FACTORS INFLUENCING THE DEVELOPMENT OF ACCOUNTING AROUND THE WORLD
FACTORS INFLUENCING THE DEVELOPMENT OF ACCOUNTING AROUND THE WORLD
One of the problems that Daimler-Benz faces is that accounting systems var around the world. This means that financial statements in France, for exam
financial statements in the United States. Som( foreign countries. observers argue that this is a minor matter, based in form rather than sub
stance. In fact, however, the substance is also different, such as in Peru, wher< consolidation of related companies is not allowed; in Sweden, where signif icant inventory write-downs are allowed; and in France and Germany, when tax accounting and book accounting are essentially the same. These varia tions put the MNE in a difficult position because it needs to prepare an< understand reports generated according to the local accounting standards a well as prepare financial statements consistent with generally accepted ac counting principles (GAAP) in the home country in order to general consolidated financial statements.
Accounting Objectives
Accounting is basically a process of identifying, recording, and interpretin economic events, and its goals and purposes should be clearly stated in th objectives of any accounting system. The Financial Accounting Standard Board (FASB) in the United States stated that financial reporting shouli provide information useful in: (1) investment and credit decisions; (2) as sessments of cash-flow prospects; and (3) evaluating enterprise resources claims to those resources, and changes in them.2 The users identified by th board are primarily investors and creditors, although other users might b considered important. The International Accounting Standards Com mittee (IASC), a multinational standard-setting organization comprised c professional accounting organizations from over 40 countries, includes em
ployees as well as investors and creditors as the critical users. Also named ar suppliers, customers, regulatory and taxing authorities, and many others.
Although the question has been discussed widely, there has been no con sensus on whether a uniform set of accounting standards and practices exist for all classes of users worldwide or even for one class of users. To understam the different accounting principles and how they affect the MNEs' operations we must examine some of the forces leading to the development of account ing principles internationally. Figure 19.4 shows these major factors. The to] four factors deal with the nature of the enterprise and the direct users o information. The bottom four represent other major factors that affect ac counting objectives, standards, and practices.
Nature of the Enterprise Within every enterprise there are many users c information, such as managers and employees. The quantity and quality c information provided depends on the users' level of sophistication as well a
on the accountants' technical competence. Managers require specialized information to assist in decision making, and this has led to the development of managerial accounting. Employees, especially in Europe, have a vested interest in the enterprise and may have an impact on the disclosure of financial data as they seek better wages and working conditions.
Government Government is one of the most pervasive forces in the development of accounting objectives, standards, and practices. Government can be divided into two groups: users and regulators. Users are tax authorities, planning commissions, and various agencies that compile statistics for general use. Regulators, such as the Securities and Exchange Commission in the United States, respond to the perceived best interests of the general public.
The extent to which the government becomes involved in the setting of objectives, standards, and practices depends on the interaction of all the factors listed in Fig. 19.4. Where the government is an important user of information, does not feel that the accounting profession is meeting users' needs, and does not foresee much change in the near future, it will probably take a much more active role in influencing the development of accounting.
Other External Users The major external users of information other than those mentioned above are investors and creditors. Investors can work alone or through institutions by way of pension funds, mutual funds, and other such investments. In countries where there is a small equity market, creditors tend to be an important source of financing and thus a strong influence on accounting standards and practices.
Local Environmental Characteristics This category of factors influencing accounting is probably the broadest and perhaps the most important, including such diverse influences as cultural attitudes and the nature and state of the economy. The four factors listed in Fig. 19.4 are by no means exhaustive. Although the characteristics are referred to as "local," they are not independent of the world economy. The rates of economic growth and inflation depend on a country's major trading partners as well as on internal economic conditions.
International Influences Many international forces that are institutional rather than environmental have influenced accounting principles worldwide. A prime example is the colonial influence of England and France during the past few centuries. Each of these countries carried their business and accounting philosophies to their colonies and instituted similar systems. The United States also has tended to do this as its economic influence has spread through direct foreign investment.
Accounting Profession As it has done in countries such as the United States, Canada, the United Kingdom, and the Netherlands, the accounting profession itself can influence the development of accounting principles. Three aspects of the profession are important: (1) its nature and extent, (2) the existence of professional associations, and (3) the auditing function. In some countries, the profession is relatively undeveloped and has little influence on accounting. In the United States and the United Kingdom, however, the profession is quite large and well-developed, and it has a strong influence on the development of accounting standards and practices. The existence of associations, such as the American Institute of CPAs, is important, because these groups can often be a force for change. Finally, a strong profession often results in a strong auditing function. Independent external auditors are needed to verify that the financial statements adhere to accepted accounting standards and that they represent the true financial position of the firm.
Academic Influence The academic infrastructure refers to the quality of accounting education offered as well as to the accessibility of this education. One of the typical problems in developing countries is the shortage of qualified professors in the accounting field. Since instruction in accounting is not considered a full-time profession and generally is not done at a very high level, little academic research that could introduce change in accounting practices is done.
