Reporting Standards (IFRS) and the United States Financial Accounting Standards Board (FASB) determines practice in the form of Generally Accepted Accounting Principles (GAAP). Historically, the two accounting standards have diverged in their treatment of accounting principles. Prior to answering the question of benefit to shareholders and business of the convergence exercise, it is important to answer the question of what is convergence. Convergence of accounting standards means to develop a set of high quality, understandable, transparent, enforceable and comparable global accounting standards that give companies a level playing field across the globe.
Naturally, the overarching principle guiding the convergence exercise is to develop uniform accounting practises that govern structure of financial statements across the globe. The convergence exercise was announced in 2006 with the process to close by end of year 2011(Maryland Association of CPA, 2008). The issue of convergence is a global one and of utmost importance. In 2010, accounting boards reported to the G20 leaders on modified convergence strategy (IFRS 2010).
Benefits
Broadly, the purpose of the convergence exercise is to enable companies to conduct business
around the globe easily. Companies do not have to produce two sets of books for regulators
in the United States such as the Securities and Exchange Commission and regulators in other
parts of the globe. In addition, the harmonization process between the two accounting
standards will help attract foreign investment as investors will be able to easily understand accounting books. Hence, the process will reduce complexity and costs and increase transparency for both regulators and investors.
Furthermore, standardized accounting procedures will help investors easily compare companies globally. The global financial crisis has caused challenges for shareholder and businesses especially financial institutions, especially those in Western economies such as the United States as foreign investors are likely to view companies in these economies with scepticism. Hence, convergence and transparency of accounting standards is likely to make investment dollars flow more easily into the United States economy.
Debate
Several groups, particularly in the United States challenge the benefits of convergence of
accounting standards. Such groups posit that part of the challenge is in implementation.
According to an article by an accounting firm, Eisner Amper, opponents state that
inconsistent auditing and enforcement of international rules will make it to ensure credibility
of financial statements. Significant hurdles to implement uniform global accounting standards
include: (a) time for converting existing records into statements as required by new standards;
(b) challenge in anticipating corporate tax impacts; (c) effect on the U.S. Uniform Certified Public Accountant Exam; and (d) adequacy of training for United States investors as well as audit firms (Fogarty, n.d).
Nonetheless, according to leading accounting firm, KPMG, the convergence exercise will be cumbersome for especially for financial services firms globally, that are especially battling ramifications of the global financial crisis (Reader G., and Trussell, M., 2010). The firm suggests that companies will have to quickly understand new standards that emerge out of the convergence process and turn costs into an investment in financial change.
However, challenges do not lie in implementation only. There are concerns about the quality
of accounting standards among the business community in the United States. A study on
comparison of accounting quality metrics by Stanford University and University of North
Carolina posits that firms in the United States exhibit higher accounting quality than those
adhering to International Accounting Standards (Barth et.al. 2007). While accounting
standards have not been finalized, such concerns will have to be taken into consideration during the convergence exercise and higher quality standards ought to be adhered to.
Conclusion
The convergence of accounting standards is not a futile exercise. Benefits outweigh costs as most of the costs are costs of transition and short-term in nature. Placing companies on an equal footing will position businesses globally to attract investment and give shareholders an opportunity to compare value across companies easily. Convergence is especially needed given that the global financial crisis has shaken the faith of shareholders in many companies in Western economies. Hence, in order to remain attractive to shareholders, companies must quickly adopt the new accounting standards.
Given the context of the global climate today, the convergence process will lead to
strengthened accounting standards for companies today, creating greater value in the future.
In fact, as companies in the United States and in other economies, position themselves to set
up operations in Eastern economies, uniform accounting standards will benefit them even
more as long-term costs of reporting will be reduced as a company will not have to adhere to
two different accounting standards. Therefore, as the accounting firm KPMG, earlier cited in
this paper, suggests, companies must act fast to understand the new accounting standards and
use them to position themselves in global markets. Uniform accounting standards are needed
and timely in today�s markets and will yield long-term benefit to companies in the form of additional capital and to shareholders in the form of greater transparency.
