Student Name: Cuong Do

The
February 4
Implications
of
International 201
Harmonizatio
n of
Accounting 1
Standards
[Increasing growth in international businesses and capital flows has
brought a rising economic integration. Because of these developments,
there has gradually been an international homogeneous effect upon many
Research
practices and institutions, thus, a desire to harmonize Accounting Proposal
Standards is born]
 The Implications of International Harmonization of Accounting Standards

Student ID: N0150919

Table of Contents

Introduction......................................................................................................................................2

Motivation........................................................................................................................................2

Background of the World Accounting.............................................................................................3

Aim..................................................................................................................................................5

Critical Reviews of the Harmonization Process..............................................................................5

Methodology..................................................................................................................................11

Proposed Timeline.........................................................................................................................12

Bibliography..................................................................................................................................13

Appendix........................................................................................................................................15

1. National Differences...........................................................................................................15
2. Hofstedes Cultural Dimensions..........................................................................................16
3. Accounting Systems Categories.........................................................................................17

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 The Implications of International Harmonization of Accounting Standards

Introduction
Over the last several years, globalization has been having a profound impact upon daily
life. As the advancements in technology and communications have meant that the distances have
become much smaller. At the same time, the reduction in trade barriers and the focus on free
market principals have meant that it is becoming increasingly competitive. As the way
businesses operate are facing increasing amounts of scrutiny from: the various activities that they
are involved in (Cultural Revolution, 2007). In some cases, this could mean that shareholders are
questioning the effectiveness of management’s ability to achieve different financial objectives.
While at other times, this could mean that companies are facing a careful examination of: their
business models and practices from government agencies. As a result, the way that corporations
are accounting for financial transactions has been brought to the forefront. Where, businesses
want to address all of the concerns and adapt to the changes that are taking place from
globalization. One tool that is being utilized, to achieve these objectives is International
Financial Reporting Standards (IFRS). Simply put, this is an international standard of accounting
principles that are most commonly used around the world. The idea is that by establishing these
different standards, you can be able to address the various concerns and improve transparency.
However, given the fact that many countries have their own traditions and principals, these kinds
of standards may not be accepted (Maree, 2007). To determine how some kind of basic
foundation can be established requires examining: the effects of cultural / national standards and
if the free markets can most effectively address these issues (based upon the efficient markets
hypothesis). Together, these different elements will provide the greatest insights, as to the total
impact that international accounting standards is having on the world of business.

Motivation
The adoption of IFRSs would enhance the communication between managers,
shareholders, other stakeholders due to the reduction of information asymmetry (Bushman and
Smith, 2001), ultimately, lower agency costs (Healy and Palepu, 2001). Reduced information
asymmetry would also mean lower costs of equity and debt (El-Gazzar et al, 1999; Botosan and
Plumlee, 2002). IFRSs would also help international investors in making better financial
decisions and informed judgements of the firm future financial performance (Street et al, 2000)

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through enhanced quality accounting and transparency (Tarca, 2004; Tendeloo and Vanstraelen,
2005). Furthermore, adopting IFRSs would improve comparability, lower transaction costs and
boost foreign investments. Therefore, IFRSs would likely minimize profits manipulation and
improve stock market efficiency (Kasznik, 1999; Leuz, 2003), whilst they would also tend to
have positive impacts upon firms’ stock returns and equity related financial performance
measurements (Guidry et al, 1999; Chung et al, 2002). Questions now can be raised despite the
numerous benefits that harmonization of international accounting standards brings.

Background of the World Accounting

To determine the impact of cultural based factors on accounting standards means that we
must examine the history of accounting throughout the world. As the basic principles of tracking
the resources of an organization and its finances has always played an important part in their
survival. This was necessary for all future planning and to determine where to effectively focus
the limited amount of resources. As a result, the practice of entering these numbers into a ledger,
following a standard format was continually being utilized. Where, businesses would
inadvertently follow a basic format of calculating the overall profits and losses. Over the course
of time, this would mean that the basic format was developed to the point, that it was continually
embraced by a host of entities around the world (in one form or another). This is important,
because it is showing how there was always an international form of select accounting standards
around the world. The reason why, is because when you are working with numbers, there are
only some many ways that you can effectively account for the overall profits and losses. Thus,
the best standards were embraced by organizations, because they were effective tools. Once this
began to occur, it would have a ripple effect on other entities, as they would use the same kind of
tools. At which point, a certain amount of accounting practices were utilized by various
organizations around the world (A Brief History of World Accounting, 2010).
When you step back and look at what was taking place, it is clear that there were a certain
amount of standards that were most preferred by organizations. Once trade began to improve, is
when these principals would be shared with other individuals (who would communicate these
ideas as well). This is highlighting, how there was need for basic accounting principles. As a
result, when they were passed on from one person to the next, this would create the standards
that are utilized to this day. In many ways, one could argue that harmonization is possible,

