The evolution of business in the global economy has raised intense debate on the need of global accounting standards. The Securities and Exchange Commission (SEC), globalization and the financial meltdown in the Great Recession has been placing immense pressure on the United States to abandon GAAP and adopt the IFRS. The IFRS is accepted worldwide with more than 12000 corporations in more than 150 countries. After 15 years from the Norwalk agreement, America is still reluctant to integrate the IFRS into US GAAP (Nacer et al., 2018). The US must shift to the IFRS to reinvigorate its dominance in the global market and strengthen its capital market orientation.
US based companies are incapable of competing on the rapidly growing global market because they are yet to recover from the 2007-2009 economic recession. US firms often look at the global market for potential investors and targets (Nacer et al., 2018). Companies encounter challenges integrating their accounting procedures with international companies due to the incompatibility of both GAAP and IFRS. International companies hesitate working with US companies due to the strict rules provisioned by GAAP (Nacer et al., 2018). IFRS is more flexible because it operates on a principle-based system. Countries that deviate from the principles are face stern sanctions from the SEC. The rule-based system in the US GAAP is ineffective because it continuously adds more rules to a long list of pre-existing ones (Nacer et al., 2018). Every accounting scandal that occurs in the United States requires the addition of an extra rule. Adopting internationally accepted principles in IFRS will foster the growth of foreign direct investment.
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IFRS has a stronger market orientation than GAAP. The IASB established the IFRS based on the English common law systems, which facilitates better economic development, stronger capital markets, and efficient accounting standards (Hellman et al., 2018). IFRS is pioneering the integration of financial markets all over the world enhancing access to the right kind of capital and eliminating unnecessary costs. Operational costs of the US GAAP model outweigh the implementation and maintenance costs of the IFRS (Hellman et al., 2018). IFRS is founded on capitalist ideologies, which assist regulators in conducting their jobs with ease. IFRS offers high-quality accounting standards that reduce the costs of accessing global capital markets (Hellman et al., 2018). With US having the largest capital markets in the world, it is imperative that the financial accounting standards board adopt an IFRS model that takes advantage of all the benefits in the international market.
The financial accounting standards board has persisted on the US GAAP model to set a strict set of standards that ensure a high level of accountability. The basic principle of GAAP is to ensure every firm in America operates under one uniform standard and generates a set of financial statements that are accurate (Lam, 2015). Lenders are able to assess a company’s financial condition before issuing loans. Information reported through GAAP needs to be verifiable by auditors to prevent scandals that have disrupted the US economy in the past. However, IFRS offers a universal system that integrates the US with internationally accepted standards that are strictly regulated by SEC.
IFRS is the future of worldwide accounting practice and should be integrated into the US economy. The US requires a complete shift from the GAAP system to the IFRS, which will facilitate its dominance in the global market and strengthen capital market orientation. US companies are in constant relations with multinational companies, which require IFRS standards from their business partners. Having an internationally recognized system of accounting eliminates barriers encountered during mergers, attracting foreign investors and acquiring foreign assets. IFRS creates a level market internationally, giving America the opportunity to display its economic prowess. As such, the financial accounting standards board should adopt the IFRS in US economy.
References
Hellman, N., Carenys, J., & Gutierrez, S. M. (2018). Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve? Accounting in Europe , 15(2), 242-321. https://doi.org/10.1080/17449480.2018.1476772
Lam, H. (2015). Why does the U.S. Continue to Use GAAP and will it Ever Converge to IFRS? Claremont McKenna College , 1-81, http://scholarship.claremont.edu/cmc_theses/1066
Nacer, B., Amor, D., Ali, D., & Tarek, S. (2018). IFRS in the U.S. Business Environment - Vision for the Future. International Journal of Econometrics and Financial Management , 6(1), 17-21. https://doi.org/10.12691/ijefm-6-1-3
