Global Issues for Finance Professionals: PAM100 Report Analysis

This report delves into critical global issues impacting finance professionals, examining the implications of globalization on financial reporting and corporate responsibility. It explores the concept of international accounting harmonization (IAH), discussing the rationales, benefits of IFRS implementation, and associated challenges, including resistance from Western nations and the complexities of principle-based versus rule-based accounting standards. The report also analyzes corporate social responsibility (CSR), evaluating arguments for and against mandatory CSR, and recommending improvements in CSR reporting. The analysis underscores the importance of transparency, comparability, and ethical considerations in the global financial landscape. The study highlights key factors such as market liquidity, reduced cost of capital, and the need for consistent application of standards to ensure the credibility and effectiveness of IFRS implementation.

Running head: GLOBAL ISSUES FOR THE FINANCE PROFESSIONALS
Global Issues for the Finance Professionals
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Table of Contents
Introduction:...............................................................................................................................2
International Accounting Harmonisation (IAH):.......................................................................3
Harmonisation of accounting standards- the rationales:............................................................3
IFRS implementation- the benefits:...........................................................................................6
Harmonisation of accounting standards- issues and challenges:...............................................7
Further issues and challenges:....................................................................................................8
Corporate social responsibility (CSR):......................................................................................9
Discussion of whether CSR is a hard or a soft law:.................................................................10
Arguments against compulsory CSR:......................................................................................10
CSR reporting:.........................................................................................................................11
Conclusion:..............................................................................................................................13

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Introduction:
In the current era, globalisation 3.0 has been shrinking the universe ranging from
small to tiny size. It is possible to define globalisation in distinct terms. In this regard,
globalisation could be defined as the rising interrelationships among organisations and global
individuals via trade and investment.
From the economic viewpoint, investments are not limited to countries and their
limits, as the entire world has turned into a market. Thus, the ways through the business
organisations develop and present their financial information are affected by globalisation. In
case of an investor, financial performance plays a crucial role in order to enhance the
decision-making process. Therefore, it is extremely crucial to prepare the financial statements
in such a manner that the information provided is timely, understandable, comparable and
relevant. All such financial information qualities could be accomplished by adopting the
significant concepts of globalisation in preparing as well as presenting the financial reports.
One such significant element is accounting standard harmonisation.
According to globalisation, it is not possible to distinguish business strategy from
business ethics. From the societal viewpoint, the shrinking universe and interrelationship
between organisations and individuals, society has better information making them more
aware of the organisational actions. This has been a major setback for the organisations to
become socially accountable as well as ensure sustainable development. However, there are
varying views on the purpose of business existence and accountability towards the
stakeholders.
Corporate social responsibility and harmonisation of accounting standards are crucial
in the current era. This paper would intend to explore the arguments for each of the two

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concepts. The first section would focus on the potential advantages from harmonisation and
difficulties associated with it. In the next section, evaluation would be made about the
arguments of a single CSR system along with recommending methods for improvement in
CSR reporting. Finally, inference would be made by taking into consideration the arguments.
International Accounting Harmonisation (IAH):
The users of the financial statements need mainly quality financial information for
undertaking informed decisions and for this, it is necessary that the financial reports should
be transparent, comparable and understandable. The existence of accounting systems
increases the challenge of comparing the financial reports.
There has always been the requirement of internationally harmonised accounting
framework in the profession of accounting. Accounting harmonisation could be defined as an
effort to take into account the various systems. Although few view harmonisation as a
method of shifting to an uniform system, most view the concept as a procedure, in which the
number of allowed alternatives of accounting is minimised as a way to promote increased
comparability.
The “International Accounting Standards Board (IASB)” is working actively on the
convergence goal for developing a unified set of accounting standards to be utilised
internationally. The accounting standard harmonisation is a highly debatable topic. In this
section, emphasis would be kept on the IAH rationales along with the challenges and issues
that persist owing to globalisation.
Harmonisation of accounting standards- the rationales:
For explaining further on this concept, it is necessary to go back to the year 1993 at
the time the investors were looking for the opportunity of investing in Daimler-Benz, since it

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was prepared to be listed on the New York Stock Exchange. The process initiated from May,
in which the accountants of the organisations worked around the clock in Stuttgart, Germany
in order to prepare for the listing of October. However, the final announcement awaited a
shock for the investors. This is because the organisation informed the German investors that
it made profit of DM 615 million, while the situation was completely opposite. It had to
admit the fact along with informing to the US investors that it encountered loss of DM 1.839
billion in the same year.
As Daimler was planning to be listed on the New York Stock Exchange, it clearly
implies that the organisation had to abide by the “Generally Accepted Accounting Principles
(GAAP)” prevalent in US. For listing in the US stock exchanges and accessing the largest
global capital markets, the business organisations are required to restate their financial
statements in accordance with GAAP irrespective of the cost or issue in conducting the same.
The case of Daimler denotes the considerable requirement of uniformity, consistency
and comparability of the financial reports. The main benefit or the fundamental concept that
the accounting standard convergence has set out is the comparability of the financial reports.
Since the volume of global economic and financial activities and investment continue to
increase, the requirement for a common business language in financial statements is rising in
urgency.
The major advantages that the employment of a unified group of international great-
quality standards could effectuate are interesting. These mainly include the following:
Comparability:
With the help of harmonisation, it is possible to improve comparability between the
financial statements by imposing restrictions on the alternative treatments of accounting

