The Disadvantages of Harmonizing Financial Statements

Written by shaun fowler
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The Disadvantages of Harmonizing Financial Statements
Simplifying financial information helps investors make better decisions. (Spencer Platt/Getty Images News/Getty Images)

Since 1973, the International Accounting Standards Board (IASB) has worked to harmonise financial statement accounting standards. Harmonisation refers to the process of standardising financial reporting across all nations into a single, uniform framework. If successful, users of financial information will be able compare companies from various nations seamlessly. While ease of comparability is a beneficial objective, there are many disadvantages to harmonising accounting standards.

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Difficulty of Implementation

Various accounting standards have been established throughout the international community. Switching to a new, uniform set of standards requires the retraining of accountants and financial managers worldwide. Developing nations face large reporting costs necessary to meet new rigours of international reporting. For example, KPMG reports that Armenia's broad adoption of international standards has created challenges for the local financial community in reconciling the new standards to national tax law.

Increasing Number of Accounting Standards

Successfully harmonising accounting standards requires a sovereign nation to cede control over financial reporting to an international governing body with competing interests. According to "The New York Times," many nations are open to reporting by international standards, but are unwilling to retire local standards. This creates a complication where a company must prepare two separate filings, one in local standards and one in international standards, which defeats the stated goal of a single financial reporting standard.

Lack of Coercive Enforcement

The integrity of international standards is greatly undermined by the IASB's inability to enforce the accounting standards. "The New York Times" reported on such an issue in 2008, when France skirted international standards to allow French companies the ability to take losses in prior years. Despite outrage from the IASB, France did not acquiesce. Without credible enforcement, users of financial information cannot trust that financial information is in fact standardised.

Problems in Approving Standards

Richard Goeltz, writing in "Accounting Horizons," noted that accounting standard decisions in the U.S. are slow and difficult to implement. The U.S. Financial Accounting Standards Board (FASB) must assess the implications of changes for a complex business community. Using FASB as an example, Goeltz argues that the increased complexity on an international scale renders a standards board incapable of meaningful decision-making.

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