The Inevitability of International Accounting Harmonization

Topics: Financial statements, Generally Accepted Accounting Principles, Globalization Pages: 8 (2324 words) Published: November 8, 2012
Along with the drastic development of world trade and the increase in international capital flow, the economy of the world is now in the process of globalization. Accounting, as ‘a major tool of business communication’ (Walton et al., 2003), plays a crucial role in promoting the growth of the global economy. Therefore, a relatively harmonious and comparable accounting system which could be accepted and understood by all the countries is required for several reasons. Firstly, accounting diversity represents an obstacle to the understanding of accounting information for both international companies and international investors (Walton et al., 2003). Moreover, international accounting differences increase the cost of accounting systems in international companies for trans-border transactions as well as cooperation. A third problem related to accounting diversity is the lack of high-quality accounting standards in some countries. Although there are many obstacles in the process of the international accounting harmonization, such as nationalism, objective diversity and high cost, the argument for supporting harmonization illustrate that harmonization is beneficial for current economic environment. Consequently, international accounting harmonization is inevitable and necessary. This research will first define the international accounting harmonization. Secondly, it will illustrate the reasons for harmonization. It will also bring about the obstacles facing the trend of harmonization. Finally, it will look at the arguments of supporting international accounting harmonization as inevitable and necessary.

There are two main terms used in the international accounting context in the literature and previous research: ‘harmonization’ and ‘standardization’. Harmonization means the attempt to make differences compatible or coordinated, while standardization aims to make them standard or uniform (Lawrence, 1996). According to Nobes & Parker (2012), harmonization is a process, which is through defining the extent of differences to enhance the compatibility in accounting practice; standardization means the application towards a more exact and inflexible rule. A similar definition is given in Walton et al. (2003), who describes harmonization as a term used in international accounting by decreasing the variation in accounting across countries. These definitions appear to show that harmonization has a wider and deeper meaning than standardization as it is based on the compatible or coordinated situations to make international accounting standardized and uniformed. Since accounting systems should be suitable for cultural environment, harmonization is generally thought to be more realistic and more achievable than standardization (Walton et al. 2003; Lawrence, 1996). Therefore, international accounting harmonization can also be defined as a coordinated process of reducing the differences and increasing the compatibility in accounting systems between countries. The reasons for harmonization

Walton et al. (2003) pointed out that accounting is ‘an economic language’ for business communicating. These ‘economic languages’ are varied across countries of different cultural, economic, and political backgrounds. However, with the globalization of the world, a number of problems are aroused because of the diversified accounting systems between different countries, such as lack of comparability and high accounting costs. There are several reasons for why harmonization is necessary to companies. Firstly, accounting diversity represents an obstacle to understanding of accounting information for international companies and international investors (Walton et al., 2003). Even one company under various accounting standards might lead to completely different financial reports. For instance, statistics showed that Daimler-Benz had made a profit of 615 million Deutschmarks (DM) based on German Generally Accepted Accounting Principles...

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