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allowed for identical transactions. The comparability of the financial statements could have
issues, if identical transactions are accounted for differently in different nations. By improved
comparability of the financial statements, the analysts and investors could be benefitted
largely.
Minimised costs of reporting:
Financial reporting could be considered as a costly work. The organisations operating
in nations with varying standards of accounting would need increased costs of developing the
financial statements, as per the accounting principles of the nation. With the help of
harmonised financial statements, the multinational organisations are benefitted, since they
could develop a single report. This minimises the costs related to compliance and reporting.
Level playing field:
The accounting policy harmonisation forms a level playing field, in which no nation is
privileged or underprivileged on the part of its generally accepted policies of accounting.
Reduced cost of capital:
The stringent adherence and consistent application of the standards lead to greater
quality financial information. With the help of such information, it becomes possible to
translate highly informed investment decisions along with allocating funds in a better
manner, which assist in minimising the overall cost of capital.
All the above-discussed arguments have supported the implementation of
“International Financial Reporting Standards (IFRS)” in the form of a common group of
accounting standards.

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IFRS implementation- the benefits:
The European Parliament and the European Council of Ministers have passed a
regulation on 19th July 2002 needing the implementation of IFRS on the application of global
accounting standards. Owing to the regulation, all the EU listed organisations are needed to
prepare the financial statements following IFRS from 2005.
The implementation of IFRS on the part of the EU members along with some other
jurisdictions encountered a number of benefits, particularly associated with the capital
markets. A number of studies highlighted that increased market efficiency has been resulted
due to the implementation of IFRS. According to some studies, the following points have
been identified:
 Enhanced market liquidity
 Minimisation of the cost of capital as well as increased value of equity
 Increased comparability and disclosures
 Enhanced trading activities
 Enhanced global holdings
 Increased volume related to mergers and acquisitions
 Translation of better quality information to improved forecasts made on the part of the
analysts
 Increased volume of mergers and acquisitions as well as increased take-over premium
result on the part of employment of common accounting standards
Harmonisation of accounting standards- issues and challenges:
The journey to accounting standard convergence has never been a smooth one,
especially the resistance from the western nations. Besides IFRS, another dominant
accounting standard format is US GAAP.

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Before the rapid implementation of IFRS, US GAAP has been the dominating
standard. However, the standard came under vigilance after the infamous downfall of Enron
in 2001. Enron was then the 11th biggest Fortune 500 publicly traded organisations and one of
the biggest insolvencies in history. The accounting policies have been alleged to play a
crucial role in such downfall. According to the Commissioner of IASB, the regulations of the
US GAAP have always been in doubt regarding the overall system validity. The main reason
behind the downfall of Enron has been the non-disclosure of balance sheet financing. In the
application of IFRS, this would have been limited.
The arguments put forth in favour of US GAAP in the case of Enron highlight the fact
that the debacle of Enron despite drawing increased attention in the dialogue of IFRS is not a
depiction of fundamental accounting or failure in system. Instead, it is a corrupt management
case, which was seeking technicalities behind the perpetration of the investor fraud.
USA is viewed to be reluctant to shift from GAAP, although there might not have
been significant differences between IFRS and GAAP. According to the belief of the US
authority, GAAP tends to be more prescriptive as well as structured in comparison to IFRS.
In addition, GAAP is dependent more on rules, while IFRS is developed more on principles.
It has been argued that IFRS lacks in specificity. It has been observed that at the time the
global accounting regulations enable for considerable discretion in application, it is not
probable that there would be de facto uniformity. As a result, the effort of harmonisation is
impaired.
Further issues and challenges:
It could be costly to implement IFRS. All business organisations regardless of their
size and nature are impacted at the time of IFRS adoption. Majority of the organisations in a
nation range from small to medium, particularly in developing nations and as a result, they

