The Reflections of the International Accounting Harmonization on Emerging
Economies: Jordan as an Example
Malek A. R. Alsharairi
Durham University, UK
Riyadh J. Al-Abdullah
The University of Bahrain, Bahrain
Abstract:
Beyond the phenomenon of international accounting harmonization and
its causes, there still a debate on its reflections, implications and consequences,
especially in the emerging economies. In addition, there are proponents and
opponents for such a topic as it looks like a form of globalization and a rigid
standardization. Therefore, it is questionable whether international standards
driven by the advanced countries for a social science like accounting can be
installed and are optimal for emerging economies with the Jordanian case taken
as an example. With this example, it is apparent that there are ambitious steps in
applying the economic reform regime on the one hand, however it lacks the large
Jordanian multinational companies (MNCs), which are one of the most vocal
parties in demanding a cosmopolitan set of accounting standards, on the other
hand.
1. Introduction
The international accounting harmonization is considered to be a new
accounting phenomenon presented by some advanced countries. This
phenomenon started to take place effectively in 1970's and continues till present
(Choi et al, 1999). Demands for greater comparability and transparency in
financial reporting have arisen due to the increase of international business
activities and the greater participation in the global financial markets. If a firm
selects accounting policies that are consistent with international standards, it will
increase the quality of reporting in terms of transparency and comparability
with other companies using the same set of international standards. Nowadays,
advocates of global accounting uniformity believe that the emergence of the so-
called economic globalization and the urgent need for huge capital markets to
finance the governmental privatization policies are major justifications for
developing and adopting international standards for accounting. It could be
argued that such standards would facilitate comparisons among companies’
financial performance across countries and consequently enhancing the efficient
allocation of resources in an increasingly global capital market.
In promotion for such an argument, in 1998, Sir Bryan Carsberg,
Secretary-General of the International Accounting Standards Committee (IASC)
comments on the need for one set of global accounting standards:
“…So the use of different accounting rules in different countries limits
the efficiency of the capital markets in attracting investment funds to the
applications where they will earn best returns and therefore has some
depressing effect on economic growth in general”1 (Eccher and Healy, 2000: 1).
After stimulating the appetite for the need of harmonizing the
international accounting standards to reach a global uniform of financial
reporting practices, the IASC was launched in London in 1973 (Epstein and
Mirza, 2001). The goal of the IASC, which became the International Accounting
Standards Board (IASB) in March 2001, is to create a single set of
understandable
and
enforceable
global
pronouncements
–International
Accounting Standards (IAS) are issued by IASC, then the International
Financial Reporting Standards (IFRS) are issued by the International
Accounting Standards Board (IASB) (the new name of IASC) – (IASB, 2005)
that will help increase transparency, consistency and comparability in
accounting numbers across the globe.
A lot of enormous objectives are assumed to be accomplished through the
issuance of internationally harmonized standards. However, important questions
1
“Global Issues and Implementing Core International Accounting Standards: Where Lies IASC's Final
Goal?” Remarks of Sir Bryan Carsberg at the 50th Anniversary Dinner, Japanese Institute of CPAs,
Tokyo, 23 October 1998.
concerning the impact and the effects of international accounting harmonization
in some applying societies are raised and need to be answered.
For instance,
the standards developed by the international regulatory body, the IASB, are
primarily based on those standards for countries with highly developed capital
markets, such as US and UK. Nonetheless, these international standards are still
under the stage of development, analysis, comparison and argument.
Furthermore, it has not ascended yet to the level of theory.
Beyond this phenomenon and its causes, there are also various reflections,
implications and consequences, especially in the emerging economies (Eccher
and Healy, 2000). In addition, there are proponents and opponents for such a
topic as it looks like a form of globalization. Therefore, it is questionable whether
such standards can be installed and are optimal for developing economies with
the Jordanian case taken as an example. With this example, it is apparent that
there are ambitious steps in applying the economic reform regime on the one
hand, however it lacks the large Jordanian multinational companies (MNCs),
which are one of the most vocal parties in demanding a cosmopolitan set of
accounting standards, on the other hand. The impact of international accounting
harmonization, therefore, is questionable in developing countries.
In this paper, we provide a literature review and a theoretical basis on the
potential reflections by the international accounting harmonization with
shedding a light on the Jordanian case. Our argument in this paper based on the
fact that accounting as a social science is a product of its environment and that
the international accounting harmonization is being perceived as a globalizing
force. In the next section we provide an analytical frame and a literature related
to the topic. Then the concept of globalization is discussed considering both
proponents’ and opponents’ perceptions. Afterwards, we give a glance on the
role of multinational companies in the international harmonization before
discussing the dimensions of the global accounting between the comparative
approach and the uniformity approach.
