Accounting Infrastructure: One Piece in
the Economic Development Puzzle
Konrad E. Gunderson, Ph.D., CPA
Craig School of Business
Missouri Western State University
Saint Joseph, Missouri USA
Introduction
Ecuador, as an emerging capital market economy, can improve its ability to
attract investment capital by developing its domestic accounting infrastructure. A key
aspect of this structure is the code of financial reporting standards for companies.
Adopting international reporting standards aids in the attraction of investment
capital, both foreign and domestic. International investors compare financial results of
companies from different countries, and any country that makes its financial results
comparable on an international level increases its likelihood of attracting capital.
International Financial Reporting Standards (IFRS) are promulgated in London by the
International Accounting Standards Board (IASB). Their goal is to harmonize financial
accounting rules worldwide.
Harmonization of accounting benefits Ecuadorian
companies, who increase their ability to attract investment capital, and Ecuadorian
investors who can analyze and choose from investments in domestic and foreign
companies depending on where their analysis leads them (Gunderson, 1998).
The adoption of reporting standards is a key element in the development of an
accounting infrastructure; other principle aspects of the accounting infrastructure include
government regulation, and the accounting profession.
This article discusses
accounting infrastructure, including financial reporting, government regulation, and the
accounting profession, and how these components work together to promote economic
development. Accounting infrastructure is part of the entire legal and regulatory system
designed to secure property rights, enforce contracts, and provide financial information;
this system, sometimes referred to as “investor protection,” is vital to development of
emerging stock markets such as Ecuador has.
International Financial Reporting Standards
As mentioned above, adoption of International Financial Reporting Standards
(IFRS) is a goal being pursued by many countries around the world.
International
consulting firm Deloitte Touche Tohmatsu estimate that today more than one hundred
countries worldwide require or allow IFRS in some form (Deloitte Touche Tohmatsu,
2008) . In 1999 and 2000 Ecuador adopted Normas Ecuatorianas de Contabilidad
ADOPTION OF IFRS FOR DOMESTIC LISTED COMPANIES
BY SOUTH AMERICAN COUNTRIES1
IFRS Not Adopted
Argentina
IFRS Allowed
IFRS Required
X
X
Bolivia
Brazil
X (beginning 2010)
Chile
X (beginning 2009)
Colombia
X
X (beginning 2008)
Ecuador
X
Paraguay
X
Peru
Uruguay2
X
X
Venezuela
1
Source: Deloitte Touche Tohmatsu IAS-Plus web site, 2008. Note that the adoption of IFRS
is for listed companies only, meaning those that have shares traded on a stock exchange.
2 Uruguayan companies follow IFRS existing at 19 May 2004, but auditors’ reports refer to
conformity with Uruguayan accounting principles
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(NEC) which represents a step toward convergence with IFRS. NEC is largely based
on IFRS, but some IFRS rulings have been excluded. Taking a gradual approach
toward adoption of IFRS is a sensible approach for Ecuador.
In reality, very few
countries have adopted all IFRS rules at once, including the European Union countries.
In the 2004-2006 time period a project was undertaken to fully adopt IFRS in
Ecuador with the support of the Inter-American Development Bank and the Multilateral
Investment Fund (MIF) and, as indicated in the above table, Ecuador is on track to fully
adopt IFRS in 2008 according to data from Deloitte Touche Tohmatsu.
After the initial adoption of IFRS there is the ongoing need for interpretation,
implementation, and updating of the standards.
Each country adopting IFRS must
support an independent domestic technical body to help national accountants interpret
and apply the standards, as well as to adopt new standards as they are issued by the
IASB. Retaining such technical expertise within the country aids economic development
by allowing high quality financial reporting to take place at a wide range of companies,
including those not yet listed.
This allows successful smaller and intermediate sized
companies to eventually offer their shares on stock exchanges, which promotes
economic growth by attracting a wider array of investors.
Technical assistance is
currently provided by the Instituto de Investigaciones Contables del Ecuador (IICE);
however, the IICE should be made independent of its sponsoring organization, the
Federacion Nacional de Contadores del Ecuador (FNCE).
The exact structure of Global financial reporting is a dynamic process.
The
International Accounting Standards Board (IASB) provides some technical support and
implementation guidance. Also regional bodies such as the Inter-American Accounting
Association may assist member countries with implementation issues. Nevertheless,
Ecuador should make a commitment of resources to allow the IICE, or a newly formed
national accounting standards board, to operate independently. The alternative would
be to place too much reliance on outside parties; such an imbalance would not be a
positive sign for a developing economy.
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Governmental Regulation
The development of an independent technical body relieves governmental
regulators of the task of adopting standards through legal processes, allowing them to
concentrate on enforcement issues such as sanctioning companies whose financial
statements do not conform to standards, or disciplining auditors who do not carry out
their work with due care.
Enforcement has been a challenge in Ecuador. In fact, Ecuador, without adoption
of additional IFRS standards, could immediately improve investor protection by simply
enforcing an existing rule, that of required disclosure of related party transactions. A
transaction between a corporate insider and a related party must be disclosed in notes
accompanying the financial statements because of the possibility that the transaction
may not reflect that which would occur in an “arms-length” transaction, or between
disinterested parties. The problem is of immediate concern from an accounting
standpoint because transaction prices determine amounts reported in the financial
statements. If a corporate official
WORLD BANK INVESTOR PROTECTION INDEX FOR SELECTED
SOUTH AMERICAN COUNTRIES
Country
Investor Protection Index
Argentina
4.7
Bolivia
4.0
Brazil
5.3
Ecuador
4.0
Peru
6.7
Venezuela
2.7
INDEX = 10 HIGH (BEST PRACTICES)
INDEX = 1 LOW (POOR PRACTICES)
Source: World Bank, Doing Business Report (2008)
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directs that equipment be purchased from a friend or family member at an inflated price,
this amount is incorporated into the financial records and assets are over-stated on the
corporate balance sheet, as is depreciation expense on the income statement.