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because it has been taking place for many centuries around the world. Where, certain practices
have been embraced, as the most appropriate way for, monitoring how an organization is
utilizing various resources to achieve their objectives (A Brief History of World Accounting,
2010).
A good example of this can be seen with double entry accounting method that was
developed in 1400’s. Where, two different thinkers would openly discuss how similar standards
should be utilized, to address the different challenges facing all organizations. As this method,
would allow for an effective way to tackle the issues that they were wrestling with. This is
important, because the double entry accounting method was developed by the Italians and the
Chinese. Even though these cultures were vastly different, the necessity in this basic principal
would force businesses to embrace these ideals. What this shows, is how all cultures were
following a loosely based format in one way or another. Therefore, adjusting to various
international accounting standards should not be too difficult (A Brief History of World,
Accounting 2010).
The technological advancements and the transmission of information, people, products
and services have gathered the world closer. Increasing growth in international businesses and
capital flows has brought a rising economic integration. Because of these improvements, there
has gradually been an international homogeneous effect upon many practices and institutions,
thus, a desire to harmonize Accounting Standards is born (Wolk et al., 2001). When Daimler-
Benz and Chrysler implemented their merger in early 1998, beyond the simple meaning that two
companies from two different countries merged, two different Accounting Philosophies were
forced to combine (Radebaugh and Daniels, 2001). These differences in Accounting Standards
led among other things to the problems in comparing financial statements (Hill, 1999). This lack
of comparability hinders the free movement of capital markets as international shareholders
might lose confidence in investing in foreign companies, which have their financial statements in
accordance with their respective country’s Accounting Standards.
In the recent years, international enterprises, financial analysts, numerous international
standards setters, e.g. International Accounting Standard Board (IASB) and other interested
parties have put great efforts in order to achieve the harmonisation of Accounting Standards. The
primary objective of those was to eliminate the diversity of financial statements, to lower extra

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costs, arising from using different financial statement formats, and to attract more foreign
investors (Epstein and Mirza, 2001).

Aim
Given the benefits that international companies enjoy after the IFRS convergence, the primary
objective of this research is to investigate the two controversial topics, namely:
 If accounting is culturally based and national cultures are different, will international
harmonization be possible?
 If the efficient markets hypothesis holds, then could it be interpreted as meaning that
harmonization of international accounting standards is unnecessary?

Critical Reviews of the Harmonization Process

Despite the common practices that were being used in accounting, various cultural
traditions were often embraced as part of these basic principles. This is because each region of
the world had common ideas and influences that were most important to them. Where, they
wanted to instill these traditions in the way business is conducted in a particular region. Part of
the reason for this, is because various countries had different: legal, governmental and reporting
procedures. This meant that when you would go from one region of the world to the next, the
basic formula was embraced within the industry. Yet, they were also augmented with others
ideas, reflecting the traditions of a particular country (International Differences in Accounting,
2005).
For example, in the West (Continental-European) the basic accounting principles that are
being utilized are based off the Roman Standards (Code law). As the ideas of ancient Rome
would have an influence upon: the legal system, the government and the way that information
was recorded. This is important, because this basic standard would be embraced by Western
countries, as the most acceptable practices for business. However, in other areas of the world
(such as China), they were not influenced by the ideas of the Romans. Instead, they were
influenced by the ideas of Confucius. This would have an impact upon: the Chinese legal system,
government and the way that business was conducted. As a result, you would see a situation
develop, where these basic principals were utilized. While at the same time, they would be

