The Correlation Of U.S Stock Returns With Overseas Stock Returns Accounting Consolidation for Developing Countries

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Accounting Consolidation for Developing Countries

Accounting plays a vital role in business, but its quality is of the upmost importance for it to be used properly. Accounting information must be relevant, faithfully represented, comparable, verifiable, and understandable for a business to make informed planning and controlling decisions. Accounting standards must be in place to ensure factual information is recorded. Without a set of rules, misallocation of resources can result and prove fatal to the company. In developing nations there is a lack of comparability and consistency with various company’s financial statements. Two underlying problems prove to be evident; lack of qualified personnel and ineffective accounting systems (Holzer). In our growing global economy, it is pertinent that these developing nations adopt a set of accounting rules that will keep them on the same page with other global companies. The International Federation of Accountants (IFAC) and the U.K. Department for International Developments (DFID) have partnered together to design a plan to help developing countries strengthen their accounting practices (Cohn).

Accounting systems and auditing procedures in developing countries have been designed to fulfill the needs of centrally planned economies (Zakari). However, the systems and personnel in these developing countries are struggling to keep up with the developed world. There are several reasons for this. These countries are only setting clear-cut objectives for their accountancy. Things like financial information, tax information, and statistical information are all measured and reported, but there is no standardization across countries, industries, or sectors. This is problematic because comparability and uniformity is crucial for external and internal users to make informed decisions. Without standardization and proper procedures, it is hard to know whether a company is being faithfully represented or just cooking the books. This creates a snowball effect for developing countries because investors and creditors will not back a company without proper knowledge of gains or growth being in place. This makes it difficult for developing countries to export, create stable growth in the economy, and raise their GDP overall.

Accounting holds the climate for an economy. The systems and controls in place inspire investor confidence, which leads to a healthy stable growth. Investors seek capital and will only invest when there is proof of growth between periods. This is where using reliable accounting data to allocate resources proves pertinent to creating competition and profits in the company’s sector. Accounting systems is a necessary infrastructure component for developing countries (Fino). Extreme poverty, unemployment, and debt in developing nations are partly contributed by the fraud and unreliable data being produced from accounting systems.

The Department for International Development (DFID) has been working closely with IFAC (International Federation of Accountants) to facilitate a plan to build strong accounting programs and controls for developing countries. The DFID will provide $7.884 million to IFAC over a period of seven years (Cohn). This funding will be used to strengthen professional accounting organizations in at least ten countries that the IFAC see to as having a greater role in furthering economic development. IFAC plans to coordinate, implement, and supervise the support needed to these countries to build managerial, financial, and technical capacity to improve the current professional and ethical standards (Cohn).

The implementation of higher ethical standards, accounting systems, and uniformity in reporting are integral to the building of healthy economies in developing countries. With more reliable and safer data we will begin to see more investment in developing countries, higher capital gains, and more international trade. This is beneficial to any of the developed nations because there will be more areas to export to, more profitability in certain sectors, and more money circulation throughout countries. Consolidating accounting standards in developing countries is the first step that needs to be taken to diminish poverty and unemployment rates. Relevant information is essential to evaluating economic performance in these countries (Fino). Many of these developing countries have adopted IFRS (International Financial Reporting Standards) but have not consulted these standards with their current socio-economic status or cultural factors. These countries need to develop a set of standards that work well for them and that will provide relevant and reliable financial data to its users. Competition is essential in the global marketplace and these developing countries have not been able to get their foot in the door because of improper resource allocation. A company needs to run efficiently and effectively. Internal users will make not be able to make informed decisions if a company lacks reliable financial data.

The DFID is contributing their time and money to boost these developing countries into the global market. Once initiated the global economy will boom. In a few years after placing these standards and systems we will see stock prices rise, interest rates lowered, easier global coordination, and overall stable economic growth. Every country’s economic system is intertwined, so building the economies of these developing countries will show a correlation of economic prosperity around the globe. The consolidation of accounting standards will greatly benefit in the future of global economics because more informed business practices would take place.

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