Finally, analytical view is presented on the Jordanian context in terms of
the related regulations, the economic regime and the reaction toward adopting
IAS/IFRS then ending with a conclusion.
2. Analytical Frame and Literature Review
The so-called process of harmonizing international accounting standards
is viewed by many researchers as a tool of globalization (Al-Abdullah, 2000;
Kirby, 2001; Rasheed and Hussein, 2002; Diaconu and Coman, 2006; Baker and
Barbu, 2007; Baskerville and Hay, 2007) and, consequently, this topic became
debatable taking the controversial consequences of globalization specifically on
the developing countries (Drache, 1999; Henry, 2003; Mott, 2004) and sometimes
going conservative further by claiming that harmonization process is structured
according to the capitalism, which comes from powerful economic lobbies
resulted from globalization (Rasheed and Hussein, 2002). In reviewing the
literature in this paper we find more focus on the technical issues of the
harmonization process and its consequences and implications afterwards.
Initially, one may ask why national accounting standards differ among
various nations.
Ding, Jeanjean and Stolowy (2005) emphasize the role of
culture as an explanatory factor underlying differences between national
accounting standards and IAS/IFRS through selecting sample of 52
countries2.They show that culture even matters more than legal origin (common
law/civil-law) in explaining divergences from IAS/IFRS and, therefore,
opposition to IAS/IFRS is not exclusively driven by contractual motives, a
claimed technical superiority, or legal origin, but also by diversity in cultural
factors. Al-Ani (2004) provides evidence on the relationship between the cultural
framework, which is important in building the accounting theory and accounting
practices, and financial reporting system.
Ideally, it could be argued that a world-wide integration of economic,
legal and political systems is required to achieve optimum accounting uniformity
2
It is worth to mention that Morocco and Iran are included in the sample.
and comparability, and alternatively, if these cultural, political, legal and
economic dimensions are taken into considerations whilst the harmonization
process, many harmful reflections are likely to evolve (Ball et al, 2000; ElJajawy, 2000).
Internationally speaking, on assessing the efforts on international
accounting harmonization, Carmona and Trombetta (2008) and Garrido et al
(2001) suggest that the IAS/IFRS constitute a significant step forward in the
process of accounting harmonization. However, there still a need to continue
working towards greater formal harmonization. To attain the required higher
level of harmonization, it could be suggested to allow more policy options (Tarca,
2003) in the international standards in order to mitigate the gaps and to
converge different national standards. Carmona and Trombetta (2008) suggest
that the current standards are flexible enough to enable the application of
IAS/IFRS to countries with diverse accounting traditions and varying
institutional conditions.
However, major changes are expected in the expertise, the educational
background and training programs held by accountants, and in the
organizational and business models of accounting firms (Carmona and
Trombetta
2008;
McGee
and
Preobragenskaya
2004;
McGee
and
Preobragenskaya, 2003). Nonetheless, there is still far to go in the comparability
of accounting measures across countries and regions, knowing the fact that a
complete and perfect comparability would also require a uniform set of
international manager and auditor incentives (Ball et al, 2000)
Eccher and Healy (2000) examine the usefulness of applying IAS in a transitional
economy, considering China as a case, and they claim that IAS are based largely
on UK and US accounting standards, in addition, the absence of effective
controls and infrastructure in China to monitor the additional reporting
judgment available to managers under IAS. This illustrates the potential
incompatibility between the IAS/IFRS and a transitional environment on which
these standards are applied.
The same sort of argument is addressed by some empirical evidence,
which also suggests the high level of proximity between IAS/IFRS and US-GAAP
explicitly (Eccher and Healy, 2000; Leuz, 2002) or implicitly (Dunagploy and
Gray, 2005) in terms of the resulted accounting information under each set of
standards. Dunagploy and Gray (2005) found that the difference statistically in
key financial ratios between US-GAAP and Japanese-GAAP (after being
revamped in line with IAS/IFRS) is not significant and Leuz (2002) emphasize
the same result after finding that the differences in key financial variables in the
financial statements prepared under IAS and those prepared under US GAAP
firms are statistically insignificant and economically small.
However, an interesting evidence provided by Christensen, Lee and
Walker (2007) on examining the economic consequences for UK firms of the
European Union's decision to impose mandatory IAS/IFRS. They find that
mandatory IFRS adoption does not benefit all firms in a uniform way but results
in relative winners and losers.
