Business Accounting and International Standards - Assignment Example

Business Accounting and International Standards Introduction Accounting standards are very important in that they make it possible for standard financial reports to be produced. This makes it possible for the profession of accounting to be standardized and therefore information sharing among parties and different stakeholders becomes easy. This need for a standardized accounting procedure has led to many standardization bodies to be founded in order to help in achieving standardization (Delaney, 2010). All countries in the world have their standardization body. However, according to Edrey (2011), as time has gone by, the requirement for a central global standard for accounting has emerged in order to close the gaps that exist among the many national standardization bodies. The IASB was therefore formed in 2001 as a way to consolidate the worlds accounting standards with the intention to make them more accommodative of all firms regardless of where they operate from. Accounting standardization are every important in not only allowing the generation of standard accounting and financial reports but also in increasing transparency (Needles, 2012). Accounting and financial report play a big role in the economy in that they are used to make useful economic decision both by the managers of a particular firm and by many other stakeholders who are not directly involved in the management of the firm. Standards make it easy for outside stakeholders to access this information in a form that they can understand and also have faith in such reports. Lack of such standards can lead to disaster. A good example is the Enron firm which was an energy generation firm that was based in Texas. Prior to its bankruptcy in 2001, the firm had been using unfair and substandard accounting methods to make its book look good and therefore attract many investors (Sterling, 2002). Enron was able to use this method to lure so many investors, fool the analysts at the NYSE and also to fool the regulators. In fact, Enron management was the main supporters of the mark to market method of accounting which came to be seen as an unrealistic way to do accounting. It used this as a way to book future (prospective) profits from assets. Because it was performing so well (at least based on its fabricated accounting books), it was able to push for this kind of accounting, to the point of even pressuring the IASB to accept this as a standard of accounting. This later led to disaster and the firm had to finally collapse. The IASB was founded as an attempt to create accounting standards with which firms can generate financial information that is useful not only to the managers but also to many users who are not within the firm’s management. These external users are many and have varied needs with regard to the accounting information they want about a firm. IASB was founded in December 31st with the intention to create accounting standards that can be used across the board and across the international borders as a way to provide standardized accounting and financial information. IASB standards have numerous advantages that any firm can benefit from when they apply these standards. To international investors As Kimmel (2009) says, prior to IASB, one challenge that international investors would face was the existence of too many accounting standards around the world. This variance in the standard meant a number of issues that were necessary to be addressed. An accounting standard determines the meaning and the implication of the financial information that is going to be produced (Frattini, 2007). As a result, an investor in one country may look at financial reports produced by a firm in another country and be unable to understand what it means in terms of future prospects of the firm. Thus, the interpretation they would make based on the information they would get form these international firms may mean something that is different. According to Roberts et al (2008), since these investors make their investments in such firms based on the financial information they get, they in most cases would make the wrong decisions if the wrong standards are used. However, with the IASB standards, investors are able to have information that is standard and whose interpretation in terms of what it means for the firm is easy. This means that the information that firms produced through the IASB standards is uniform regardless of which country they operate in. Investors can therefore understand this information easily and make the right decision with regard to investing or not investing in such a firm. Government The government is also interested in financial information that a firm produces. Government is interested in financial information for tax purposes and sometimes for regulatory purposes. Before the IASB standards, governments would find it hard to deal with international firms because these international firms would be using a range of accounting standards for each of their international regional offices. Consolidating this accounting information for tax purposes would be a difficult task that in most cases the government would not be able to have a clear way to determine how much tax is owed (Holgate, 2009). The government would also be unable to determine on some regulatory issues on some firms. With IASB standards, the government is able to have much more control. Lawyers Lawyers also require financial information from firms in their various operations. In cases where a firm is embroiled in legal suits, the lawyers of both sides may require the financial information that is going to be useful in their legal argument. As Loughrey (2011) says, these layers want information that is standard and that is not subject to unstable interpretation. One of the things that the IASB endeavors