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Globalization of business has been with us for many years and, in the main,
has been managed successfully by organizations. This is because many of the
problems have been concerned with practices, not policies, and working
within regulations in other countries. It has not involved changes to the financial
regulations affecting domestic operations. When the issue becomes one of
international regulations and policies affecting domestic arrangements, the
impact is much greater and pervasive.
Undoubtedly, organizations are going to be involved in a significant
amount of work, but it will be gradual. However, the complete and the long term
impact on all aspects of accounting have yet to be realized. The effects
can be grouped under four headings of education and training, professional
accounting bodies, regulators, and companies.
Education and Training
In 2000, the American Accounting Association (AAA) published the results of
a joint research project with the AICPA, the Institute of Management Accountants
(IMA), and a number of international accounting firms. Authored
by W. Steve Albrecht and Robert J. Sack, the report makes a critical examination
and analysis of accounting education in the United States. It is not surprising
that these prestigious bodies were able to agree on the findings of the
research. Their conclusions extend and reinforce previous studies and opinions
expressed in other countries. The main message is that accounting education
needs to change and it needs to change soon.
The authors of the report argue that accounting educators “have spent too
much time resting on our traditions and looking into the rearview mirror when
we should have been teaching for the future.” To reach that conclusion, they
conducted a thorough analysis of the factors that have led to that position.
They also point out that improvements have taken place in some institutions
and offer sound recommendations as to how further change can be brought
about. With the increasing influence of international accounting standards, the
present provides an opportunity for introducing and accelerating change.
Some of the fundamental issues revolve around perceptions of accounting,
held by a number of accounting professors. The method of teaching has been
based on the preparation of financial statements and not their use. Introductory
classes concentrate on the record-keeping aspect under the mistaken belief
that it is both interesting and useful. Students whose career goal is to enter
the accounting profession may find this approach useful, but the majority of
students earning business degrees do not share this goal. They need to be able
to understand, interpret, and use financial and statistical information, as well
as deal with the conceptual issues such as recognition and measurement.
The authors of the American Accounting Association report propose how
this may be achieved. The main points they make are the necessity for an accounting
department to:
• Assess the environment and the programs the faculty faces
• Examine rigorously every degree offered
• Challenge curricula and content from the most introductory course to
the most advanced course
• Consider carefully the pedagogy in every class
The AAA report is applicable to educational institutions in many countries
but it deals with the teaching of accounting per se and does not address
the special needs of teaching international accounting. Such needs have been
energetically debated in international circles. Conferences and workshops
held by the International Association for Accounting Education and Research
(IAAER) constitute a prime force for linking the activities of standard
setters and professional accounting bodies with the concerns of academic institutions
worldwide.
Professional Accounting Bodies
Those who are not accountants find it surprising how fragmented the accounting
profession is in most countries.
At one
stage, professional accounting bodies attempted to secure their position and
to grow by arguing a special skill and knowledge in a particular subdiscipline.
Broadly speaking, this led to the division in most countries between those
who claim expertise in financial accounting and those in managerial accounting.
As businesses and accounting have become more complex and integrated,
some accountancy bodies have established routes to specializations within a
subdiscipline. For example, taxation or auditing has been considered as distinct
career paths for some.
Recently, professional bodies have attempted to differentiate themselves
by making geographic claims. Thus, there are claims to be the main accounting
body in Europe, the largest in the world, or the fastest growing in Asia.
Some, particularly the U.K. bodies, have also added international accounting
as an alternative course or as a freestanding certificate or diploma in their
portfolio. Such a strategy neatly fulfills a demand for knowledge and supports
global ambitions.
Another strategy for growth has been to allow mutual recognition or various
forms of support. Thus a member of one accounting body can be accepted
as a member of another accounting body. This might require taking
certain examinations, particularly taxation and regulatory requirements,
when the qualification is to be used in another country.
This process of formal recognition and other working agreements has, to
date, not resulted in national or international mergers. This is surprising,
since the early twentieth century saw numerous mergers, often with regional
bodies coming together to form a national body. The next logical stage would
be for the accounting bodies in one country to combine to make it easier to
achieve international presence and credibility. We would seem to be a long
way from that final stage but the influence of international accounting standards
is accelerating change, and interest in mergers at the national level has
begun to reappear. Canada and the United Kingdom are currently the main
incubators for mergers, and, if they take place, this development could accel
erate further movements in other countries. To date, however, negotiations
between professional accounting bodies have yet to result in mergers.
