International Issues in Accounting and Audit - Essay Example

INTERNATIONAL ISSUES IN ACCOUNTING AND AUDIT By of the of the School Introduction Globalization has become a trend that businesses should not ignore. This has therefore prompted various companies worldwide to adopt the International Financial Reporting Standards (IFRS). This process began in 2005 with various European Union states adopting these techniques so that their financial statements can be prepared in accordance with these new standards. Since 2005, the numerous states that have been planning to convert from the U.S. based Generally Accepted Accounting Principles (GAAP) actually switched their focus towards adopting the International Financial Reporting Standards (Mehta, 2013, pg. 285). The UK being an active member of the European Union has not been left behind in the adoption process. The International Financial Reporting Standards (IFRS) has been adopted as a basis for financial reporting by a significant number of countries worldwide. The main of the UK companies adopting the IFRS is to improve the quality of the information on the corporate performance. However, while the advantages of a common set of global reporting standards are recognized, there are a number of implementation challenges at the international and national levels if the objective of an improved and harmonized reporting system is to be achieved (Tosen, 2006, pg. 99). The paper explores the expected benefits of adoption to the UK such as consistency in reporting, improved transparency in financial reporting and enhanced global completion among other benefits. Benefits of Adopting IFRS Today, International Financial Reporting Standards has been the main subject of discussion especially among numerous financial experts. The debate has been on how changes in the way the companies can file their financial statements and records can the enforced. Adoption of IFRS has enabled companies to swap from GAAP which depends largely on the size of the company. Transition from GAAP to IFRS has therefore helped companies to efficiently adapt the new regulations (Sale et al, 2007, pg. 114). This in turn has provided a number of benefits to the countries that its member companies have adopted the IFRS. The benefits of the adoption of the International Financial Reporting Standards can be examined not only from the reporting quality position but also from the economic perspective. These benefits include: Consistency The transition to IFRs has provided the companies with many perks. The most beneficial part of adopting IFRS has been consistency. Most companies in the world especially in the UK use this policy because it has high level of consistency and Canada too is in the process of setting up plans so that they can adopt it as well because of this benefit. It is therefore advisable that many countries should enforce this policy because it gives the member companies internal consistency thereby decreasing the reporting costs. Moreover, it provides a common basis thereby allowing for easier comparison of the firms worldwide (Dick & Missionier-Piera, 2010, pg. 220). Better capital markets Globalization is a trend that businesses cannot basically ignore due to the benefits associated with it. For instance, increases sales volume, increased market share, and most importantly increased access to capital from the international money and capital markets. Therefore the adoption of IFRS which is a new system of standardization and financial reporting on the global scene places a company in the global marketplace (BrüGgemann, 2011, pg. 31). This in return helps promote new trade to the business or company thereby increasing the company’s access to the capital markets where it can raise funds easily and cheaply. As a result, this gives a company an opportunity to be recognized basically as a global player in the international capital market. Moreover, globalization has made companies in the UK to switch over to the IFRS. This is because it enables them to easily make deals and transactions with other companies that operate under the same system. In addition it gives the stockholders and companies in the other countries a better, reliable, and effective economic indicator as to how well or bad the companies in the UK are doing. It therefore obliges the companies to encourage high performance so that they can remain competitive in the market thus attracting more foreign investors. This therefore will foster the economic growth of the country (BrüGgemann, 2011, pg. 32). Improvement in the internal communications Fundamentally, companies have numerous partners, affiliates and most importantly subsidiaries worldwide. The parent company and its subsidiaries and affiliates for that matter usually communicate with each other in the day to day running of the business. This deals with matters of policy implementation, forecasting, evaluation of performance and conducting analysis and reporting of the company activities. The companies therefore require a reliable financial reporting that would allow the parent company (multinational companies) and its subsidiaries and affiliates to apply standardized accounting procedures (Kirk, 2009, pg, 13-15). This in turn enhances quality reporting, internal communications and decision making. Adoption of the IFRS provides the company with proper internal communications thereby ensuring that good decisions are arrived at which leads to economic growth. Easier performance appraisal The various user of financial information such as investor, managers, banks, creditors, trade unions, and government officials especially tax authorities requires to evaluate the performance of the company (Ernst & Young, 2012, pg. 102). However, this becomes an issue especially if the company has international investors and creditors and it uses the reporting standards that are domestic. The remedy to this limitation is therefore the International Financial Reporting Standards. The IFRS increases the competitive markets thereby allowing companies to clearly stand out among their peers especially in this ever competitive capital markets. Consequently it gives their investors an opportunity to clearly evaluate the performance of the companies so that they can remain at par with their competitors worldwide. When it comes to employee benefits, deferred taxes, financial