Harmonization: The Benefits of Universal Accounting Standards

As the countries of the world continue to become more interconnected on a daily basis, increasing globalization is inevitable. Their economies are tied together in a web that cannot be undone. Despite this connection most countries have their own individual set of accounting standards. Currently, it is difficult to compare the financial statements of a company from one country to those of another. As globalization accelerates, the idea of harmonization between different countries’ accounting systems becomes more necessary. Though it is a complex challenge to construct and enforce a worldwide set of accounting standards, there would be many advantages. A uniform accounting system would lead to more comparable financial information, encourage international investment and trade, and minimize future economic crises.

The harmonization of accounting standards would allow for the financial statements of all companies to be comparable. If every financial statement was calculated following the same standards, it would be easier to compare one corporation’s performance to any others. It would even be possible to compare the financial statements of a firm in one country to those of a firm across the globe. There would be no confusion for any of the various financial statements users because they would all be prepared using the same standards. The enactment of a harmonized set of accounting standards would make the financial statements of different countries around the globe more comparable.

Easily comparable financial statements would help to facilitate international investment. Most individuals are only familiar with the financial statements of their country of residence. Foreign financial statements most often are not created following the same accounting policies. Though the information they convey may appear similar, one cannot make a proper comparison because the numbers were not calculated the same way. This can make international investment a bit more risky, and therefore less likely that the average individual will participate. If a universal set of accounting standards is into place, the flow of capital across international borders would increase. Everyone, from multinational firms to individuals, would easily be able to compare the financial statements of any firms in any country. Investors could be more certain about the financial health of a foreign company and would then be more likely to invest.

In addition to increasing international investment, harmonization would also have an effect on international trade. Today, firms often choose to buy products and natural resources from other countries because of greater abundance or better prices. Yet sometimes the international market for goods and resources can lead to disputes and tension. There are often disagreements over pricing caused by the usage of different accounting practices to calculate costs. For example, the lumber producers in the US have been submitting formal complaints against Canadian lumber producers for many years. They believe that the Canadian’s cost of softwood timber is too low. This allows the Canadian lumber producers to offer their goods at a more competitive price, while still maintaining a profitable margin. A lower cost gives Canada an unfair advantage in the international market. If a universal accounting method for cost was in place, both the US and Canada would calculate their costs the same way. There would be no reason to disagree, and all of the prices on the market could be more accurately and fairly compared.

A universal set of accounting standards could help to avoid some potential future economic crises. In the past, the inability to fully comprehend the information on foreign financial statements has aided the development of financial crises. One such crisis took place in Southeast Asia at the end of the 1990’s. This crisis began when investors believed the country could no longer maintain its levels of foreign investment and withdrew their money. The flight of capital invested in Thailand facilitated an economic crisis. A contagion effect influenced investors to remove their money from other Southeast Asian countries with similar economic traits, including Indonesia. Indonesia as well as other Southeast Asian countries fell into an economic crisis despite the fact that their financial information indicated health. If a universal set of accounting standards had been in place, there may never have been any unsustainable valuations in Thailand. Additionally, foreign investors would have had more confidence in their investments knowing the financial information was accurate. They could have made better decisions regarding their investments. In the future, harmonization could help to prevent this type of occurrence

Globalization makes it necessary for investors and firms to have access to financial information from companies around the world. It would be beneficial to create and enforce a set of universal accounting standards for every country. Financial information would be more transparent and easier to understand. Additionally, financial statements of firms in any country would be easy to compare. Harmonization would lead to an increase in international investment since investors would have more confidence in foreign financial information. International trade would also be affected, as universal accounting procedures would limit disputes. Finally, future economic crises due to misinformation and confusion could be avoided. Though the task of harmonization are daunting, it is evident that a universal set of accounting standards would have several benefits.