In today’s business environment, companies need to take every advantage

they can to remain competitive. Global competition, rapid innovation,

entrepreneurial competitors, and increasingly demanding customers have altered

the nature of competition in the marketplace. This new competitive environment

requires companies’ ability to create value for their customers and to differentiate

themselves from their competitors through the formulation of a clear business

strategy. Business strategy must be supported by appropriate organizational factors

such as effective manufacturing process, organizational design and accounting

information systems also.

Modern business environments are increasingly competitive and dynamic.

International competition through e-commerce and demand-based supply chain

management dominate business. It is important for companies to develop coherent

and consistent business strategies and to utilize management accounting tools to

support strategic planning, decision-making and control. To integrate business

strategies with various management accounting tools, first companies need to

identify which business they are in. It is essential to identify products and services,

customer types, geographical markets, and delivery channels. It is useful to match

the strategic business unit (SBU) with the related business unit strategy. An SBU is

a company department or sub-section which has a distinct external market for

goods or services that differ from another SBU. A business unit strategy is about

how to compete successfully in particular markets. It is important to focus on a

certain segment, such as environmentally friendly cars in the automobile industry

or internet and phone banking in the retail banking industry.

The financial crisis is also encouraging more critical examinations of the

managerial innovations that have emerged from the audit industry, not least its

pursuit of the bureaucratisation of risk in the name of risk management. Coming

through a crisis where risks have been real and perceived, increasingly it is coming

to be seen that risk management mechanisms do relatively little to facilitate the real

management of risk. Adding as they do to costs – and the income of the

consultancies involved, by isolating rather than integrating the management of risk,

the bureaucratic mechanisms still promoted by the audit firms and their associates

provide yet further evidence of the relatively limited understanding that the audit

industry has of real time management in action.

Trying to understand the crisis and reflect on its implications also

illustrates the dangers of the drift away from the world of accounting practice that

has been a characteristic of so much accounting research for the last few decades.

Indeed at times it is possible to think that for some there has been a drift away from

accounting itself: at the very least there has been a pronounced move towards

studying accounting at a distance. As yet this has not been as severe in its

implications as for those of our colleagues in finance research where increasing

numbers have a very limited appreciation of the complexities of practice and its

institutional context. There nevertheless has been a move away from analysing just

such complexities and institutional contexts in the accounting area, often in the

name of theoretical elegance and methodological rigour. Interestingly this is true

Volume 13, Issue 1, March 2012 Review of International Comparative Management 160

for both statistically based capital market studies and a great deal of more critical

theorizing. Of course theoretical and methodological issues are of real importance,

not least in helping to avoid methodological capture by practice norms, frameworks

and ways of looking at the world. But as numerous other social science disciplines

illustrate, there are ways of balancing interests in the need for sound and reliable

research with genuine interests in the complexities of practice. It really is important

to understand how accounting has become implicated with the creation of new

financial practices, with objectifying and simplifying the increasingly complex

financial transactions that have emerged from an ever expanding investment in

financial engineering. Equally significant is the need for a more informed

understanding of the changes that have occurred in the influence structures in the

world of accounting politics both national and international, of the changing role

that accounting plays in the informational environment of organizations and with

how accounting changes in relation to shifts in the underlying nature of the socio-

economic system in which business operates.

Standardization is the process of developing and agreeing upon technical

standards. The standard is a document that establishes uniform engineering or

technical specifications, criteria, methods, processes, or practices. Some standards

are mandatory while others are voluntary. Voluntary standards are available if one

chooses to use them. Some are de facto standards meaning a norm or requirement

which has an informal but dominant status. Some standards are de jure meaning

formal legal requirements. Formal standards organizations such as the International

Organization for Standardization or the American National Standards Institute are

independent of the manufacturers of the goods for which they publish standards.

In social sciences, including economics, idea of standardization is close to

the solution for a coordination problem, a situation in which all parties can realize

mutual gains, but only by making mutually consistent decisions. Standardization

implies the elimination of alternatives in accounting for economic transactions and

other events. Harmonization refers to reduction of alternatives while retaining a

high degree of flexibility in accounting practices. Harmonization allows different

countries to have different standards as long as the standards do not conflict. For

example, within the European Union harmonization program, if appropriate

disclosures were made, companies were permitted to use different measurement

methods: for valuing assets, German companies could use historical cost, while

Dutch businesses can use replacement costs without violating the harmonization

requirements.

