International Accounting, 6/e

Frederick D.S. Choi

Gary K. Meek

Chapter 8: Global Accounting

and Auditing Standards

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Learning Objectives
 Define and understand the distinction between “harmonization”
and “convergence” as they apply to accounting standards.
 State the pros and cons of adopting international accounting
standards.
 Understand what is meant by “reconciliation” and “mutual
recognition” of different sets of accounting standards.
 Identify the six organizations that have leading roles in setting
international accounting standards and promoting international
accounting convergence.
 Describe the structure of the International Accounting
Standards Board and how it sets International Financial
Reporting Standards.
 Understand the major provisions of the U.S. Sarbanes-Oxley
Act and why similar legislation is being enacted in other
countries.

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Standardization, Harmonization,
and Convergence
 Standardization
 Rigid, narrow set of rules
 One-size-fits-all approach
 Less flexible than harmonization or convergence
 Not the current thinking
 Harmonization
 Standards that are compatible – no logical conflicts
 Means the elimination of differences among existing accounting standards
 Convergence
 Means the gradual elimination of differences in accounting standards
 But might also involve a new accounting treatment not in any current
standard
 Involves cooperative efforts of IASB and national standard-setters
 Now the preferred term over harmonization

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A Survey of International
Convergence
 Advantages of international convergence
 Investor understanding and confidence is improved.
 Investor decision making is improved.
 Capital is allocated more efficiently around the world.
 Financial risk and cost of capital are reduced.
 Strategic decision making in mergers and acquisition is
improved.
 Criticisms of international standards
 Solution is too simple for such a complex problem.
 Strips accounting of its flexibility to adapt to different situations.
 Challenges national sovereignty.
 A tactic of large accounting firms to expand their market share.
 May create standards overload.

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A Survey of International
Convergence (contin)
 Reconciliation and mutual recognition
 Reconciliation
 Financial statements based on home GAAP, but net income and stockholders’
equity reconciled to another GAAP.
 This is the SEC requirement for foreign filers.
 Less costly than preparing complete financial statements based on another
GAAP.
 But a summarized, incomplete picture.
 Mutual recognition (reciprocity)
 Jurisdictions accept financial statements based on each other’s GAAP.
 Does not improve comparability.
 Can create an unlevel playing field.
 Evaluation
 Arguments on both sides have merit.
 But convergence and international standards are a reality.

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Some Significant Events in the History
of International Accounting Standard
Setting
 1959 – Jacob Kraayenhof issues first significant proclamation that work
on international standards should begin
 1973 – IASC created
 1977 – IFAC founded
 1978 – EU Fourth Directive issued
 1987 – IOSCO resolves to promote common, international accounting
and auditing standards
 1989 – IASC issues Exposure Draft 32
 1995 – IASC and IOSCO agree on core standards work plan
 1995 – EU adopts New Accounting Strategy
 2000 – IOSCO accepts IASC’s core standards
 2001 – EC proposes that EU-listed companies use IAS by 2005
 2001 – IASB succeeds IASC
 2002 – Norwalk Agreement signed between IASB and FASB
 2005 – SEC “roadmap” to eliminate IFRS reconciliation requirement

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International Accounting
Standards Board
 Overview
 Independent private-sector standard-setting body
 Objectives
1. To develop, in the public interest, a single set of high-quality,
understandable, and enforceable global accounting standards that require
high-quality, transparent, and comparable information in financial statements
and other financial reporting to help participants in the world’s capital
markets and other users make economic decisions
2. To promote the use and rigorous application of those standards
3. In fulfilling the objectives associated with (1) and (2), to take account of, as
appropriate, the special needs of small and medium-sized entities and
emerging economies
4. To bring about convergence of national accounting standards, and
International Accounting Standards and International Financial Reporting
Standards to high-quality solutions
 Represents accounting organizations from approximately 100 countries
 Standards follow fair presentation and full disclosure
 Standards are principles-based

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International Accounting
Standards Board (contin)
 IASC’s core standards and the IOSCO
agreement
 IOSCO agreed to IASC’s core standards plan in
1995
 IOSCO’s agreement was a major boost to IASC’s
credibility
 Core standards completed in 1998
 IOSCO approved core standards in 2000

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International Accounting
Standards Board (contin)
 The new IASB structure
 IASC was restructured as IASB in 2001
 Bodies
 Trustees
 Representatives from entire world
 Appoints members of Board
 Raises funds and oversees IASB activities
 IASB Board
 Issues International Financial Reporting Standards
 14 members – 12 full-time and 2 part-time
 Actively partners with national standard setters to promote convergence
 Follows due process in setting IFRS
 Standards Advisory Council
 Advises IASB Board on agenda and priorities
 International Financial Reporting Interpretations Committee
 Issues interpretations of IFRS

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International Accounting
Standards Board (contin)
 Recognition and support for IASB
 IFRS are widely accepted around the world
 Significant events that boosted IASB’s credibility
 IOSCO endorsement of (IASC’s) work plan
 EC proposal that EU-listed companies use IFRS by 2005
 Norwalk Agreement between IASB and FASB
 SEC response to IFRS
 Supports work of IASB but does not yet accept IFRS filings by
foreign companies
 2005 – Issued “roadmap” setting out the steps for eliminating
requirement to reconcile IFRS to US GAAP
 2007 – Proposed eliminating reconciliation requirement by 2009

