An International Perspective

The bankruptcy of major companies and the ensuing media attention and political rhetoric make it seem like the U.S. system of accounting has been a total failure. However, this is simply not true. Compared to the accounting systems used internationally, the United States is quite tough. Characteristics of a high-quality system would have many shareholder rights and strong protection of those rights. This protection comes from strong laws that are enforced and accounting standards that have little ambiguity.

In comparison with the environment in other countries, the United States already has tough laws and a high degree of enforcement. In a recent study of 31 countries , three accounting researchers found that the United States has the best legal environment to discourage earnings manipulations and smoothing. ^[15] Australia, Ireland, Canada, and the United Kingdom also have good investor protection and enforcement histories. Earnings manipulations are more common in Austria, Italy, Germany, South Korea, and Taiwan. While investors currently lack confidence in the financial numbers reported by U.S. firms, the numbers of some foreign firms could be of lower quality. The scandals in some U.S. firms parallel some recent international scandals. International examples of scandal include embezzlement at the Bank of Credit and Commerce International and at Polly Peck, accounting fraud at Lernout and Hauspie, cash diversions at Daewoo Motors, and numerous shenanigans in Robert Maxwell's firms.

There is work being done to create a high-quality set of international accounting standards. The International Accounting Standards Committee (IASC) was founded in June 1973 by the accounting bodies of ten countries. Effective April 1, 2001, the International Accounting Standards Board (IASB) assumed accounting standard-setting responsibilities from its predecessor body, the IASC. This board is developing a single set of global accounting standards that are high quality, understandable, and enforceable, and that require transparent and comparable information in general-purpose financial statements. In addition, the board wants to encourage convergence in accounting standards of individual countries around the world.