1. Previous related international literature review

The International Accounting Standards Board (IASB) has planned to

develop a uniform and understandable global accounting convergence (Easton,

2006), and the IASB’s plan has resulted in more than 100 countries world-wide

now requiring, permitting or adopting International Financial Reporting Standards

(IFRS) (Epstein, 2009). This growing acceptance of IFRS has also influenced

Review of International Comparative Management Volume 13, Issue 1, March 2012 161

emerging economies (Ball, Robin and Wu, 2003). Beke (2010a:49) asserted that

“the purpose of the use of international accounting information systems is that

similar transactions are treated the same by companies around the world, resulting

in globally comparable financial statements”. These findings have led many

authors to conclude that global comparability will be driven by factors other than

the accounting standards. In particular, most authors point to either regulatory

oversight or capital market pressures (Burgstahler, Hail and Leuz, 2006).

Researchers have suggested that the best approach to assessing the

applicability of IFRS is to evaluate the convergence process in emerging markets

(Jones and Higgins, 2006, Cordazzo, 2008). However, the process of adoption has

been the subject of limited research, since researchers themselves have suggested

that it would be better to use national case studies to analyse the adoption of IFRS

in individual nations. Examples of this are Callao-Jarne-Lainez (2007) in Spain,

Cormier-Demaria-Lapointe-Teller (2009) in France, Lantto and Sahlström (2009)

in Finland, Iatridis and Rouvolis (2010) in Greece, Peng and Smith (2010) in

China and Beke (2010b) in Hungary also.

The research undertaken in the form of national case studies will develop

guide-lines on best practice in the implementation of IFRS in order to assist

developing countries and countries with economies in transition to succeed in their

efforts to harmonise their national accounting rules and practice with international

requirements

Earlier literature shows that the level of the capital market orientation of

the financial environment also follows the differences in accounting systems

internationally. Examples of this are found when the Common Law accounting

systems of the USA and the UK are compared with Code Law-based systems of

many Continental European countries (see, for example, La Porta, 1998).

Earlier studies show that, in Code Law countries (e.g., in Europe) the

capital provided by banks tends to be more important than in Common Law

countries e.g., the USA and Canada) where firms are mainly financed by a large

number of private investors (Barth et al., 2004). Therefore, information asymmetry

between capital providers and the company is likely to be resolved in Code Law

countries by providing accounting information to the capital providers by means of

high-quality, public financial reporting (e.g. Beke, 2011a).

Previous studies also show that the adoption of IFRS improves the

accounting quality of publicly traded companies in Europe (Daske and Gebhardt,

2006). Overall, the adoption of IFRS seems to benefit investors, especially in

countries which resemble Code Law clusters and where the information needs of

investors were not the primary interest of standards setters.

Additionally, many papers examine the properties of accounting

information across different accounting regimes. Overall, these studies indicate that

similar accounting methods are applied very differently around the world.

However, Beke (2011b) remarked that “the unified accounting information system

will probably lead to new types of analysis and data – with the possible additional

integration of new indicators from the practice of certain countries”.

Volume 13, Issue 1, March 2012 Review of International Comparative Management 162

The purpose of the use of international accounting methods is that a single

set of standards ensures similar transactions are treated the same by companies

around the world, resulting in globally comparable financial statements. However,

looking at accounting standards as consistently by firms, we see that they are

changeable since they depend on the varying economic, political, and cultural

conditions in one state. Accounting standard-setters and regulators around the

globe are planning to harmonise accounting standards with the goal of creating one

set of high-quality rules to be applied world-wide (Whittington, 2008).

2. Methodology and results

The purpose of this study was to measure the differences between national

rules and the international methods, evaluating and analysing their effects on the

economic environment. This survey also includes information on how international

accounting standards have been affected by the global economic crisis. To examine

decisions made by companies to adopt IFRS, we created a sample comprising

Budapest Stock Exchange (BSE) companies who adopted IFRS in Hungary in

2005. For the purpose of research, the pre-adoption period was 2000 - 2004 and the

post-adoption 2006 - 2010. The final sample consists of 65 companies who adopted

IFRSs and 260 Hungarian firms using local accounting rules. The specific samples

are of conventional shareholder companies with Hungarian headquarters who

employ an average of more than 50 people. The financial data are taken from

accounts published on the Budapest Stock Exchange and in the Hungarian

Business Information database.

The adoption decision models are expanded relying Nobes (2006)

researches and test if the demand from internal performance evaluations is a factor

in businesses decisions to adopt international accounting standards under the global

financial crisis situations. It is estimated in the following logistic regression model

(1) after the prior literature (Wu and Zhang, 2009):

Prob [Adopt=1] = Logit (a 0 + a 1 Close_Held 0 + a 2 Labor_Prod 1 +

+ a 3 RET 1 + a 4 ROA 1 + + a 5 Size 1 + a 6 Lev 1. +

+ a 7 Growth 1 + a 8 Foreign_Sales 1 ) (1)

Where:

Close Held: Percentage of closely held shares at the end of event year

(event year of 2009 for the management turnover and employee layoffs analyses),

Labour Prod: Labour productivity (sales per employee) minus the median

labour productivity.

RET: Annual raw stock return.

