Accounting plays a vital role in business, but its quality is of paramount importance if it is to be used correctly. Accounting information must be relevant, faithfully represented, comparable, verifiable and understandable so that a company can make informed planning and control decisions. Accounting standards must be in place to ensure that factual information is recorded. Without a set of rules, misallocation of resources can prove fatal to the business. In developing countries there is a lack of comparability and consistency with the financial statements of various companies. Two underlying problems are apparent; lack of qualified personnel and ineffective accounting systems (Holzer). In our growing global economy, it is relevant that these developing nations adopt a set of accounting rules that will keep them in step with other global companies. The International Federation of Accountants (IFAC) and the UK Department for International Development (DFID) have partnered to devise a plan to help developing countries strengthen their accounting practices (Cohn).
Accounting systems and auditing procedures in developing countries have been designed to meet the needs of centrally planned economies (Zakari). However, systems and personnel in these developing countries struggle to keep up with the developed world. There are many reasons for this. These countries are just setting clear goals for their accounting. Things like financial information, tax information, and statistical information are measured and reported, but there is no standardization across countries, industries, or sectors. This is problematic because comparability and consistency are crucial for external and internal users to make informed decisions. Without proper standardization and procedures, it’s hard to know if a company is fairly represented or if it’s just tampering with the books. This creates a snowball effect for developing countries because investors and creditors will not back a company without adequate knowledge of earnings or growth. This makes it difficult for developing countries to export, create stable growth in the economy and increase their GDP overall.
Accounting maintains the climate for an economy. Established systems and controls inspire investor confidence, leading to healthy and stable growth. Investors seek capital and will only invest when there is evidence of growth between periods. This is where the use of reliable accounting data to allocate resources is relevant to create competition and profit in the company’s sector. Accounting systems are a necessary infrastructure component for developing countries (Fino). Extreme poverty, unemployment and debt in developing countries are due in part to fraud and unreliable data produced from accounting systems.
The Department for International Development (DFID) has been working closely with IFAC (International Federation of Accountants) to facilitate a blueprint for creating robust accounting programs and controls for developing countries. DFID will provide $7.884 million to IFAC over a seven-year period (Cohn). This funding will be used to strengthen professional accountancy organizations in at least ten countries that IFAC believes have a greater role in promoting economic development. IFAC plans to coordinate, implement, and oversee the necessary support to these countries to develop the administrative, financial, and technical capacity to improve current professional and ethical standards (Cohn).
The implementation of higher ethical standards, accounting systems and uniform reporting are integral to building healthy economies in developing countries. With more reliable and secure data, we will start to see more investment in developing countries, higher capital gains, and more international trade. This is beneficial for any of the developed nations because there will be more areas to export, more profitability in certain sectors and more circulation of money in the countries. The consolidation of accounting standards in developing countries is the first step that must be taken to reduce poverty and unemployment rates. Relevant information is essential to assess the economic performance of these countries (Fino). Many of these developing countries have adopted IFRS (International Financial Reporting Standards) but have not consulted these standards with their current socioeconomic status or cultural factors. These countries need to develop a set of standards that work well for them and that provide relevant and reliable financial data to their users. Competition is essential in the global marketplace and these developing countries have not been able to get their foot in the door due to the misallocation of resources. A business needs to function efficiently and effectively. Internal users will not be able to make informed decisions if a company lacks reliable financial data.
DFID is contributing its time and money to propel these developing countries into the global marketplace. Once started, the global economy will grow. Within a few years of implementing these standards and systems, we will see rising stock prices, lower interest rates, easier global coordination, and overall stable economic growth. The economic system of each country is intertwined, so building the economies of these developing countries will show a correlation of economic prosperity around the world. The consolidation of accounting standards will greatly benefit the future of the global economy because more informed business practices will be carried out.