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could experience increased financial burden in terms of resource cost needed for
implementation and recruitment of qualified staffs for preparing their accounts.
It has been argued that comparing accounting information is not defective and
efficient IAH could not be achieved without the uniform group of GAAP along with entirely
adjusted common monetary denominator (CMD). The CMD could be accomplished only
under historical cost accounting (HCA) and fair value accounting (FVA). IFRS has provided
the users with the option of adopting the method they like despite the fact that it is not
mandatory of employing fair value accounting. Therefore, in this sense, consistency set out to
be accomplished by IAH has been undermined. Certain issues are evident that principles-
based approach could minimise the financial information comparability along with leaving
additional room for judgement on the part of the auditors and the organisations.
Various nations have developed their accounting standards under various economic,
social, legal and cultural environments. Such diversity is shown in the accounting standards
of the nations as well. In case, there is requirement to accomplish convergence, it is crucial to
make an agreement on the primary financial reporting objective.
However, it has been argued that organisations could encounter adverse impact from
the adoption of non-local GAAP. With reference to local tax liabilities, they have protected
them by careful utilisation of their current accounting standards. Such amounts could be
certainly substantial. One of the crucial concerns of an organisation is the fear of additional
transparency exceeding the desired limit.
It has been gathered from the research evidences that the advantages of IFRS are
probable to be obtained at the time IFRS gains support by strong implementation, the
effectiveness of the process of implementation of IFRS along with assuring adequate
monitoring and credibility. Despite such convergence, no assurance is provided on the benefit
of enforcement among various jurisdictions.

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One of the aspiring objectives is the accounting standard harmonisation. The road to
success is not easy owing to the number of obstacles. Although efforts like the adoption of
IFRS on the part of EU members and other jurisdictions and the Norwalk agreement as the
memorandum of understanding between FASB and IASN for increasing the compatibility of
the standards of financial reporting are made, success is still far away.
Corporate social responsibility (CSR):
One of the prevalent consequences of globalisation is identified as corporate social
responsibility (CSR). For answering this, it is crucial to address two further questions:
 What is the reason behind the existence of business? For serving a purpose or making
profits
 For the stakeholders (customers, staffs and society) or the shareholders
There have been two separate views, which include the social view and the economic
view. The traditional economic view is that the main reason behind the existence of business
is to earn profit. In addition, the business has only one social responsibility, which includes
using its resources for involving in activities designed to raise profits as long as it remains
within the game rules. This implies that it is involved in free and open competition in the
absence of fraud or deception.
From this viewpoint, business does not concern about the society. Instead, they view
that the NGOs and the government would bear the responsibility of the society. It has been
argued that CSR is a significant threat to the capitalism convention, since profits lie with the
shareholders alone. However, from the viewpoint of the society or the stakeholder view, the
corporations need to emphasise on their responsibilities towards the society along with
personalising social responsibilities by delineating the particular groups or individuals.

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Corporate social responsibility, termed as corporate responsibility, sustainable
responsible business and corporate citizenship, could be described in the form of legal,
economic, discretionary and ethical expectations of the society towards the organisations at
any particular point of time.
Economic responsibility denotes the production of high quality services and products
that cater to the needs of the society at affordable prices. The legal responsibility signifies the
expectation of the public towards the organisations in conforming to the regulations
governing all aspects of business operations. The ethical responsibility implies the
expectation that the organisation carries out their business operations fairly and responsibly.
Finally, discretionary responsibility represents the commitment of the organisation in
conducting its affairs effectively.
The adverse effects of the business activities coupled with globalised consumption
and production systems have resulted in significant concerns for sustainable global growth.
Legitimacy could be described in the form of social acceptance of institutions or actions and
it is described to the organisations in social construction process. Such legitimacy is in doubt
when the organisational actions are deemed to be undesirable and inappropriate within the
social contexts. Therefore, for ensuring legitimacy, many global organisations involve in
CSR functions and they make the same a portion of the mission statements. All organisations
have CSR ideas; however, it is to be borne in mind that CSR is the bottom line in the recent
times and not an option.
Although in certain jurisdictions, CSR is deemed to be a soft law, it is treated as a
hard law in certain jurisdictions. For example, in Belgium and USA, “Section 404 of
Sarbanes-Oxley Act” and corporate codes mandate CSR reporting. However, in other nations
such as China, UK and Japan, CSR is still treated as a soft law.

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Discussion of whether CSR is a hard or a soft law:
Arguments for compulsory CSR:
 Higher pay and safer work practices are converted to improved performance along
with translating to improved quality of products and services
 Improved staff practices minimise the class conflict as well between the employees
and the organisation
 CSR hampers the image of the organisation, improve goodwill and reputation along
with generating brand equity
 The corporate responses to the societal welfare result in effective utilisation of
economic power and national resources in the absence of governmental intervention
 The involvement of the organisations in CSR supports the role of the government
towards the welfare of the society
Arguments against compulsory CSR:
Green washing:
This could be explained as the action of misguiding the customers about the
environmental practices of an organisation or the environmental advantages of any service or
product.
Competitive tool:
This is defined as a competitive benchmark for the organisations owing to the fact that
it is not mandatory. In the presence of competition, organisations are involved in voluntary
challenge by increasing the programs of CSR in attracting the customers. By making CSR
practices compulsory, all organisations have to conduct the same practices, which would
tarnish the competitive level.
Failure to address the local difference: