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The Development of Institutional Accounting Mechanisms Report (Assessment)

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Factors are contributing to the internationalization of accounting

Accounting is practiced across the globe. There are a number of reasons that facilitate the internationalization of accounting. First is the advancement of information technology. The Internet makes the globe a one-stop market. Therefore, accounting should be internationalized to enhance trade. The second reason is the rise in multinational companies. Domestic companies are making entries into foreign markets. These markets are in different jurisdictions and apply different accounting principles. Thirdly, the rise of global competition creates the need for the internationalization of accounting. This facilitates the comparison of financial records. Fourth, there is an increase in the number of cross-border mergers and acquisitions. The use of common accounting principles makes mergers and acquisitions easy. Fifth, the internationalization of capital markets requires that accounting also be internationalized. This is because internationally traded financial assets end up in the books of accounts. The sixth reason is the advancement in financial innovation. New financial products are being introduced in the market. This creates the need for the internationalization of accounting.

Global capital markets

The global capital market is a platform where international financial instruments are traded. This market helps in raising long-term finances for companies. These securities are either debt or equity. Some of the financial instruments traded in the market are stocks, bonds (such as GDR, ADR and EURO bonds), debentures, treasury bills, foreign exchange, and fixed deposits. The global capital market allows companies to raise large sums of capital required easily. Secondly, it gives companies international recognition. Finally, global capital markets enable companies to overcome restrictions imposed in domestic markets.

Factors that influence accounting development

Some of the factors that influence the development of accounting are sources of finance, legal system, taxations, inflation, political and economic ties, education level, and level of economic development of a country. These factors directly affect the development of the accounting of a country. A country with a favorable legal system, taxation laws, low rates of inflation, strong political ties, and a high level of education is likely to develop in accounting easily.

Cultural values

Culture brings about institutional arrangements in a country. These arrangements affect accounting development. Individualism, power distance, and uncertainty avoidance are the key cultural determinants of accounting development. Countries with weak uncertainty avoidance, small power distance and individualism have strong accounting professions. In such countries, accountants rely on professional judgment. Also, capital markets are the main sources of finances. From this, we can deduce that cultural value is central to the development of accounting. This is concurrent with the factors named above.

It is also evident that the cultural values of countries explain the national difference in accounting practice. This is because the structures of a nation arise from its cultural values.

Economic and legal factors affect specific features of accounting while cultural variables affect the whole accounting system. Therefore, economic and legal factors explain the national differences in accounting practice more than cultural differences.

Approaches to accounting development

The patterns of accounting development are less applicable at present than in the previous years. The standard accounting practice is vanishing over time since countries are privatizing their economies. This can be attributed to the fact that financial reporting is tending towards International Financial Reporting Standards.

Classifying systems of accounts

Classification of the system of accounts provides a standard framework for the understanding of similarities and differences in accounting around the world. It improves understanding of accounting systems. Judgmental classifications are based on knowledge, intuition, and experience while empirical classifications apply statistical methods to accounting principles and practices.

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