Harmonisation of accounting practices
A process in which we try to increase the compatibility of accounting practices by removing different limits is known as Harmonisation. A lot of times it is considered as standardization but it has way broader view then standardization. In a nutshell Harmonisation means that how we can bring similarity by eliminating different procedures and alternatives. The users of financial statements always want a Harmonisation in accounting practices and this demand has been increasing in recent times to create Harmonisation so users of financial statements can take better decisions about investments and credit decisions. A big portion of financial analysts believes that diversity in account practices around the world is a hurdle in better flow of capital. This is because when investors want to compare financial statements of different companies from different regions then due to diversity it becomes hard for them to compare and analyze but when there will be Harmonisation then it will be easy for them to compare financial statements and flow of capital become more frequent and easy.
The rise of multinational companies’ culture also increased the need of Harmonisation in accounting practices for different regions. For example if a multinational company wants to start operations in a new territory that have different accounting rules and practices then it will be hard for them to cope with totally new laws as they will not be able to compare their performance and results.
It is also very vital for accounting professionals that there should be Harmonisation in accounting practices as it will be easy for them to switch from one region to another if rules and regulations are same but if every region will have its own accounting practices then it will be hard for accountants to offer their services to different regions. Developing countries and financial institutes also require Harmonisation so they can observe performance of different economies on global level because it will be easy for them to compare performance indicators.
For example a US company ENRON which was energy trading company having 7th rank in fortune companies faced bankruptcy. It was largest bankruptcy in the history of US. The stock of ENRON that was once traded at 90$ dropped to 0.36$ in just 2 years. So what was the reason of this downfall? It was suspected accounting policies that made possible for ENRON to hide their liabilities. More than 3000 companies issued bonds backed by ENRON stock but investors were totally unaware about account practices of ENRON. This was the scandal which helped to change the perspective of US for international accounting standards which also known as IAS.
Why we need Harmonisation
- High quality of financial reporting becomes easy due to Harmonisation.
- The reliability of financial reports increases due to Harmonisation
- Credibility of financial reports at global level becomes high due to Harmonisation.
- It enables multinational organizations to evaluate their performance.
- Due to GAAP harmonization gives all stakeholder equal opportunity to get same environment.
- It play big role in economic development of growing economies
- Greater opportunities arise for financial analysts and accountants because they will not have to learn new laws and accounting practices where will Harmonisation across the regions.
- Investments from highly developed countries like USA, Japan, Australia and Great Britain flows to less developed countries so in this way capital flows globally as investors seek investment opportunities.
- Global integration of financial markets becomes possible due to Harmonisation in accounting policies. We can take example of European union that how it made possible for whole union to do business in others territory due to same policies, rules and regulations.