As of January 1, 2005, all European Union
companies with shares listed on securities exchanges are required to prepare
their consolidated accounts in accordance with IAS/IFRS (Baker and Barbu,
2007). In this occasion, the role of multinational companies (MNCs) in
demanding, supporting and disseminating the international standards (Ruder,
Canfield, and Hollister, 2005) could be found mentioned in the literature since
1973. Savoie (1973) warns the increased power of MNCs, which has raised a lot
of criticism and he suggests that harmonization of the world standards should be
the response.
In a more focused view within the context of Jordan, Al-Jajawy and Noor
(2003) examine the application of IAS/IFRS in the Jordanian environment, the
role of auditors and companies in the application, and the role of universities and
other academic institutions to improve the compatibility and harmony. They
found that the academic environment varies in the level of compatibility with
IAS/IFRS, and the practical environment varies in the level of application of
IAS/IFRS as well. They conclude that it is necessary to focus more on the study
of factors and elements to achieve more appropriate compatibility and perfect
application of IAS/IFRS. Moreover, the compatibility between the legal
infrastructure and the plugged in accounting standards is one of the most basic
requirements to allow these standards work properly in serving accounting
profession. Al-Abbadi (2003) highlights this issue in Jordan by studying and
analyzing the degree of compatibility of the items of the Jordanian income tax
law, with the requirements of the IAS/IFRS and examining the extent of
commitment of the Department of Income Tax to the use and application of the
IAS/IFRS.
His evidence states that there is no compatibility between the
income tax laws and IAS/IFRS in many aspects, and as a result there is a great
difference between the auditory profit and the tax profit. Therefore, he
recommends that the sample system should be applied in a better way when
considering the IAS/IFRS and taking them into account in tax regulations and
laws.
To shed light on the capital markets and financial statements effects of
adopting the international standards, the literature shows that some accounting
information under the international standards are generally value relevant, some
other information (such as the adjustments to income) are generally value
irrelevant compared to the same information provided based on the national
standards as in Germany for example (Hung and Subramanyam, 2004).
Empirical evidence, which is provided by Assa'aideh (1997) on
investigating the impact of adopting IAS in Jordan on the usefulness of
accounting information to market investor, reveals a significant improvement in
the correlation with, and the predictive ability of financial leverage of equity
market risk measures and he concludes that adopting IAS has been partially
effective, however, fewer methods and choices in IAS and more compliance with
them are still needed in order to limit the management ability to manipulate
published accounting information which reduces its usefulness to market
investors.
Nonetheless, an inconsistent evidence provided by Juhmani (1998), who
examines the effect of introducing IAS on the Jordanian stock exchange during
the period 1990-1991. Juhmani (1998) finds that the adoption of IAS does not
increase the information content of financial statements. He also presents
evidence that although IAS adoption has little influence on Jordanian domesticowned firms' share price reactions, there is a considerable effect on foreignowned firms' share prices.
This quick glance on the literature shows the interrelationships between
globalization, MNCs and harmonization and that establishing a global set of
accounting standards cannot be done by only translating these standards into
different languages without considering the substantial cultural, legal, economic
and political variables (Diaconu and Coman 2006).
3. Globalization Vs Glocalization: Proponents and Opponents of Globalization
Cancelling the customized-nationally standards and replace them by
having one set of standards to be applied on the globe sounds much related to the
term globalization. However, more than one definition of globalization can be
found and they are different explicitly but they all have the same essence, which
is the "integration", "convergence" or "intensification" of worldwide aspects in
some sense Many writers (Kiely and Marfleet, 1998; Mott 2002; Graham and
Neu, 2003) agree that globalization is best defined by David Harvey as "a
compression or overcoming of both distance and time, and noting the variety of
effects this has on social and cultural relations" (Harvey, 1989:240). Within
accounting literature, prior research on economic globalization has focused on
the role of financial market liberalization and the harmonization of accounting
standards in encouraging the spread of common practices (Al-Abdullah, 2000;
Al-Jajawy, 2000; Graham and Neu, 2003; Ghadar, 2004). So far, globalization is
still a debatable topic under the shadow of the distinct cut rural backgrounds. To
the vast majority of economists, political scientists, and political commentators
globalization is a "friendly force" (Gundlach and Nunnenkamp, 1996), leading
the world ultimately to the era of converging world economies, converging
institutions as democracy becomes a universal norm, and cultural richness as
people of different background interact more frequently. However, this view has
been opposed by many. For example, Branko Milanovic in World Bank argues
that:
"We shall show here that this view of globalization is based on
one serious methodological error: a systematic ignorance of the
double-sided nature of globalization, that is systematic
ignorance of its malignant side" (Milanovic, 2002:3).