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embracing the same basic standard used in other countries. The only difference is that they were
augmented to reflect different cultural factors. (International Differences in Accounting, 2005)
Over the course of time, these different standards would continue to evolve with an
increased focus on improving reporting and disclosure. This was a main emphasis within the
accounting industry in many developed countries during the 20 th century. Part of the reason for
this, is because various events (such as the 1929 stock market crash), would have an impact upon
the economy. Where, it became obvious that increased amounts of disclosure and transparency
were necessary for the public to have confidence in the financial system. As a result, there were
various regulations implemented that would require organizations to increase the overall amount
of disclosures. The idea was that by disclosing any kind of material changes in balance sheet
would help everyone, to make more informed decisions about what was taking place with a
company. At the same time, it would make it easier for regulators to monitor the different
activities of businesses.
A good example of this can be seen with implementation of the Securities and Exchange
Act of 1934 (in the United States). This law would require all companies to disclose to the public
changes in: their earnings and report them on quarterly basis. The idea was that forcing everyone
to follow these different standards would help to improve transparency. At which point, investors
can make an informed decision about what was occurring. This is important, because it shows
how this regulation was embracing the Western ideas of disclosure. Where, there was the cultural
belief that this would help to: improve the stability of the markets and the economy (which it
did). As a result, this principal would be embraced as time went by, as part of the basic standard
operating procedures in an organization. Globalization would spread this basic idea around the
world during the 1990’s, by incorporating these views with the advances in technology and
communication. What this shows, is that different cultural standards can become a part of
international accounting principles. Therefore, this is highlighting how these different accounting
standards can effectively be harmonized over the course of time.
A good example of this can be seen by looking no further than China, where they
announced that the country would follow IFRS standards. As they are going to be phasing in the
different provisions one step at a time. This is significant, because it shows how globalization is
causing a single form of accounting standards to be embraced. At the same time, the US and EU
have begun working together to integrate the different accounting standards in line with IFRS

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principals. This is important, because it shows how there is an emphasis to slowly integrate these
ideas into one basic standard that can be used around the world (Fritz, 2006). Therefore, even
with the various cultural differences, the acceptance of accounting based principals has become
an integral part of business. As a result, harmonization is possible, because these basic ideas are
being accepted in a number of countries around the world (China’s Move on IFRS, 2007).
The efficient market hypothesis states that it is impossible to beat the equity markets.
The reason why is because they are reflecting the current and future expectations about the
business itself. As stock prices in relation to the major market average will reflect these
expectations at all times. This is important, because this theory is basically saying that anyone
who is involved in the equity markets will have no way of outperforming the averages.
Therefore, many individuals have concluded, that it is impossible to beat the markets, which
makes creating various accounting standards an exercise in futility. The reason why, is because if
you cannot have a better understanding of the situation (through accounting principles), then
there is the possibility that this will not provide any kind of advantage. Where, the markets and
investors are reflecting their expectations about profits in the price of the underlying stock
(Efficient Market Hypothesis, 2011).
When you step back and analyze what is taking place, it is clear that even if the efficient
market theory is correct there is still the need for universally accepted accounting standards. This
is because accounting is necessary in providing clarity to the organization. As a result, the
implementation of these different standards can have an effect upon: all the entities and the
activities that they are involved in. Where, they will provide the public with additional
information including: presenting reliable information and making additional disclosures.
Presenting of reliable information is when the different procedures will evaluate the overall
strengths as well as weaknesses of an organization, based upon the allocation and use of various
resources. This is important, because all entities are given a limited amount of resources that they
can use, to achieve their different financial objectives. In some cases, this could be in the form of
various financial based instruments such as: cash, stocks, bonds and insurance policies. While at
other times, this could be utilizing various natural resources in the production of: different
goods / services and the total amount of labor available to address the situation. These different
elements will help managers to determine how they can be able to increase their overall profits,

