Necessity of Accounting Standards - Assignment Example

Necessity of Accounting Standards Transparency in financial reporting, and the existence of internal and external controls, are the sheet anchors on which modern financial markets are based. These are ensured through accounting standards. Accounting standards are the means by which the investing public is assured of a fair and comparable representation of financial information. In the absence of accounting standards an analyst would be hard put to compare the financial statements of two different companies and arrive at meaningful conclusions. Hence the question whether accounting standards are at all necessary appears to be out of place in today’s business and economic scenario. However, certain facts about accounting standards, and what they have achieved or failed to achieve, are behind the scepticism of some professionals who question the need for accounting standards. A brief look at these circumstances might be in order before proceeding further. Perhaps the most important among these is the spate of financial misrepresentations, and the fraudulent approaches that could be adopted by large and reputed organizations such as Enron, Worldcom and Arthur Anderson in spite of the existence of these standards. If expenses can be misstated in spite of standards, and the cautious investor has to look behind the published figures in any case, what purpose do accounting standards serve? The answer to this question lies in the fact that in the absence of accounting standards such misrepresentation would acquire legal status at least in some cases. The solution therefore is not to avoid accounting standards altogether but to strengthen them. One of the lacunae in the existing accounting standards is the lack of uniformity among various sets of standards followed nationally in various countries. With increasing globalisation, more and more organizations are exposed to multi-national working and require a common framework for financial reporting. Moreover, even in cases of national reporting most accounting standards have a number of weaknesses. For example, many accounting standards, including the one by US Financial Accounting Standards Board, are rules oriented, while the need of the day seems to be principle based accounting. Yet another issue is the inadequacy of accounting standards by themselves to prevent the occurrence of fraud as has been witnessed in several cases around the world. This, however, is understandable, as accounting standards are not a panacea for all evils related to financial reporting but are to be taken only as guidelines that would enable various users to understand their content in the same sense. This has necessitated the supplementing of these standards through other legislation such as the Sarbanes-Oxley Act in the United States. As can be seen from the above, accounting standards need to undergo changes and to be standardized, and perhaps also need to be supplemented with other measures. Admittedly, therefore, there is a need to improve upon the existing standards and bring in a measure of uniformity amongst them. However, this does not mean that accounting standards can be done away with altogether, or that they do not serve any purpose at all. Harmonization of accounting standards –Pros and cons of International Standards The most powerful argument in favour of common international accounting standards is the increasing need for a common framework for financial reporting across borders. Globalisation has reduced the stringency as well as relevance of national borders, and made it incumbent for organizations to operate in several countries at the same time. International accounting standards will reduce the cost of doing business in many countries for individual organizations, and make national regulations more effective. Costs of reporting will be greatly reduced for individual organizations because they can avoid duplication of work, since multiplicity of accounting standards force organizations to prepare different sets of accounting statements in each of the countries in which the organization operates, in order to comply with the accounting standards and reporting requirement of each country. Thus international accounting standards are advantageous to the organizations, the investing public, and the governments concerned. Although global accounting standards will obviate many of the problems faced by organizations operating in several countries, the implementation of such standards are themselves not free of disadvantages. The accounting standards in each of the industrially developed nations have a history of their own that is rooted in the culture of the country and the commercial history. This has led to countries having a more or less conservative approach to accounting and financial reporting. Divergence in the practice of financial reporting is one of the problems that need to be resolved before a common global standard can be evolved. For example, organizations from the US and France adopt the local language as well as currency in financial reporting, while Germany and Switzerland use local accounting principles but report them in their own language. Organizations consequently follow varying practices in reporting their international operations. Another problem is the type of accounting and reporting system that is in existence in each country. For example, the US follows a rule-based accounting principle that has been criticized as being a basis for avoidance, and a source for manipulation. As against this, other countries follow a principle-based accounting system. It would be difficult for rules-based systems to abandon this approach overnight and switch over to a principle-based approach. The cost of converting to a common international standard might be prohibitive for smaller organizations. In some cases even countries may find it difficult to adopt entirely new sets of accounting practices that may be required to comply with international standards. Apart from cost, political compulsions may hinder the effort in some countries. Another possible impediment to implementing international accounting standards could arise from differences in language and their use. Thus, the adoption of common international accounting standards, although highly desirable, and perhaps even inevitable in the long run, is also fraught with a number of disadvantages and difficulties that might need to be addressed and sorted out before they can become a reality. Progress achieved by International Accounting Standards Board The progress achieved in implementing global accounting standards has been very satisfactory, with a number of countries all over the world having adopted, or seriously