In the above stated argument, there is an obvious indication to the doublesided effect of globalization which leads theorists, thinkers, commentators and
critics to ramify into two groups; proponents and opponents regarding the
potential cultural and economic impacts.
Proponent Perception:
Proponents suggest that the ultimate openness under the umbrella of
globalization offers better chances for developing countries to catch up with the
industrialized countries as well as to achieve an economic reform, especially after
the emergence of Washington Agreement in 1989, which was suggested by the
American economist John Williamson, in a form of Ten Recommendations
toward the broken-down communistic countries (Kikso, 2002).
Globalization is perceived by its proponents as a mean to ease the inflow
of capital and technology, thus, helping to increase the rate of factor
accumulation beyond the level to be financed by domestic savings (Gundlach and
Nunnenkamp, 1996). Others argue that countries that rank high in economic
freedom and trade openness also rank high on social (e.g. infant mortality,
longevity, etc.) and economic indicators (GDP growth, GDP per capita, income
share of the poorest, etc.) (Mejia-Vergnaud, 2004).
They believe that those countries with greater barriers to trade and
economic activity exhibit high poverty and low levels of human development.
Moreover, they argue that critics of globalization have conveniently chosen to
ignore the obvious link between closed markets and corruption. Therefore, in a
corrupt and closed economic environment, the gains from economic activity are
more likely to be captured by elites, and then, increase economic inequality
(Mejia-Vergnaud, 2004).
Some suggest that the improvement toward welfare is a direct result of
the increase in globalization in both developing and developed countries.
However, this requires an open market, protection of private property rights, the
rule of law, privatization of public assets and limited government intervention.
These suggestions with an empirical study taking the following social
indicators into consideration: 1) individual rights (measured by child labor and
human development), 2) income distribution, 3) health, 4) the environmental
effects, 5) gender equality (Quinlivan and Davies, 2003).
The implication for accounting would be obvious then. As any other
globalization tool, accounting would work well for everybody and everybody
would accordingly be well-off.
However, globalists believe that globalization also reduces the degrees of
freedom of economic policy making in developing countries (Gundlach and
Nunnenkamp, 1996), and they support the economic policies that assist
disadvantaged and poor countries through both: multilateral grants (not loans)
and trade policies that would create millions of jobs (Quinlivan and Davies,
2003).
The effects of globalization on developing countries which are perceived
by globalists can be summed up and summarized as follows:
1- Developing countries are economically benefited from the industrialized
countries.
2- Easing the inflow of capital and technology into developing countries.
3- Increasing the rate of factor accumulation beyond the level to be financed
by developing countries domestically.
4- Earning a high rank on social indicators as well as economic indicators.
5- Squeezing poverty and maximizing the levels of human development.
6- Reducing corruption which is combined with the closed economic
environments.
7- Contributing to economic equality.
8-
Improving social welfare represented by human development, gender
equality, income distribution, health and environmental conditions.
9- Creating more job vacancies and contributing to employment.
10- Attaining multilateral grants.
11- Losing the freedom of making an economic-policy decision.
Opponent Perception:
In view of the fact that opponents of globalization suggest that the
globalizing movement is being led by capitalism, which is related to pure EuroAmerican origins, it will not be surprising to find that most anti-globalists are
from developing countries.
The central argument of anti-globalists that there are "invisible hands"
behind globalization aiming at demonstrating supremacy on developing
countries by advanced counties (Sulaiman, 1999; Ragheb, 2001; Al-Abdullah,
2000; Tahoon, 2003; Ghadar, 2004). They also argue that globalization is a kind
of colonialism or imperialism permitting one party to control another one.
The former produces informational tools, methods and techniques in
order to spread facts, knowledge, values, culture, standards and rules from its
"own" perspective to the latter. Then ultimately the following clear classification
of the world comes up. Producing party (an active sender) that controls and
imposes its environment conceptually and materially and, on the other hand,
consuming party (a passive recipient) which is fascinated by the easiness of
obtaining information, knowledge, entertainment and other products. (Tahoon,
2003). This relationship between the producing and consuming parties impairs
the equilibria at different levels of flow of "things" leading more poverty in the
developing
countries
and
more
richness
in
the
advanced
countries.
Consequently, the gap between the rich and the poor countries is getting wider.