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by allocating resources where they are most effectively needed (Efficient Market Hypothesis,
2011).
At the same time, it will allow investors and regulators to monitor the activities of the
business. Where, investors could use the information from the different reports, to decide if the
company has the ability to remain financially solvent (based upon the allocation of the
resources). This is because the basic function of all businesses is to make a profit. When an
investor can be able to determine, if the actions taken by managers will affect the bottom line, is
the point that the information being disclosed is useful. For example, the efficient market theory
states that it is impossible to time the market, due to the fact that all current and future
assumptions are being reflected in the price of the stock. However, investors such as Warren
Buffet will use the different pieces of financial data, to determine if the company is a good long
term investment (in relation to the price of the stock). This is important, because utilizing the
data that was provide, has help Buffet be able to experience a larger return, in comparison with
other investors (who subscribe to the efficient market theory). In this case, the use of common
accounting standards would help Warren Buffet, to determine if particular company could
provide him with superior returns. As a result, the harmonization of international accounting
standards would be useful for investors, in determining if purchasing a particular company is
advantageous (Efficient Market Hypothesis, 2011).
In the case of regulators, the use of financially accepted accounting principles helps to
improve their enforcement of different regulations. This is because, the information that is being
provided, can gives bureaucrats more clarity about the nature of an organizations activities. At
which point, they compare these numbers with public statements that were made by executives,
to determine if they are trying to mislead investors. A good example of this can be seen with the
Enron investigation. What happened was, no one understood the overall scope of the fraud, and
much less how it would affect investors (until it was too late). At which point, various executives
began to play a game of finger pointing and denial of their involvement. To determine who was
responsible for what took place and their roles, investigators would look at the statements that
were made by executives (to the public), their personal sales of company stock at the time and
the reported financial information in comparison with the off the book special purpose entities.
As a result, the former CEOs Ken Lay and Jeffrey Skilling were charged with being the ring
leaders of the fraud. This is because both men would make public statements about the financial

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strength of their company. While at the same time, they were privately selling their shares in the
company and continuing to hide the overall extent of the losses. Once regulators were able to
unravel the fraud, they would charge these two as the main culprits for what took place. This is
important, because it showing how regulators would utilize financial information, to take down
the veil of secrecy surrounding what took place. At which point, they would charge the two with
securities fraud and making misleading statements to the general public. In this aspect, the use of
accounting based standards was important, in creating a basic foundation for the investigation
that took place. Therefore, the harmonization of different international accounting standards is
necessary, as the efficient market theory will overlook key aspects of elements that may not be
known to the general public (such as fraud). As a result, the various standards help to prevent
this from occurring, by leaving a paper trail of what activities took place and when (Thomas
2002).
Making additional disclosures is when the company is providing added information that
can be used, to determine if there is any kind of changes, in the underlying financial condition of
an organization. This is important, because this basic standard has been utilized to: keep the
public and investors informed about the changing market conditions. Where, it will tell them if
there have been changes to the balance sheet of company, based upon particular events. As a
result, this is providing information that has been used as part of understanding the financial
condition of an organization. When you compare this with the efficient market theory, it is
obvious that the improved accounting standards will help to inform the public about what is
taking place. Where, this is providing additional information that may not have been known
about something that could be occurring internally.
For example, in 2008 UPS was being affected by a sharp increase in energy prices to
their business model. Under the traditional market theory, the increase in oil prices would be
reflected in the price of the stock. As it was a total evaluation of the current run up to: record
highs and the impact that they would have upon the overall bottom line of the company. Yet, in
July 2008, the company would report a sharp reduction in quarterly earnings. As they were being
hit by record high energy prices and declining demand from customers (UPS Lowers 2 Q
Earnings, 2008). This would have an impact upon the price of stock, as shares would fall from
$55.00 to below $40.00 per share in less than two months (UPS, 2011). In this case, the efficient
market theory should have reflected these different views in the price of the stock. However,

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because UPS made this disclosure, meant that analysts and investors would reevaluate the
underlying earnings. Where, they would begin to see shares reflecting these changing views
about what was occurring. In this aspect, one could argue that the efficient market theory is
ignoring key facts that may not be known about: the company or various challenges that could be
affecting their overall bottom line. This is important, because it shows how having some kind of
internationally based accounting standards, helps organizations to be able to identify key changes
that are occurring in: the economy and communicate this information to the public. Where, there
are obvious facts and figures that may not have been known (when looking at the prevailing
news headlines). Therefore, having a universal accounting standard will have an impact upon
how quickly an organization will respond to different challenges.
When you step back and analyze this information, it is clear that even if the efficient
market theory holds true, there needs to be some kind of universal accounting standards. This is
because, the efficient market theory is assuming that all relevant information is reflected in the
price of the stock. However, international accounting standards are helping to help an
organization be able to identify, changes that are occurring and adapt to them. At the same time,
they can improve communication with the general public and regulators about these changes.
This will improve transparency and help to increase the confidence that investors will have in the
activities of management. Even if the efficient market theory is correct, it will not be able to
actively tell managers, about the changing conditions of supply and demand. In this aspect, the
use of universal accounting standard will help to address these issues. At the same time, it can be
used to communicate with: the public, investors and regulators about how these changing
conditions will have an impact upon the overall bottom line. This is important, because the use of
an effective accounting system has helped to support the rapid increases in economic growth
(due to improved accounting standards). Therefore, harmonization is necessary to address the
constant challenges facing all organizations on a regular basis.