instruments and business combinations, the adoption of the system may look different (Pricewaterhousecoopers (Firm), 2013, pg. 110). Both internal and external reporting features should therefore be set up so that a smooth transition is ensured. This system therefore allows the UK government to easily appraise the performance of their companies for the purposes of tax calculation and determination (Ernst & Young, 2012, pg. 105). Clarity and productivity International Financial Reporting Standards provides the financial makers with the opportunity to use their own professional judgments regarding how specific transactions can be handled. This in turn leads to less time that is being spent in trying to follow all the necessary complications or rules that are usually coupled with the rules-based accounting (Christian & LüDenbach, 2013, pg. 39). The International Financial Reporting Standards also allows for the preparation of financial information in a manner that the statements are kept in an understandable and simplistic form so that other companies and investors that are interested in the financial statements of the companies under discussion can easily access and comprehend them. The simpler the statements are the easier it is for the investors to understand and evaluate the financial performance of the companies. The UK government benefits indirectly from this because it leads to increased performance of the company as a result of increased investments. The indirect benefit is that there will be increased tax returns that hence increased government revenues which can be spent on development projects which lead to economic development and growth (United Nations Conference on Trade and Development, 2007, pg. 52-52). Economic impact The adoption of the International Financial Reporting Standard has created strong economic benefits to the countries like the UK which has rigid regulation regarding financial reporting. The said benefits include lower cost of capital, increase in the market value of the stocks, and an increase in the market liquidity (McEwen, 2009, pg. 62). In addition, research has shown that firms that adopted the IFRS early have strong benefits not only in the year of change but also in the year that the reporting is officially mandated. These results reinforces the normal view that the strong enforcement of this universal reporting standard not only increase the market positions of the adopters but also enhances the transparency that is required by the investors in their decision making (Journal of Accounting Research, December 2008 issue). Strong regulatory environment in the UK and the voluntary early adoption of the IFRS has therefore emphasized financial reporting quality and transparency (McEwen, 2009, pg. 68). Flexibility The International Financial Reporting Standards is framed in such a way that it allows for relative flexibility in part to the department, company and trade scenario. This is because they are basically almost completely framed as guidelines unlike the generally acceptable accounting principles of many countries which are usually fixed or set out as fixed mandates (Mirza, 2006, pg. 182-183). The accounting teams have an opportunity to adopt any means of financial analysis and financial reporting they please so long as they meet the standard’s spirit of uniformity. From the business standpoint, the flexibility allows an easier adaptability hence putting the expertise back to the hands of the corporations thereby enabling them to know what is best for them in particular situations. This increases the performance of the companies leading to high returns and profit before tax hence increasing the tax returns to the government, consequently enhancing the economic growth of the country as a whole in the long run (Walton, 2011, pg. 120). Quality of the financial statements A true and a fair view accounting approach as with the case with the International Financial Reporting Standards basically provides a higher quality and more presentable financial data unlike the conservative accounting approach like in the generally acceptable accounting principles. A research conducted by the Journal of Accounting Research indicates that companies that use the IFRS have their earnings associated with previous year cash flows but not the previous year accruals (Bellandi, 2012, pg. 336). This therefore ensured an increase in the return on earnings. The research went ahead to point out clearly that investors systematically overreact to the accrual accounting information commonly known as the accrual anomaly. A case that is not present in the International Financial Reporting Standards because of its ability to reflect a prior year cash flows which is easier to verify. This true and fair view accounting improves the quality of the accounting information in case the corporate governance system is weak because it uses information that is easier to verify. The accounting system therefore provides a favorable economic impact to the country because it encourages good corporate governance hence increasing the performance of the companies. This is so because good corporate governance allows the companies to follow multiple goals, for instance, the companies seek to maximize shareholders wealth, maximize market shares and maximize stakeholders’ welfare at the same time. This increases the quality of the information because the companies’ management has an incentive to report more reliable information to their stakeholders for proper decision making. Regarding improved quality, the research points out that empirical evidence shows that the quality of the processes of financial reporting have more to do with the way and manner in which these standards are enforced (Bellandi, 2012, pg. 338). Goal-global comparability The main reason and global for companies to convert to the International Financial Reporting Standards has been to put everyone and all the companies globally on the same level with regards to the preparation of the financial statements(United Nations Conference On Trade And Development, 2007, pg. 52-52). This being said and done basically allows domestic or local companies to present and publish their financial statements on the same level as those of their international or foreign competitors on the same industry (Mirza, 2010, pg. 56). Moreover, those