1. INTRODUCTION
Research studies on the evolution of accounting have a long
tradition. Transformations in accounting knowledge and practice have
been influenced by many factors, such as economic, social and political
pressures, (Tomkins, 1798) ad hoc influences like wars, periods of
economic decline and labour disputes (Miller et al., 1991). Also, Hans
Hoogervorst, the incoming Chairman of the International Accounting
Standard Board, claims that "it is a sad truth that most
initiatives to strengthen the international financial architecture to
reap the fruits from the on-going liberalization of capital movements
have been taken under the pressure of some kind of crisis" (Address
to the International Monetary and Financial Committee, 2002: 16).
International accounting regulations (IAS and IFRS) is considered part
of this international financial architecture, defined as a "set of
measures that can help prevent crises and manage them better in the more
integrated international financial environment" (World Bank
webpage).
To illustrate such a relationship between the financial crisis and
accounting, we build this study that aims to emphasis that crises are
one of the factors that bring the National Accounting Regulations, from
those countries affected by crises, into line with the International
Accounting Regulations. The end of the twentieth century is
characterized by depression periods which led to crises in different
parts of the world, such as Asian and Scandinavian countries, Mexico,
Russia and Argentina. All these crises, together with the US corporate
crisis (2001-2002) led to changes in accounting regulations, of the
aforementioned countries, bringing them into line with the International
Accounting Standards (Bhimani, 2008; Lin, Chen, 2000; Mooskooki, 2002;
Rahman, 1998).
2. RESEARCH PURPOSE AND METHODOLOGIES
The main purpose of this study is to prove that crises, from the
end of twentieth century, are one of the rationales used by IASB to gain
global dominance, with the International Monetary Fund (IMF) and World
Bank (WB) as messengers, particularly with an emphasis on Asian Crisis,
that led to changes in the Accounting Regulations, in Asian countries,
bringing them into line with the International Accounting Regulations.
Below is the hypothesis for this study:
Hypothesis 1: Crises are one of the rationales used by IASB to gain
global dominance, with the International Monetary Fund (IMF) and World
Bank (WB) as messengers.
The method that will be used here will be the explanatory case
study because it will enable an analysis of the reasons influencing why
accounting regulators modify accounting regulations after crises. There
are few articles related to this topic in the literature, however there
are several reports prepared by the IMF and World Bank that can be used
in order to emphasis the purpose of this study.
The research method that is going to be used in this research is
case studies. Ray et al. (2002: 142) points out that "in accounting
research case studies are gaining acceptance as an appropriate research
method, and an increasing number are appearing in the research
literature". The following paragraphs aims to describe the case
studies of this research and also the appropriate research methods that
are going to be used.
3. LITERATURE REVIEW
Reflecting the magnitude of "financial crises" in 2008,
some academics started examining causal relationships between
accounting, accounting regulations and the crisis. In terms of
"accounting crises (or scandals)" and accounting regulations,
there has been significant amount of literature, but such literature is
yet to be developed to illustrate the relationships between financial
crises, accounting and accounting regulations. There is a trend that was
evident in the 1990s, when the IMF imposed the adoption of international
accounting standards as a condition for loans to Asian countries such as
Korea, Indonesia, Japan, as well as in China's actions to revise
its practices to conform with International Accounting Standards when it
joined the World Trade Organization.
It is widely believed that the lack of proper use of International
Accounting Standards in affected countries hindered
"transparency" in the financial statements of corporations and
banks. As a result of this, financial statements failed to provide
useful information, on a timely basis, regarding various important
factors that appear to have contributed to the triggering of financial
crisis. (Zubaidur, 1998) The lack of transparent, reliable and
comparable financial information did not cause the financial crisis in
East Asia: a weak financial infrastructure, ill-conceived liberalization
and speculation were all to blame. (Zubaidur, 1998)
Alan Greenspan, Chairperson of the United States Federal Reserve
System, in his testimony on the Asian financial crisis before the
Committee on Banking and Financial Services of the United States House
of Representatives, on 30 January 1998, highlighted debt problems as
follows: "a major improvement in transparency, including both
accounting and public disclosure is essential The conclusion of his
testimony is that Accounting Regulations, in the countries affected by
crises, need to be put into line with the International Accounting
Regulations in order to avoid future crises.
