The Impact of Professional Judgment on the Effectiveness of International Financial Reporting - Research Proposal Example

Literature Review on the impact of professional judgment on the effectiveness of International financial reporting standards Introduction Financial accounting is a fundamental element for organizations whether they are in the private or public sector, profit or non-profit making organizations, large or small enterprises and service or product industries. Financial accounting is important because it helps an organization establish its cash inflow and cash outflow, it enables the organization establish their financial position in comparisons with its competitors and it helps organizations to calculate their annual losses and profitability. Financial accounting entails making financial statements that will help depict the financial status of the company to stockholders, labor forces, government agencies, investors, financial institution and the management of the organization. It helps the management when making strategic planning and decision-making processes, evaluating organizational performance and to help the organization comply with regulatory requirements as highlighted by (Rodrigues & Craig, 2007). Effective financial accounting is, founded on competent financial reporting. Financial reporting involves acquiring skills in comprehending and applying accounting standards and the appropriate theory when planning financial statements of entities, assessing and interpreting the prepared financial statements. This report is a literature review on the effectiveness of international financial reporting standards. The International financial reporting standards The international financial reporting standards also referred to as the IFRS are standards, analysis and frameworks founded on globally accepted principles that were developed, and adopted by the International Accounting Standards Board (Committee on Economic & Monetary Affairs. 2008). The standards are, meant to guide organizational management to publish financial information that is not only relevant and reliable, but also accurate, comparable and prepared transparently (Flegm, 2008). International; financial reporting standards in contemporary global economies has initiated universal accounting convergence and harmonization as enterprises in Europe and Australia are adopting them while organizations in Asian countries such as New Zealand, Singapore, India, Malaysia and China among others are warming up and implementing the standards. The US enterprises are also gearing up to not only, using the GAAP but also utilize other financial standards such as IFRS. The research question The research question is what is impact of professional judgment on the effectiveness of international financial reporting standards? Literature Review The major findings and conclusions of the reviewed research work on the impact of professional judgment on the effectiveness of the international financial reporting standards are that the application and effectiveness of the standards is, influenced by the corporate objectives, legal liability and ambition of the accounting professional. In addition, language factors and cultural factors do influence the opinion of a professional while preparing and interpreting financial reports (Chand & White, 2006), which has an impact on the reliability, accuracy and relevance of the financial reports. According to (Doupnik & Riccio, 2006), adoption of international financial reporting standards is beneficial for organizations in enforcing fair value and encouraging transparency, which is essential in enhancing the aspect of financial comparability between organizations with their competitors. The author mentions however, the effectiveness and benefits of implementing IFRS vary across regions and organizations depending on the strength of legal enforcement, accounting culture and the judgment of accounting professionals. This report criticize this line of thinking since all accounting professionals are taught relevant and similar skills and knowledge on financial accounting and reporting and are bound by their professional code of ethics. When universal standards are, applied globally, the accounting gaps are, filled as all accounting professionals over time and place will follow and adhere to similar standards and therefore, produce consistent results regardless of their judgment (Rodrigues & Craig, 2007). This does not mean the judgment of the accounting professional is not required. This is because their integrity, honesty, reliability; accuracy will help prepare and interpret more efficient and accurate financial reports and hence, expose financial malpractices such as embezzlement, fraud and corruption within an organization. The importance of having capable accounting professional who are able to make accurate and fair judgment is supported, by (Chand & White 2006), (Doupnik & Riccio 2006), and (Patel 2006) who argue that financial accounting is not merely a technical aspect but more so a socio technical practice, thereby giving more importance to professional opinions. The authors indicate that financial accounting standards usually carry measurement and recognition options and entail statements such as probably, more likely, less likely and approximately among others, statements that require the analysis, interpretation and opinion of accounting professionals (Patel, 2006). The importance of international financial reporting standards as argued by (Lantto & Sahlström, 2008), cannot be emphasized. The benefits of adopting accounting standards that are principle based rely on having professional accountants and auditors that are, bound by generally accepted principles. Among the benefits of enforcing international financial reporting standards that are, facilitated by competent accountants and auditors, include increased competent