Even capital flows into developing countries, sometimes, have considerable
negative effects on economies. Examples of economic crises resulted from the
liberalization of capital flows are obvious in Mexico (1994), South East Asia
(1997), Russia (1998) and Brazil (1999) (Khateeb, 2002; Titawi, 2002).
According to the Islamic philosophy, economic activities are bounded by
many ethical values and principles that prohibit unfairness, deception, usury,
monopoly and so on. This philosophy does not consider "profit maximization" as
the highest goal of economic activity as it is in the case of the capitalistic system.
Thus, any activity that does not agree with these high values would be prohibited
and not allowed by Islam. Since the economic globalization is considered to be an
extension of "unfair" capitalism, then the Islamic system is conservative and
cautious of this phenomenon.
The effects of globalization which are perceived by anti-globalists on
developing countries can be summed up and summarized as follows:
1-
There are "invisible hands" behind globalization aiming at demonstrating
supremacy on developing countries by advanced counties.
2-
Globalization is a kind of colonialism and imperialism.
3-
Globalization allows advanced countries to spread its knowledge, values,
culture, standards and rules to developing countries.
4-
Globalization impairs the equilibria at different levels. This implies more
poverty in developing countries and more richness in advanced countries.
5-
Economic crises can be resulted from liberalization of capital flows.
6-
International organizations are established to impose certain plans, rules
and conditions on the Third World but in behalf of the advanced countries.
7-
International organizations and advanced countries trick the developing
countries to uncover their markets, resources and other information through the
promotion for "transparency".
8-
Globalization is an extension of "unfair" capitalism.
9-
Globalization impairs the ethical values of Islamic philosophy and, thus, it
is resisted by the Islamic system.
From an accounting perspective, the anti-globalists argue that accounting
is employed in the globalization process and it would then disseminate western
values around the globe. So they would discredit accounting globalization
benefits and accordingly would raise an obvious red flag pertaining to the
detrimental effects of accounting globalization on cultural, economic, and
political aspects of most countries of the world.
Glocalization as a reformed Globalization:
While globalization is critiqued as a biased power, a new concept arose,
glocalization. The term was modeled on Japanese word dochakuka, which
originally meant as a concept arose to help mitigate the conceptual difficulties of
global-local relationship (Khondker, 2004).
The word and the concept came from Japan and it is composed of
Globalization-Localization. It is defined by Wordspy3 “the creation of products
or services intended for the global market, but customized to suit the local
cultures.” (Khondker, 2004). For more illustration, if a marketing plan of an
international restaurant series recommends to adjust the menu according to
each country’s distinct cultural and social norms this can be described by
glocalization, i.e. a global product is modified to fit the local “endogenous”
3
http://www.wordspy.com/words/
system. If these international products are introduced to different societies as
they are without any adjustments, probably they will not sell.
In the accounting harmonization literature, we could not find any
previous use of this term, which has been intelligently used by many researchers
in the social, political and even psychological sciences to describe the need of
“indigenization” whilst the process of globalization because it raises questions
about the applicability of social scientific ideas and concepts (Khondker, 2004).
One basic question arises here as an example on the need of employing this
concept in the accounting harmonization –at least at this stage of the process-, do
all countries have the same regulatory, legal and taxation frames? Some studies
show that incompatibilities can be found between the applicable code of tax and
the international standards of accounting (Al-Abbadi, 2003), which implies the
need of either having “glocalizable” international standards or then local legal
modifications will be urgent.
4. The Multinational Companies (MNCs): a Key Player
As it is mentioned above, globalization means a closer international
integration of markets and production, or, in general, the liberalization of the
trade. This means that firms can place their production around the world, and
source inputs from different countries. This would be better by harmonizing the
atmosphere of international environment regarding many aspects. Governments,
laws, rules, accounting standards, norms, cultures, technologies and languages
are examples. It is noticeable that this kind of business, international or
multinational, has emanated from globalization. It refers to Multinational
Companies
(MNCs),
Multinational
Enterprises
(MNEs)
or
sometimes
Transnational Companies (TNCs). The simplest definition of MNC is "a business
organization operating in more than one country" (Miller, 1979:3; Kiely and
Marfleet, 1998:50). However, the definition constructed by Professor Raymond
Vernon of Harvard University is widely used. It depicts an MNC as a "parent"
or dominant enterprise controlling the operations of a network of foreign
corporations and furnishing them with "common" objectives, strategies and
resources (Miller, 1979).
US-based MNCs responded to particular conditions; market saturation in
some sectors, a developed international communications and transportation
system, and growing economic challenge to the US from Europe and Japan
(Kiely and Marfleet, 1998; ILO, 1981). European and Japanese companies have
followed the steps of the US companies to increase the direct foreign investment.
