Accounting Principles (GAAP), Research Paper Example

Curtis Verschoor’s statement regarding the convergence of US General Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), which reads in part, switching the standards for financial statements from a rule-based system such as US GAAP to a principle-based such as IFRS ,could create greater ethical challenges for accountants, does indeed speaks  to the heart of organizational leaders and brings into question whether  they are teleologically or deontologically driven.

Teleology according to Professional and Ethics Standard Board (2010), embraces making the best decision the maximizes net positive benefits to individuals regardless of the to others, advocating that it is ethical to sacrifice others at the lower end to protect the reputation of those at the top, or protecting a particular group at the expense of others. Deontology on the other hand, involves the making of decisions such that the consequences or intentions does not offend or trample on the rights of stakeholders, the laws of the country, contractual rights of those engaged and human rights, and represent fair distribution of benefits and cost (Professional and Ethics Standard Board, 2010).

According to vanTendeloo and Vanstraelen (2011), the International Accounting Standard now renamed the International Financial Reporting Standard (IFRS) was developed to harmonize corporate accounting practices and to answer the need for high quality standards to be adopted in the world’s major capital markets, while General Accepted Accounting Principles (GAAP)according to Investopedia (2011), is a set of accounting principles, standards and procedures that companies use to compile financial statements.

The mechanism is a combination of authoritative standards set by policy boards and has been seen as the commonly accepted of way of recording and reporting accounting according to Investopedia, (2011), before the introduction of IFRS, and company that uses it have a minimum levels of consistency in their financial statements in that they only have to report on revenue collections, balance sheet classifications, and outstanding share measurements.

It seems that there must be deficiencies in the GAAP standard, why there were strong demands for the incorporation of IFRS by companies and countries globally. The number of scandals that occurred at corporations like Enron, WorldCom, Wall-mart, Lehman Brothers, Xerox, Duke Energy, Halliburton, Kmart, Merrill Lynch and AIG mainly in the United States of America,  was perhaps among the reasons why this change was desired, as all these companies used the same accounting methodology to report to their stakeholders for several years.

The number of scandals should have affected the ethicality of company leaders and accountants  seek to deliver more transparency to stakeholders by accepting the IFRS approach which according to Accounting Day (2011), will lead to a decrease in the cost of preparing and interpreting the financial statements, decrease in cost of capital, increase in the credibility of local markets to foreign investors, provide for more efficient allocation of capital and make more company-friendly US securities market for foreign listings.

In light of the benefits highlighted and the demand for transparency, honesty, objectivity, and high standards of fiduciary responsibility,company leaders, accountants and auditors refuse to positively respond to the challenge to change to the IFRS accounting rule should be seen as more teleological in their ethical philosophy rather deontological, in that they would have shown that they are only interested in maximizing the benefits to profit themselves  and not caring about sharing the cost and benefits equally with the stakeholders.

One of the reasons why they may be resisting the ethical challenge to make the switch could be the fact that accounting, according to Gill (2009), is a technical craft that is embedded with partiality and unfair skewed company policythat members of the public are not aware of when reading financial statements reports submitted under the GAAP accounting rule.

Ball et al. (2003) joins the list of those who sees the desire positive response from those who are in positions of authority and are ethically challenged to make the switch, when he remark that adopting the high quality standards might be a necessary condition for high quality information, but it may not be sufficient.

Investors should be able to benefit from high quality information released companies on the basis of them being highly transparent, when making their investment decisions, and Gill may be saying that what  presently obtains form GAAP and even IFRS, may not be sufficient to achieve those objectives.

However the former chairman of the SCC Christopher Cox shows strong deontological tendencies when he remark that reports in an international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well informed decisions (Accounting Day, 2011).

Switching the accounting rule for financial statements from the rule base GAAP means giving up the covert powerresident in it, as according to Gill (2003), accounting escapes the imagination of the public to discern this aspect of the discipline, and this is what accountants and auditors as well as company leaders do not want to lose by making the change to IFRS. Gill (2003) went further to state accountants crave this power until things go spectacularly wrong in terms of scandals and fraud detections.

The advocates of IFRS should be somewhat encouraged by the results of a study conducted by van Tendeloo and Vanstraelen (2011), on 636 listed companies in Germany in 2010. The study investigated companies that used the GAAP accounting rule between 1992 and 2005 and those that adopted the IFRS to see whether the adopters were associated with lower earnings management, and found that there were no difference in earnings management behavior between both groups of companies.

Reporting on the findings, van Tendeloo and Vanstraelen (2011), argues that it contributes immensely to the current debate on whether the high quality standards are sufficient – as postulated by Gill, 2003, and effective in countries that have weak investor protection, and shows that voluntary IFRS adopters elsewhere like in Germany, cannot be associated with lower earnings management behaviors by those who oppose the switch.