development of local accounting standards that meets international criteria and improving the international rankings and competitiveness of local capital markets (Lantto & Sahlström, 2008). With IFRS, organizations are able to effectively, compare their financial positions against each other both domestically and internationally, and it reduces the time and resources wasted on restatement of financial records when domestic firms want to offer international securities, which also minimizes the costs of soliciting for capital in foreign international markets (Patel, 2004). When using international financial reporting standards for a dometic organization that has investments abroad, the domestic organization is able to cut on costs related with conversion of accounts and it is able to enhance the management systems of the organization. According to (Penman, 2007), having effective, adequate and reliable IFRS is not enough if the accounting professionals are not trained to handle the new system of IFRS, if they do not have the know how on the required international accounting practices and the control mechanisms and they do not know how to implement the necessary changes required in reporting requirements. The report does support these findings as accountants do play an important role in ensuring the reporting systems and techniques used by an organization complies with set standards and the financial statements prepared are understandable by all the concerned stakeholders such as financial analysts, investors, customers and the labor forces among others. IFRS ensures the financial reports are reliable, objective, consistent, timely, and comparable and complete globally (Committee on Economic & Monetary Affairs. 2008). Among findings by (Patel, 2006) are that accountants and accounting scholars are critical of the link between reliability and relevance as the deficiency of relevance is as a result of diminished reliability caused by broad dependence on professional judgment, approximates and discretion in international financial reporting standards. Therefore, this report suggests that analyzing the interoperability and relationship between application of IFRS and the role professional judgment plays in promoting efficacy, comparability, reliability and accuracy of financial reports globally is important and is required. This is because neither of the two variables can function independently. Training and employing qualified professional accountants that meets the required international accounting standards is the first step to improving the effectiveness of IFRS as they will be adequately equipped to establish the necessary changes required to accommodate and integrate IFRS and discard alternative financial reporting standards that an organization may be using (Patel, 2004). Additionally, they will be able to communicate the pro, cons and effects of IFRS and other financial reporting standards to the concerned stakeholders, which help in selecting the appropriate reporting standards (Patel, 2006). Trained and qualified accounting professionals promote effectiveness of IFRS, as they are able to offer reliable, accurate, unbiased and professional opinions necessary in interpreting and analyzing financial reports (Suddaby, et al., 2007). Conclusion Financial reporting is an essential practice to an organization. Financial reporting allow concerned stakeholders such as existing and potential investors, competitors, suppliers, customers, government agencies, the management and the labor force to understand the financial performance of the organization. As accounting and reporting practice has evolved from an internal issue to an external issue, international organizations are implementing international reporting standards in a bid to improve comparability, accuracy and reliability of financial reports. The report has analyzed previous researches on the impact of professional judgment on the effectiveness of IFRS and has critically analyzed their findings and conclusions. Conclusively, professional judgment impact on the effectiveness of the IFRS as interpretations and analysis of financial reports depend on the skills and opinions of the professional accountant or auditor. References Chand, P., & White, M. (2006). The Influence of Culture on Judgments of Accountants in Fiji. Australian Accounting Review 16(38), 82-88. Committee on Economic & Monetary Affairs. (2008). Report on International Financial Reporting Standards (IFRS) and the governance of the International Accounting Standards Board (IASB) (2006/2248(INI)): European Parliament. Doupnik, T. S., & Riccio. E.L. (2006). The influence of conservatism and secrecy on the interpretation of verbal probability expressions in the Anglo and Latin cultural areas. The International Journal of Accounting 41 (3):237-261. Flegm, E. H. (2008). The Need for Reliability in Accounting. Journal of Accountancy, 37-39. Lantto, A.-M., & Sahlström. P. (2008). Impact of International Financial Reporting Standard adoption on key financial ratios. Accounting & Finance 9999 (9999). Patel, C. (2004). Some theoretical and methodological suggestions for cross-cultural accounting studies. International Journal of Accounting, Auditing and Performance Evaluation 1 (1):61-84. Patel, C. (2006). A comparative study of professional accountants’ judgments. Vol. 15. Amsterdam; Oxford: Elsevier JAI. Penman, S. H. (2007). Financial reporting quality: is fair value a plus or a minus? Accounting & Business Research, 33-43. Rodrigues, L. L., & Craig. R. (2007). Assessing international accounting harmonization using Hegelian dialect, isomorphism and Foucalt. Critical Perspectives on Accounting, 18:739-757. Suddaby, R., Cooper, D.J, & Greenwood. R. (2007). Transnational regulation of professional services: Governance dynamics of field level organizational change. Accounting, Organizations and Society 32 (4-5):333-362. Read More