This has resulted in some giant MNCs whose assets are comparable to some
developing countries GNPs and they started to dominate some important
decisions on the international arena.
During the 1970s, the growing problems associated with the emergence of
MNCs, as well as international accounting diversity, began to attract interest.
These resulted in the establishment of IASC in 1973. At the same wise, the U.N.
Economic and Social Council focused on this area by appointing a study group
which eventually led to the creation of a U.N. Commission on Transnational
Corporation in 1976 (Evans et al, 1985).
Views regarding the effects of multinationals on the developing economies
vary, supposing one of them is a host country4. These opinions can be
categorized into two categories; the optimistic versus pessimistic view. In the
optimistic view, three types of effects may be distinguished (1) net macroeconomic impact, such as adding to total national income and to the host
government's revenue and foreign exchange availability, (2) horizontal impact,
which is the impact of MNCs on other enterprises that compete with them or are
otherwise linked to them through various market-structure mechanisms and (3)
vertical linkage impact, which is the impact of MNCs on employment in other
enterprises directly linked to them in the production chain, by selling or buying
from them (ILO, 1981).
4
Host country is the country in which a subsidiary operates and is located.
On the other hand, MNCs are charged with some concerns, as a
pessimistic view, by developing countries. An example of these concerns, which is
not all-inclusive, such as having the power to be above any government and
abrogating the sovereignty of the local government, competing unfairly,
fostering technological dependence, lacking social responsibility, destroying
stability of labor markets, disrupting foreign exchange markets, exploiting local
resources and capital and evading taxes (Miller, 1979).
From an accounting perspective, since the international accounting
harmonization primarily serve this kind of organizations, it could be argued that
accounting harmonization ease the spread of MNCs, and at the same time,
support greatly the spread of IAS/IFRS in all the host countries where their
subsidiaries operate. Therefore, a debate regarding the association between the
international accounting harmonization and MNCs might arise also when the
positive and negative effects of MNCs are taken into consideration.
5. Global Accounting: Uniformity Vs. Comparative
As a result of the growing importance of financial and economic
globalization5, more awareness by the accounting profession has recognized the
need to establish a uniform set of accounting standards that would be valid at the
international or global level.
More specifically, it could be said that globalizing or internationalizing of
accounting is induced by the following four critical factors: 1- Multinational
enterprise6 operations, 2- Globalization of money capital markets, 3International nature of some technical accounting problems, and 4- Historical
antecedents (Choi and Mueller, 1984).
When talking about international, global, universal or world accounting, there
is confusion in the literature regarding these concepts. A good definition for the
purpose of this study is set by Weirich et al as follows:
"International accounting is considered to be a universal system that
could be adopted in all countries. A worldwide set of generally accepted
accounting principles (GAAP), such as the set maintained in the United
States, would be applicable to all countries. This concept would be the
ultimate goal of an international system" (Weirich et al, 1971:80).
It could be said that, on one hand, an ideal condition is to have a complete
"uniformity" of accounting standards in order to be adopted by all countries
around the globe. On the other hand, a concept of "comparative international
accounting" directs international accounting to understand, study and
analytically classify national accounting systems as has been done in the other
social sciences such as economics, politics and laws. This involves an awareness
of the international diversity in corporate accounting, understanding of the
accounting standards and practices of each country, and assessing the impact of
diverse accounting practices on financial reporting.
5
6
The concept of Globalization and Economic Globalization is discussed in Part 2 of this chapter.
The concept of Multinational enterprise (MNE) is discussed in Part 2 of this chapter.
Many have investigated the determinants and factors influencing the
accounting standards, practices and financial reporting. For example, Nobes and
Parker (1991) have set the following seven factors that may explain the financial
reporting differences internationally:
1- Legal systems, 2- Providers of finance, 3- Taxation, 4- The accounting
profession, 5- Inflation, 6- Theory, and 7- The accidents of history.
Belkaoui (1985) believes that five environmental factors are affecting the
determination of accounting standards, namely; 1- cultural relativism, 2linguistic relativism, 3- political and civil relativism, 4- economic and
demographic relativism, and 5- legal and tax relativism. While others, such as
Arpan and Al Hashim (1984), suggest these determinants as only four, namely;
1- the differences in accounting uses, users and preparers, 2- socio-cultural
differences, 3- legal and political differences, and 4- economic conditions.
