Harmonization of Accounting Standards

In this article we will discuss about the difficulties in harmonization of accounting standards with suggestions.

Difficulties in Harmonization of Accounting Standards:

Many difficulties have been faced in the harmonization programmes commenced by international agencies, especially by IASC (now IASB) which are as follows: 

1. Difficulties in the Development of Standards:


The main difficulties in establishment of an internationally uniform system of accounts and the standardisation of accounting procedures are the following:

1. Provincialism:

Many countries hold provincial outlook in many spheres. As long as people believe that their own views are superior to those of others, known or unknown, it is hardly possible to reach agreement on a common solution. Although this provincialism is absent among the (IASC) Board members, it is present very often in their countries.

This provincialism is found greatly in developed countries, or countries where accounting is most developed. Such countries are reluctant to change their views and listen to others. Arpan and Radebaugh believe that “nationalism, egoism and pride also impede progress: the French would like to have the new global system patterned after the French System…the American, the American. Each country believes its system is the best and is reluctant to adopt a system it perceives to be inferior or unsuitable”.

2. Differences in Economic and Social Environment:

Harmonization is adversely affected by the differences in economic and social environment, in which accounting has a role to play. In different countries, there is a different view on what is, or should be, the primary purpose of financial statements. In some countries, and the USA is one of them, the investor and his decisions are considered to be most important. In others, such as Germany, it is the creditor.


In France, the information needs of Government play a major role. In some countries, it is believed companies have a public accountability to a great variety of interest groups. These differences in purposes which are in the minds of accountants lead to different views on what is appropriate accounting treatment. Some operate from an environment of extreme conservatism, others from an environment that borders on creative accounting.

Fantl argues that “one of the chief and least recognised misconceptions which occurred in international accounting is the assumption that accounting objectives are uniform”. Fantl meant that if we are going to achieve harmonization, we can only do so when all countries have the same objectives from their accounting systems. It is only if accounting objectives are compatible with one another that there is any real prospect of arriving at meaningful common standards.

As McComb points out, “if any two national accounting models are irreconcilable, then either one or both must be fundamentally changed if common standards are assumed to be a primary goal”. Chetkovich states “it would make sense that we seek to define international accounting objectives before we attempt to define international accounting standards. Common objectives must necessarily derive from social and economic environments that are similar and thus create similar needs”.

3. Diverse Accounting Practices:


Another difficulty is that at the present time, there are wide divergences in world-wide accounting practices. Each practice may have its own justification and we’ll be understood in the national environment. Obviously, it is the task of IASC to try and narrow these areas of divergence. However, variations in accounting practices hampers harmonization. IASC is operating in an environment of conflict between ideals and practicality.

The IASC has, first, to outlaw practices that are clearly misleading or allow management too much latitude; and then should try to eliminate options that do not contribute to fairness and usefulness in financial reporting.

4. Gaps between Developed and Developing Countries:

In many areas, developing countries differ from those of developed. In fact most developing countries had little chance to evolve accounting systems which truly reflected the needs and circumstances of their own societies. Their existing systems are largely extensions of those in developed countries.


In this situation, the benefits of their being more deeply integrated into systems that predominantly suit developed countries become questionable. Briston comments that instead of recognising the inadequacies of the UK and US system and attempting to make it more relevant and integrated, UK and US accountants are gradually imposing that outmoded system upon developing countries.

On the contrary, developing countries must create their own systems before this adverse influence has reached an irreversible stage. Briston has studied the spread of western accounting ideas throughout the world. British influence is very long-standing in many old colonial countries. He points out that once a reporting system and nucleus of an accounting profession has been established, it becomes very difficult to modify the system.

The result is that these countries have adopted accounting principles and systems which originally evolved to meet the needs of UK capitalism. Enthoven points out that we must not assume that what might be good accounting for the developed countries “will automatically be economically relevant and good for the emerging nations and process of development”.

Samuels and Oliga argue that differences between countries can be so great that the problem of appropriate accounting standards can assume vastly different conceptual meanings and contextual significance from one country to another. Bailey makes a similar point and says that there may not be an accounting model universally applicable in all countries.

