Recent scandals involving Enron, WorldCom, Parmalat and Vivendi have cast dark clouds over the world of professional accounting and auditing. The mounting sense of urgency has been triggered by widespread fears of losing public confidence and by the need to strengthen internal controls. This long postponed issue has become a priority: Should a wide range of different accounting rules continue to coexist, or should international accounting rules take a leading role? Could such rules really be applied?


Transparency, confidence, control and security are the keywords most likely to come to mind after the scandals at Enron and Xerox, where accounting fraud was discovered. As a result, many analysts now believe that the accounting profession must move more and more toward creating clear and precise rules that apply worldwide. After all, we live in a globalized world.


Should one set of rules be applied globally? For accountants, this has been one of the most troubling areas of discussion. In recent years, a worldwide trend has moved towards adopting International Rules of Accounting, written in accounting language that could be understood and applied by any company in any country.


“More than 30 years ago, people were already thinking about the advantages of establishing a sole body of accounting rules that could be applied worldwide,” says Fabián Gustavo Marcote, a partner in BDO Becher & Associates, an international consulting and auditing firm. “In 1973, the International Accounting Standards Committee (IASC) was established as a non-profit organization for addressing this issue.”


In reality, thousands of companies – global and local; big and small – are now applying IASC’s international accounting standards.


[According to the IASC’s web site, another regulatory body was also recreated in 2001 — the International Accounting Standards Board, or IASB. Standards issued by the International Accounting Standards Board are known as International Financial Reporting Standards (IFRSs). Standards originally issued by the Board of the International Accounting Standards Committee (1973-2001) continue to be known as International Accounting Standards (IASs).]


In Argentina, for example, “more than three years ago, the Federation of Professional Advisors in Economic Sciences defined a conceptual framework for our technical norms and its relationship with international accounting rules by drafting a technical resolution,” says Enrique Martín Imperiali, a partner in PKF Argentina, an auditing and consulting firm.


“The process of globalizing accounting rules is very important because of the globalization of business,” explains Imperiali. “Accounting information can become standardized, so it can be analyzed within the same parameters anywhere around the world. This also allows everyone involved in financial management to make [more accurate] comparisons and achieve a higher level of confidence when it is time to make strategic decisions.”


According to Marcote, the most important advantage of this approach is that “it makes it possible to compare information about different companies in the same industry, without worrying about where the country is located. That way, it helps promote free circulation within capital markets. However, this body of [global] regulations must be broad enough to allow for the recognition of certain local realities; it should not become a collection of rigid rules that cannot be applied.”


Clearly, not every company is alike. Companies come in various sizes – big, midsize, and small. Some companies do business locally; others are multinationals and are active exporters. Some companies are traded on the stock market, and others are not. Some own their own subsidiaries, and others have representatives.


Given these contrasts, should the global rules take account of special characteristics of various types of companies?


Are Small and Midsize Companies At Risk?


Jorge Voss, a professional auditor with ISAR, the United Nations’ inter-governmental working group of experts on international accounting and reporting, recently completed a study on this issue. It concluded that “different rules have to be created for big, midsize and small companies.” Voss adds, “The problem is that ISAR does not differentiate between small companies in various countries. I do not think that small companies in Europe operate under the same conditions as those in Latin America.”


Voss, a professor of accounting at UADE, the Argentine business school, argues in favor of creating “global rules for global companies, while differentiating between big and small companies.” He also favors “local rules for local companies, while differentiating between big and small. The language [of the regulations] has to be adapted to each location. For example, a small Spanish firm that competes with a small firm in European markets is very different from a small Argentine firm that only competes in its local market.”


Latin America seems to be the region where it is hardest to apply global rules. That is because most firms there are either small or midsize. As a result, you have to pay more attention to the advantages and disadvantages that such a set of accounting rules could create for big companies. According to Voss, “It would be a big mistake to impose complex accounting procedures [in Latin America] if you take into account that more than 50% of employees in small companies work in the black market, and some companies do not report all their accounting data. Small companies would incur greater administrative costs that affect their competitiveness if you required them to meet rules that are different from their usual accounting practices.”


When it comes to costs, Marcote agrees that “making greater demands for precise reporting of accounting data implies that you need to upgrade administration and personnel, while also establishing more rigorous benchmarks for [financial] control and more advanced systems for processing information. All these efforts inevitably mean higher costs. How much impact all this has on the profitability of a business depends on how well management takes advantage of the benefits this process can generate by producing accounting information that is more reliable. Higher costs will not necessarily lead to lower competitiveness for a small company if all the other players in the market are also carrying out these sorts of initiatives.”


For his part, Imperiali rejects the idea that international rules can weaken competitiveness. “Nothing is further from the truth. You have one sort of accounting rules, and the standards must be global — the basic, complete information. The problem is really about deciding what you can do with this information, and what advantages it can provide [for the company].” In response to that question, Imperiali notes that “accounting provides fundamental data for companies; it is the primary source for measuring [the performance of] management. The focus of the discussion should not be on how much these accounting initiatives will cost companies, but on the high costs if they fail to modernize their accounting systems, their principle source of information for decision-making. Those companies that fail to modernize will wind up paying a higher price whenever they go looking for accounting information. Their competitiveness will suffer as a result.”


According to analysts, some specific cases must be treated as exceptions. “It is hard to apply international rules in organizations that do not issue shares on the stock market,” Marcote explains. “So it may be inconvenient to use international rules for that sort of business …. If you differentiate accounting rules in terms of company size, you need to address the end-use of the information (for example, when public funding is used) more than you address the size of the company. Access to public funding must mean you impose fair conditions on the [accounting] information in order to improve its transparency for investors when they make [investment] decisions.”




Although the consensus view is moving toward the adoption of global rules, some analysts continue to support making exceptions in certain cases, such as small companies and those companies quoted on the stock exchange.


Meanwhile, in Latin America, work continues toward creating ideal regulations. As Voss notes, “In Colombia, they are thinking about applying international rules to big companies …. In Mexico, they have created an organization that will adapt international rules to local realities, while applying a sole body of rules for all [Mexican] companies. In Chile, they have used U.S. regulations because that country would like to join NAFTA. However, this project has yet to be completed.”


Based on Voss’s experience, “we are sure that the least costly way to obtain reliable [accounting] information is to apply international rules, whether a company is small, midsize or large, and whether it does business only in its local market, or around the world.”


“Because we are international, our professional services are focused on providing a response tailored to the specific needs of each customer, in every sort of company,” Marcote adds. “When it comes to auditing, our professional service fulfills established international policies and procedures, but it also reflects a deep understanding of the local setting.”


When it comes to avoiding new scandals on the scale of Parmalat or Enron, some things seem certain. As Marcote notes, “In jurisdictions and contexts where regulatory bodies are not performing their functions effectively, the ultimate prejudice will be in favor of those companies that comply with regulations over those that do not comply.”