First started by the International Accounting Standards Board (IASB) in 1975, IFRS began as an alternative to the American-used GAAP, Generally Accepted Accounting Principles. Today, over 100 countries worldwide use IFRS, most of which joined during the 1980's and 1990's (Larry). In order to fully understand all of the pros and cons of IFRS, one must look at what a country was like before implementing it. In 1981, H. P. Holzer and J. S. Chandler researched the accounting issues in the developing countries of Tunisia, Tanzania, Fiji, Thailand and Pakistan in the enterprise sector, local accounting professions, accounting in the government sector and the education of accounting. What they discovered was horrifying as compared with American accounting; late closings of accounts (sometimes years late), shortages of proper accounting manuals and deficiencies of qualified staff. Specifically, in the enterprise sector, developing countries saw issues of lack of accountants, bookkeepers and even auditors because the businesses could not afford to give as high salaries as the private sector. What staff members they did find were very under qualified and the lack of on job training made this worse. The enterprises' accounting systems were out of date with no accounting manuals or forms. Because of the poor accounting systems, there were absolutely no internal controls, which of course can lead to fraud and abuse. The financial statements that were made were as late as three years old.
Without any proper financial statements, management cannot make proper decisions for the organization and the actual financial position of the business is questionable. This led to lack of international investors interested in the businesses. In order to help improve the situation of the financial statements, auditors had to step in. Because so many businesses needed help from auditors just to complete monthly and annual statements, this created an even worse staffing situation. The governmental sector of these developing countries was just as horrendous, if not worse. Government agencies can only afford smaller salaries than mentioned in the enterprise sector, so staffing is an even bigger problem. The accounting basis is usually cash-based as opposed to a modified or full accrual basis. This basis is very outdated for the needs of accounting in governments. As also with the enterprise sector, financial statements that were made were inaccurate or not even made at all, calling more help for external auditors. With incomplete statements, the finances of the government were uncertain, including foreign debt which had a negative impact on foreign trade. As for the professional accountants of the developing countries, there was still a lack of staffing, although not as much of a concern as in the previous sectors. The reasons for this were different; many accountants that were trained for this sector ended up more often in the richer developing areas of the countries, leaving the poorer developing areas without proper staffing. The staff that did exist was used inefficiently; as stated before, the auditors of the accounting firms were stuck with having to reconcile the inadequate financial statements. The problems of the enterprise and governmental sectors negatively impacted the professional sector with their lack of adequate records and no internal control. Finally, the education sector was where all the problems started. In developing countries in the 1980's, there were few universities that actually offered an accounting program. The programs that were taught, educated students more about the accounting procedures in developing countries. By the time these students were ready to enter the workforce, they discovered that they were unable to fully understand the differences of the developing country's accountancy. The poor education of the students stemmed from a lack of educated teachers, textbooks and properly secondary school educated students (Holzer). The four accounting sectors in developing countries all affect one another with their problems and deficiencies. The solutions to these problems can be solved over time by the improving of education in these countries as well as strengthened accounting standards. The International Financial Reporting Standards would ultimately enable these countries to fix these problems. Today, only three out of five of the developing countries mentioned now have implemented IFRS. Fiji and Tanzania have already fully adopted IFRS while Pakistan is still in the process of converting to it. Thailand and Tunisia still use their systems similar to GAAP, however both countries accounting systems are currently converting to GAAP systems closer to IFRS ("IFRS"). Although not all of these countries have fully adopted IFRS as their financial reporting standards, they are on the way to doing so. This means that the problems in their previous accounting systems are reducing. However, adopting IFRS is not an easy process for a country. Next, we will discover the challenges of converting to IFRS.