In the following paragraphs, in order to deepen the knowledge of
this theme, we used the archival method, through rigorous analysis of
the specialized literature. The case studies, that we built, aims to
prove that Asian crisis is one of the rationales used by IASB to gain
"accounting" dominance, in those Asian countries that were
affected by crisis, with IMF and WB as messenger.
4. FIRST CASE STUDY: CHINA
In February 1993, the Ministry of Finance of China started a
three-year project to formulate detailed accounting standards. The
project, funded by the World Bank, employed Deloitte Touche Tohmatsu
International as an international consultant and also involved a number
of accounting experts from China. (Bing, 1998) The Chinese Ministry of
Finance was responsible for the promulgation of accounting standards.
The revision of China's accounting standards and the upgrading of
the accounting profession were supported by a $2.6 million World Bank
loan. Deloitte Touche Tohmatsu is working with the Ministry of Finance
to meet the 1995 target date (Bangsberg 1993, Xinbua 1993). The primary
focus was to develop a set of national standards "in line with
internationally accepted norms". (Gary, 1994)
In 1998 the Chinese government has realized the potential
association between accounting and its reporting practices and financial
crisis as experienced in other Asian countries, the inflated accounting
numbers might play a part in building up a "bubble economy"
and lead the subsequent financial crisis. The government has to
introduce a series of preventive measures, including new accounting
reforms, to curb financial turmoil in China. (Jun, Feng, 2000) The
Chinese Government had place an emphasis on improving the reliability of
accounting information and reconciling Chinese accounting to prevailing
practices in the industrialized world, as one of the necessary steps to
prevent China from financial crisis. (Jun, Feng, 2000)
Nine, out of twenty-five practical accounting standards, that are
fairly similar to the IASs, have been promulgated by August 1999. This
development could not only assist to prevent China from a "bubble
economy," but also enhance the credibility and international
comparability of Chinese accounting. (Jun, Feng, 2000)
5. SECOND CASE STUDY: KOREA
Following the financial crisis in 1997, the Korean government, in
consultation with the World Bank, embarked on a plan to improve
financial reporting practices, taking IAS as their benchmark. A new
independent private-sector Korea Accounting Standards Board (KASB) was
created as of 1 September 1999. (IAS PLUS, Accounting Standards Updates
by Jurisdiction, 2000)
Korean Accounting Standard Board's goal is to improve Korean
accounting standards to a level consistent with international best
practices. Since its establishment, the KASB has adopted a policy of
harmonizing Korean Accounting Standards with IAS. (IAS PLUS, Accounting
Standards Updates by Jurisdiction, 2000)
6. THIRD CASE STUDY: INDONESIA
The economic crisis in the late 1990s highlighted the problem of a
lack of adequate measurement and disclosure practices by Indonesian
firms. (Hector and Nabil, 2007) A lack of accountability in business and
government has been often mentioned as a major contributor to the crisis
during which the need for a financial system that works with
transparency and efficiency, and the importance of corporate governance
became painfully clear. (Choi, 1998)
The United Nation report on the Asian financial crisis prepared for
the 1999 meeting of the United Nation's accounting expert group
concludes that "as a result of this non-compliance with IASs, users
of financial statements failed to note the weakening condition and
performance of the corporations and banks" (Cairns, 1998) The
International Monetary Fund recommended solutions designed to rescue
Indonesia and other countries in the region from the crisis. For
example, Indonesia was offered a $43 billion rescue package. (The
Economist, 1998).
7. FORTH CASE STUDY: JAPAN
One of the IMF paper work related to the Japanese Banking Crisis
suggested that weak corporate governance can prevent banks from
undertaking meaningful restructuring to arrest their deterioration.
