Inadequate international standards of financial accounting and reporting

Accounting practices vary from country to country so that financial reports are rarely comparable. This contributes directly to the difficulties in developmental policy-making at national, regional and global levels. This applies mainly to accounting practices in business enterprises, which are designed for reporting to shareholders and for internal profit controls. It also applies to some extent in the accounting practices of governments and inter-governmental and non-governmental organizations.

Comparability of financial reports is important to all users - shareholders, lenders, creditors, employees, governments and the general public. Users also need financial reports to be reliable - which means that, as well as being comparable, financial reports must be based on relevant, balanced accounting standards. Governments need corporation reports which are comparable in order to be able to monitor volatile short-term movements of capital, to protect consumer interests, to regulate monopolistic practices, and to prevent artificial transfer pricing and tax evasion. Absence of standardized accounting may be used by corporations to avoid complete disclosure of information which would reveal the negative social impact of some policies. Progress in this area is particularly essential for a wide range of policies and programmes concerning multinational enterprises, as well as for general development. The lack of international standards for the accounts of governments impedes the evaluation task of international funding agencies of applications for developmental grants, aid and loans.

It is possible to define a pyramid of problems regarding accounting discrepancies. At the base is the fact that accounting is not a science in the sense that it may not be possible to 'prove' one particular theory and eliminate all conflicting theories; some can and some cannot. The result is that when the annual statements of competitive firms are analyzed, one may be found to use one acceptable method of depreciation of assets, for example, while the other uses a completely different but equally acceptable method. Balance sheet impacts vary enormously, and financial analysts must recalculate or estimate to achieve comparable data. This level of problem relates to definitions of account use, account classifications, allowable computational methods, and statement presentation styles. At this level the accounting experts are said to agree on disagreeing. On the next level of problem the experts agree: namely that the governments' tax accounting methods do not satisfy the needs for financial statements in commerce. In effect, governments require another presentation of financial accounts for internal revenue, tax assessing purposes; and firms are obliged to employ tax accountants to maintain the accounts and books that governments need.

A third problem affects importers, exporters and transnationals: foreign currency translation accounting. The rules are burdensome, and transnationals keep separate books in local currencies in addition to those in the home country money values. Again, special accountants are needed to deal with foreign currency exchange and translation accounting requirements.

Finally, there has been the recent arrival of theories of inflation, or replacement cost accounting. Government tax specialists are pitted against private sector accounting firms; and accounting firm partners, economists, and corporate secretaries and treasurers debate among themselves the standards, or supposed correct methods of recording the apparent increase in value of assets as inflation proceeds. Different governments have different approaches but the net result has been still another set of books to be kept by companies, revealing assets and making other changes according to the prevailing standard. Governments' standards have been revised several times in the past few years, as have the standards recommended by the accounting profession: the resulting confusion, debate, and cost of maintaining the new accounts and new 'books', have been very high.

In 1993 it was reported by the European Court of Auditors that a combination of weak management, poor financial controls and fraud in member states cost European taxpayers over $131 million in 1992.