Globalization and Accounting

Much has been said about the cons of globalization, a big one being the cheap imports from China that are suffocating the small scale industries in a lot of countries including US. But there are definitely some positives effects- especially related to the world of accounting.

In October 2002, the US accounting standard setter Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced the issuance of a memorandum of understanding (“Norwalk Agreement”), this was the first formal step towards the commitment of the two organizations to converge US and International accounting standards. The working of the IASB and the FASB in conjunction to converge and implement rules is the first example of the positive impact of globalization. Convergence of the standards would mean that accountants will, from here on, be truly a global breed. A US based accountant could easily work on the financials of a Japanese firm because the rules would be similar. The accounting field is moving towards being one, consistent world.

The use of International Financial Reporting Standards in preparation of financial statements of organizations around the world is the second example of globalization benefiting the accounting world, converging it to one common understanding. At the last count 123 countries in the world either required or permitted IFRS reporting. Use of the same standards worldwide actually is a boon for smaller organizations who want to do business or invest in the international arena, the use of single set of accounting standards will reduce the cost of conversion of the financial statements. If an organization wants to raise capital in the international market, the company does not need to restate its financial statements to adhere to the standards of different countries; thereby resulting in reduction of cost of raising capital overseas.

Another similar movement that is taking effect now is the use of eXtensible Business Reporting Language or XBRL. It is the language for the electronic communication of business and financial data. Companies all over the world are moving to filing their financial statements in the XBRL format. The language streamlines the process of understanding the data in financial statements. It standardizes the financial statements across the board, so one can compare and contrast a company’s performance with its peers and even across a broader set.

Actually once the standards are converged and XBRL becomes a standard process, the accounting world will move to the next level; a truly global and technologically higher level. Not only will the basis for the financial statements be similar and comparable due to converged standards, but also the language of reporting will be comparable due to use of XBRL.

On a similar note, globalization is also a trend that ensures adherence with accounting rules. Any organization that wants to market its products or invest or raise capital in the global world needs to ensure that they adhere to the rules and regulations. Because it is a global world the news about rule breakers travels fast. A good example is Satyam. How many of us here in the US had heard about Satyam or its CEO Raju? Maybe a few people were aware of the company, but since the news of the huge scandal in the organization in 2009 people have taken notice, people all over the globe.

Why do you think that happened, it is because the world is one now due to globalization. People are watching companies like Satyam that are servicing clients’ world over. So in the economies where companies could tweak a few rules and still get away, now if one wants to be a global player one has to ensure compliance with not just the rules of their country but of the world.

So globalization isn’t necessary a bad thing, it is getting the accounting world close and making the accountants a true global professional.