One of the problems that Daimler-Benz faces is that accounting systems var around the world. This means that financial statements in France, for exam
financial statements in the United States. Som( foreign countries. observers argue that this is a minor matter, based in form rather than sub
stance. In fact, however, the substance is also different, such as in Peru, wher< consolidation of related companies is not allowed; in Sweden, where signif icant inventory write-downs are allowed; and in France and Germany, when tax accounting and book accounting are essentially the same. These varia tions put the MNE in a difficult position because it needs to prepare an< understand reports generated according to the local accounting standards a well as prepare financial statements consistent with generally accepted ac counting principles (GAAP) in the home country in order to general consolidated financial statements.
Accounting Objectives
Accounting is basically a process of identifying, recording, and interpretin economic events, and its goals and purposes should be clearly stated in th objectives of any accounting system. The Financial Accounting Standard Board (FASB) in the United States stated that financial reporting shouli provide information useful in: (1) investment and credit decisions; (2) as sessments of cash-flow prospects; and (3) evaluating enterprise resources claims to those resources, and changes in them.2 The users identified by th board are primarily investors and creditors, although other users might b considered important. The International Accounting Standards Com mittee (IASC), a multinational standard-setting organization comprised c professional accounting organizations from over 40 countries, includes em
ployees as well as investors and creditors as the critical users. Also named ar suppliers, customers, regulatory and taxing authorities, and many others.
Although the question has been discussed widely, there has been no con sensus on whether a uniform set of accounting standards and practices exist for all classes of users worldwide or even for one class of users. To understam the different accounting principles and how they affect the MNEs' operations we must examine some of the forces leading to the development of account ing principles internationally. Figure 19.4 shows these major factors. The to] four factors deal with the nature of the enterprise and the direct users o information. The bottom four represent other major factors that affect ac counting objectives, standards, and practices.
Nature of the Enterprise Within every enterprise there are many users c information, such as managers and employees. The quantity and quality c information provided depends on the users' level of sophistication as well a
on the accountants' technical competence. Managers require specialized information to assist in decision making, and this has led to the development of managerial accounting. Employees, especially in Europe, have a vested interest in the enterprise and may have an impact on the disclosure of financial data as they seek better wages and working conditions.
Government Government is one of the most pervasive forces in the development of accounting objectives, standards, and practices. Government can be divided into two groups: users and regulators. Users are tax authorities, planning commissions, and various agencies that compile statistics for general use. Regulators, such as the Securities and Exchange Commission in the United States, respond to the perceived best interests of the general public.
The extent to which the government becomes involved in the setting of objectives, standards, and practices depends on the interaction of all the factors listed in Fig. 19.4. Where the government is an important user of information, does not feel that the accounting profession is meeting users' needs, and does not foresee much change in the near future, it will probably take a much more active role in influencing the development of accounting.
Other External Users The major external users of information other than those mentioned above are investors and creditors. Investors can work alone or through institutions by way of pension funds, mutual funds, and other such investments. In countries where there is a small equity market, creditors tend to be an important source of financing and thus a strong influence on accounting standards and practices.
Local Environmental Characteristics This category of factors influencing accounting is probably the broadest and perhaps the most important, including such diverse influences as cultural attitudes and the nature and state of the economy. The four factors listed in Fig. 19.4 are by no means exhaustive. Although the characteristics are referred to as "local," they are not independent of the world economy. The rates of economic growth and inflation depend on a country's major trading partners as well as on internal economic conditions.
International Influences Many international forces that are institutional rather than environmental have influenced accounting principles worldwide. A prime example is the colonial influence of England and France during the past few centuries. Each of these countries carried their business and accounting philosophies to their colonies and instituted similar systems. The United States also has tended to do this as its economic influence has spread through direct foreign investment.
Accounting Profession As it has done in countries such as the United States, Canada, the United Kingdom, and the Netherlands, the accounting profession itself can influence the development of accounting principles. Three aspects of the profession are important: (1) its nature and extent, (2) the existence of professional associations, and (3) the auditing function. In some countries, the profession is relatively undeveloped and has little influence on accounting. In the United States and the United Kingdom, however, the profession is quite large and well-developed, and it has a strong influence on the development of accounting standards and practices. The existence of associations, such as the American Institute of CPAs, is important, because these groups can often be a force for change. Finally, a strong profession often results in a strong auditing function. Independent external auditors are needed to verify that the financial statements adhere to accepted accounting standards and that they represent the true financial position of the firm.
Academic Influence The academic infrastructure refers to the quality of accounting education offered as well as to the accessibility of this education. One of the typical problems in developing countries is the shortage of qualified professors in the accounting field. Since instruction in accounting is not considered a full-time profession and generally is not done at a very high level, little academic research that could introduce change in accounting practices is done.
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