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Accounting Standards Globalization

Date: 10 Aug 2015
Author: Fawaz, Khalil
“Sunlight is said to be the best of disinfectants; electric light is the most efficient policeman”. This 1933 quote from Louis Brandeis (Supreme Court of Justice) which is to be understood in the context of the Great Depression, emphasizes the importance of transparency in mitigating fraud and market manipulation.   Accounting Standards Globalization: A Subject of Global Importance   One of the main objectives of the corporate governance framework, as defined by the Organization for Economic Cooperation and Development (OECD), is to ensure that timely and accurate disclosure is made on all material matters regarding a corporation, which include the financial situation, performance, ownership and governance of the corporation so that transparency is enhanced. Corporate disclosure is aimed at all stakeholders such as creditors, employees, regulatory agencies and the public at large. at investors.   Timely and accurate disclosure is a key indicator for the integrity of markets and stakeholders’ confidence in the business operation as well as in management of a given company. Investors, who are, in fact, one particular stakeholder, must decide where and with what risk to place their money. Reliable and timely information would increase their confidence, and, accordingly, their willingness to invest in the company, thereby reducing that company’s cost of capital. Transparency also assists those in charge to reduce fraud risk by placing measures in place to mitigate this risk. All these factors help improve the firm’s productive capacity and productivity.   The most useful – and thus critical – information that must be transparently disclosed to stakeholders relates to the financial situation and performance of an entity, i.e. the interim and annual financial statements. Transparency in the disclosure of financial information is thus a key factor contributing to financial market efficiency and to the provision of the information necessary for market discipline to be effective. Most countries generally agree on the need for a company’s directors to disclose to its shareholders (whether in an annual report or in some other document) their own interests, as well as key financial information of the corporation.   The challenge for policy-makers is to establish a framework within which transparency, market discipline and corporate governance can interact in a positive and coherent way that would strengthen the market integrity and the related economic performance. Such a framework would provide an important check on the quality of accounting and reporting. In practice, however, accounting standards continue to vary widely around the world; corporate disclosure requirements can, in fact, differ significantly between countries, regions, industries and others. For that, corporate governance chains have undergone various overhauls in order to increase transparency. Having said this, the main factor which would effectively mitigate the risks coming from such differences is the globalization of general principles, requirements and accounting principles. Internationally prescribed accounting standards that promote uniform disclosure would enable comparability, and assist investors and analysts in comparing corporate performance and making decisions based on the relative merits. However, and despite the efforts made, there are still significant differences among the different sets of accounting principles adopted around the globe.   For international groups, such differences are a burden since different sets of financial statements are being prepared for the same period; some of which are based on locally adopted standards, while some are based on internationally adopted standards, which are used by the mother company. The burden not only translates into inefficiencies at the report preparation level but the risk of unintentional errors, as well as the risk of intentional manipulation of data and financial reporting, are greatly increased.   Accordingly, current accounting and reporting practices fall short of meeting the information needs of the capital markets nowadays. The goal now, for enhanced transparency, is an improved reporting model built on principle-based standards that can be applied in a cost-effective manner around the globe. The convergence of accounting standards is a matter of decisive strategic importance to the future of global capital markets. High quality information is essential to high quality markets and governance. Such a convergence of financial reporting and accounting standards is a valuable process that contributes to the free flow of global investment and achieves substantial benefits for all markets stakeholders. It improves the ability of investors to compare investments on a global basis and, thus, it lowers their risk of errors of judgment. Accounting and reporting for companies with global operations is facilitated while some costly requirements are eliminated. Accordingly, operational challenges for accounting firms are reduced and their value and expertise is focused around an increasingly unified set of standards. Globalization creates an unprecedented opportunity for standard-setters and other stakeholders to improve the reporting model.   While all standard-setters are focused on realistic economic representation whereby accounting standards address the legitimate needs of key stakeholders and provide a comprehensive overview of financial information, it makes perfect business sense that accounting standards should be unified around the globe.   The Globalization of the Kingdom of Saudi Arabia’s Financial Reporting Standards   The Saudi economy has its own unique national practices. The mandatory adoption of International Financial Reporting Standards (IFRS) has undoubtedly been the next major milestone in the country’s economic development. Currently, the Saudi Arabian Monetary Authority (SAMA) requires banks and insurance companies to mandatorily report under IFRS with few exceptions. All other listed and unlisted companies are required to follow accounting standards issued by the Saudi Organization for Certified Public Accountants (SOCPA).   During year 2013, SOCPA’s board of directors approved an IFRS convergence plan by which listed entities other than banks and insurance companies would be required, starting year 2017, to report under. They mandated that public listed entities would be required to adopt these standards as early as 1 January 2017. All other entities are required to report under IFRS from 1 January 2018. The goal is to make a transition towards IFRS after assuring their suitability to the Saudi financial and business environment through SOCPA’s independent standard-setting process.   The possible modifications are likely to fall under three categories: (a) additional disclosure requirements; (b) the removal of optional treatments; and (c) amendments where IFRS requirements contradict Shariah or local law.   On an overall basis, it is needless to mention that standard setters are more and more convinced with globalization. Saudi Arabia is one example of a country that has its own unique national practices and that is moving toward the globalization of accounting standards.  

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