THERE HAS BEEN reluctance on the part of U.S. decision makers
to wholeheartedly accept international standards.ACCOUNTING

ACCOUNTING IN THE GLOBAL BUSINESS ENVIRONMENT

By Mary Ellen Oliverio and
Bernard H. Newman

The optimism of global business leaders is a key driver of global accounting standards. Global business is on the minds of CEOs and CFOs in countries throughout the world. In the United States many companies are increasingly taking their expertise around the world. A telecommunications company has developed partnerships in 17 other countries, including Argentina, Australia, China, Denmark, Germany, India, and Singapore. A major automobile manufacturer is forming a strategic alliance with a South Korean auto maker, in which a German company already has a stake.

These are just two illustrations of the globalization of business. A chief financial officer and staff of accountants who attempt, for example, to consolidate financial information from 18 countries, as required for the telecommunications company, or combine the financial results of a South Korean, United States, and German operation, are daily faced with the varying rules governing accounting in the several countries.

Such employees and their key executives are exerting considerable pressure for having a single way of maintaining financial information and reporting.

Background

A single body of principles for recording financial transactions and reporting for global entities is not yet a reality. Despite the many differences among countries in laws, languages, customs, etc., much interest has developed for such a single body. While countries still rely on their own national professional accounting standards-setting bodies, harmonization, and in particular the greater disclosure of differences, has gained greater prominence.

Key Players

There is considerable activity in a number of organizations related to international accounting. The major ones are briefly discussed.

The International Accounting Standards Committee (IASC) is an independent private sector body. Its objective is to develop accounting principles that can be used by businesses and other organizations for financial reporting around the world. It was formed in 1973 through an agreement made by professional accounting bodies in ten countries: Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom/Ireland, and the United States. In 1982, IASC joined with the International Federation of Accountants (IFAC). As a result, the members of IFAC are also members of IASC. IASC has an office in London. As of January 1, 1996, there were 32 international standards. IASC has now adopted a work plan to produce a comprehensive core set of high quality standards, aiming at more general acceptance of the standards for cross-border listings.

The International Federation of Accountants (IFAC) was founded in 1977 for the purpose of creating a stronger more unified accountancy profession. Its mission is "the development and enhancement of the profession to enable it to provide services of
consistently high quality in the public interest."

Today, IFAC membership consists of more than 119 professional accountancy bodies from 86 countries. The federation is concerned about all accountants--those in public practice, industry, commerce, the public sector, and education.

The organization seeks to encourage broader adoption of IFAC standards worldwide and works to gain increased acceptance and recognition of these standards by those who regulate the profession and the world's capital markets.

The Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, established by the Economic and Social Council's 1982 resolution, is to "serve as an international body for the consideration of issues of accounting and reporting falling within the scope of the work of the Commission on Transnational Corporations." The purpose of the Working Group was to improve the availability and comparability of information disclosed by transnational corporations and to review developments in the field, including the work of standard setting bodies.

The International Organization of Securities Commissions (IOSCO) is not directly involved in developing accounting principles but is a key influence in the field. Founded in 1974, IOSCO currently has more than 60 securities regulatory agencies around the world as members, including the Securities and Exchange Commission of the United States. The organization is interested in facilitating cross-border securities offerings and multiple listings without compromising the presentation of financial statement information. This association sees the differences among countries in financial accounting and reporting as a primary impediment to the free flow of capital.

Regional Groups. There are a number of regional groups--with varying structures--that give attention to accounting and reporting. Among such groups are the African Accounting Council, European Union, and the Organization for Economic Cooperation and Development Working Group on Accounting Standards.

United States' Support

There has been reluctance on the part of U.S. decision makers to wholeheartedly accept international standards. United States disclosure requirements are considered the most rigorous in the world. The system is perceived to have integrity, fairness, and carefully monitored
regulation.

However, the efforts of the international group are supported in principle. The AICPA officially subscribes to the philosophy and practical need for harmonization of basic accounting and reporting standards and supports the work of ISAC. However, the official policy statement goes on to say, "If such a goal is to be achieved, it is essential that the confidence and respect for the work of the IASC must be gained as a result of a demonstrated capacity to produce timely and high quality standards responsive to the international needs of the professional and business communities throughout the world."

The attitude implied in this statement of the AICPA is not uncommon. A study of the extent of conformity to IASC standards shows that as a group the IASC founders have an average compliance somewhat less than nonfounders.
The efforts of the United States to
be more supportive appear to have increased as will be discussed under recent successes.

Issues

There are many points of tension among representatives of accounting associations throughout the world. Tensions range from the determination of "economic reality" in relation to revenues to the nature of disclosures that are informative. A limited number of points that illustrate the range are discussed briefly.

Income--Matching or Smoothing. In the United States, all revenues earned in the fiscal year are to be reported in that year and all expenses incurred to generate such revenues reported in the same period. The "economic reality" is what actually happened during the period. In Germany, however, authorities have a different view of economic reality. One year's performance may not be representative of what the entity ordinarily achieves, so income smoothing in Germany is considered a way of assuring "economic reality."

Historical Cost vs. Market Value. Historical cost for recording acquisitions has been a persistent belief among accounting standard setters in the United States. However, there is increasing willingness to require disclosures based on fair values, especially for specified financial instruments.