companies that have their subsidiaries on other continents will have a platform to prepare their financial statements in one, universal and worldwide accounting language that is well understood by everyone. The firms are therefore required to completely and fully comply with the IFRS principles. This allows for the comparability of the companies’ performance. Furthermore, the adoption of the IFRS provides the international corporations with an ease of accounting burdens, as well as the better and improved ways in which these multinational corporation could be clearly contrasted and compared in terms of their overall financial accountability and profitability (Mirza, 2010, pg. 32). This is enhanced because the International Financial Reporting Standards have universal accounting procedures that do not change from one place or country to another. This therefore allows the global goal of comparability to be easier to conduct among different companies. The country therefore benefits from this global goal in that companies’ performance is easily benchmarked to the foreign industry leaders thereby forcing them to up their game so that they can remain relevant in the market. Negative impacts or the limitations of the IFRS adoption Adoption of the IFRS has not provided resolute benefits to the country. In one way or another they have it has resulted to a number of negative impacts or limitations to the country. The following are the negative impacts that the country faces as a result of their adoption of the International Financial Reporting Standards (Mader et al.2013, pg. 67); High costs of adoption and implementation There are several costs that are associated with the implementation of the IFRS (Mader et al.2013, pg. 69). These costs include costs associated with the establishment of the IFRS project team, training of other staffs like internal audit and management, IT staff, training staff, taking tax advice, obtaining technical advice from external sources, communicating with third parties, changing systems and software, renegotiating debt covenants, and additional external audits incurred (Picker, 2013, pg. 927). These recurring costs normally represent up to 24% of the company’s turnover depending on the company’s size. Most companies have to use subcontractors or hire extra staff for IFRS implementation because of the problem of lack of trained staff. These costs of additional resources that are needed by the company are usually significant hence decreasing the company’s returns, consequently affecting the economic growth of the country. Less detailed Unlike the GAAP, the IFRS is less detailed hence eliminates the required specifics hence causing the distrust and uncertainty in auditing as well as the more fraudulent scandals that exist in the accounting world (Collings, 2011, pg. 123). This is evidenced in the size of the books, for instance IFRS is only between two and three inches thick while the GAAP book is almost ten inches thick (Hussey & Ong, 2005, pg 12). With full detail not being shown the lenders and stockholders may basically lose faith in the company. This consequently affects the other many areas of the UK economy because investors would not want to invest in a business they lack sufficient information about Insignificant change in earnings management The research conducted and released by the Journal on accounting research found out that the management of the earnings did not change greatly when the IFRS was adopted by the companies in the UK (Beatte et al, 2011, pg. 2003). High cost to domestic companies The companies that operate nationally experiences increased cost because in the adoptions of the International Financial Reporting Standards these costs basically outweigh any benefit available to the corporations because of its high transition cost and complexity. This in turn reduces the economic growth for the country (Mirza, 2010, pg. 56). Difference economic conditions The markets and conditions in which the companies operate differ from one geographical location to another. The companies are also in different capital markets and because of this the comparability issue brought about by the IFRS is not very possible (Mirza, 2010, pg. 56). Manipulation In as much as the IFRS is flexible and allows companies to use desired techniques in reporting the financial statements, it allows for some manipulation by the company. It gives the company an opportunity to only utilize the methods they wish which allows the financial statements to show the results they desire. The company therefore manipulates profit or revenue thereby hiding their financial problems and even encourages fraud. For instance, when a company changes the methods of valuating inventory it reports more income in the profit and loss statement in the current year. This therefore makes the company to appear more profitable than the company actually is. Not Globally Accepted Other countries especially US have not yet adopted the IFRS. This hold out by these companies makes accounting by international-based countries that do business in the UK hard since they have to prepare their financial statements using GAAP and another set using the IFRS. This makes the process tiresome and costly. Increased volatility The IFRS uses the fair values as the primary basis for measuring liabilities and assets. When the assets are reporting using this method, there is increased volatility. Conclusion The adoption of the IFRS in the UK has provided many economic benefits to the country than the costs. These benefits includes, consistency and comparability of the performance, flexibility in preparation process, economic growth, high quality financial statements, easier performance appraisal, better capital markets, improved internal communications and increased clarity and productivity. This not withstanding, the company is also faced with few limitations such as high cost of implementation, less detailed information, insignificant change in earnings management, high cost to local corporations, and lack of comparability. (Word count -2851) References Beattie, V., Fearnley, S., & Hines, T. (2011). Reaching Key Financial Reporting Decisions: How Directors and Auditors Interact. Chichester, West Sussex, United Kingdom, John Wiley & Sons. Hussey, R., & Ong, A. (2005). 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