Effects of Foreign Accounting Standards

Published: 2019-10-30 06:30:00
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Countries like India, Australia, United States as well as many European Union countries have their unique GAAP or the Generally Accepted Accounting Principles that provide standards and rules for financial reporting within those countries. The GAAP standards in the U.S are established by the Financial Accounting Standards Board (FASB). The fact that every country has its GAAP puts these countries ate a disadvantage. GAAP has some limitations because the guidelines and the standards vary from one country to another. For this reason, many countries and companies are advocating for the adoption of International Financial Reporting Standards due to the widespread investments in global companies across the national borders (Wu & Zhang, 2014).

International accounting standards offer globally acceptable framework for financial reporting. Many countries have adopted this standard for their financial reporting. However, when it comes to foreign GAAP, every country has its unique guidelines and rules. Privately held organizations or companies do not always have to adhere to foreign GAAP standards since SEC does not regulate them. They have the liberty to make use of these standards only whenever it suits them. Typically, the GAAP standards are the rules that all financing and accounting professionals agree to adhere to as well as the measuring stick that potential investors will use to compare one business or company to another (Wu & Zhang, 2014).

Effects of foreign accounting standards from a resource, time and cost standpoint

Adopting foreign GAAP standards has some effects when it comes to time as well as cost. For instance, a U.S based company will make financial statements that conform to the U.S Generally Accepted Principles. However, the company will also need to make other financial statements for other entities or individuals outside the United States in conformity with the GAAP standards of that particular country. An example is a U.S entity that is a subsidiary of an Australian company. Both the countries have foreign GAAP. However, the Australian standards differ from the U.S standards. Therefore, one report will have to be prepared using the Australian Standard for the Australians while another will have to conform to the U.S standards. There will be two sets of reports. The main effect here is that time will have been wasted in trying to prepare two or more other copies for US, Australia or other global audiences. Resources will also be wasted here in trying to prepare different sets of financial statements. For instance, these different but related copies of financial statements will require extra money and manpower (Krahel & Titera, 2015). It is for this reason that many countries are advocating for the adoption of international accounting standards.

International accounting standards help improve the capital flow. These standards assist in facilitating the convergence as well as transparency of the accounting practices in business. As a result, this boosts capital flow across the international market. Typically, it is easier and convenient for investors as well as other investors to make a comparison of their business performance with other international organizations or companies. Therefore, this makes it a lot cheaper and easier for them to get business capital from other investors across the world (Krahel & Titera, 2015).

Using the international accounting standards also help in globalizing a business or company. Foreign accounting standards are globalization oriented. In other words, adopting these standards contribute to free a business from the limiting scope of just national level accounting standards. The financial statements automatically become understandable and acceptable in all the foreign accounting standards compliant countries. Therefore, companies will have no need to organize an alternative set of financial statements when chasing other business interests in such countries (Krahel & Titera, 2015). As a result, it saves the companys time and also reduces the cost of making extra sets of financial statements intended for global purposes.

How the foreign standards will affect the audit plan and sampling techniques used to validate original transactions

Foreign accounting standards have some effects on the audit plan as well as sampling techniques. First, we understand that foreign accounting standards have guidelines that differ from one country to another. Therefore, there is the need for well-developed auditing programs because the financial statements will be prepared using different rules and guidelines. In the auditing plan, it is, therefore, important to ensure that auditors are familiar with all the foreign standards and guidance of both accounting standards. The importance of having auditors conversant with all the guidelines and norms of the foreign standards is to ensure that the different sets of financial statements correspond with one another. Using foreign standards means an additional cost. Using foreign accounting standards will also have an effect on the sampling techniques (Grenier, Pomeroy & Stern, 2015).

How to approach potential fraud issues in a global environment

The best way to handling fraud is understanding why fraud occurs and how it occurs. First, fraud may take two different forms; misappropriation of companys assets and misrepresentation of the businesss financial statements. Misappropriation of the companys assets occurs when an employee steals the companys assets either monetary or physical. On the other hand, misrepresentation of financial statements often occurs where the businesss financial position is misstated. It could be by increasing the reported revenue or by reducing the reported expenses (Hsu, Jung & Pourjalali, 2015).

For fraud to occur, three conditions always have to exist; pressure, rationalization and opportunity. Rationalization is the justification for why is it tolerable to commit fraud in some cases. Opportunity is the chance that fraudsters get to commit fraud. Pressure, on the other hand, is what pushes someone to commit fraud e.g. bills, gambling or drug addiction. Fraud has become very widespread in the current global environment. However, in preventing fraud, the most important factor to consider is the opportunity. Fraud can be significantly reduced by eliminating the opportunities. It is always cheaper for fraud to be prevented than to be detected. This is because there are slim chances that losses will be recovered. Therefore, internal controls of a company should be efficient and effective to help the gain the most for the business. In this case, the internal controls of a company include supervision, IT controls, as well as segregation of the duties (Hsu, Jung & Pourjalali, 2015).

It is also important to know things to look for in potential fraudsters or fraudsters. Employees with a sudden shift in behavior may be indicating signs that they are potential fraudsters or have committed fraud. Employees who have regular new purchases or go on an unexpected spending spree or become quickly upset may be showing that they have already committed fraud. Employees with debt collectors showing at work or talk of family problems at work may be potential fraudsters. However, in the current century, not only employees could be commit fraud. Fraud could as well be committed by customers or third party vendors.

How the accounting profession is changing to address the issue of inconsistent accounting standards

The changes in accounting always demand adjustments to the processes, systems, business practices, internal controls as well as contractual arrangements. Therefore, executives in this field need to be aware of all the potential changes in accounting. Currently, the fast-tracked scope, as well as the pace of the projected changes towards the merging of global accounting standards, has increased the significance of understanding the technical details as well as the wide range of the implementation requirements and technology consequences of what could be an unprecedented amount of change in accounting. To add to the accounting convergence, some businesses or companies will also need to review their business models to conform to the changes in technology as well as other accounting requirements (Wu & Zhang, 2014).

Conclusion

Different countries have different GAAP standards that guide how their financial statements are to be documented. Countries like India, Australia, United States and many others in the European Union countries have their GAAP or the Generally Accepted Accounting Principles that provide standards and rules for financial reporting within those countries. However, many countries and companies are advocating for the adoption of International Financial Reposting Standards (IFRS) that will have all the countries and enterprises use the same guideline in preparing their financial statements. Adopting this change holds numerous advantages including improvement of capital flow as well as the globalization of businesses. Moreover, in a way, this will save resources and reduce cost and time used in preparing different sets of financial statements. Adoption of international standards will also reduce fraud as financial statements will be clear and easily understandable by the global audience. Currently, the inconsistent accounting standards used by different countries are associated with reduced capital flow across the international borders.

References

Grenier, J. H., Pomeroy, B., & Stern, M. T. (2015). The Effects of Accounting Standard Precision, Auditor Task Expertise, and Judgment Frameworks on Audit Firm Litigation Exposure. Contemporary Accounting Research, 32(1), 336-357.

Hsu, A. W., Jung, B., & Pourjalali, H. (2015). Does International Accounting Standard No. 27 Improve Investment Efficiency?. Journal of Accounting, Auditing & Finance, 30(4), 484-508.

Krahel, J. P., & Titera, W. R. (2015). Consequences of Big Data and Formalization on Accounting and Auditing Standards. Accounting Horizons, 29(2), 409-422.

Wu, J. S., & Zhang, I. X. (2014). The Adoption of Internationally Recognized Accounting Standards: Implications for the Credit Markets. Journal Of Accounting, Auditing & Finance, 29(2), 95-128.

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