Global Convergence Of Accounting Standards: Need, Benefits, And Challenges In Essay.

Report arguing for a single set of accounting standards for worldwide use

Discuss about the Global Convergence of Accounting Standards.

The continued growth of the world economy over the years has been greatly influenced by the increase in the human economic activities around the globe. Some of these economic activities are alike among people from different parts of the globe. For this reason, there has arisen the need for this income formation activities to be monitored or their operations be controlled by policies formulated by a single world-wide body in charge of setting accounting standards. Presently, most of the accounting standards in the world differ from country to country. However, the idea behind international convergence and harmonization during the formulation of accounting standards is to enhance comparability between business entities from different countries around the globe. This report clarifies the need for the world business entities to have a single body regulating and controlling operations, the challenges that will come up due international convergence and harmonization in establishment of world accounting standards. This report also highlights the possibility of success on the move to have convergence in setting accounting standards for the world’s business community.

The decision to move to a single set of global accounting standards would come with several positive implications to the world’s business sector. Since the modern economy depends on the bilateral transactions, world entrepreneurs are always seeking to pursue diversification and exploit all the gaps in the world market. World business communities no longer depend on the investment opportunities around them; there is always a yarn to explore new business ideas globally. Currently, a business entity looking to tap global market will have to comply and have to operate under a completely new kind of set accounting standards of the country or countries it wishes explore their market. Apart from these creating unwanted hectic procedures, the business may also incur extra costs in terms of compliance in order to meet set of requirements in the new market (Committee 1999).

Having universal governing regulations would be a solution in this situation. In a business environment where all the players will be operating under the same type of regulations, a company can think of expansion and expand its market share to new markets without necessarily having to undertake specific procedures so as to allow its operations in the new market.  This will save the time and financial resources for carrying out the expansion procedures. Furthermore, it will also trigger motivation for world enterprises to seek their markets globally without much strain (Philips and Sui 2007).

Report critically outlining challenges facing single set of accounting standards for worldwide use

As the international accounting standards board (IASB) continues to emphasize on the international convergence on accounting standards and focus on the issue of ensuring their quality despite the country in which they were formally based. This can also be beneficial to investors. Considering most investments are made on the basis of the accuracy of information about a business idea, having financial standards in place to regulate businesses globally will be a step to place investors at a better position to  understand how the market is operated and which type of market can work perfectly under the type of convergent and harmonized financial standards. Global Convergent accounting regulations being a move to enhance comparability of the financial information across all world companies, this global comparable financial information will not only help the investors to make well informed decisions but will also be a basis to increase the rate of tapping across the border business opportunities by investors (Collins 2011).

Furthermore, under such a system, bodies monitoring the implementation of the financial standards nationally will also stand a better position in acquiring information about the market participants. The idea of having a single set of standards for international purposes helps place all the businesses globally under single watch. This way the international body in charge of the setting and administering of the standards and its respective branches at national level in every country will be able to easily share information. The national regulatory body can then easily acquire information about the participants exploring its markets as the confusion that comes up with the idea of trying to understand different accounting standards from different states around the globe is greatly cut down (Beke 2013).

When all companies around the globe are controlled by the same accounting regulations, it generally implies that auditing of the financial records will not differ much between companies. In this case there will be a move by international auditing firms to standardize training among its personnel. Standardized training will be able to create a platform where all certified auditors are well conversant to auditing different financial information from different business organizations professionally. There will be a resulting case scenario where by the auditing personnel are able to do audits on a range of companies around the globe while the respective business firms are assured of the better quality in the case of hiring the audit personnel (Berger 2018).

As indicated earlier, having a single set of regulations for all the world market players will make them have the capability of tapping investment opportunities equally depending on their own financial ability. This will create a favorable business environment for all the competitors in the market as they all stand an equal chance to explore new markets and grow their income formation methods (Mirza and Holt 2008). Apart from the competition in terms of competing to get the markets attention on their individual products, the business entities also have the same capability to seek international funds for investment reasons. As a result, there will be improved effectiveness when it comes to competition for funds from international organizations supporting business by advancing loans (Sepe, L.Tomassini, & Ed.McGraw-Hill, 2015)

In as much as the international accounting standards board (IASB) is trying to achieve its goal of having the world market players under one regulatory system, the positive impacts it will create on the business environment are identifiable but there is also the possibility that the step being taken will experience some shortcoming on the other hand (Mohammadrezaei, Banimad, and Saleh 2013). To begin with, considering every state has their own accounting standards, this financial regulation often varies sometimes sharply due to the complicated nature of some of the financial standards. This situation has brought about   difficult in terms of coming to an understanding globally on the single set of accounting standards to embrace by all market players. Further differences in terms of economic environments, regulation administration institutions and even local capital markets have also posed a big challenge for the global convergence of accounting standards (Efobi, Nandi, Iyoha and Global 2016).

Also, among other challenges deterring the success of global convergence of accounting standards include high costs of implementation global system. On acquiring a set of agreed upon global accounting regulations that are supposed to be unbiased and equally favorable to all the market players. The respective countries in agreement with the stipulated regulations move to the implementation stage which involves setting up the relevant institutions and employment of appropriate personnel charged with the responsibility of ensuring the implementation and conformity of all market participants to the agreed accounting standards. However, this process will definitely turn out to be a bit costly because it requires the necessary financial support by the government. Monetary funds will be required to put up structures and cater for the salaries and wages of the employees working in the institutions alongside all the other expenses that can be incurred in the day to day running of the accounting regulation institutions (Mackenzie 2014).