It could be argued that van Tendeloo and Vanstraelen (2011) study  results has significant credibility; due to the large sample size chosen and the number of years that were covered and should be accepted empirically on a globally basis, but the preparers of accounting statements like auditors and accountants may argue according to Verschoor (2010), that the cost to issue these financial statements using IFRS accounting rule is too monumental for companies to undertake, bearing in the change in reporting structures that has to be done.

The ethical challenge Verschoor (2010) poignantly highlighted in his statement, manifest strongly here, in that accountants and auditors as well as company executives have a choice between giving the stakeholder higher quality information, as part of their responsibility to ensure due diligence, objectivity, competence and due care, as well confidentiality and professionalism, so that they can make the best investment decisions, or hide behind the cost of making the switch to IFRS in order to maintain their covert power and propensity to partially apply company policies to the accounting systems, to generate maximum benefits to  select groups at the top of their organizations.

Additionally, the reports using IFRS  accounting rule may force companies to retroactively change accounting statements which had already been declared as fairly constructed by reputable auditing firms, in order to maintain consistency and historicity in procedures and costs. Differences that may arise can be scandalous and damaging to the reputation, integrity and corporate image of all parties concerned, and this may add to the reason why the resistance to the change that many are presenting.

Ethically from their perspectives they are protecting themselves from defamation and possible self destruction at the expense of the stakeholders, who in the final analysis be due for higher earnings that they have been paid.

Those in opposition to the switch are also suggesting that the new accounting rule should be applied to non-profit organizations according to Verschoor (2010), and when confronted in the courts to make the change they have even contended that their clients accounting treatments will not be at material variance regardless of the specific accounting rule that are applied.

This position taken by legal advocates for companies in defense of the GAAP accounting rule may be based on the study conducted by van Tendeloo and Vanstraelen (2011) in Germany, which shows that there was no difference in earnings management behaviors among firms that had adopted the IFRS accounting rules, when compared to those with GAAP standards.

The challenges to the ethicality of those in charge of preparing financial statements of firms for the investing public can also be seen by the specific standards of credibility demanded by the IMA Statement of Ethical Professional practice (Verschoor, 2011).

Members of this IFRS related organization were required to:

• Communicate all information fairly and objectively
• Disclose all relevant information that could reasonable expected to influence the understanding, analytical applications and recommendations investors will make, and
• Reveal all delaysor deficiencies in information, timeliness, processing or internal controls as they relate to their organizations rules and national laws (Verschoor, 2011).

These requirements demanded all preparers and leaders to become totally clean in terms of honesty, so that by extension their organizations can become highly transparent. This means switching their ethical philosophy from a teleological leaning to that of the deontological, which is a difficult move bearing in mind the years of benefits secretly achieved through partiality, the control and covert power embedded in the profession, cultural traditions, and the fact that they may also incriminate themselves, as well as provide fodder for prosecutors in lawsuits, should there be court cases in the future.

Additionally, base on the demands by the IFRS system, time would be needed to adequately learn the procedures and to differentiate them from the GAAP methodology in applications and interpretations, and this may lead to delays in the presentation of financial statements which investors urgently need. Such development could lead to these personnel and their companies being perceived as incompetent and not employable for future accounting assignments.

Verschoor (2011) is therefore perfectly correct in his conclusion about the ethical challenges that accountants and auditors face in making the switch, and the trend will continue for years to come, especially due to the teleological stance maintained by those responsible for making accounting preparation decisions, the  outcomes of hidden agendas that may come to light, the lack of perception among the public regarding the partiality in application of company policies on accounting systems, as well as a lack of an internationally recognized ethical code to guide the behaviors of those using GAAP and IFRS at the same time .

Reference

Ball, R., Robin, A., Wu, J.S., (2003). Incentives versus Standards : Properties of Accounting income on four East Asians countries , and implications for acceptance of INS  Journal of Accounting and Economics , 36 (1-3) pp. 335- 270

Van Tendeloo, B., Vanstraelen, A., (2005). Earnings Management under German GAAP vs. IFRS, European Accounting Review 14:1, pp.155-158 extracted from <www.dx.doi.rg/101080/0963818042000>, on 10/06/11

Investopedia, (2011). Generally Accepted Accounting Principles – GAAP Extracted from <www.invewtopedia.com/terms/g/gaap.asp#axzz1a2tSSsL1> , on 10/06/11

Verschoor, C., (2010). IFRS Would Escalate Ethical Challenges for Accountants Strategic Finance University of Chicago Illinois

Gill, M., (2009). Accountant Truth: Knowledge and Ethics in the Financial World European Accounting Journal 2011, Vol.20 No.3 pp.583-600

Accounting Day (2011).  (Lecture Notes)

Accounting Professional and Ethics Standard Board (APES), (2011). APES 110: Ethics for Accountants Extracted from <www.apesb.org.au/> on 10/06/11