Globalisation And Its Impacts On Accounting Standard Harmonisation And Corporate Social Responsibility

Defining Globalisation and Its Economic Implications

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 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.

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.

Role of Accounting Standard Harmonisation in Financial Reporting

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.

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 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 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. 

Arguments for and Against Corporate Social Responsibility

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.

The European Parliament and the European Council of Ministers have passed a regulation on 19^th 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

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.

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 11^th 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. 

Advantages of Accounting Standard Harmonisation

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.

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 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.

Challenges to Accounting Standard Harmonisation

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.

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.

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.

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.

Comparison of IFRS and US GAAP

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.

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

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:

It has been often argued by free market economists that the international environment as well as social standards fail to address the local differences between nations, which might intervene with the growth of the poor nations.

All business organisations are obliged to perform four major duties, which include conforming to laws, earning profits, working beyond the spirit law and discretionary social welfare acts. More precisely, CSR is developed around ethical and philanthropic accountabilities. This implies that CSR could be deemed in the form of voluntary activity and compulsory CSR changes the CSR rationale as well as deviating from natural accountability of organisations towards the society.

Barriers to IFRS Adoption

By making CSR compulsory, there has been a movement towards the roles of the organisations and government. The government bears the accountability of the societal welfare of the environment and the state. The organisations intend to maximise their profits by ignoring the societal welfare.

As discussed above, regardless of soft law or hard law, involvement in CSR activities and moving towards a specific purpose is necessary for the business organisations in maintaining their corporate legitimacy. It has been observed that organisational legitimacy could rely on the advantages that are deemed to rise from the existence of the organisation, pragmatic legitimacy or sub-conscious acceptance of the firms. For the dynamic international heterogeneous environments coupled with conflicting sustainable growth, the maintenance of legitimacy for organisations has been challenging. It has been identified that the organisations have varying and separate legitimacy strategies, which could be deployed for adhering the business activities to the expectations of the society. They include strategic manipulation, isomorphic adaptation strategy along with moral reasoning.

The (Isomorphic adaptation strategy) depicts that the company could vary their corporate exercises and adapt societal prospects in order to continue intellectual lawfulness. This could take place when the company when the corporate exercises would be changed in order to satisfy the interests and law related worries of their most capable shareholder groups). The (strategic manipulation strategy) explain those cases where the companies affect the social prospects by bending or even manipulating the concepts of the main players or (policy makers) in the ambience. The societal prospects are majorly moulded by the (organisations political strategy). These prospects could be affected by the organisations via politicking, promoting, embellishing and so on.

Righteous interpretation develops upon speculation. The company involves in an open monologue with focal shareholders or societal groups in order to debate for the prominence of its status and conduct. 

Generally, there are three ways to acknowledge lawful demands –

One best way approach:

According to few studies, organisations need to emphasis upon the economic performance of the company when involving in green strategies. It is believed that manipulation is the most approved lawful strategy. In this regard, the major liability of the company is producing profit, no direct engagement in campaigning for social well-being.

Contingency approach:

This one is considered to be a better one in contrast to the one discussed above. This approach contradicts the concept of a single strategy, rather this one debates that there could be an (one best way) for a specific situation, however, it would keep on changing based on the occurrence of different incidents.

Paradox approach:

This approach proposes that, the corporations do not select between various strategies, however, they apply all the three strategies simultaneously.

Organisations operate in a very complicated, diversified ambience, therefore, utilising this approach to make a strategy lawful could be the most feasible thing, with regards to the post national sequence and organisational benefaction to viable progress.

A (sustainability report) is a report issued by a company or corporation regarding the economic ambience and societal effects caused by the day to day functionalities of the company. Creating and maintaining trust in the market and government is the basic for attaining sustainability globally as well as economically.

Sustainability computing helps in focusing upon non-financial data, it also helps in focusing on social factors as well as ambient factors. Environmental reporting is not a fresh idea, the companies had been utilising this idea from the very beginning of financial reporting.

Moreover, in the past quarter of a century there has been a thrust from the public for more societal and ambience data. Various elements has raised the requirement for organisational answerability: raised public consciousness, pressure from the shareholders and societal worries over exercises like- (sweatshop labour), (ambient disasters) and so on.

Sustainability reports are very good, as they promote socially liable inspecting. Furthermore, there is still some issue, which continues and it is like the problem we come face to face with financial reporting, it emphasises on the requirement for proportionate, rational and dependable data.

Compatibility is important for proportionality and rationalism, and hence helpful data for taking the decisions. An international grade on CSR reporting would notably enhance the CSR reporting process as it would result in proportional data and knowledgeable decisions.

CSR compatibility is more complex in comparison to accounting compatibility. Conflicting to financial accounting, there is not a single authorised grade worldwide for CSR reporting that would be able to satisfy the requirement of all the shareholders.

A combined sustainability reporting could produce an output that would be  able to provide various advantages  like- raised profits, improved customer reputation, improved administrative conformity, well-defined organisational targets and strategies.

There are many CSR reporting grades, which are available and D. Tschopp and M. Nastanski carried out an investigation related to the most commonly utilised CSR grades, in order to reach a conclusion of the most feasible grade that could be internationally agreed upon.

They concluded that, various shareholders have different types of needs and request various data. Therefore, it would be an uphill task to cite an internationally accepted grade, which would be able to satisfy the requirement of all the shareholders.

The obstacles in this application associates the companies wish to explain their CSR activities (bad or good), absence of common problems applicable to all the companies, issues in creating basic CSR factors, absence of specific quantitative or qualitative approaches a distinguished accordance specifically as it associates to performances. 

Conclusion:

Modernisation has shortened the globe. There are no more obstacles and the globe is now a market for the investors. The requirement for proportional, persistent financial data is crucial for consumers of financial data to make knowledgeable decisions. Varying financial gradations amongst countries serve as a trade obstacle owing to extra translation expenses and scope of data for decision makers, the feasibility of financial data is reduced, this discourages investment and hampers economic development. The IASB and FASB are working on compatibility of accounting gradations to accomplish conformity. The IFRS and US GAAP are the superior formats. The path to conformity is not smooth, one big obstacle being unwillingness of US to embrace IFRS and stick to US GAAP. One of the debates being the principle-dependent character of IFRS helps in selecting on specific accounting policies, and this variance obstructs harmonisation. IASB and FASB are working on reducing the minimal variances between the IFRS and GAAP. It could take some time to reach absolute conformity.

The current demand for Sustainable growth has made a once discretionary strategy of CSR now a must. Whilst some nations make CSR a hard law, in most of the nations it is being treated as a soft law. There has now been a shift from the traditional view of business existence only to make profit. Faithfulness on the traditional view alone could harm the business’s legality.

There are many lawful strategies, the organisations could apply, however, considering the different ambiences of companies, there is no one best approach and a paradox approach is the best policy. The paradox approach is when all lawful strategies could be implied simultaneously based on the business conditions.

CSR reporting could be enhanced through compatibility of the reporting gradations as this would enable proportionality and persistency of data. Compatibility of CSR is complicated, a big challenge to agree upon global gradations, which could meet the requirements of varying demand of all shareholders.