The following points highlight the seven main beneficiaries of harmonisation of accounting standards. The beneficiaries are: 1. Growth in International Business 2. Globalization of Capital Markets 3. Investors 4. Multinational Companies 5. International Auditing Firms 6. Developing Countries 7. Other Interest Groups.
Beneficiary # 1. Growth in International Business:
The main stimuli for harmonisation comes from the enormous expansion that has taken place in world trade and in international investment since the end of World War II. As international business and investment multiplies, accounting’s international dimension broadens, international financial reporting has become more important as the tool of communication among businessmen, entrepreneurs, financiers and investors.
At the same time, variations are evolving in accounting principles, audit practices, financial statement presentations, and professional standards. If accounting reports are to become a universal means of communication, action must be taken to harmonies world-wide efforts to meet the international users’ needs.
John C. Burton at 1980 Proceedings of Arthur Young Professors Round Table on “The International World of Accounting & Challenges and Opportunities” remarked:
“…today, as more business is done internationally, as more capital crosses borders, as more investors seek investment opportunities in other countries, as more managers of international business attempt to better understand performance of foreign subsidiaries, the problem of diverse accounting standards becomes more acute…. There is also the argument for a common need to communicate—a common language problem that suggests that it is useful if we talk in the same terms. The world is too small today to have national boundaries create many bases for totally different principles of economic environment.”
Robert L. May, President of International Federation of Accountants, in his speech (1986) delivered at Australian Accountants Centenary Congress, Sydney, observes:
“There is a greater need than ever before for comparability of international financial data. Government, lenders, businesses, shareholders everywhere—they all need information in a form that is reliable, that is understandable, and that will encourage the flow of international investing rather than inhibit it. In a world where finance and trade are international, it seems utterly incongruous that the accounting standards are not. In a world where the world ‘multinational’ is almost a cliche, it seems strange that it has had so little application to accounting. In a world where national economies are so linked together that crisis in one can send shock waves rolling into every corner of the universe, it seems entirely against logic that accountancy professionals must heed the out-of-date doctrines of separatism.”
Beneficiary # 2. Globalization of Capital Markets:
Nowadays, investors seek investment opportunities all over the world. Similarly companies seek capital at the lowest price anywhere. The problem that this creates for investors, of course, is that accounting differences can completely obscure the comparisons and other analyses that they must make in order to assess various investment opportunities.
Paul Volcker, Chairman of International Accounting Standards Committee (IASC) Foundation Board of Trustees, said:
“If markets are to function properly and capital is to be allocated efficiently, investors require transparency and must have confidence that financial information accurately reflects economic performance. Investors should be able to make comparisons among companies in order to make rational investment decisions. In a rapidly globalizing world, it only makes sense that the same economic transactions are accounted for in the same manner across various jurisdictions.”
Beneficiary # 3. Investors:
A strong case for increased harmonisation can be made from the viewpoint of the users of accounting and financial information mainly the investors who wish to invest outside their own country, that is, both transnational companies investing directly and individual investors wishing to invest part of a portfolio of funds.
If comparability of accounting standards helps economic decision-making and the efficient allocation of economic resources within a nation, the same can be said about economic decision-making and economic resource allocation on a world-wide bases.
Without world-wide accounting, and auditing standards, it is difficult, if not impossible, to assess the relative merits of alternative investment opportunities, or to make valid comparisons of the financial performance of companies in different countries.
Harmonisation, thus, could lead to improvements in the allocation of financial resources. It would help to avoid confusion and possible misallocation of resources by bringing uniformity in accounting standards and practices. Cummings and Chetkovich comment that “it is obvious that there is a need to harmonies accounting and reporting standards”.
They recognise that it “may not always be possible to achieve universal acceptance of a single method of accounting and reporting, the fact is that the promulgation of an international standard reduces the alternatives available under varying circumstances and that the required disclosures facilitate understanding and comparison”.
Although international harmonisation would make financial statements easier, with not so many adjustments being required, it has also been argued that international investment and business has and still does go on without standardisation, and harmonisation. It has, in fact, not been found that the variety of systems really act as a restraint on international investment and international business.
Beneficiary # 4. Multinational Companies:
A major force in the movement toward international harmonisation has been the economic self-interest of multinational companies. Multinational firms are the preparers of financial information.
With diversity in accounting standards from country to country, these firms face a myriad of accounting requirements from the countries in which they operate. The burden of this financial reporting would be lessened with increased harmonisation which would simplify the process of preparing individual and group financial statements.
Multinational companies would benefit from harmonisation on the following counts:
(a) Consolidation of overseas subsidiaries would be easier due to harmonisation as financial statements from all round the world would be prepared on the same basis.
(b) Many large companies want to raise money in more than one country and in international markets, and so need to produce accounts which can easily be understood by investors in many countries. For this reason, the World Federation of Stock Exchanges is said to be encouraging the acceptance of international accounting standards.
(c) The task of preparing comparable internal information for the appraisal of the performance of subsidiaries in different countries would be made much easier. Many aspects of investment appraisal, performance evaluation and other decision-making uses of management accounting information would benefit from standardisation.
Management control would be more easily accomplished. The appraisal of foreign countries for potential takeovers would also be greatly facilitated. Multinational companies would also find it easier to transfer accounting staff from one country to another.
Beneficiary # 5. International Auditing Firms:
Another major force in the movement toward international harmonisation was the economic self-interest international auditing firms have in such standards, so that they can sell their services as experts in many different parts of the world. McComb points out that “the thrust of the movement toward the harmonisation of accounting standards on the international level has come mainly from accountants in public practice rather than academic accountants”.
It would make life very much easier for them if similar practices existed throughout the world. Many auditing firms have clients (in the form of subsidiary or branch) operating in foreign countries.
The preparation, consolidation and auditing of these companies’ financial statements would become less onerous if accounting practices were standardised. The international auditing firms would also like to be able to quote international accounting standards to clients, to give them backing for recommending certain ways of reporting.
Beneficiary # 6. Developing Countries:
There is an argument that countries that do not have any domestic accounting standards would benefit from international standards in that it would enable them to adopt a readymade system. They would not have to produce their own, they could adopt (perhaps with some slight modification) the international standards. If this were possible it would of course save them a great deal of time and expense.
Many developing nations do take a great interest in international standards. Nigeria, for example, one of the developing countries who are members of IASC has adopted these standards, and companies over a certain size are required to produce accounts that conform to such standards.
Beneficiary # 7. Other Interest Groups:
One group who it is said would benefit from a greater degree of harmonisation would be tax authorities. They would find their work less complicated when dealing with foreign income.
It must be said, however, that it is taxation rules that are responsible for many of the differences that do exist in accounting practices. Tax is and will remain a national matter. Accounting measurement may be harmonized, but it would need to be recognised that standardised accounting practices may need to be adjusted for national tax purposes.
At the Twelfth International Congress of Accountants in Mexico City in October 1982, John N. Turner, former Minister of Finance, Minister of Justice and Attorney-General of Canada, and first Chairman of the Interim Committee of the International Monetary Fund, cited these advantages of “universally applicable standards”.
“The greatest benefits that would flow from harmonisation would be the comparability of international financial information. Such comparability would eliminate the current misunderstanding about the reliability of ‘foreign’ financial statements and would remove one of the most important impediments to the flow of international investment…..
A second advantage of harmonisation would be the time and money saved that is currently spent to consolidate divergent financial information when more than one set of reports is required to comply with different rational laws or practices…….
A third improvement from harmonisation would be the tendency for accounting standards throughout the world to be raised to the highest possible level and to be consistent with local economic, legal and social conditions”