This scenario is precisely the one used by the World Bank to evaluate investor
protection for its “Doing Business” reports.
World Bank evaluates each country’s
investor protection environment based on what mechanisms are in place to prevent or
detect such an insider transaction. The basic accounting principle concerning related
party transactions, if enforced, provides investor protection because disclosure deters
corporate officials from engaging in self-dealing.
Thus, while Ecuador has moved ahead with the adoption of IFRS, there are still
problems with enforcement. Adoption of new accounting standards will be of no benefit
if there is not effective enforcement of those standards and, as indicated by the World
Bank report, Ecuador has not had effective enforcement in the area of investor
protection.
A structure with an independent technical body to adopt and interpret
standards, and separate governmental enforcement of those standards, should help
improve compliance and allow the benefits of IFRS to be realized.
The Accounting Profession
Companies in emerging markets rely on professional accountants to prepare
financial reports in accordance with standards such as IFRS, and independent
professional accountants audit these reports to assure investors of their truthfulness.
The financial reporting system is reliant upon an adequately trained pool of professional
accountants.
Not only is this important for the large listed companies, but equally for those
medium sized companies which will grow to a point where they begin to have their
shares traded in the stock markets. In the period of transition it will be particularly
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important to have accountants and auditors who can adapt to the increased reporting
and disclosure regulations that are required by the stock exchanges.
One way a country can improve the average quality of expertise across its
domestic accounting profession is to implement a uniform written examination for all
candidates entering the profession.
Professional accounting exams, while relatively
new to developing countries, are common in developed economies such as the United
States and Great Britain. South American countries all require a university academic
background for professional accountants, and professional exams are beginning to
emerge. Brazil and Peru have taken the lead by requiring uniform examinations for
licensure as a professional accountant, and Chile is considering a similar move
(International Federation of Accountants, 2008).
Ecuador certainly has universities whose graduates would exceed the level
required in professional exams.
And a uniform exam broadens the base of well
prepared accountants from which companies can draw to staff their accounting
departments. This improves financial reporting by these companies, and, on a personal
level, enhances the careers of licensed accountants who enjoy a recognized credential
of uniform quality.
Conclusion
A thriving economy needs physical infrastructure such as transportation and
communications systems.
Equally important is a country’s accounting infrastructure,
which includes the system for adoption of financial reporting standards, the system of
governmental regulation, and the system for education and certification of professionals.
In this regard, Ecuador’s development of an independent institute of accounting
standards, governmental regulation focused on enforcement, and adoption of a uniform
professional examination, should be part of any economic development plan for
Ecuador. These measures promote investor protection which increases the flow of
capital from domestic and foreign sources.
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References
Deloitte Touche Tohmatsu. 2008. IASPLUS website, accessed March, 2008:
www.iasplus.com.
Gunderson, K. 1998. Accounting Standards: Key to Attracting Investment. Ekos
Economia Empresa, Volume 53, No. 6 (June, 1998) 62-63.
International Federation of Accountants (IFAC).
2008.
IFAC website, accessed
February, 2008: www.ifac.org.
World Bank. 2008. Doing Business 2008 – Ecuador: Comparing Regulation in 178
Economies. World Bank: Washington, DC.
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Bibliographical References
Askary, S.
Accounting Professionalism – A Cultural Perspective in Developing
Countries. Managerial Auditing Journal, Volume 21, No. 1, 102-111.
Baydoun, N., and R. Willet. 1995. Cultural Relevance of Western Accounting Systems
to Developing Countries. ABACUS, Volume 31, No. 1. 67-92.
Blair, Richard, CPA, Chief Financial Officer, HCJB VOZ ANDES World Radio, Quito,
Ecuador. Interview concerning implementation of International Financial
Reporting Standards (March, 2008).
Fortin, Henry, Senior Analyst, Latin American Region, World Bank. 2008. Interview
concerning Ecuador’s response to World Bank’s Report on the Observance of
Standards and Codes (2004).
Hooper, V., and R. Morris. 2004. Washington Consensus, Emerging Economies and
Company Financial Reporting:
An Appraisal.
Research in Accounting in
Emerging and Transitional Economies, Supplement No. 2, 93-116.
Kirsch, R., K. Laird, and T. Evans. 2000. The Entry of International CPA Firms into
Emerging Markets:
Motivational Factors and Growth Strategies.
The
International Journal of Accounting, Volume 35, No. 1 99-119.
Pazos, Jenny De Burbano, CPA, Internal Auditor, HCJB VOZ ANDES World Radio,
Quito, Ecuador. Interview concerning education and certification of Ecuadorian
CPAs (March, 1998).
Pozo, Felipe Alban, Attorney, Superintendencia De Companias, Quito, Ecuador.
Interview concerning formation of Ecuadorian accounting law (March, 1998).
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Saudagaran, S., and J. Diga. 1997. Financial Reporting in Emerging Capital Markets:
Characteristics and Policy Issues. Accounting Horizons, Volume 11, No. 2, 41-64.
World Bank. 2004. Report on the Observance of Standards and Codes – Ecuador
(Accounting and Auditing). World Bank: Washington, DC.
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Acknowledgements
Thanks to Monica Rojas, Professor of Economics, University of San Fransisco-Quito,
and former economist, Central Bank of Ecuador, for editorial and translation
assistance.
Thanks to the staff at the Ecuadorian-American Chamber of Commerce, Guayaquil, for
their assistance and communication during the editorial review process.
Thanks to Missouri Western State University for Applied Learning travel funding which
allowed me to be on the ground in Ecuador in February-March, 2008.
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