International standards

1. Why were consolidation techniques not adopted in continental Europe until relatively recently?

According to Nobes and Parker (2006), the consolidated accounting procedures were not adopted until recently. The main reason is the existence of numerous legal and legislative requirements that made the preparation of individual company balance sheets compulsory and militated against new ideas. There was a lack of large, strong professions to innovate coupled with the lesser importance of ‘big business’ and holding companies. In addition, there were powerful bankers and creditors who opposed consolidation because it confuses legal liabilities. There were influential individual companies. Finally, there was a relative lack of importance of shareholders who may want the overall “economic view.”

Why consolidation arose earlier in the USA than it did in France

Consolidation arose in the USE in the late nineteenth century. It was regarded as required practice by the time the SEC was regulating listing companies in the early 1930s. By contrast, consolidation (although encouraged by COB) was rare in France in the early 1970s and not required even for listed companies, until 1987.
USA was quick to adopt consolidation because it has the world’s largest equity markets, whereas France has comparatively few listed companies and non-director shareholders. As such, the demand for “commercial”, as opposed to "legal" financial reports, has been limited in France. Group accounts are not those of a legal entity, so they are only needed for “commercial “purposes. The US lacks no company law on accounting. Consequently, it was easy to dispense with parent company financial statements in favour of consolidated statements. By contrast, two sets of accounts are necessary for France if group accounts are prepared. Finally, the US was first with corporate group structures, partly because of its federated nature. Multi-state US groups need the structure of a holding company and subsidiaries; pan-France structures do not.

2.  Compare rules- based and principles- based approaches to accounting standards and critically discuss their effects on the quality of accounting information.

The U.S accounting standards are rule-based. The system largely stems from the emphasis put on two aspects of the wording of the typical attestation statement. The first is the financial statements presents fairly, in all respects, the financial position of company X as of data and the results of its operations. Secondly, its cash flow of the year ended in conformity with accepted principles. The core element of the principle of “present fairly” that indicates a principles-based approach as defined in SAS 69. The rule states that “presently fairly” implies that the application of officially established accounting principles results in the fair presentation of financial position, the outcome of operations, and cash flows. One of the major shortcomings of the principle-based is the dismissal of a true-and-and-fair override requirement for the standard-setting approach. The large number of rules the standard include, the more an override position is essential to avoid allowing or requiring accountants to follow rules by letter but not by attention.
The FASB issued a proposal, principle-based approach to the U.S. standard setting. According to the Board, much of the details and complexity of the accounting standards were demand-driven resulting from exceptions to the principles in the standards. Secondly, the amount of interpretive and implementation guidance offered by the FASB and other for applying the standards. The FASB have developed rule-based standards to meet the demand of key constituents, especially management and auditors. Despite the need for rule-based standards, the FASB and SEC (2003) reject the rules-based standards because, in the light of accounting scandals, the cost of rules-based standard to outweighs their benefits. According to SEC, rule-based standards often provide a roadmap for the avoidance of the accounting objectives vital to the standards. SEC notes that inconsistencies, exceptions and bright-line test reward those willing to engineer their way around the intent of the standards. In addition, the rule-based standards can become useless and dysfunctional when the economic environment changes. Such standards need not reduce earnings management and increase the value relevance of financial reports as long as the rules increase managers’ ability to structure transactions that meet these rules while violating the intent and real earnings management. The principle-based approach format of the standards is dependent on the contents of what the standards regulate. The asset/liability approach combined with fair-value is inconsistency because it requires vital guidance and fair over-ride as a requirement.

3.  Characterise the accounting system in the USA using Gray’s theory of accounting culture and identify sources of, or reasons for, these characteristics

Since the publication of Gray’s theory, increasing attention has been paid to the cultural dimension of accounting. Using Gray’s theory, the USA accounting system exhibits low power distance and uncertainty avoidance.
In the USA, there is great emphasis on inter-temporal uniformity. There is consistency within companies over time and some concerns about the comparability between companies, to the relative flexibility of accounting systems to suit situations of individual companies. The preference to uniformity is consistent with high uncertainty avoidance leading to greater concerns for law and order and rigid codes of behaviours, the need for formal and written rules and regulations and respect for the conformity.

The USA accounting system inclines toward less conservatism. The flexibility preference of the U.S. explains the wide variety of management accounting in the country. In addition, the inherent need for flexibility has likely led to the numerous changes in the accounting systems.

The USA scores low in terms of power distance that underscores the American premise of “liberty and justice for all.” The country also focuses on equal rights and all aspects of American society and government. The hierarchy in the American society is for convenience and superiors are easily accessible.

The USA score high in individualism because of the highly individualistic culture. The society is loosely-knit in which the expectation is that people care for themselves and their immediate families.

The American system is characterized by a system of accounting that is strongly influenced by the accounting bodies rather than the government thus emphasizing the importance of capital markets. As such, the accounting environment is transparent.

4. Analyse the impact of recent international accounting convergence on ( Anglo-Saxon Accounting ).

The movement toward the international convergence of financial reporting standards is driven by the International Accounting Standards Board with the support of the European Union. Convergence refers to the process of converging or bringing together international standards issued by the IASB and current standards issued by national standard setters. The converge will have numerous effects including enhanced comprehensiveness and comparability of cross-national financial reports. It enhances international capital flow and cost savings accruing to multinational corporations raised the level of accounting. In addition, it will improve the provision of low-cost financial standards to the nation with limited resources. One of the major drivers of convergence is the globalisation of business. With the increased globalisation, multinational companies continue to seek stable capital markets. Most multinationals favour the convergence of accounting standards to increase comparability of financial reports. Increasing the comparability of financial information will facilitate the free flow of capital around the world. Convergence of international standards will increase the effectiveness of making investment decisions. The convergence of the standards will make cross-border reporting consistent.

The converge of the standards will improve the quality of financial reporting in some countries that have underdeveloped standards. It will also provide a cheaper route to some developing countries. However, converge may also have some negative impacts especially in developing countries as some of these standards may be too complex for these countries. In addition, the application of these standards requires addition training to accounting professions in these countries. Another key impact of convergence for companies adopting IFRS is the huge cost and the disruption of the change from preparing accounts using national standards to prepare statements.
According to Nobes and Parker (2004), international standardization of accounting will facilitate greater flexibility and efficiency in use by staff by multinational firms’ accountants and auditors. The different accounting regulation in different countries acts as barriers to transfer of staff between countries. The importance of accounting standards for the quality of reporting is more limited than often though. Other supporting institutions and structures play an important role in determining reporting outcomes. As such, a single set of accounting standards does not guarantee the comparability of firms' reporting practices. In addition, the effects of accounting standards cannot be evaluated in isolation from other elements of a country’s institutional infrastructures. In a functioning economy, the key elements of the institutional infrastructure fit and reinforce each other.

References

George J., Michael B & Alfred W (2006). Principles-versus rules-based accounting standards: The FASB’s standards are setting strategy. ABACUS, Vol. 42, 2006.

Luzi H & Luez C (2009). Global accounting convergence and the potential adoption of IFRS by the United States: An analysis of economic and policy factors. 

Malthus S (2004). International convergence of financial reporting standards. 

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