Extent and Nature of Disclosure. There are some observers who believe that the willingness to disclose information is culture-driven, so that in a nation where secrecy about behavior is the common position, there is likely to be a reluctance to disclose entity financial information. The U.S. accounting requirements have been noted for their full disclosure of relevant information. Illustrative of the problem of disclosure is that related to reporting by banks. In Germany and Switzerland, for example, banks have the right not to disclose provisions for doubtful debts and market value of investments. In the United States, on the other hand, the approach is one of full disclosure of the institution's business situation, including a description of its management of risks, information on interest rate differentials, allowances for doubtful debts, debts restructured and other problem debts, the market value of assets and liabilities, activity and exposures according to business and geographical sectors, credit concentrations, and many other matters.

There are many issues, of varying levels of significance. Among others that are evident in the deliberations of international groups are who shall have the authority to impose rules, the relationship of taxing rules to financial reporting, the extent of specificity in rule setting that is optimal for a wide variety of entities, and whether or not harmonization is needed.

Recent Successes

Acceptance of International Standards. IFAC has reported that over 2,000 companies, mainly large multinational companies and international financial institutions, have stated that they prepare their financial reports in accordance with International Accounting Standards (IASs). In addition, many countries endorse these standards as their own either without amendment or with minor additions or deletions. Many stock exchanges accept IASs for cross-border listing purposes. Canada, Japan, and the United States are currently exceptions.

Recognition by the United States. Early in 1997, the FASB issued a new standard on earnings per share. The noteworthy feature is that the new statement makes the U.S. requirements compatible with international standards.

Listings on the New York Stock Exchange. The SEC is credited with the most rigorous requirements for financial reporting in the world community. During the past two decades, the New York Stock Exchange has been campaigning for more flexible rules in relation to accounting disclosure requirements for foreign companies. Because of the status of the New York Stock Exchange, there is great interest in being listed on this exchange.

As of March 26, 1997, there were 296 foreign companies listed on the exchange. On January 1, 1990, there were 86. There have been some minor concessions to foreign companies seeking listing on the exchange. Among the concessions are the following:

* Reconciliation to U.S. GAAP is required for the last two years only.

* The company does not have to meet U.S. governance requirements for a board of directors and independent audit committee. A foreign company must provide a legal opinion that the company's governance is in accordance with the home country's requirements.

* Interim reporting can be according to home country accounting practices. The only requirement is that such reporting must be in English.

Efforts of the International Organization of Securities Commissions. IOSCO has stated that it would consider the acceptability of IASC's international standards when it has completed its work program, which requires the completion of a core set of standards. Because of the pressure of IOSCO, the IASC Board agreed in March 1996 to accelerate its work program and has set a new target date of March 1998, 15 months earlier than originally planned. Based upon current progress, many observers do not think that deadline will be met.

Comments

The momentum for change in international accounting has been intensified as more and more companies in countries throughout the world view the business community as global.

International Harmonization Is Beyond the Take-Off Position. There appears to be a convergence of several key factors that support an optimistic future for international harmonization. The current technological power to transmit information and the giant shift in the business community within the last 10 years are possibly the combination that is most significant. This combination has fueled the willingness to take the risks present when a company moves beyond its domestic boundaries.

In this environment where accountability has become globally significant, those concerned with international accounting have taken a more aggressive role. The willingness of the IASC, as noted, to work toward an earlier completion date for its core standards and the willingness of IOSCO to advance such standards for international trading are two illustrations of enhanced efforts.

In June 1996, the IASC Board agreed that it should establish a system for issuing interpretations. Earlier, the IASC believed "it did not issue interpretations." In fact, members of the staff were
prohibited from giving advice on the meaning of the standards. The position was one of providing standards to
be used by those who chose to
use them.

Concomitant Developments in Auditing and Management Accounting. The discussion has been confined to financial accounting principles that provide the framework for external reporting. However, the impact of accounting in the world community is broader.

* International Auditing Standards. The International Auditing Practices Committee (IAPC) is giving attention to matters similar to those that concern national auditing standard setting boards.
The current International Auditing Standards are comprehensive and have been accepted as national standards in some countries.

* The Public Sector. As of 1996, the International Federation of Accountants' Public Sector Committee began a new multiyear project that has as its goal the development of a set of authoritative
statements on financial reporting by
governments.

* Management Accounting. There
is a Financial and Management Accounting Committee in IFAC that has
as its goal helping management
accountants cope with the challenges facing financial managers to maintain
the integrity of the information
system and interpret the data for
decision-making tasks of management.

* Internal Auditing. The Institute of Internal Auditors has undertaken a global study related to establishing a competency framework for internal auditing. It is the first time this association has attempted to identify core competencies on an international basis.

The efforts related to these other aspects of accounting and auditing appear to be reinforcing each other's work and to heighten the visibility for an international framework for the total professional field of accounting.

An Assessment at Mid-1997

An assumption not made explicit in the foregoing discussion is that there is great desire to increase the world's gross national product and that increase requires viewing the world as a single economy. The role of the accounting profession in such an effort is a staff role, but is perceived to be critical.

All this leads to a number of interesting questions. Will harmonization lead to just one standard setting body and the elimination of national standard setters? And will this standard setter be IASC? *

Mary Ellen Oliverio, PhD, CPA, and Bernard H. Newman, PhD, CPA, are professors of accounting at the Lubin School of Business, Pace University.

Editor:
Douglas R. Carmichael, PhD, CPA
Baruch College