Countries have different histories, values, cultures, and political and economic systems. They are also in various stages of economic development. These various environments in which companies operate influences financial accounting. Some companies operate in many countries. These companies are referred to as multinational companies. Multinational companies may earn more than half of their income from countries outside of the United States (Schroeder, Clark, Cathey, 2002).
Due to different accounting practices in the various countries, the accounting data reported by the multinational companies will vary significantly from one country to another country. These accounting differences make it difficult for reported data to be combined by the parent company. In addition, if investors, creditors, and other third party users cannot understand the financial statements, they will not invest in or lend money to the company. The need for comparative financial statement reporting across countries resulted in a move towards harmonization of accounting standards (Schroeder, Clark, Cathey, 2002).
Harmonization involves multiple standard-setting bodies working together to create accounting standards that can be applied globally. The FASB and IASB are jointly working towards the common goal to provide accounting standards that generate “high-quality, transparent, and comparable information that will help participants in capital markets and others make economic decisions” (Schroeder, Clark, Cathey, 2002, p. 85).
History of U.S. Accounting Standard Setting
In the United States, a comprehensive set of accounting standards started forming after the stock market crash in 1929. The Securities Act of 1933 and the Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC) which was given the authority to prescribe accounting principles and reporting practices. The SEC has historically acted as an overseer of accounting policies and relied...