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Methodology
Since the research describes the characteristics and the implications surrounding the
international harmonisation of Accounting Standards, it is believed to belong to the descriptive
research field. However, the interested results will not be measured in terms of quantity, amount,
intensity or frequency. A qualitative approach will be used to document the field of interest.
Miles and Huberman identify a qualitative analysis as three flows of activity, namely:
• Data reduction,
• Data display and
• Conclusion drawing/verification (Miles and Huberman, 2000).
Data collection is considered as data reduction because it is a decision, which data should
be used. This research will only rely on secondary and not on primary data. In this case, books,
previous research reports, articles and homepages are used as main secondary resources. Using
secondary data will help us to save both time and money. As there is restricted time for writing
this thesis, it is vital that we could collect data in a way which will be possible in this limited
given time. Several researchers have given their efforts in finding the benefits of the
harmonisation process. Thus, this research will use that method as well. Yet none of them gave a
clear line of reasoning of the controversial topics discussed above. Therefore, existing data will
be helpful in finding out the focus for the analysis part.
Throughout the thesis, there will be graphics and tables to illustrate the content better (see
Appendix for samples), which is believed to provide the reader a better understanding of the
topic. Moreover, a specific structure will be chosen, which is different from the general
structures, used in other thesis. As we are going to explain the national differences, implications
underpinning the implementation of international harmonization, a structure is needed, which
suits this process and guides the readers through the work.
The structure will be the following three stages of development:
• A starting point  the needs and benefits of international harmonization
• Discussion 1  differences of Accounting Practices and National Cultures  Possible?
• Discussion 2  efficient market hypothesis  Necessary?
Thus, these three stages of development will be applied to the structure of the thesis.

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Conclusion drawing includes the questions of what factors have influenced the researcher
in making the conclusion. Conclusion drawing is believed to be a question of verification. In
order to avoid subjective results the researcher will try to remain open and sceptically, to obtain
diverse point of views during the study. Different books and article both from American as well
as European and Asian authors are used. The ultimate aim is to prevent one-sided arguments and
therefore, both sides of the medal will be considered. This could be done by not only trying to
present the Asian and European view but also to explain the American view.

Proposed Timeline

February: Research proposal

Start data collection

March: Data collection completed

Data display and analysis
Literature review

April: First draft

July: Second draft

June: Final report completed

Findings presented

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Bibliography
- A Brief History of World Accounting, 2010, Finance Professor. Available from:
http://www.financeprofessor.com/francis/accountinghistory-anders.htm
- Botosan, C. and M. Plumlee (2002), “A Re-examination of Disclosure Level and the Expected
Cost of Equity Capital”, Journal of Accounting Research, 40, pp. 21-40.
- Bushman, R. and A. Smith (2001), “Financial Accounting Information and Corporate
Governance”, Journal of Accounting and Economics, 32, pp. 237-334.
- Chung, R., M. Firth and J. Kim (2002), “Institutional Monitoring and Opportunistic Earnings
Management”, Journal of Corporate Finance, 8 (1), pp. 29-48.
- China’s Move on IFRS, 2007, ACCA. Available from:
http://www.accaglobal.com/archive/ifrs/news/2792735.
- Cultural Revolution, 2007, Economist. Available from:
http://www.economist.com/node/8522275.
- Efficient Market Hypothesis, 2011, Investopedia. Available from:
http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp.
- Epstein, B. and Mirza, A. (2001), “IAS, Interpretation and Application”, John Wiley & Sons,
New York.
- El-Gazzar, S., P. Finn and R. Jacob (1999), “An Empirical Investigation of Multinational
Firms’ Compliance with International Accounting Standards”, The International Journal of
Accounting, 34 (2), pp. 239-248.
- Fritz, Susanne, 2006, The International Harmonization Process. Available from:
http://www.ep.liu.se/exjobb/eki/2003/fek/003.
- Guidry, F., A. J. Leone and S. Rock (1999), “Earnings-based Bonus Plans and Earnings
Management by Business-unit Managers”, Journal of Accounting and Economics, 26, pp. 113-
142.
- Healy, P. and K. Palepu (2001), “Information Asymmetry, Corporate Disclosure, and the
Capital Markets: A Review of the Empirical Disclosure Literature”, Journal of Accounting and
Economics, 31, pp. 405–440.
- Hill, C. (1999), “Competing in the Global Marketplace”, Irwin McGraw Hill, Boston, 3rd
edition.

