Question

A. Mention and describe one of the strategies to develop accounting standards for develop- ing countries. B. What are the advantages and shortcomings of the strategy?

Answer 1

A)

A reliable and efficient accounting system plays a vital role in the economics

of a country. This has never been truer than it is today, as markets are becoming

more and more global allowing for business, investment, knowledge and

transactions to take place across many borders. There is increased pressure on

corporations and countries for reliable, relevant and accurate data. According to a

study conducted by the United Nations (UNO 2008), the benefits of a reliable

financial reporting framework for a country include greater economic growth, more

efficient allocation of resources, lower cost of capital, greater comparability of

financial information for investors, and a greater willingness on the part of investors to invest cross border.

With this increase in globalization, the need for comparative financial

statements has driven the growth of International Financial Reporting Standards

around the world. Currently, there are 119 jurisdictions that require IFRS Standards

for all or most public accounting entities. This includes eight countries that do not

have stock exchanges, and six do not require it for listed financial institutions. In 87

jurisdictions, the auditor’s report refers to conformity with IFRS (“Analysis of

IFRS”). The growth of these international accounting standards highlights the global

desire to increase the quality of accounting standards as well as the compatibility of

these standards from country to country.

With the growth of IFRS, there also comes a debate about the merits of the

standards for developing nations. While the term ‘developing countries’ is meant to

group together countries that share some of the same traits, the reality is that it

comprises a vast amount of countries with different backgrounds, history, culture,

etc. Applying a global standard to such a large and diverse group of countries is a

major challenge, and there are differences of opinion regarding if the benefits

received outweigh the costs. The need for improving the accounting and financial

reporting system in these countries is apparent. However, what is not so apparent is

whether implementation of IFRS does more good than harm, and what the best

approach for adopting IFRS should be for different countries.

Developing nations face many problems with regards to inadequate

accounting and financial reporting standards. As Deputy Secretary-General Petko

Draganov stated at the 2012 International Standards of Accounting and Reporting

conference hosted by UNCTAD, “many developing countries lack some of the

fundamental aspects of an accounting infrastructure. Institutional requirements,

regulatory requirements, and human resource requirements go unmet. The

resulting negative impact on transparency puts a break on the attraction of

investment and the promotion of growth in many of these countries.” During the

same conference, Michael Prada, Chairman of the Board of Trustees for the IFRS

Foundation said that minimal or nonexistent accounting infrastructures in these

countries have lead to difficulties in implementing international accounting

standards. (“Accounting standards”).

Developing countries generally do not have an established accounting and

auditing tradition. They often lack a strong professional accounting body, if they

even have one at all. Accounting and auditing systems may be inadequate or

nonexistent. Also, one of the largest issues is the shortage of a skilled professional

accounting workforce in many nations. This can prevent the development of a well-

functioning financial environment (Polizatto, Vincent). Countries like Ghana have

inadequate funds for educational institutions where accounting is taught, a lack of

skilled teachers, lack of teaching materials, and an inappropriate structure for

training and education of accountants (Gyasi, 2009).

Also, some countries face unfavorable political environments, where

corruption is common and transparency is limited. Hooper, et al., stated that

corruption flourishes when there is little government transparency, illiterate

populaces, little to no freedom of information legislation or lack of freedom of

speech, as well as a dysfunctional government system. Many lesser-developed

countries lack needed financial and technical capacity, lax fiscal controls, false

government financial statements, weak institutions, and a process of government

where information is often undisclosed to its citizens (Hooper, et al. 2008).

Disclosures of banks and other financial institutions are often misleading or

fraudulent, which limits foreign investment and the growth of capital markets.

Without reliable financial statements, investors are reluctant to assume the risks of

lack of transparency and investor protection (Polizatto, Vincent)(Berglöf et al.

1999). While not every country faces all of these issues, many have at least some of

the problems just described. It makes for an unfavorable environment in which to

grow economically and conduct business. It also makes implementation of adequate

accounting standards much more difficult in a situation that is less than ideal.

However, continuing to improve on the accounting and financial institutions will

help to alleviate some of these issues that these countries face

B)

The advantages of developing accouting standards are it helps in manner of presentation of finanacial statements to the corporates and it helps the investors to better understand that financial statements

These strategies also help to reduce frauds ftom the corporate perspective and also these standards  helps the auditors to carry on their auditing work fairly