ROA: Return on Assets, accounting earnings is defined as net income

before extraordinary items.

Size: Natural logarithm of market capitalization.

Lev: Leverage, defined as long-term debt divided by total assets.

Review of International Comparative Management Volume 13, Issue 1, March 2012 163

Growth: Sales growth, current year’s sales change divided by prior year’s

sales

Foreign Sales: Foreign sales divided by total sales.

The dependent variable Adopt is equal to 1 for adopting firms and 0

otherwise. All the independent variables are measured around event year 0. This

model includes year and industry dummy variables.

We included lagged variables on businesses performance (RET 1 and

ROA 1 ), firm size (Size 1 ), leverage (Lev 1. ), growth (Growth 1 ) on the right-hand

side of the regression model and I expected the coefficients on firm size, leverage

and growth to be positive. I also included foreign sales as a percentage of

enterprise total sales (Foreign_Sales 1 ). I expected these variables to have positive

signs.

The regression results are reported in Table 1. In Table 1 the coefficients

estimates, standard errors, and the marginal effects are reported in columns (1) to

(3), respectively.

Table 1. Logistic analysis of accounting standards adoption decision

Analysis Estimate Standard Error Marginal Effects*

Close_

Heldo

-0.00445 0.0026** -0.64%

Labor_P

rod-1

-0.00005 0.0003 ** -1.08%

RET-1 -0.11341 0.1447 -0.30%

ROA-1 -0.56092 0.7148 -0.31%

Size -1 +0.26595 0.0461*** 4.21%

Lev-1 +1.30047 0.4882*** 1.12%

Growth-

1

-0.28834 0.2021 -0.50%

Foreign

_ Sales-1

+1.20857 0.2301*** 3.08%

(Source: Author’s own construction)

**,*** Indicate that a coefficient is significantly different from zero at the

10 percent, 5 percent, 1 percent levels, respectively (one-sided tests for coefficients

with predictions and two-sided tests for those without a prediction)

*Marginal effects measure the changes in the predicted probability from a

one standard deviation increase from the mean for a continuous variable and form

0 to 1 for an indicator variable with the other variables measured at the mean.

The Close_Held0 has a negative coefficient, -0.00445, and significant at the

0.05 level. The percentage of closely held shares can also vary with business’

incentives to access the capital market as more closely held business may have

lower demand for external capital. This is the reason why the research controls for

various factors related to business financing needs in the regression model.

Volume 13, Issue 1, March 2012 Review of International Comparative Management 164

The coefficient on Labor_Prod-1 is -0.00005 negative as expected and

significant as the 0.05 level. The marginal effect indicates that a one standard

deviation increase in labour productivity reduces the likelihood of adoption by

1.08 percent. Regression has reasonable predictive power with a Pseudo R 2

of

32 percentages.

It was expected that the coefficients on the percentage of closely held

shares (Close_Held 0 ) and labour productivity (industry-adjusted sales per

employee, (Labor_Prod 1 ) variables to be negative, because prior researches

suggested that these variables associated with disclosure incentives have predictive

power for the adoption decision (e.g. Zeff, 2006). The control variables signed that

larger businesses, those with higher leverage, with more substantial foreign sales

are more likely to adopt international standards. We found that Close_Held are

consistent with compensation contracting demands affecting business decisions to

adopt international accounting standards.

The marginal effect suggest that a one standard deviation increase in the

percentage of closely held shares decreases the adoption likelihood by 0,64

percent, or 5 percent of unconditional adoption probability of 20 percent (65/325).

This supports a greater demand for more informative and conservative accounting

earnings due to economic performance evaluations at more widely held by

businesses stimulating to adopt international accounting standards.

Conclusions

This research paper investigates the effects of international accounting

standardisation on management decisions, business performance and economic

environment. As we predicted that businesses face a better need for informative

measures of enterprises performance to facilitate internal performance evaluation,

therefore a higher probability of international standards.

We found that larger firms (those with more leverage, higher market

capitalization and substantial foreign sales) were more likely to have adopted

international accounting standards. Among these firms, lower profits are declared

less frequently - possibly indicative of the quality of earnings management.

Companies which had adopted IFRS also provided higher quality and value

relevant accounting information systems. The results show that those enterprises

which have adopted international standards achieved higher and statistically

significant positive coefficients than those following local accounting rules. As a

further consequence of IFRS adoption, corporate policy and requirements became

gradually more clear and transparent – in the same way as the application and

implementation of the standards became more user-friendly.

Discussions

After the measuring some economic effects of accounting standardisation

on business management and achieving some results the author decided that we

Review of International Comparative Management Volume 13, Issue 1, March 2012 165

need to continue this analysing process using interdisciplinary methods also,

because it can be reach the whole real picture of globalized unified financial

statements. We would like to advise them for researchers and practitioners to

employ these methods and measure their effects on different management

functions.

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