Challenges of Adopting IFRS in Developing Nations

Introduction

Accounting methods vary around the world. The environments that allow the prominent methods, such as U.S. GAAP and IFRS, to flourish tend to be in the First World countries such as the United States, European nations, and Russia, or nations that closely use these areas as business models. The First World has the resources available to research the best options and continue innovation in financial reporting. They have the money, the man power, intelligence, and a significant amount of government connections to apply and enforce the guidelines chosen.

This is not the case for developing countries. They face several problems concerning accounting principles. The Third World does not always have access to these privileges. It’s not only limited resources that prevent proper reporting; a force that must be acknowledged is local culture and governments.

The main goal of accounting, anywhere in the world, is clear: presenting a business’ financial information clearly and honestly to investors and creditors in a timely fashion (Zahirul 2009). If the Third World is to keep up, each of their accounting branches must take the prior statement to heart, then unite under it and then under IFRS. This will “bring about accounting quality improvement through a uniform set of standards (Zahirul 2009).” They must educate accountants and auditors to become experts in IFRS so they may have global representation and be taken seriously in the accounting and business worlds.

Development and Solidarity

The biggest problem facing these developing countries in the business world is just that, they are developing. These countries face large obstacles such as lack of infrastructure, volatile governments, and corruption. Furthermore, the lack of set standards in accounting practices can lead to more corruption and a disincentive for foreign investors to move capital and resources to these countries. When foreign investors are in the process of planning their investments, an important step is studying the accounting system in the country of interest. They look for a uniform set of accounting standards like IFRS. Using a uniform set reduces confusion, error, and fraud which leads to a greater amount of transparency and most importantly trust in the investments. Developing regions need this growth to continue to survive and eventually prosper.

Most are not united under set standards, though, or do not have standards to call their own. The Third World is extremely impressionable by “Western Influence (The United States, Europe) or Eastern Influence (Russia).” The First World has developed their own principles right in their own nations, by their own people, for their own businesses. Through colonial influence, or the influence of large investors and corporations, the accounting systems of the First World have trickled down to the Third World countries (Perera 1989). The concern of the Third World is that foreign influence will not benefit and reflect the needs of specific localities. In the case of Bangladesh, accountants and academics believed “highly sophisticated rules like IASs is not suitable for the less sophisticated economic and regulatory structure of Bangladesh (Zahirul 2009).” Middle Eastern countries are also having difficulties making IFRS “workable” within their national standards (Razik).

Ultimately it is not IFRS itself that is not workable for the Third World. Hidden behind the fa├žade is the fear of losing control. That fear is completely justified for these small nations that don’t have much to barter with. For a set of standards as vast as IFRS to work in developing countries, proper representation must be established. These nations need a voice of their own to speak for their concerns. In the Middle East where local Islamic culture plays a huge role in daily life and in their business world, representation is extremely valuable. Presently they do not have it. From 2001 to 2005 the Middle East was only represented by two members in the Standard Advisory Council and not represented at all in IASB (Razik). Local councils and governments need to work, hand in hand, with IASB and the SEC for the ability of customization in favor of developing localities while still conforming to IFRS.

In reality, to accomplish all of this, the Third World needs access to the most valuable resource of education. Skilled accountants that have the knowledge of the correct construction and use of financial statements and the policies that must be followed, are the core to success. Nigeria is another example of a developing country trying to fix the accounting situation at home. Nigeria is facing a shortage of skilled accountants and auditors competent enough to implement and continue the use of IFRS (Madawaki 2012). To ensure an acceptable amount of quality in financial reporting, Third World governments must implement an initiative to proper training in the academic and practical portions of IFRS.

Conclusion

The Third World is struggling to use modern accounting methods that investors would rather see than localized forms. They have many setbacks including lack of funding, knowledge, and government support. Solving the lack of proper accounting will first take education. Education is the base that keeps the accounting structure together. When accountants and auditors of developing countries show expertise in IFRS it will lead to more representation in large groups like IASB. From there they can try to implement some localized methods and help their nations succeed with IFRS. Funding from investors, large corporations, and wealthier nations will soon follow. Success will not be easy and it will take time, but it is essential for national growth.

References

Amged Abd El Razik. Scientific Bulletin- Economic Sciences. Challenges of International Financial Reporting Standards (IFRS) in the Islamic Accounting World, Case of Middle Eastern Countries. Vol. 8.

Bhattacharjee, Sumon; Zahirul Islam, Muhammad. International Journal of Business and Management. Problems of Adoption and Application of International Financial Reporting Standards (IFRS) in Bangladesh. Dec 2009, Vol. 4, No 12.

Madawaki, Abdulkadir. International Journal of Business and Management. Adoption of International Financial Reporting Standards in Developing Countries: The Case of Nigeria. Vol. 7, No. 3, p. 152-161. Canadian Center of Science and Education. Feb, 2012.

Perera, M. The British Accounting Review. Accounting in Developing Countries: A Case for Localized Uniformity. Vol. 21, Issue 2, p. 141-157. Elsevier Ltd. 1989.

Source by Nicole M Chrzan

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