| Historically, for centuries Western economies have | | | | countries to follow their own accounting |
| operated by a select few in power and wealth | | | | standards, there has been a push by the SEC for |
| making political and business decisions in secret | | | | the US to move from the current GAAP to the |
| that affect the masses; even if those millions are | | | | more widely used IFRS accounting method. Most |
| unaware of these deals. As the world's economies | | | | notably, The U.S. is one of the only countries still |
| globalize and modernize, with information | | | | using GAAP, and according to the SEC is |
| becoming instantaneous, the common notion | | | | projecting that we will make the transition around |
| becomes one of knowing what leaders in politics | | | | 2015 or 2016. There are some fundamental |
| and business are doing to affect the world's | | | | differences in the two methods. One of the |
| economies. The truth is that a surprising | | | | major differences is that GAAP is rules based |
| percentage of business and diplomacy | | | | where IFRS is principle based. Rules based means |
| internationally is still held in the "traditional" way of | | | | that accountants focus mostly on the literature |
| political and business leaders making deals behind | | | | aspect of accounting. GAAP attempts to project |
| closed doors that affect people worldwide. | | | | every possible situation that may occur and have |
| In order to maintain a free and honest ECONOMY, | | | | a written rule on how to deal with that situation. |
| the development and enforcement of accounting | | | | Principle based leaves room for different analysis |
| principles and regulations internationally is | | | | and interpretations on similar situations. |
| imperative. Traditionally, American Generally | | | | Both the rules-based method and principle-based |
| Accepted Accounting Principles (GAAP) have held | | | | methods have their downfalls. In following the |
| stringent regulations on businesses' reporting and | | | | rules-based method, there is rigorous training |
| disclosure of their financial transactions(2); | | | | needed in order to be knowledgeable about any |
| translating to large penalties and litigation for any | | | | situation that may occur. On the other hand, |
| company who violates these principles. | | | | principle-based tends to leave uncertainty and |
| Internationally, accounting principles have been a | | | | requires extensive disclosures in the financial |
| mix of guidelines and recommendations (IFRS) on | | | | statements. There are also some differences in |
| bookkeeping that are not necessarily enforceable | | | | the way financial reports are written under the |
| by law(2). These more relaxed guidelines have | | | | two methods. On the Income statement, under |
| allowed for some international corruption to enter | | | | GAAP, any extraordinary items are shown below |
| into business practices. This has leaded the global | | | | the net income. Under the IFRS any extraordinary |
| accounting community to instate a universal | | | | items are not separated, according to the |
| standard for all businesses independent of country | | | | Another difference between the two is that |
| of origin. | | | | under GAAP accountants have a choice of using |
| The corruption of government and business | | | | the LIFO or FIFO method to account for |
| officials is "how business in Europe is done" (1). A | | | | inventory where under IFRS accounts must use |
| landmark case of which spurred changes in IFRS | | | | FIFO. This is a big change that will undoubtedly |
| was one with a British company whom made | | | | bring have some positive and negative effects. |
| corrupt business deals with Saudi Arabian royalty. | | | | The SEC would not be pushing this matter if it did |
| In the mid 1980's, Saudi princes brokered an arms | | | | not benefit the U.S. According to the |
| deal with the United States, Britain and Saudi | | | | journalofaccountancy.com, the adoption of the |
| Arabia and the arms manufacturer British | | | | IFRS by other countries has resulted in strong |
| Aerospace (BAE). Essentially the terms of the | | | | economic benefits. These benefits include increase |
| deal left BAE with government weapons | | | | in company stock value, increase in market |
| contracts in the three countries involved in the | | | | liquidity, and lower cost of capital. There are also |
| deal, while the company paid almost the | | | | cost savings because under IFRS companies will |
| equivalent of 1.5 billion dollars in cash, vacations, | | | | no longer have to report under several sets of |
| cars and shopping sprees to the family and | | | | standards. Other benefits include enhanced financial |
| friends of the Saudi princes who brokered the | | | | transparency for investors, and enhanced overall |
| exchange. The money for this company spending | | | | financial reporting. Arguably the most important |
| came from a "slush fund"(1); money kept off of | | | | factor in switching to IFRS is that it improves |
| financial records so that most people examining | | | | communications and relations with other countries. |
| them could not detect the fraud. For over | | | | Since most countries operate under the IFRS, it |
| thirteen years this fund paid out to these princes | | | | would make it easier if the U.S. operated the |
| as BAE received renewed government contracts. | | | | same standards. |
| Whistleblowers were kept silent for years, until | | | | As the global business community moves towards |
| media outlets discovered the fraud and the British | | | | an international accounting standard and issues |
| government was forced to take action. Other | | | | dealing with fraud and business conduct, other |
| notable cases include companies such as Siemens | | | | problems arise with enforcement and its |
| information systems and Halliburton Oil Company, | | | | sustainability. According to Wiecek and Young, |
| which had similar issues with the use of "slush | | | | there is a concern that private companies- |
| funds" to get large contracts. Those companies | | | | specifically small and mid-sized ones- would not |
| were charged and faced large penalties in the | | | | benefit from using IFRS. Their operations run in a |
| United States. | | | | local market and often occur on smaller, simplified |
| Since scandals like BAE have come to international | | | | business models that make IFRS accounting |
| attention in recent years, the need for greater | | | | standards too complex and costly to implement. |
| business regulation beyond borders has come to | | | | Another concern with the emerging international |
| the most attention it has ever had. The | | | | standard is implementation in smaller, less |
| international community has been examining use | | | | developed countries. In these cases, lack of |
| of accounting standards to combat business | | | | governmental support and stability along with |
| practices once held by BAE, Halliburton and | | | | issues with lack of access to technology makes it |
| Siemens as opposed to attempting to make | | | | nearly impossible for small or mid-sized in |
| countries enact laws or forming regulatory | | | | developing nations to implement IFRS standards. |
| agencies. | | | | In some of these companies, fraudulent business |
| The International Accounting Standards | | | | practices are a usual occurrence. |
| Committee is an international board of accounting | | | | How will these issues change the case like BAE? |
| specialists who are working towards an | | | | For one the billions of dollars kept in the "slush |
| international standard for accounting. Having such | | | | fund" for the company must be correctly named |
| standards in place would allow a capital and | | | | and disclosed in financial statements. Companies |
| business exchanges to occur more freely and help | | | | would no longer be able to hide money or use it |
| prevent fraud and corruption from happening. The | | | | for unsavory business practices. This would force |
| discrepancies in international and North American | | | | the international business community to make all |
| accounting standards add challenges to conducting | | | | of their financial records public. In doing so, fraud |
| business internationally. As mentioned before, it | | | | can be avoided, along with the use of company |
| also allows for fraud and corruption to enter into | | | | funds for uses other than it was intended. Uniting |
| the business arena. | | | | financial standards will allow for greater expansion |
| Because the United States is one of the last | | | | of foreign trade and better business practices. |