Since 2005, companies listed in the European stock exchange have to present their financial statements in accordance with the International Accounting Standards (IAS), rather than comply with their national reporting standards. According to the European Parliament, the creation of such standards ‘facilitate the movement of capital; remove barriers to cross-border trading; permit comparison of company results; and assist the evaluation of managerial and corporate performance.' (Stittle J, (2004) page 1)
Indeed, the adoption of IAS was supposed to bring a large number of benefits, but the experience has proven so far that listed companies have also faced confusion and challenges.
The comparison of financial statements between various countries before 2005 was not an easy task for investors, due to many differences in individual national reporting standards.
[...] In 2001, the International Accounting Standard Board (IASB) was established to replace the IASC, and the IFRS norms were created in order to be the basis of international reporting standards. By 2005, a large number of countries chose to adopt IFRS as their own accounting standards, at the expense of their national reporting rules. Moreover, the adoption of IFRS has not only been limited to European listed companies. Indeed, many unlisted companies chose these accounting reporting standards, and most of them were located in different continents. [...]
[...] and Wayne (2008) International Accounting Standards and Accounting Quality, Journal of Accounting Research Vol June 2008 Rajagopalan N. & Zhang (2009) Recurring failures in corporate governance: A global disease?, Business Horizons pp 545-552 Hope (2003) Disclosure Practices, Enforcement of Accounting Standards, and Analysts' Forecast Accuracy: An International Study, Journal of Accounting Research, Vol May 2003 Stittle (2004) The Reformation of European Corporate Reporting, Towards a model of convergence or confusion?, European Business Review Vol pp 139 Ashbaugh H. & Pincus (2001) Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings, Journal of Accounting Research, Vol 3 December 2001 Gray S. [...]
[...] It has quickly seemed obvious that good financial statements were essential to keep an effective functioning of the capital markets, and they rapidly felt the need to develop an efficient system of international accounting standards. These common reporting standards were created in 2005, and were supposed to bring many benefits to organisations and investors: creating an international and high quality set of accounting standards would increase reliability of the financial statements and improve their comparability. However, the benefits supposed to be provided by this harmonisation also led to challenges to be faced. [...]
[...] By focusing on the practices within the accounting department of organisations, internal controls of accounting will protect them against fraud and inaccurate data reporting. Thus, this is an important element for companies and investors as it will ensure that all the company rules and government regulations are correctly followed. In his article, Sir David Tweedie also believes that a rigorous enforcement could increase accounting quality and improve the reliability that investors need in companies' financial results. Ole-Kristian Hope considered enforcement as being a process encouraging “managers to follow prescribed accounting rules, which, in turn, reduces analysts' uncertainty about future earnings.” (Hope (2003) page 235) However, despite the fact that divergences in accounting practices have recently decreased between countries, this has not really been the case for the enforcement of the IAS. [...]
[...] Sir David Tweedie claimed that strong internal controls, efficient auditing practices and enforcement mechanisms are also considered as very important influences for the good functioning of capital markets. Indeed, internal controls and audit practices contribute to investor confidence, but have to be carefully applied. Auditing financial statement has not been an easy task for auditors since the establishment of the common reporting language. They have to work objectively and scrutinously on the financial statements and the compliance with the new accounting standards has sometimes been a matter for some of them, as they could not work without referring to specialists. Moreover, Marden, R. [...]
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