In addition, the tax laws vary greatly from one country to the other. Since this is supposed to be an agreement between all the different countries, the tax-oriented nature of some of the accounting standards of some states can bring about some hindrances on the huge global move. Countries with financial regulation of such nature consequently end up limiting the implementation to only a few companies (Taub 2013). Since global convergence accounting aims at creating equal opportunities for the business enterprises to access the market, a move by some states to allow only a few companies to operate does not work well with the objective of the International accounting standards board (IASB) to unite the whole globe in terms of regulation of business activities (IASB 2009).

Also, among the challenges there is the issue of inadequate training, where by as the program is still not much familiar to many. There is still more need of establishing a well-designed course programs for the personnel interested in the global convergence accounting standards program. This will serve to ensure there is enough future supply of a skilled labourforce to work in the sector. These will also secure the future of the world accounting standards program because with professionalism in the system there will be efficiency in the delivery of services. The professional accountant is supposed to deliver services in terms of a well-designed model of creating the single set of international accounting standard that will ensure smoothness and above all equal chances of exploring the market by the business enterprises. A case study currently explains that the objective of having well-trained and fully professional personnel for the world accounting standards program to deliver equality and the desired level of service is not yet fully a success (Pounder 2009).

Another challenge could also come up where by, despite the fact that the international accounting standards board (IASB) will try to achieve its objective of a well-managed world market with opportunities for all market players who are guided by single set global accounting standards. Some of the market’s players that are the investors and other entrepreneurs may still be cite the issue of not being satisfied with the accounting standards governing the market. In addition, the creation of a single set of global accounting standards to oversee the running of market players may also pose as an administratively unacceptable challenge to the states sovereignty. Since countries vary, are different economically and have their own strengths and weaknesses. Some countries may not embrace the issue of transparency into some of their matter (Katz, 2014)The main reason for not complying with transparency by some states would be because, a look into some environmental, cultural and economic weaknesses of these states would mean negative to the level of investment and may bring about losing investors with the thought of investing in the affected countries as the shortcoming in the affected states may affect the investors decision on the preference of the challenged country. (Deegan & Unermann, 2006)

The feasibility of the international accounting standards board’s goals can be evaluated from different points of views. From an institutional point of view, Institutional theory mainly looks at explaining the interaction between the organization and the business environment. It also explains that, the legitimacy of an organization greatly depends on the business environment because organizational legitimacy is in most cases compromised by the business environment. (Dimaggio & Walter, 1983)Having a single set of standards worldwide will in some way affect the business environment for all the market players globally. The effect on the business environment will be in terms of extensive exploration of the market gaps and opportunities by market players, the business environment will also experience a lot of diversification and investments from the existing and new market players, Market players existing in the business environment will also enjoy the ability to compare financial statements and make upright decisions under the single accounting standards. The above mentioned changes in the business environment can be threatening forces to the institutional legitimacy of competing market players that do not operate under the single accounting standards. (Luzi, Daske, Luez, & Verdi, 2008)

Institutional theory further explains that, threatening forces to institution’s legitimacy consequently result to the management of the respective organization to find ways to maintain the institutional legitimacy. In a move to maintain organizational legitimacy, the management often goes for the idea of deciding on the partial favorable between the threatening forces in the organizational environment. The motive of this idea is often to help the respective organization maintain legitimacy and most importantly, help the organization adapt to the changes in the business environment. (Marcquis & Tilscik, 2016)

Since the International accounting standards board’s single set accounting standards are meant to have definite implications on the general global business environment, majorly positive implications in this case. All major market players from countries that will not be operating under the single set standards will have a feel of the changes in the market environment. Considering all the advantages that will accompany the adoption of international financial reporting standards by a business firm like easy comparability and accuracy of financial statements, some business organizations will definitely have an upper hand in the business environment in terms of operating in the market efficiently. (Luzi, Daske, Luez, & Verdi, 2008)

Due to the advantages experienced by the market players that have adopted IFRS, The business firms from countries that have not yet adopted IFRS will have to find a way to adapt to the threatening forces in the business environment as explained by institutional theory. More firms and states will therefore move to adopt IFRS so as to operate in the market with equal advantages. The plan to have a single set of accounting standards for the globe is therefore achievable.

Conclusion

Since globalization is speeding up in the current era. There are so many business activities all around the world with companies and other business enterprises showing no sign of stopping on global investments. With the full realization of the single set accounting standards to govern all the business ventures globally, the international accounting standards board (IASB) would have helped so much in terms of pushing the world’s business sector and economy as well to the next level of growth and development. Despite the challenges that will come up due to the onset of the world’s transformation to having a single set of global accounting regulation system. There will be more positive implications in terms of what the general world business community will have to gain from global agreement. For as long as the global institution in charge of global convergence accounting standards is able to find appropriate measures to curb the challenges involved in the process, there will be some quite desirable outcomes that benefit both the businesses and the consumers in the world market. Finally, on feasibility of the IASB’s accounting set target, the complete adoption of the International financial accounting standards can be achieved but this will be realized after a significant time period.

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