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- International Differences in Accounting, 2005, SVSES. Available from:

http://www.svses.cz/skola/akce/konf/ucto04/texty/jindrichovska.pdf.
- Kasznik, R. (1999), “On the Association between Voluntary Disclosure and Earnings
Management”, Journal of Accounting Research, 37, pp. 57-81.
- Leuz, C. (2003), “IAS Versus U.S. GAAP: Information Asymmetry-based Evidence from
Germany’s New Market”, Journal of Accounting Research, 41 (3), pp. 445-472.
- Maree, Jayne, 2007,Globalization of Accounting Standards, Edward Elgar, Cheltenham.
- Miles, M. and Huberman, A. (1994), Qualitative Data Analysis – An expanded source book,
Sage Publications, Inc, Thousands Oaks, 2nd edition.
- Radebaugh, L. and Daniels, J. (2001), “International Business, Environment and Operations”,
Prentice Hall, London, 9th edition.
- Street, D., N. Nichols and S. Gray (2000), “Assessing the Acceptability of International
Accounting Standards in the US: An Empirical Study of the Materiality of US GAAP
Reconciliations by Non-US Companies Complying with IASC Standards”, The International
Journal of Accounting, 35 (1), pp. 27-63.
- Tarca, A. (2004), “International Convergence of Accounting Practices: Choosing Between IAS
and U.S. GAAP”, Journal of International Financial Management and Accounting, 15, pp. 60-
91.
- Tendeloo, B. and A. Vanstraelen (2005), “Earnings Management Under German GAAP Versus
IFRS”, European Accounting Review, 14 (1), pp. 155-180.
- Thomas, Cathy, 2002, Called to Account, Time. Available from:
http://www.time.com/time/business/article/0,8599,263006,00.html.
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s=UPS+Basic+Chart&t=5y.
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http://www.webwire.com/ViewPressRel.asp?aId=68703.
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Accounting Theory”, South-Western College Publishing, 5th edition.
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Articles. Available from: http://findarticles.com/p/articles/mi_qa5439/is_200901/ai_n31965625.

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Appendix

1. National Differences

Source: Roberts, C., Weetman, P. and Gordon P. (1998), International Financial Accounting – a comparative
approach, Financial Times Pitman Publishing, London.

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2. Hofstedes Cultural Dimensions

 Large versus small power distance

The dimension of power distance should measure the degree of inequality in society and to what
extent members of a society accept that the power in an organisation is distributed unequally.
 Strong versus weak uncertainty avoidance
The basic assumption behind this dimension is that humans are unsure about their future and
therefore tend to use rules, laws and rituals to a certain degree to reduce uncertainty. This
dimension is therefore the level to which people are uncomfortable with ambiguity and an
uncertain future.
 Individualism versus collectivism
This dimension describes whether members of a society have a very close relationship in the
collective or if members of a society care for themselves and their family first. This dimension
asks whether the I or we prevails.
 Masculinity versus femininity
This dimension measures whether a society is more determined by masculine values as for
example performance and achievement or by feminine values as relationships and caring

Source:
- Helgesson, T. (1996), Culture in International Business: an Introduction, Academia
Adacta, Lund.
- Choi, F., Frost C. and Gary, K. (2002), International Accounting, Prentice Hall, New Jersey, 4th edition.

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3. Accounting Systems Categories

Member of Anglo-American Model (Common Law)

Source: Nobes et al., 1997.

Member of Continental-European Model (Code Law)

Source: Nobes, C., Mueller, G., Gernon, H. and Meek, G. (1997), Accounting an International Perspective, Richard
D. Irwin, Inc; Chicago, 4th edition.

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