As the countries of the world continue to become more interconnected on a daily basis, increasing globalization is inevitable. Their economies are linked in a web that cannot be undone. Despite this connection, most countries have their own individual set of accounting standards. Currently, it is difficult to compare the financial statements of a company in one country with those of another. As globalization accelerates, the idea of ​​harmonization between the accounting systems of different countries becomes more necessary. Although it is a complex challenge to build and enforce a global set of accounting standards, there would be many advantages. A uniform accounting system would lead to more comparable financial information, encourage international trade and investment, and minimize future economic crises.
Harmonization of accounting standards would allow the financial statements of all companies to be comparable. If all financial statements were calculated using the same standards, it would be easier to compare the performance of one corporation with that of others. It would even be possible to compare the financial statements of a company in one country with those of a company around the world. There would be no confusion for any of the different users of the financial statements because they would all be prepared using the same standards. The promulgation of a harmonized set of accounting standards would make the financial statements of different countries of the world more comparable.
Easily comparable financial statements would help facilitate international investment. Most people are only familiar with the financial statements of their country of residence. Most of the time, foreign financial statements are not created following the same accounting policies. Although the information they convey may appear similar, a proper comparison cannot be made because the numbers were not calculated in the same way. This can make international investing a bit more risky and therefore the average individual is less likely to participate. If a universal set of accounting standards is established, it would increase the flow of capital across international borders. Everyone, from multinational companies to individuals, could easily compare the financial statements of any company in any country. Investors could be more confident in the financial health of a foreign company, and in that case, they would be more likely to invest.
In addition to increasing international investment, harmonization would also have an effect on international trade. Today, companies often choose to buy products and natural resources from other countries due to greater abundance or better prices. However, sometimes the international market for goods and resources can generate disputes and tensions. There are often disagreements about prices caused by using different accounting practices to calculate costs. For example, lumber producers in the US have filed formal complaints against Canadian lumber producers for many years. They believe that the Canadian cost of softwood lumber is too low. This allows Canadian lumber producers to offer their products at a more competitive price, while maintaining a profitable margin. A lower cost gives Canada an unfair advantage in the international market. If there was a universal cost accounting method, both the US and Canada would calculate their costs in the same way. There would be no reason to disagree, and all market prices could be compared more accurately and fairly.
A universal set of accounting standards could help avoid some potential future economic crises. In the past, the inability to fully understand the information in foreign financial statements has contributed to the development of financial crises. One such crisis took place in Southeast Asia in the late 1990s. This crisis began when investors believed that the country could no longer maintain its levels of foreign investment and withdrew their money. The flight of invested capital in Thailand facilitated an economic crisis. A spillover effect influenced investors to withdraw their money from other Southeast Asian countries with similar economic characteristics, including Indonesia. Indonesia, as well as other Southeast Asian countries, fell into an economic crisis despite the fact that their financial information indicated health. If a universal set of accounting standards had been established, there may never have been unsustainable valuations in Thailand. Furthermore, foreign investors would have been more confident in their investments knowing that the financial information was accurate. They could have made better decisions regarding their investments. In the future, harmonization could help prevent such incidents
Globalization makes it necessary for investors and companies to have access to the financial information of companies around the world. It would be beneficial to create and enforce a set of universal accounting standards for each country. Financial information would be more transparent and easier to understand. In addition, the financial statements of companies in any country would be easy to compare. Harmonization would lead to an increase in international investment as investors would have more confidence in foreign financial information. International trade would also be affected, as universal accounting procedures would limit disputes. Finally, future economic crises due to misinformation and confusion could be avoided. Although the task of harmonization is daunting, it is clear that a universal set of accounting standards would have several benefits.
