Globalization and the harmonization of accountingExecutive summaryGlobalization may have started thousands of years ago with the long distance trade that connected Central Asia, China and Europe yet we can safely argue the magnitude of the trade and impact then cannot be compared with what we are witnessing today. At the very core of trade lies accounting which is said to be the ‘language of business’. With the convergence of telecommunications and information technology, and the now ubiquity of the internet this paper seeks to understand one of the few remaining barriers to ‘full’ globalization.
Businesses need a uniform way through which they can conduct, measure and disclose their transactions so that they can be understood by any interested party around the world. This is where the importance of having a harmonized international accounting standard is realized. This paper looks at the concept and development process of international convergence of accounting standards while it also seeks to bring out the major criticisms / factors that could be said to be hindering the progress towards having harmonized international accounting standards. The paper also highlights both arguments for and against convergence of international accounting standards.
Finally possible approaches that could be applied to aide in the hastening and/ or spreading the ‘gospel’ for harmonization of the international accounting standards are outlined in the recommendations section. The paper ends with a strong pro- harmonization conclusion. IntroductionGlobalization is the process of integration and interaction of people, organisations and governments of different countries. It is driven by investment, international trade and supported by information technology. The effects of globalization are manifested through the changes in people’s cultures, prosperity and economic development, changes in political systems, societies and also changes in the environment.
With globalization we have witnessed an increasing volume of trade in goods and services and capital flows as foreign direct investments (Levin Institute 1). As multinational companies, individuals and governments seek to increase their wealth through identification of viable investment opportunities around the globe, the need for developing tools, techniques or methods that will assist in making accurate decisions has arisen. Accounting is the language of business. It is used to communicate the existence and evolution of a business’ financial situation and the performance of its economic entities.
Financial information is a language form, therefore if we are to use it to make decisions on investment or taking up credit it should not only be intelligible but also be comparable. Due to the rise of new business factors, such as the international monetary system and the global economy, businesses need a uniform way through which they can conduct, measure and disclose their transactions so that they are understandable by any interested party around the world (Diaconu 1-2). In brief what we are saying is that for one to accurately compare the performance of two businesses located in different parts of the world one would find it much simpler if the two organizations that he was comparing used a similar accounting system for their analysis.
There has been some effort for sometime now to come up with a harmonized international accounting standard. Presently, the two major accounting standards that are in use are the International Financial Reporting Standards (IFRS) and the United States’ Generally Accepted Accounting Principles (GAAP).
The IFRS are issued by the International Accounting Standards Board (IASB) and are currently in use in approximately 100 countries (including the European Union, Australia, South Africa etc).