Effective corporate governance, which requires shareholder activism and
is built around disclosure standards, effective internal and external
audit arrangements, separation between board and management, and the
accountability of board directors to shareholders and regulators, is
critical to provide the necessary checks and balance between
shareholders, bank board and management. (IMF Working Paper, 2000)
IMF also suggested that transparent accounting standards (such as
pertaining to loan classification, accrual of interest and
marking-to-market of assets) are an important tool in effective
supervision. Accounting standards should be designed around the need to
promote substance over form and to discourage manipulation. Consolidated
accounting, especially when there are substantial transactions between
financial institution and their affiliates and subsidiaries, facilitates
consolidated supervision. Inclusion of qualification by accountants
should be an integral part of the publicly disclosed audited financial
statements. (IMF Working Paper, 2000)
8. CONCLUSION
Finally, the impact of crises on accounting regulations, and vice
versa, has a long tradition in accounting literature. This research aims
to determine the factors that led regulators to change accounting
standards/norms, by analyzing all the major crises from history.
Researchers believe that accounting standards are deeply implicated in
the financial crises and in at the same time they consider that crises
shaped the evolution of accounting.
The purpose of this study was achieved and the hypothesis was
accepted, so we can conclude that Crises are one of the rationales used
by IASB to gain global dominance, with the International Monetary Fund
(IMF) and World Bank (WB) as messengers. The Asian Crisis led to changes
in the Accounting Regulations, in the affected countries, bringing them
into line with the International Accounting Regulations (IAS/IFRS).
What is argued have is that if reliable accounting information had
been available, excessive financial exposures would have been detected
earlier, allowing corrective action to be taken by the banks and
corporations themselves, as well as by market participants and
regulators, thus diminishing the magnitude of the crisis. Accounting
disclosure should have provided useful and timely information--early
warning signals--on the weakening financial condition of enterprises.
The main recommendation of this article is therefore that concerted
national and international efforts should be made to develop and
implement international accounting and reporting standards, compliance
with which should be monitored and enforced.
These shortcomings not only explain our failure to anticipate the
current financial crisis, they also limit our ability to analyze,
interpret, and response to the crisis as it continues to unfold.
Economic scholars are uniquely positioned to use our knowledge of
economic institutions, the intricacies of accounting rules, and the
socially and politically contested nature of economic practices to
identify and explain how seemingly neutral economic practices
facilitated, and continue to facilitate, the massive wealth transfers
that mark this extraordinary financial crisis. The crisis, thus,
challenges us to re-evaluate our research agendas and perhaps also the
institutional incentives and unexamined assumptions that drive them--so
that economic research can contribute to a broader social and political
analysis of the financial crisis.
Furthermore, stakeholders are the one that are considerable
affected by crises and any changes in accounting regulations that will
influence their welfare. There are limitations that need to be
acknowledged and addressed regarding the present study. These
limitations concerns the fact that there are few research studies and
articles related to the crises, from the end of the twentieth century,
written in English. But the author of this study welcomes any
collaboration with other researchers that show interest to this topic,
from those countries affected by crisis in 1990s.
Finally, it is important to recognize that economic rules and
changes in them are shaped by political processes (like any other
regulation). The role of the political forces further complicates the
analysis. For instance, it is possible that changing the economic rules
in a crisis as a result of political pressures leads to worse outcomes
than sticking to a particular regime (e.g., Brunnermeier et al., 2009).
In this regard, the intense lobbying and political interference with the
standard setting process during the crises provide a fertile ground for
further study.
ACKNOWLEDGEMENTS:
Ph.D. scholarship, Project co-financed by the SECTORAL OPERATIONAL
PROGRAM FOR HUMAN RESOURCES DEVELOPMENT 2007--2013. Priority Axis
1--"Education and training in support for growth and development of
a knowledge based society". Key area of intervention 1.5: Doctoral
and postdoctoral programs in support of research. Contract nr.:
POSDRU/88/1.5/S/60185--"INNOVATIVE DOCTORAL STUDIES IN A KNOWLEDGE
BASED SOCIETY", Babes-Bolyai University, Cluj-Napoca, Romania
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Internet:
Economist, 20 June, 1998, pp. 82-87, www.economist.com
IAS PLUS, Accounting Standards Updates by Jurisdiction,
www.deloitte.com
www.worldbank.org
www.ifrs.org
www.imf.org
Cristina M. Marcus, Babes-Bolyai University, Cluj-Napoca, Romania
Mrs. Cristina M. Marcus is a PhD student at Faculty of Economics
and Business Administration, Accounting and Audit Department,
Babes-Bolyai University, Cluj-Napoca, Romania.