Given these determinants of accounting standards while assessing the
logic, applicability or relevancy of both uniformity and comparative concepts, it
is noticeable that uniformity, as an ideal state, requires a maximum level of
homogeneity for the international environment in terms of culture, language,
policies, civilization, economics, demographics, laws and taxing systems in order
to achieve the optimum compatibility between the standards and the
environment, whereas the comparative theorem of international standards seems
to be more logical but serves at the national level, and might not be useful
internationally.
Such a debate does exist between those favoring "uniformity", and those
preferring a "comparative" analysis of different national accounting systems.
The argument of those supporting the comparative standards that accounting is
influenced by accounting objectives, cultures, policies and techniques result from
the environment factors in each country since these environmental factors differ
significantly between countries. It would be expected that the major accounting
concepts and practices in various countries would also differ.
Therefore, the environmental conditions affect the determination of
accounting standards as it is shown above. However, there is an internationally
organized trend toward uniformity which is represented by the process of
International Accounting Harmonization.
International Accounting Harmonization:
Indeed, the starting point of the efforts of international accounting
standards setting in 1959 is credited to Jacob Kraayenhof7, who urges that the
work on international accounting standards ought to begin. In 1961, "Groupe
d'Etudes"8 was established in Europe to advise European authorities on matters
concerning accounting. Then in 1966 Accountants International Study Group
was formed by professional institutes in Canada, United Kingdom and the
United States of America (Choi et al, 1999). In June 1973, IASC was founded to
be charged with the issuance of IAS, but later it changed its name into IASB,
which has issued the IFRS (IASB, 2005).
During this phase, a debate regarding two concepts associated with the
efforts of the uniformity of accounting standards namely, "standardization" and
"harmonization" has been existed. In fact, it could be said that the term
"standardization" has some rigidity since it implies no flexibility in a given set of
standards, then incompatibility with different applying environments might
arise. Generally, standardization means the imposition of a rigid and narrow set
of rules, and may even apply a single standard or rule to all situations (Nobes
and Parker, 1991).
Therefore, using the word "harmonization" sounds more favorable to
remove this rigidity since harmonization is defined as a process of increasing the
7
8
A founding partner of a major European firm of independent accountants.
An association of practicing accounting professionals.
compatibility of accounting practices by setting limits on how much they can
vary (Choi et al,1999). Thus, harmonization implies a reconciliation (bringing
together) of different points of view. This is more practical and logical when the
formation of accounting standards at the global level takes place.
A third related concept, which is not commonly used, has appeared and
used especially in the European literature is "normalization". English
"standards" being called "norme" in French, the process of "standardization" is
translated by "normalization" (Barbu, 2004:5).
opinion
(2004), normalization
According
is situated between
to
Barbu's
harmonization
and
standardization.
However, it is argued that every country has its own sets of rules, philosophies,
and objectives at the national level aiming at protecting or controlling the
national resources. This aspect of nationalism gives rise to particular rules and
measures which ultimately affect a country's accounting system. It is suggested
that harmonization requires: (1) recognizing these national particularities, (2)
attempting to reconcile them with other countries' objectives, and (3) correcting
or eliminating some of these barriers in order to achieve an acceptable degree of
harmonization (Belkaoui, 2004).
This agrees somehow with the scientific logic suggested by Al-Abdullah
(2000), in which he argues that determining the causes and providing
explanations and justifications is a must to conclude a scientific result.
Otherwise, globalization of accounting could suffer a complete absence of
scientific logic.
It is fair to mention that international harmonization could have the
following advantages and disadvantages (Choi et al,1999; Al-Abdullah, 2000;
Epstein and Mirza, 2001; Belkaoui, 2004).
Advantages of international harmonization:
1- The comparability of international financial information.
2- Set-up cost and time saving for those countries which have no adequate
codified standards of accounting and auditing.
3- Time and money saving that is spent to consolidate divergent financial
information, which could lead the international financial markets to be more
efficient.
4- The tendency for accounting standards throughout the world to be raised to
the highest possible level and to be consistent with local economic, legal and
social conditions9.
Disadvantages of international harmonization:
1- International standards could not be flexible enough to handle differences in
national backgrounds, traditions and economic environments.
2- It would be a politically unacceptable challenge to national sovereignty.
3- Tax-collection systems vary internationally. Since this requires diversity in
accounting standards and systems used internationally, it creates "standards
overload".
4- Corporations that must respond to an ever-growing array of national, social,
political and economic pressures are hard pressed to comply with additional
complex and costly international requirements.
