Pros and Cons of the Implementation of Accounting Standards - Essay Example

Introduction This essay provides an insight into the pros and cons of the implementation of accounting standards and the need for standardisation offinancial reporting in Europe. The debate on the advantages and disadvantages of accounting standards and their effectuation is not new. The consequences arising out of the accounting issues due to the lack of transparency, lack of integrity, lack of disclosure, lack of fair representation and lack of comparability, in the form of incidences such as Enron and WorldCom etc seem to have ignited the concerns on the part of the international community proposing the implementation of accounting standards. However, the question also arises as to whether or not the accounting standards are effectual in improving the quality of accounting information or these happen to be a waste of time and money. The other matter concerns with the need for standardisation of accounting standards in Europe, or in other words, is standardisation the best possible solution to implement accounting standards in Europe. Hence, this essay encompasses the discussion on advantages and disadvantages of accounting standards combined with a discourse on the effectiveness of standardisation in Europe. Advantages And Disadvantages Of Accounting Standards Accounting standards are basically the set of policies and procedures that are commenced by a specific body responsible for standard setting. Apparently, as the name suggests, these standards are set out to direct the recognition, preparation and demonstration of accounting and financial information in a company's financial statements. Fogarty et al. (1994) describe accounting standards as the guidelines the purpose of which is to delineate a procedure to present transactions and outcomes in the company's financial statements. Hence, there lies eminent significance of accounting standards for the purpose of financial reporting, however, there also remain several underlying advantages and disadvantages with different accounting standards. Sunder (1997) propounds that accounting and financial reporting standards serve to be an agreement among all the factors involved in a company's business, i.e., the investors, shareholders and management etc. Under a set of accounting standards, all the companies are bound and expected to act, account, present and report the information in compliance with particular principles. Therefore, the investors as well as the management, both remain aware of the standards to be followed for the preparation and presentation of financial statements. Formulation and implementation of accounting standards connote that there is uniformity of the procedure through which the companies account for various transactions, prepare the reports and present it to the shareholders. If the accounting standards are fair and unprivileged, it further suggests a binding investor trust in the company that all the information presented to him is true and fair devised and displayed under the prescribed standards. This, on one hand, leads to enhancement of investor confidence and on the other, maximises regulation on the companies to present a genuine picture of its position and performance. In short, the accounting standards are meant to enhance both, the investor trust and transparency. Moreover, when all the companies prepare their financial statements in full compliance with the accounting standards, it leads to the comparability between the financial statements of various companies for the purpose of improved decision making. It was this need for transparency, investor protection and comparability that led to the development of International Accounting Standards (IAS) to promote all these factors on international level as a consequence of globalisation. These accounting standards are also meant to serve all these functions, but among international companies. Hence, PricewaterhouseCoopers (2000, p5) stresses that "[...] widespread adoption of international accounting standards will bring benefits to companies and investors. It will help bring down the cost of capital and help companies compete more effectively for international funds. It will enable better investment and management decision-making and will make international capital markets more efficient. It will stimulate economic growth". Watts and Zimmerman (1978) illuminate that there happen to be several users of accounting information having various perceptions and purposes consociated with the financial reporting. Therefore, the standard setters need to investigate into the most useful and beneficial standard for all the users, which becomes rather impossible in certain situations and there remains a possibility of exploitation of these standards in the process leading to their development. This serves to be a major disadvantage of accounting standards. Georgiou (2004) propounds that some participants even exert their influence in the standard setting process so as to drive the decision according to their interests i.e., lobbying. Sutton (1984, p81) refers to lobbying as "all the actions, which the interested parties take to influence the rule-making body". This act of lobbying, if takes place during the accounting standard setting process, over powers all the advantages of these standards. If the standard setting process is driven by a single or specific parties' influence, then they will serve no use of the standard implementation. In such a situation accounting standard setting will, in real sense, serve to be a waste of money and time because it will then meet no ends of investor protection, transparency, integrity and economic advancement. Rather, it will lead to manipulation, mismanagement and deception on the part of a single party abusing the rights of all others involved. Standardisation-The 'Only Way Forward' For European Financial Reporting For a long time, European Union has been struggling to promote comparability and transparency of financial reporting across the Europe. However, there seem to be several hurdles coming in the way of the accomplishment of this purpose. The biggest hindering factor is the differences in accounting principles followed in different countries in European Union. In this era of globalisation, when companies are trading across borders, these differences underlying financial reporting minimise comparability, transparency and thus debilitate investor confidence. Walton et al. (1998) says that international companies and investors, both find it difficult to operate in the presence of national differences prevailing in accounting standards. When European Commission is on the way of integrating all the European countries into one community, these differences serve to be the greatest drawback. Nobes (1994, p1) "... European accounting differences have become increasingly noticeable and damaging. They militate against cross-border investment and, within multinational companies, they hamper the appraisal of performance, the work of auditors and the movement of staff". Hence, in such a situation, standardisation of accounting standards prevailing in different countries within European boundaries happens to be the best possible solution and also the 'best way forward' for further enhanced integration of the community in financial reporting. Choi et al. (1999, p248) refers to standardisation as, "... the imposition of a rigid set of rules which may even apply a single standard or rule for all situations". The standardisation of accounting standards throughout the European Union will lead to the heightened comparability of financial statements of companies belonging to different nationalities. The investors will be provided with relevant and reliable information that will lead to the maximisation of investor confidence benefiting the companies with greater investment. Conclusion It is therefore evident from the above discussion that accounting standards are greatly advantageous to the investors, corporations and the economic state of a country. However, these advantages are very likely to turn into major disadvantages if the accounting standards are lobbied or devised under the influence of one party interests, rather than promoting an interest-balancing approach for different parties interested in the accounting standards. In Europe, distinct accounting principles are being followed in different countries, leading to the debilitation of these standards' efficacy. To tackle this issue, European countries need to devise a set of standards to be followed in each country so as to enhance the integration process. This process is termed as standardisation, which happens to be the best possible remedy for European financial reporting. References Choi, F., Frost, C. and Meek, G. (1999), "International Accounting", Prentice Hall, London, p248 Fogarty, T. J., Hussein, M.E.A., and Ketz, J. E. (1994), "Political Aspects of Financial Accounting Standard Setting in the USA", Accounting, Auditing & Accountability Journal, Vol. 7, No. 4, pp. 24-46 Georgiou, G. (2004), "Corporate Lobbying on Accounting Standards: Methods, Timing and Perceived Effectiveness", Abacus, Vol. 40, No. 2, pp219-237 Nobes, C. (1994), "Interpreting European Financial Statements", Butterworths, London, p1 PricewaterhouseCoopers (2000), "International Accounting Standards in Europe - 2005 or Now", PricewaterhouseCoopers, London, p5 Sunder, S. (1997), "Security Markets and Accounting Standards: Lessons from Research," The Chinese Accounting Review Vol. 30 (March): pp1-31. Sutton, T., G. (1984), "Lobbying Of Accounting Standard-Setting Bodies In The UK And The USA: A Downsian Analysis", Accounting, Organizations and Society, Vol. 9, Issue 1, pp81-95 Walton, P., Haller, A. and Raffournier, B. (1998), "International Accounting", Thomson, London Watts, R., L. and Zimmerman, J., L. (1978), "Towards a Positive Theory of the Determination of Accounting Standards", The Accounting Review, pp112-134 Read More