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European Union
 Overview
 Company law harmonization designed to integrate
European financial markets
 European Commission has full enforcement
powers for accounting directives

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European Union (contin)
 Fourth, Seventh, and Eighth Directives
 Fourth Directive (1978)
 Broad, comprehensive set of accounting rules
 Valuation rules
 Disclosure requirements
 Format rules for financial statements
 Individual company accounts
 Applies to public and private companies
 True and fair view is overriding requirement
 Requires audits of financial statements
 Seventh Directive (1983)
 Consolidated financial statements
 Required for groups of companies above a certain size
 Specifies
 Note disclosures
 Director’s report
 Requires audits of financial statements
 Member states have wide latitude in incorporating provisions
 Eighth Directive (1984)
 Specifies qualifications for statutory auditors
 Revised in 2006 and now called Statutory Audit Directive
 Requirements for appointment and removal of auditors
 Audit standards
 Continuing professional education
 Auditor rotation
 Public oversight
 Audits must follow International Standards on Auditing
 Established European Group of Oversight Bodies
 A response to European accounting scandals similar to those in the U.S.

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Choi/Meek, 6/e 13
European Union (contin)
 Have EU harmonization efforts been successful?
 Yes:
 Directives improved financial reporting practices and
brought about harmonization
 Directives accelerated accounting development in many EU
countries
 No:
 EU countries mostly adapted the new rules to their existing
ones
 Enforcement was uneven

 Some difficult issues weren’t dealt with

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European Union (contin)
 The EU’s new approach and the integration of European financial
markets
 Requirement that EU companies listed on regulated markets
prepare consolidated financial statements using IFRS
 To become legally binding, IFRS must be adopted by the
European Commission
 European Financial Reporting Advisory Group (EFRAG)
 Provides technical review and opinion of the IFRS
 Standards Advice Review Group
 Assesses whether EFRAG’s advice is well balanced and objective
 Accounting Regulatory Committee
 Recommends that the IFRS be adopted (or not)
 Is the IFRS compatible with European directives?
 Is the IFRS conducive to the European public interest?
 European Commission
 Adoption completes the process

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International Organization of
Securities Commissions (IOSCO)
 Securities regulators from over 100 countries
 Responsible for over 90 percent of global securities markets
 Objectives of member agencies
 To cooperate together to promote high standards of regulation in order to
maintain just, efficient, and sound markets
 To exchange information on their respective experiences in order to promote
the development of domestic markets
 To unite their efforts to establish standards and an effective surveillance of
international securities transactions
 To provide mutual assistance to promote the integrity of the markets by a
rigorous application of the standards and by effective enforcement against
offenses
 Extensive work on international accounting and disclosure standards
 Cooperates with IASB
 Has endorsed IFRS for cross-border securities offerings

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International Federation of
Accountants
 Worldwide organization representing the accountancy profession
 160 member organizations
 120 countries
 2.5 million accountants
 Mission
 To strengthen the accountancy profession worldwide
 To contribute to the development of strong international economies by establishing and
promoting adherence to high-quality professional standards, furthering the international
convergence of such standards
 To speak out on public interest issues where the profession’s expertise is most relevant
 Aim is to harmonize and converge auditing standards and professional
practice worldwide
 Auditing adds credibility to external financial reports
 High-quality auditing standards are necessary to ensure that accounting standards are
rigorously interpreted and applied
 If auditor training and audit standards vary, the reliability of financial statements will
also vary

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International Federation of
Accountants (contin)
 Organizational structure
 IFAC council elects the IFAC board
 IFAC board sets policies and oversees IFAC operations
 Public Interest Oversight Board provides additional oversight
 Work done through standard-setting boards and standing committees
 Standard-setting boards
 International Accounting Education Standards Board
 International Auditing and Assurance Standards Board
 Issues International Standards on Auditing
 International Ethics Standards Board for Accountants
 International Public Sector Accounting Standards Board
 Standing committees
 Compliance Advisory Panel
 Developing Nations Committee
 Nominating Committee
 Professional Accountants in Business Committee
 Small and Medium Practices Committee
 Transnational Auditors Committee

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UN Intergovernmental Working Group of Experts
on International Standards of Accounting and
Reporting (ISAR)
 Only intergovernmental working group devoted to
corporate accounting and auditing
 Objective
 To promote the transparency, reliability, and comparability
of corporate accounting and reporting
 To improve disclosures on corporate governance by
enterprises in developing countries and countries with
economies in transition
 Discusses and publishes worldwide best practices
 Recent initiatives
 Corporate governance
 Accounting by small and medium-sized businesses
 Technical assistance in emerging economies
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Organization for Economic
Cooperation and Development
(OECD)

 International organization of 30 (mostly

industrialized) market-economy countries
 Promotes good governance in public and
private sectors
 A voice for larger, industrialized countries

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Conclusion
 Debate is no longer whether to converge, nor
even how to converge
 Financial reporting systems are converging,
as international capital markets become more
investor oriented
 International Accounting Standards Board is
at the center of the convergence movement

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Other Chapter Exhibits

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Other Chapter Exhibits (contin)

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Exhibit 8-2 (contin)

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Exhibit 8-2 (contin)

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Exhibit 8-2 (contin)

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Chapter Exhibits (contin)

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Exhibit 8-3 (contin)

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Other Chapter Exhibits (contin)

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Exhibit 8-5 (contin)

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Other Chapter Exhibits (contin)

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Exhibit 8-6 (contin)

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