considering the adoption of, the standards of the International Accounting Standards Board (IFSB). According to Sir David Tweedie, Chairman of the IASB, more than 100 countries require or permit the use of international accounting standards. These include 27 countries from the European Union. The transition in these countries from their national accounting standards to the international standards have gone without major problems. Major emerging economies, including Brazil, Russia, China and India – the BRIC countries – are adopting the International standards. Canada, Chile, Korea and Israel are also planning to adopt the international standards. Thus widespread adoption of International Accounting Standards is already a reality that covers a wide spectrum of nations. On the negative side, countries such as Japan and the United States still have problems and are working towards compliance with the international standards. There is still a lot of work that needs to be done towards the preparation and adoption of international financial Reporting Standards. From the above, it is clear that there has been considerable progress in the preparation and adoption of International Accounting Standards, but there is still a long way to go before the process can be completed. Is Rolls Royce Socially Responsible? The answer to this question would, prima facie, appear to be strongly in the affirmative, as the company has taken the trouble to publish a separate and elaborate account of its commitment to community development. The stated objectives of Rolls Royce in the area of community development include contributions to education, arts & culture, environment, and regeneration. This list reinforces the view that the company is socially aware because it includes some of the most pressing requirements of society, and areas such as environment in which commercial organizations have a huge potential to contribute both positively and negatively. Although mere statement of intention, or profession of interest, is insufficient grounds for coming to a conclusion on this matter, they do provide an insight into the way the company wants to project itself, and the manner in which it probably wants to shape its activities. On these two grounds, Rolls Royce does come out as a company that desires to fulfil its social responsibilities. The only question that remains is the extent to which it has succeeded in carrying out its intentions. The recognition that Rolls Royce has won recognition from reputed bodies and organizations such as Business in Community’s Corporate Responsibility index in the UK, the Dow Jones Sustainability index, Dow Jones-World and European STOXX indices provide ample evidence of third party approbation of the company’s efforts in carrying out its social responsibilities. The company has also resolved to incorporate several of its social objectives into its business processes and goals. In view of these facts, it can be concluded that Rolls Royce is a socially responsible company. Rolls Royce and the Environment Concern for the environment has to include active interest in, and contribution to, conservation, pollution, recycling of waste and most importantly, educating the community and ensuring compliance from a large number of common people, who can contribute to these issues in their day-to-day lives. Rolls Royce scores highly on all these factors. Apart from involving itself actively with local governments and regulatory bodies, the company has taken a number of positive steps aimed at making a significant and positive contribution towards environment related issues. Rolls Royce has spent more than £40 million in order to minimize the environmental impact of its plant on local residents in Derby. The company has taken care to protect long established habitats of swans, and established wild life conservation areas near other facilities of the company. Rolls Royce has also developed forest areas, and provides access to school students and other members of the community to these areas with a view to educating these sections of society. The contribution of the company in improving awareness and educating the general public on matters related to environment has been significant. Recycling of used computers is another area in which the company has made a contribution both to society, by providing the comparatively weaker sections with access to computers for training and education purposes, and avoiding the waste and damage to environment that the destruction of these computers would cause. Rolls Royce and Corporate Governance Rolls Royce has a responsible Corporate Governance policy that reflects its commitment to ensure adequate controls through the independence of the structures of its policy making and overall management organizations. The Board is headed by an independent and non-executive chairman, and includes seven non-executive directors and four executive directors. The non-executive directors are independent and unrelated to the affairs of the company, thus ensuring the absence of bias in their decision making. The company’s day-to-day operations are overseen and controlled by the Chief Executive Officer. The overall management structure as above is augmented by a number of Management committees that include the Nominations committee, the Remunerations committee, and the Audit committee. The board has delegated a portion of its authority to these committees, which operate under clearly defined terms of reference. The Nominations committee makes recommendations to the board about appointments, while the Remunerations committee is concerned with the remunerations to be offered. The Audit committee oversees accounting policies and reporting. It also oversees the internal audit function and is responsible for establishing and maintaining the company’s relationship with its external auditors. These committees ensure independence in the handling of these three vital areas. It can be seen that the company has a balanced management structure and a corporate governance system that is fairly transparent and ensures independent and unbiased decision making and management of the affairs of the company. References 1. Rolls Royce (2008). ‘Corporate Governance’. Annual Report 2007. Retrieved on 1 June 2008 from http://www.rolls-royce.com/community/governance/default.jsp 2. Rolls Royce (2004). ‘Rolls Royce in the Community – Powering a better world’. Retrieved on 1 June 2008 from http://www.rolls-royce.com/community/downloads/community04/community 3. (2007). ‘Statement of IASB Chairman Sir David Tweedie Before The Economic and Monetary Affairs Committee of the European parliament’. Retrieved on 1 June 2008 from http://www.iasplus.com/resource/0704tweedieparliament.pdf Read More