In today’s financial world, many companies rely on globalization to find success. This is no secret, as more and more companies operate internationally. With this in mind, each country has different accounting standards by which the company must follow. This poses a problem for 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 harmonization of accounting standards. This harmonization is defined by “a political process that aims to reduce differences in accounting practices around the world 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 it is not. While there is a clear advantage to harmonizing international accounting standards, there is also a downside. This document will describe the advantages and disadvantages of harmonizing accounting standards.
The advantages of harmonization include providing comparability of financial statements between international companies and countries. This brings many benefits to the companies that operate and to the countries that adopt the standardized rules. The first of these benefits is that it is now easier to invest in international companies. Companies can be easily compared to each other and the risk of investing is reduced. This will lead to more investment and an economic boost for both the country and companies. Another benefit is that emerging third world countries can now adopt the new standards without going through the process of creating 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 practices” (Shift 1). This allows companies to take the money they would have spent doing these different financial statements and invest it back into their company.
As good as the idea of harmonization sounds, there are also some downsides to this concept. The first is the language and cultural barriers of each country. Translating a standard set of accounting principles into each different language would be extremely difficult as each language does not exactly translate to each other. Another disadvantage of harmonization is trying to get all countries to agree to the established standards. As each country believes that harmonization of 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 issues, such as the amount of disclosure. Getting each country to agree would be very difficult. In addition, the adoption of a new set of accounting standards would be expensive for smaller companies in smaller countries that now have to figure out how to adapt to the new standards.
The idea of creating a set of accounting standards for each country to adopt seems like a great idea but, as we have seen, it can also have some downsides and drawbacks. The advantages include creating comparability between the financial statements of companies in different countries, as well as enabling better and smarter 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 achieve. Obviously, it goes without saying that a globalized set of accounting standards would benefit everyone, but creating the actual standards that benefit everyone is the main problem.
Works Cited
Hoarau, Christian. “American Hegemony or Mutual Recognition with Benchmarks?”. European Journal of Accounting 4.2 (1995): 217-233. Premier Business Source. website. November 19, 2014.
Roy, P. Norman. “International Accounting Standards – Why bother?”. Financial Executive 11.6 (1995): 1. Business Source Premier. website. November 19, 2014
Turner, John N. “International Harmonization: A Professional Goal.” Accounting Magazine 155.1 (1983): 58-66. Legal Collection. website. November 19, 2014
