What Are the Disadvantages of Harmonizing Financial Statements?

Harmonized financial statements use internationally standardized accounting practices and a uniform reporting format to present the financial information of a company in any country in the world. The purpose of this is to facilitate financial comparisons between companies in different countries, and improve management and decision-making regarding global financial resources. The ultimate goal is to maximize the potential of the world economy. The International Accounting Standards Board -- the standards-setting body of the independent International Financial Reporting Standards Foundation -- has been leading the initiative to create international accounting standards since 1973. Despite the obvious benefits, there are also a number of challenges and disadvantages to harmonizing financial statements.


Cultural Differences

One of the criticisms of harmonized accounting standards is that the IASB has failed to fully take into account the cultural, political and social differences between countries. This is particularly relevant to their implementation in developing countries, where language barriers, attitudes toward accounting and other socio-cultural aspects may affect their interpretation and application. For example, when the harmonized standards were implemented in Jordan, they were first translated into Arabic. Even though technical accounting terms have been well-defined in Arabic, challenges arose when the English terminology was hard to interpret or used inconsistently and, therefore, difficult to translate accurately.


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Worldwide Acceptance

National accounting standards are highly politicized and there is often a natural tendency to place the interests of the national economy ahead of those of the global economy. Private sector businesses and professional accounting bodies also have a vested interest in accounting practices and financial reporting. Pressure from these groups to change or reject certain standards can carry a lot of weight with political decision makers. Adopting international financial standards is met with additional challenges in developing countries. They often lack the resources and infrastructure to adapt national legal and legislative frameworks in which to house the standards, making proper implementation difficult.


International Enforcement

The success of harmonized financial reporting depends on individual governments enforcing adherence to the international standards once they have been implemented. In 2008, the French authorities allowed the bank Société Générale to transfer some of its losses from 2008 to 2007, meaning its financial statement for 2008 looked much better than the reality. This provoked an international outcry, not the least from the IASB. When exceptions are made, it undermines the integrity of the whole system and renders it ineffective.


Training and Retraining

When a country decides to harmonize with the international standards, its companies, accountants and auditors need to be retrained in the new standards and reporting procedures for financial statements. College and university programs in this field also have to undergo significant changes in order to educate new people entering the profession. Before any of this can happen, trainers and professors will require training so they can instruct professionals and students. This will require the development of new learning materials and curricula, new examinations for professional licensing and new accounting software and reporting systems. To further complicate matters, the adoption of harmonized standards has to be phased in, so for a number of years, two different systems are in operation. Such a complex transition requires a lot of safety mechanisms to ensure it achieves uniform results.