Issues in Financial Accounting: New Institutional Theory & IFRS

This essay discusses the use of New Institutional Theory (NIS) in understanding IFRS convergence. It highlights the factors driving IFRS adoption, such as the expansion of global business, the increase in cross-border transactions, the influence of the European Union, and the need to restore public trust after corporate scandals. The essay also addresses the challenges of IFRS adoption, emphasizing that it is a complex and costly process. However, it concludes that IFRS convergence is a beneficial initiative that promotes transparency, quality, and comparability in financial reporting, ultimately satisfying stakeholder needs and fostering a globally united business environment. The example of India adopting Indian Accounting Standards compliant with IFRS norms is provided to show the practical application of the theory.

ISSUES IN FINANCIALACCOUNTING

Answer 1 :
New Institutional Theory (NIS) is being used by the researchers in subjects such as business,
management, political science, and sociology and information technology. In a similar way, this
theory is now used in accounting field to have an understanding about various case studies
covering accounting, auditing and management accounting. Researchers use this as a tool to have
an understanding about the behavior of an entity, or a state or a nation for the worldwide
acceptance of global accounting standards (Albu & Alexander, 2014).
Coming to IFRS Convergence, institutionalization is a process of analyzing the level of
acceptance of global accounting standards by a nation for the aim of having harmonized
accounting standards internationally. Researchers use the tool of NIS for analyzing quality and
quantity. When a country decides to adopt IFRS standards and replace its previous accounting
standards, it looks forward for economic benefits in terms of declined cost of capital, increasing
of foreign investments, etc. However, studies say that IFRS adoption is more for having a
legalized institutional status than having economic benefits.
 The most important factor driving IFRS Convergence is increase in expansion of business
globally. We see a global need of investments and trading opportunities by multinational
companies since last years. Thus, for the sake of having investment opportunities by an
MNC in one's company, it is important for companies to have a consistency in the
accounting practices they apply to facilitate comparison purposes in terms of financial
performance and position (Chand, 2005)
 Another important factor for IFRS convergence is increasing of cross border transactions
in international banking transactions and equity securities due to which financial reports
are required to be prepared using global accounting standards for having a consistency in
reporting and in that way, such reports can be used and compared by stock brokers,
investors, researchers, business & financial analyst, shareholders and such other intended
users for making useful decisions.
 Another main driving factor is European Union (EU) which has set its goal to have a
business environment united on a global base and with a common market in Europe,
healthy competitions can be made with US market (He, Wong & Young, 2012).

 With corporate failures and accounting scandals such as Worldcom, Enron, HIH
Insurance etc the public confidence and trust was shook in the accounting & auditing
industry. Thus, to prevent the happening of such collapses, the auditing & accounting
industry would be blamed heavily in terms of having weak accounting standards. In order
to avoid criticism, IFRS adoption has become a necessary requirement.
 Another factor that has influenced countries for IFRS adoption is cost savings as
continuous monitoring and revising of accounting standards cost heavily (Irvine, 2008).

Answer 2 :
IFRS adoption is just not another accounting exercise but a complex process that would take
months for a clear adoption. Also, the organizations do not have a comprehensive knowledge
about IFRS norms and therefore, its adoption is costly in terms of hiring of IFRS experts,
installation of new information technology system, better controls over the business
environment, etc. However, what needs to be focused upon is the bigger picture where IFRS
aims at creation of globally united nation that would deliver transparency, quality and quantity of
financial reports of an entity. With previous collapses, lessons have been learnt and IFRS have
been set in that way itself to satisfy stakeholder's needs (Nobes, 2015).
Thus, we can conclude that IFRS convergence will be the best initiative for the preparation and
presentation of financial reports which are highly qualitative and quantitative. Global acceptance
of consistent accounting standards is a dream of International Accounting Standards Board
(IASB) and qualitative reports will bring it into reality. For maintaining the trust of the
stakeholders in the companies, company's trust in the global accounting standards and of the
general public in the market, qualitative reports are important and that is possible through IFRS
Convergence. For example, recently India has replaced its accounting standards with Indian
Accounting Standards that are complying with IFRS norms (Ali, Ahmed & Henry, 2006).
Though IFRS adoption is a comprehensive process in terms of having detailed disclosures, it is
still better to prepare IFRS based financial reports that facilitates the global comparative analysis
among companies, transparency, fair presentation, better understanding of business environment
& operations and satisfaction of stakeholder's needs. The required changes might be dramatic for
the coming years but time would be the best judge to tell us whether such global efforts are
resulting in the fulfillment of expectations or not (Mısırlıoğlu, Tucker & Yükseltürk, 2013).

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