International Accounting Standards Just Not Worth It – Impractical And Expensive

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In the current global economy that we reside in, why shouldn’t all companies participating in international trade be required to be under the same standards? While in theory it seems an obvious move in the accounting realm, the implementation of international accounting standards isn’t so easy. There are many obstacles to achieve efficient and successful international standards that benefit the economy as a whole. There is a very high monetary cost, a significant time cost, as well as the many obstacles of interpreting such standards.

One may think that to switch to international standards, standards would need to be decided upon and then an easy transition into harmonization would occur; it’s quite the contrary. One of the largest obstacles standing in the way of international standards is the large amount of time and money required to switch over. Edward Iwata of USA Today explains that:

The long march to IFRS[i]would be grueling and the preparations expensive to carryout. Companies need two or three years to upgrade their communications and softwaresystems and to train many thousands of financial professionals. Regulators, CPAs andinvestors would need to intensely study global accounting principles. Business schoolwould have to teach students the new accounting.

Switching over to international standards doesn’t just require the accountants of each company to transition; it is a holistic transitioning process for the entire company, as well as the entire economy of each country switching over from local to international standards. While business’s may be able to create a plan that absorbs the time and cost over a period of time, Cameron Weber reminds us that, ‘the curriculum of business school accounting programs… must quickly adopt these international standards”. To transition to new accounting programs, education systems would be incurring an additional cost of finding international standard experts to teach said new subject, as well as find a way to create all new courses and curriculums; a task that is undoubtedly not inexpensive. All of the time spent transitioning and training all parties involved, requires funds, creating quite an expensive price tag.

The cost to transition over to international accounting standards is exceedingly high. Margaret Smyth, a company comptroller for United Technologies believe that it will cost the company several millions of dollars to implement over a span of two years. (Iwata) To gain perspective, “The SEC says that adopting IFRS will cost $32 million for each of the 110 U.S. companies that are eligible to use IFRS” (Iwata). Either way it is viewed, $32 million is a lot of money. While it may not be as dramatic of an expense for larger companies than can absorb it, the cost to smaller businesses is excruciatingly detrimental. Chief Financial Officer, Martin Headley of Brooks Automation, explains that implementing IFRS would cost the company “multiple millions of dollars while bringing scant benefits” (Iwata). These large costs to companies to switch standards do not seem to prove worth it. Other sources agree that “the costs of creation and adoption of [international accounting standards]would not be worth the benefits… [and that]full harmonization is probably not practical nor valuable” (Weber). Overall, the amount of time and money spent to fully change over our economy; including education in the field as a hole, education within each company, and all costs involved with the transaction, the benefits of IFRS do not appear to be worth the benefit of just being on a “level playing field”.

Besides the high cost of inputs that are necessary to achieve harmonization, there are also many obstacles that will prevent international accounting standards from harmonizing. There is an array of economic, cultural, and political aspects, as well as the problem of interpretation, that prevent complete harmonization. Within each country’s economy, there are variations of rules and regulation as well as differences of what is perceived to be valuable information. Edward Iwata recognizes that “global accounting is plagued by gaping differences in business customs, financial regulations, tax laws, politics and other factors”. Likewise the Ross Roundtable Journal understands and agrees with Iwata that what is decided to be “useful information transcends national borders” (“International Accounting Standards”). The journal goes on to give the example that in the United Stated, financial information is mainly useful to investors and creditors, while in other countries, the same information is more useful for taxing authorities and government agencies(“International Accounting Standards”). An article from CFO.Com also notes that “varied cultural differences color the way business is done around the world” (Leone). To expect every culture and society to be able to fit one set of standards is absolutely ignorant.

In addition, economic and cultural differences inadvertently affect how each country interprets each regulation. The same standard can be read, but can and will be interpreted to mean different things; “It’s unrealistic to think that more than 100 countries embracing global accounting will use those rules in the same way” (Iwata). While having international standards may bring the global economy closer to being equal, it never will be, because there will always be some misinterpretation and irregularities in understanding.

Along with interpretation, there are political issues that some may not even recognize as an obstacle. It is a known truth that not every country believes and lives by the same laws and policy’s when it comes to politics. Cameron Weber points out that “the creating of accounting standards is a political process…the process of setting accounting standards might be more the result of political than economic variables”. To even think that 100 plus nations could possibly agree on creating a policy on standards is also quite a far reach. This in and of itself would be extremely difficult as well as costly. It’s hard to convince all parties involved to agree on the same standards when all nations cannot even agree that “free trade is good for a nation’s, and the worlds, economy” (Weber) the most basic principle of why we even need international standards.

Composing international accounting standards is a great idea in that it would help all companies to be on a level playing field and also make it easier for investors to be able to compare global companies by reducing exchange costs and risk. While these are great benefits, the cost to attain these benefits is neither worth the time nor the money. In addition, the obstacles and problems that arise to harmonize are also too great to overcome; you cannot change a country’s political or cultural views over night. To put it simply, the benefits overall just do not outweigh the costs of time, money, and effort.  As questioned by a student of Pace University, “If the SEC forces U.S. companies to adopt IFRS, can I get some sort of refund for all the GAAP I learned” (Leone)? This student’s inquiry sums up the problems with harmonization; his GAAP education was a waste of his time, money, and effort, and is now going to cost him more time, money, and effort towards learning international accounting standards, just like it will the economy on a larger scale.

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