Critics of harmonization in the developing nations also argue that these (developing) countries have few indigenous private investors. Economic activity is, to a considerable extent, in the hands of government agencies, and financial information should be geared primarily to their needs rather than to the needs of private investors. When it is said that financial reporting should be useful to investors, this goal is primarily oriented towards indigenous investors.

2. Difficulties in Enforcement of Standards:

After establishment of international standards, difficulties may emerge at enforcement level. These obstacles have to be overcome in order to achieve adoption of and compliance with International Accounting Standards.

Such difficulties are listed as follows:

1. Tax Laws:

Harmonization faces problems due to differing tax laws. In many countries of the world, enterprise are required to draw up one set of financial statements only serving both tax purposes and financial reporting purposes. Government has an overriding interest in profit as computed for fiscal purposes; tax laws often prescribe in detail how profit should be measured.

In this framework, it is unavoidable that business is more concerned about tax saving than it is about accurate determination and reporting of financial performance. And equally unavoidable is the consequence that International Accounting Standards are judged primarily by these tax implications, the government opposing standards that would reduce profits and business opposing standards that would boost profits.

Due to these reasons local standards and international standards differ and, where they differ, local standards prevail and international standards tend to be ignored.

Clearly, we cannot hope for improvement and harmonization of financial statements unless all ties between tax accounting and reporting to the public are cut completely. This would be the single most important contribution that governments are able to provide to the cause of international harmonization.

2. Disclosure Laws:

Another difficulty is, again, the law—not the tax law but laws regulating financial reports to shareholders and the public. In some countries, this law provides great details both on disclosure and on measurement. In this environment, the notion of ‘true and fair reporting’ loses importance and the primary purpose of preparers and auditors comes to comply with law and regulations.

For IASC, this situation means that in such a country International Accounting Standards will not be adopted unless they are incorporated in the disclosure laws. This requires changing the relevant law which is itself a tiresome and time-consuming task.

In most countries lawmakers are not leaping to their feet to do this job because company reporting is not a hot political issue. And if it is, even worse, because then politicians will handle the issue with strong political overtones.

3. Existence of local standards:

Difficulties may evolve from the activities of the national standards-setting bodies. In more and more countries, accounting standards have been found established by the profession or government agencies or jointly by both.

Seen on the national level, this may have merits. But seen from an international viewpoint, problems arise. If many countries have detailed rules on many subjects, there is bound to arise conflict between these national systems. This is unfortunate for international enterprises who address their reports to users both at home and abroad, and it reduces the credibility of their statements abroad.

At the same time, once there are national standards, it appears to be rather difficult to adopt them to international consensus. As soon as there is a national standard, national positions become entrenched, and it is hard to exchange that position for one that is considered second rate.

Apart from that, national standards-setters have to weigh carefully the feelings and environment prevailing in their own countries. That means that often standards-setters are unable to compromise even if they would wish to do so.

4. Competition among International Standards-Setting Agencies:

There is found a potential competition between international standards-setters. As it is clear, apart from IASB, the UN and the OECD are now engaged in the field of company reporting, especially by multinational enterprises.

OECD has made it clear that it does not want to go into setting of standards, but wishes to restrict itself to clarifying the guidelines for disclosure of information, and to energizing in some way or other, the process of international harmonization.

In the UN, on the other hand, it is quite clear that a number of countries wish the UN to develop and issue enforceable standards for reporting by multinationals. In such situations, there is a serious danger of incompatible and conflicting sets of international standards. It is also rightly said that the UN exercise has strong political overtones.

5. Unhelpful Corporate Attitudes:

Standards are basically meant for business enterprises. They are expected to comply with International Accounting Standards, and if they do not, they are an obstacle in getting compliance.

Amongst the enterprises that are reluctant to formally adopt international accounting Standards, two broad categories can be made:

(a) Those whose affairs are purely domestic, and that hold the view that international standards are none of their business. The vast majority of companies in countries of the world belong to this category.

(b) Those whose affairs are international, that recognise there is a need for international harmonization, but are hesitant to back IASB as long as they are not sure IASB is a winning horse.

On the other hand, it should be noted that many companies do comply with International Accounting Standards for the simple reason that these do not require anything that is not already in their national standards.