It is apparent that there have been two levels of professional accountants
for many years (the general practitioner and the specialist). The specialist is
someone who is a general practitioner and either through experience, study or
examination, has a higher level of specific knowledge and skills. Accounting
bodies have formalized this by having separate streams, interest groups, or
similar divisions. In some instances, courses have to be taken with, or without,
an examination. There are also examples where the specialized qualification
is obtained by acceptance into another professional body. It can be
anticipated that mergers or some forms of mutual recognition agreements
could take place at the specialized level.
National Standard Setters
The future of national accounting standard setters is uncertain as the influence
of the IASB increases. It is evident that there will be a decline or a change
in the focus of their powers and responsibilities. Normally, their authority
comes from legislation that recognizes the accounting standards issued. If international
standards are recognized as valid for the preparation and presentation
of financial statements, the question arises whether national accounting
standard setters are required if the IASB is doing the task.
In the foreseeable future, the response must be in the affirmative. There is
the process of negotiating and managing convergence and meeting the needs
of organizations, mainly small and medium-sized, which at present are not
covered by international standards. The IASB currently has a project on the
standards appropriate for smaller and medium-sized entities. A standard such
as the U.K.’s Financial Reporting Standard for Small Entities (FRSSE) could
prove a useful model.
It is probable that national standard setters will maintain their existence
through various activities on several levels. First, the IASB still has to maintain
an international consensus, and for this it needs national standard setting
bodies. Political and interest groups are very powerful in some countries, and
the IASB will have to rely on national bodies to reflect these and assist in
forming opinion. Certainly, on the identification of issues for standards and
emerging issues, national bodies will play a key role.
The matter of ensuring compliance has also not been addressed. The IASB
does not have an appropriate mechanism whereas some national bodies have
established means for monitoring financial statements. It would seem that the
IASB would therefore depend on auditors, national standard setters, stock exchanges,
and independent bodies to ensure compliance. In addition, the iden
tification of problems after implementation, the operation of standards, and
the need for their revision have to be monitored.
Finally, a major role for national bodies will be in the area of education
and research. This may be conducted either unilaterally or by various coalitions
working on common interests. The research papers produced by the
G4+1 are excellent examples of the progress that can be made, and some national
standard setters are now working together to seek solutions to accounting
and financial reporting problems.
Companies and Accounting Firms
One conclusion from the above analysis is that the main impact on harmonization
of accounting standards will be best managed by companies and accounting
firms. Indeed, for the latter it could be contended that a marvelous
opportunity has been presented for increasing their revenues through consulting
and advisory services!
The argument that these two groups will be least affected is at variance with
popular thinking, which tends to concentrate on organizations that publish financial
statements. The reason for this is that the most immediate, visible, and
easiest impact of international harmonization that can be identified is compliance
by organizations with the standards. In reality, companies have had a long
history and considerable experience in dealing with new and revised accounting
standards. In some countries the national accounting standard setters have issued
a plethora of pronouncements and interpretations in the same year. CFOs
may not have enjoyed the experience, but they have managed it successfully.
Organizations that foresee moving to an international accounting regime
are advised to start making plans early. Much initial planning can be done in
anticipation of regulatory changes, even if these do not finally occur. One immediate
action to take is the examination and analysis of the accounting procedures
and systems. This should reveal any weaknesses or areas where
attention is required in the organization and, regardless of IFRSs, should improve
the efficiency of the organization and its internal control system.
The next stage is to undertake a diagnostic appraisal of how IFRSs, if implemented,
would affect accounting policies. The final stage is to design a
plan for the transition to IFRSs. This should incorporate the following issues:
• The availability of suitably trained staff
• The adequacy of the internal control system
• The work of the internal audit department
• The knowledge of the directors and audit committee about the changes
• The likely impact on any covenants, agreements, and contracts that confo
tain key financial performance indicators, including incentive targets for
employees and managers
Finally, it will be necessary to determine how to manage communications
to various groups involved. There will be an impact on both the staff managing
the current system and the staff needed for the new system. Training may
solve many of the problems, but there may be changes in job descriptions and
these will have to be handled appropriately.
As well as those handling the practical change, it must be appreciated that
financial performance indicators under IFRSs will differ from those reported
previously. Communication must take place with interested parties before
new financial indicators are published. Not only should the immediate impact
be communicated, but it is also important to clarify what may be the long termf
effects on managerial incentives and compensation plans. This may require
explanations of how ROI-based performance bonus and incentive plans
may be affected as well as the renegotiation of agreements with external parties
that are based on financial indicators.
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