The world of finance and accounting is ever and continuously growing. This is thanks to the solid trend of globalization or the interconnectivity of countries and the number of people who are becoming more financially proficient. In this paper, the author argues why the world needs a universally accepted accounting theory. In the most basic sense, accounting theories are sets of principles or frameworks used to study and explain the application of numerous financial concepts. There are, of course, mainstream and alternative theories of accounting. The importance of accounting theories can be emphasized in the process of financial reporting—where corporations submit financial statements to certain regulatory bodies. A business that has employed a different accounting theory in its financial reporting process may cause confusions when its financial statements get reviewed by other companies, auditors, or regulatory bodies.
The adoption of a universally accepted accounting theory addresses two important problems: accountability and transparency . Back in the days when primitive accounting methods were used by businesses and governments to report their finances, regulators noticed a lot of errors, some of which were unintentional while some ringed of fraud and were intentional, violating some of the fundamental ethical codes of accounting in the process . This created a loophole in the system. Because the world was becoming more and more connected, the systemic risks that were posed by falsified government and corporate financial reports became even bigger. International regulatory bodies realized that they could not afford to not have an internationally recognized set of accounting theories and standards . And this is why the International Accounting Standards were created.
These accounting theories are designed to force organizations to be transparent. That is, their financial records must be open for audit and review purposes. This only becomes truer in the case of publicly listed entities and national governments. With an increased level of transparency, stakeholders of an organization that follows a universally accepted accounting theory would be able to determine, for himself, or with the help of a professional, whether there were falsifications or any fraudulent activity that was done with the organization’s books. Unfortunately, this would be something that would be hard to accomplish in the absence of a universally accepted accounting theory.
Accountability is another issue that gets addressed by a universally accepted accounting theory. In the case of the IAS, its purpose is to serve as a deterrent for organizations that intend to cook their books. Knowing that they would be force to present their financial reports to a regulatory body and that they would eventually be caught if ever they would commit any fraudulent accounting trick (e.g. falsification of figures in the balance sheet), they would most likely avoid the commission of such actions.
Considering these information, what the presence and application of a universally accepted accounting theory creates is a healthy financial and accounting environment, free of fraud and other malicious activities. Experience is a perfect teacher and so far, the world has already experienced a stage wherein there existed no universally accepted accounting theory. Every individual working in the financial industry during that period knows that what that absence led to was chaos (i.e. spike in the number of fraudulent accounting activities).
One of the most perfect and specific examples would be the case of Enron. Enron was a huge corporation that went under after cooking its books for far too long; falsifying its financial statements . Surely, without a universally accepted accounting theory, companies would be freer to follow Enron’s path; and with a lot of companies going bankrupt as a result, this could pose as a systemic risk to the global financial system and economy.
Works Cited
Barth, M., W. Landsman and M. Lang. "International Accounting Standards and Accounting Quality." Journal of Accounting Research (2008): 467-498. Print.
Benston, G. "Fair Value Accounting: A Cautionary Tale from Enron." Journal of Accounting and Public Policy (2006): 465-484. Print.
RIPA International. "The Importance of International Accounting Standards." (2013): http://ripainternational.blogspot.com/2013/07/the-importance-of-international.html. Web.
Schroeder, R., M. Clark and J. Cathey. "Financial Accounting Theory and Analysis: Text and Cases 11th Ed." Wiley (2014): 21. Print.