3. Other Difficulties:

There are many other difficulties which hinder the efforts towards international harmonization. These difficulties primarily relate to international standards-setting agencies. Daley and Mueller has analysed country representation on international standards-setting bodies.

Of the countries who are represented on at least three of the bodies, seven are western developed nations, only one is from Africa, and none is from the Middle East. They point out that because of the ‘western bias’ of the IASC many of the developing nations criticize its work for ‘being insensitive to their situation and needs’.

Daley and Mueller conclude that if private sector standards- setting is to continue as at present, with no enforcement powers, then it must become more internationally oriented. That is, more nations must be represented on the international committees than at present; it is then more likely that statements will be acceptable.

Mueller gives three major reasons why the IASC may be viewed as an ineffective and inappropriate agency for setting international standards. First, there is the potential conflict between the standards set by IASC and those set by the national bodies. Second, in many countries accounting standards need to be incorporated in law and set by political procedures.

Third, there is no political and diplomatic recognition of IASC by national governments or international agreements. The IASC does, however, participate in the discussion on standards by the appropriate UN and OECD groups.

Burggraaff discusses the political pressures on IASC. He differentiates between political pressure coming from various interest groups in the private sector and political pressure from government bodies, and government agencies who are interested in international standards.

The pressure that the various interest groups, from time to time, bring on the LASB, places the Board in an uncomfortable dilemma. The pressure means that the committee decision-making process either has to be based on consensus and compromise or on resorting to underlying concepts.

It is also argued that the IASB (IASC) has no real authority to implement its recommendations and has to rely on the best efforts of individual members which most often are not the accounting standards-setting bodies of these countries.

Suggestions for Increased Convergence and Harmonization:

There is no doubt that harmonization of company annual reports would be beneficial to all countries of the world and would achieve the goal of comparability in international financial reporting. Although many international agencies and bodies are working towards harmonization in financial reporting, the International Accounting Standards Board (IASB), earlier IASC, plays (and would play) an important role in harmonization programme.

Some suggestions have been given here to enable harmonization in published company annual reports at the international level:

1. Enlarge representation on IASB:

At present, IASB is seen by many as an organisation heavily influenced by Western accounting profession. The effective representation of third world countries is not found in IASB. The IASC has to be ‘International’ in real terms. That is, more countries, especially the developing countries, must be represented on the IASB than at present. In that situation IASB’s statements will have world-wide acceptance and compliance.

2. Avoid political pressures on IASB:

Generally political pressures on IASB come from various interest groups in the private sector and government agencies who are interested in international standards.

Developing useful international standards requires that all kinds of pressures from any quarter should be eliminated in the decision- making process applied in the development of international standards. If international standards are the result of pressures exercised by vested interests, the IASB will not be able to function in an objective and purposeful manner.

3. IASB should publicize standards developed by it and for this should try to get support of the accounting profession, member countries and corporate managements all over the world.

IASB should encourage member bodies to adopt IFRSs or phrase or rephrase their rules in such a way that they are in line with IFRSs.

4. Each country should pass legislation to the effect that as and when an international standard is set or amended by IASB, local standards, if they exist, should be brought into line; if local standards do not exist the IFRS should be adopted. Legislation of this character would enjoy the necessary degree of flexibility.

5. UN should recognise IASB as the body qualified to set up international standards. The UN should then use its authority to hasten universal acceptance of such international standards. IASB should be formally recognised by governments as an international standards setting body.

6. The governing bodies of the accounting profession should formally acknowledge that it is their task, among many others, to apply disciplinary procedures when bad professional work, including the non- observance of standards, is brought to their notice.

7. In each country the local stock exchange should cooperate in taking appropriate action against companies which failed to comply with standards.

8. And finally, continuous research is needed to ascertain why the differences arise and to determine what will be the economic effects of some countries changing practices.

We should study the reasons for the continued existence of national differences in accounting principles and practices. Emphasis should be upon investigation, analysis and education rather than upon undue haste in speeding the process of promulgating further International Accounting Standards.

Convergence and Harmonization, in fact, can only be achieved if there is mutual international understanding both of corporate objectives and rankings attached to them. The research results of various studies of economic effects of market reaction to pronouncements can provide feedback to policy-makers which will assist them in their deliberations.

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