6. Harmonization and the Context of Jordan
Jordan has become a member of the board of IASC since 1988 (IASB,
2005). The Jordan Association of Certified Public Accountants (JACPA)
recommended the adoption of IAS in the 1988 and 1989 fiscal years but
mandated them for 1990 and beyond by its Board of Management' Decision
number (54) on March 13, 1989 (Assa'aideh, 1997).
Moreover, Article number (42) of Chapter (6), which is issued by the
Board of Commissioners of the Securities Commission pursuant to Articles (9)
and (53) of the Securities Law, No. (23) for the year 1997, states that all entities
subject to the Commission's monitoring shall apply IAS issued by the IASC,
9
Choi et al refer this point to Turner, John N. (1983). International Harmonization: A Professional Goal.
Journal of Accountancy. January, pp. 58-59.
unless there is a conflict between these standards and the legislation in force in
Jordan, otherwise, the national legislation shall supersede, then the Directives of
Disclosure and Auditing and Accounting Standards issued under No. (1) for
1998 (JSC, 2005).
The aims of these directives, referring to Jordanian Securities and
Commissions (JSC), are to maintain fair dealing in securities, enhance the trust
of investors and savers and achieve transparency in the market in line with
international standards.
Furthermore, the Jordanian legislation mandates the application of the
international standards. According to the Articles (62), (75), (184), (195), (201)
and (208) of The Jordanian Companies Law No. (22) for the year 1997 with its
latest modifications, there are explicit indications of subjugating each of the
limited liability companies, closely held (private) corporations and publicly held
corporations to provide their accounts and financial statements in accordance
with the internationally accepted standards, at the same vein, the auditor is
responsible to follow the international auditing standards to examine the
companies' appliance of the international accounting standards.
It is fair to mention that economic reform have become a part of the
overall economic package that the government adopted in the early nineties and
after the economic crisis that affected the country.
The economic reform process in Jordan initiated in 1989, through signing
arrangements with the International Monetary Fund (IMF). However, the
period 1999-2008 marked with remarkable reform effort under the new regime
of King Abdullah II, who made economic reform one of his top priorities and
launched a many initiatives and projects aiming at promoting economic
development (Alissa, 2007). This period has also characterized by an accelerated
economic developments at the global scene in terms of globalization, increasing
of competition, lifting of tariffs and administrative barriers to liberate
international trade, capital flows, the communications and information
revolution, privatization process and a dramatic involvement of the Jordanian
economy in the global economy (ASE, 2005; MOF, 2005).
Thus, the Jordanian choice is to open up to the world through the
international economic tools such as adopting international standards -including
IAS/IFRS- and developing partnership agreements by signing three free trade
agreements with the United States, in 2000, and the European Union, effective
2002, and gained accession to the World Trade Organization (WTO) in 2000
(Alissa, 2007).
7. Conclusion
The
international
accounting
harmonization
is
perceived
as
a
contemporary phenomenon with questionable reflections, implications and
consequences, especially in the emerging economies. The increasing debate on
this issue ramifies commentators into proponents and opponents as it has been
being viewed as a tool of globalization and creating rigid standardization
following the Western domination. Therefore, it is controversial whether
international standards for a social sience like accounting, which are also driven
by the advanced countries, can be installed and are optimal for emerging
economies with the Jordanian case taken as an example. With this example, it is
apparent that there are ambitious steps in applying the economic reform regime
on the one hand, however it lacks the large Jordanian multinational companies
(MNCs), which are one of the most vocal parties in demanding a cosmopolitan
set of accounting standards, on the other hand.
Generally, the distinctiveness of each country and the differences
among them should be taken into consideration in the process of setting
international standards. A new concept can illustrate and facilitate this situation,
glocalization. In the accounting harmonization literature, we could not find any
previous use of this term, which has been intelligently used by many researchers
in the social, political and even psychological sciences to describe the need of
“indigenization” whilst the process of globalization. Therefore, IASB should
permit more flexibility when setting any standards to actually harmonize, but
not standardize, the international standards then international standards should
be examined and tested before adopting them, to ensure their impact and
appropriateness while applying.
Finally, economic globalization could have double-sided effects. While
it holds many economic benefits, it should be dealt with carefully to ensure that
this does imply drastic cultural and economic impacts. These impacts could
evolve in case of hosting the huge foreign MNCs as well. However, going back
since the start of economic reform process in Jordan through integrating the
Jordanian economy in the global economy and through getting the accession into
many international organizations and partnerships, it could be concluded that
the Jordanian choice of being involved in the international accounting
harmonization is a justified choice and a consistent policy with the current
economic regime.
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