to achieve is to create accounting standards that help a firm in producing accounting information that is easy to analyze and also that is not subject to manipulation. Lawyers need this kind of informing because of a number of issues. First, the practice of law is said to be a very specific endeavor that leaves no room for unspecific issues. This means that when a lawyer presents facts and information in a court of law, they want to be sure that this information is not subject to change based in circumstances. IASB endeavors to create standards that can help firm in producing this kind of information. Competitors Competitors are also interested in financial information of a form as a way to gauge their competition. They want to know that the financial information of the firm is not biased and that it has been prepared to standard. The IASB helps in creating standards that are not subject to manipulation. A good example of an accounting standard that is subject to manipulation is the mark-to-market accounting. Firms can use this kind of accounting to make their financial reports to be more appealing than the reality and in this case, it can be a dangerous affair for the competitors who may be comparing their books to such a firm. A good example of this kind of accounting dishonesty is the case of the fallen energy firm in US called Enron. Enron was able to introduce this kind of accounting to its books and the firm was able to convince its investors, competitors and analysts that the firm was doing so well while in actual sense they were just being creative with their accounting books. IASB tries to make standards that make this kind of accounting practice to be impossible and therefore make it harder for the firm to have creative accounting processes that make their books paint a different picture than what is the actual scenario. Analysts Analysts play a major role in the economy because their analysis about a specific firm determines how investors are going consider investing in the firm. For the external business analysts to be able to do the analysis of a firm, they need to be able to access useful accounting and financial information of such a firm. They need consistent information that can be used as a way to gauge the firm in terms of how it is likely to perform in the future. As such, they need information that is not subject to manipulation. Again, the Enron case here also is a very good example of how accounting information can mislead the analysis if they get the wrong accounting information. In Enron case, many analysts in the New York Stock Exchange were convinced that Enron was doing so well and so gave it a positive review. The firm had managed to carry out accounting procedures that were so creative that for a long time that they had managed to fool everyone that the firm was doing so well. IASB intends to make the accounting standards so standard and so easily understandable that such a scenario should never happen again. Conclusion IASB is the first global accounting standardization organization that attempts to standardize the global accounting practices. This is important in a world that is getting more global every day. As Roberts (2004) says not only do multinational firms want a standard accounting procedure so that they can have an easy way to reconcile their books from their regional offices around the world, but it is also necessary to make sure that there is a recognized way for accounting procedures that can produce financial information with relevance and usefulness to all users, including non managerial users such as analysts, government, investors etc. This standardization is important in making sure that users of this information are not provided with misleading information by firms. A look at a number of big multinational corporations that failed due to the use of substandard accounting standard indicates that there is a need for a way to standardize the accounting practices. When such standards are ignored, or when they don’t exist, it leaves a risk that so many stakeholders will be affected negatively. For instance, investors are more likely to lose their money (like in the case of Enron) and government is likely to lose revenue and also fail its role as a regulatory force. This indicates why it is necessary for all the businesses in the word to be able to conform to a standard that is internationally recognized. However, it has been made clear that adopting these standards across the world is not going to be an easy thing because many firms prefer to continue with their old practice. This then mean that it is necessary for these organizations to be involved in the activities of the IASB in order to help in the adoption of the IASB standard to be easier for them. Reference list: Delaney, O. (2010). Wiley CPA Exam Review 2011, Financial Accounting and Reporting, Volume 3. Hoboken, NJ: John Wiley & Sons. Edrey, Y. (2011). Tax Law and the Mediterranean Area. New York, NY: Marco Greggi. Frattini, G. (2007). Improving Business Reporting: New Rules, New Opportunities, New Trends. New York, NY: Giuffrè Editore. Holgate, P. (2009). Accounting Principles for Non-Executive Directors. Cambridge: Cambridge University Press. Kimmel, P.D. (2009). Accounting: Tools for Business Decision Making. Hoboken, NJ: John Wiley & Sons. Loughrey, J. (2011). Corporate Lawyers and Corporate Governance. Cambridge, UK: Cambridge University Press. Needles, B. (2012). International Financial Reporting Standards: An Introduction. London, UK: Cengage Learning. Roberts, C.B. (2004). Developments in Financial Reporting by Multinationals. New York, NY: E. Elgar Publications . Roberts, C. et al. (2008). International Corporate Reporting: A Comparative Approach. New York, NY: Prentice Hall/Financial Times. Sterling, F.T. (2002). The Enron Scandal. New York, NY: Nova Publishers. Read More