There are several reasons why countries decide to convert to IFRS including the desire for foreign investments, smaller costs and the listing of companies in other countries' stock exchanges. The challenges that a country may face in the adoption process include awareness, regulations on reporting, compliance, and training. In the case of Nigeria, university student Abdulkadir Madawaki considers these challenges of implementation. Awareness of IFRS is the foremost important step of conversion. As Madawaki states, "implementation of IFRS requires considerable preparation both at the country and entity levels to ensure coherence and provide clarity on the authority that IFRS will have in relation to other existing national laws" (156). Auditors, accountants, regulators and educators all need to be made aware of the new accounting standards of the country and what it means for them. In order to fully convert to IFRS, countries must be able to make changes in their current tax reporting laws. According to Madawaki, "accounting issues that may present significant tax burden on adoption of IFRS include determination of impairment, loan loss provisioning and investment in securities/financial instruments" (157). These adjustments to current tax laws are complex and can be very confusing, but with a proper regulatory system, can better the accountancy in the country. Some of the existing laws in these countries are also amended or repealed by the adoption of IFRS. While it may be a hard process to reverse some of these laws, implementation of IFRS requires this to be done. Training and education are of paramount importance when a country is converting to IFRS. Education in developing countries of IFRS can cause a problem as there may be a lack of professionally trained educators. This means that there will be a lack of competent individuals in the accounting profession. The accountants that were already trained in old accounting practices will need to relearn the financial reporting under IFRS. Another issue with training is that the costs of accounting manuals are too high for many companies to afford. (Madawaki 156). Fully capable and trained accountants can ensure the proper implementation of IFRS in order to receive its full benefits. Finally the last challenge of implementing IFRS is compliance. Full compliance of IFRS results in more benefits from the standards. Written in the Journal of International Accounting Research, Francesco Bova and Raynolde Pereira research compliance levels of IFRS in Kenya. What they discovered is that there are better compliance levels in publicly traded firms as opposed to private firms. Their reasoning for this is that stockholders in public firms demand better and more concise financial statements than do the stockholders in private firms. This is probably true because public stockholders have more of a tendency to keep up to date with the company's financial statements while private stockholders are less hands on and only request financial statements as needed (Bova 89). More communication of the business to the stockholders will create a stronger need of compliance to IFRS. A weaker compliance in IFRS will overall hurt the firm's financial structure. Proper compliance is needed of IFRS in order to get its full benefits. In the next section, solutions to the issues of adoption and implementation will be discussed.
While implementation of IFRS may cause problems in a country, there are some solutions that could make this better. In regards to awareness, a country's government, its accounting associations, as well as the IASB need to work together to make accountants and others working with financial statements conscious of IFRS' new standards and laws. Awareness will in turn create a more successful compliance rate. New laws and adjustments to previous laws are set in place in the conversion process of IFRS. A proper governing regulatory body should be set in place to ensure that accountants are correctly instituting these laws. Compliance to regulation of new and changed laws will lead to stronger overall compliance to IFRS. Training and education in IFRS is the best way to make individual accountants ready to use the new standards. Universities in countries implementing IFRS need to provide proper education in the new reporting standards. On-site training at work of IFRS can be improved by having affordable accounting manuals and programs. Governments should find ways to be able to attract accounting students and professionals to stay in the developing country for accounting work, instead of going to a more developed country. Perhaps a monetary incentive given to individuals that stay in their home educated country to do accounting would encourage more professionals to stay there. This will ultimately tackle the lack of staff problem as seen in countries before implementation of IFRS. Proper training and education will also in turn improve compliance levels. Finally, compliance levels of IFRS can be improved by auditors and accounting associations making sure of proper compliance. As stated before, more compliance is typically seen with public firms as opposed to private firms. A solution to this would be for private firm stockholders to be more hands on and to more frequently ask for financial statements. The solutions given to the other problems of IFRS also will result in greater compliance. With all the solutions to the implementation of IFRS in place, the higher compliance level will make IFRS more beneficial to the country. More awareness, better regulatory bodies, more education and training of IFRS will result in a higher compliance level which will lead to cheaper costs of operations, more investments from foreign countries by having higher quality financial statements and a higher reputation for companies that are able to be listed on other countries' stock exchanges.
Works Cited
Bova, Francesco, and Raynolde Pereira. "Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country." Journal of International Accounting Research 11.1 (2012): 83-111. Print.
Gray, Larry, CPA, MBA, and Marc Fogarty, CPA, CFE. "IFRS America International Financial Reporting Standards IFRS." Is IFRS Good for America? EisnerAmper Accountants and Advisors, 9 Feb. 2010. Web. 3 Apr. 2013.
Holzer, Peter H. and John S. Chandler. "A Systems Approach to Accounting in Developing Countries." Management International Review, Vol. 21, No. 4 (1981), pp. 23-32.
"IFRS Adoption by Country." PricewaterhouseCoopers LLP (2012): n. pag. Print.
Madawaki, Abdulkadir. "Adoption of International Financial Reporting Standards in Developing Countries: The Case of Nigeria." International Journal of Business and Management 7.3 (2012): 152-61. Print.
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