1.7 Right Now Is an Exciting Time to Be Studying Accounting

If students have been learning double-entry bookkeeping for over 500 years, why is right now a particularly exciting time to be studying accounting? One reason is that the integration of the global economy is forcing an integration of worldwide accounting standards. In the past, German banks loaned money only to German companies, Chinese investors (or the Chinese government) owned 100 percent of all Chinese companies, and large American firms did the vast majority of their business inside the United States. Now, the increased efficiency of financial markets allows investment funds, no matter where in the world they originate, to be matched with the most attractive investment opportunities, whether in South Africa, France, or Mexico. Accordingly, investors are complaining that the financial statements they use to evaluate investments across the world are not prepared according to a common set of standards.

At numerous points throughout our study of financial accounting, we will point out certain international applications of accounting as well as some differences that might exist in accounting rules between the United States and other countries.

To meet the needs of users, the diverse national accounting practices that have developed in isolation must now be brought together and harmonized. As mentioned in the previous section, the International Accounting Standards Board (IASB) represents one effort to develop uniform worldwide accounting practices. The goals of the IASB are not enthusiastically embraced by all accountants; in fact, if they were able to freely choose, most accountants across the world would probably prefer to stick with their own national set of accounting standards to which they have become accustomed. However, economic globalization makes that isolationist approach impractical—and this historic harmonization is happening right now.

Another force significantly impacting the practice of accounting right now is information technology. In the pre-computer world of limited analytical capacity, it was essential for lenders and investors to receive condensed summaries of a company’s financial activities. Now lenders and investors have the ability to receive and process gigabytes of information, so why should the report of McDonald’s financial performance be restricted to three short financial statements? Why can’t McDonald's provide access to much more detailed information online? In fact, why can’t McDonald’s allow investors to tap directly into its own internal accounting database? Information technology has made this type of information acquisition and analysis possible; the question accountants face right now is how much information companies should be required to make available to outsiders. Twenty-five years ago the only way you could get a copy of McDonald’s financial statements was to call or write to receive paper copies in the mail. Now you can download those summary financial statements from McDonald’s website. How will you get financial information 10 years from now? No one knows, but the rapid advance in information technology guarantees it will be different from anything we are familiar with now.

On October 16, 2001, Enron, an energy trading company based in Houston, issued a press release regarding its third quarter earnings. The press release included a passing reference to a $1 billion accounting adjustment. The disclosure of this accounting charge sent off alarms throughout the investment community, and within six weeks Enron was completely engulfed in an accounting scandal and was forced to declare bankruptcy. The Enron accounting fraud, followed soon after by the revelation of a $10 billion accounting fraud at WorldCom, combined with many other cases of financial statement manipulation, severely damaged the credibility of the accounting profession and U.S. accounting standards. Congress passed the Sarbanes-Oxley Act, which increased the U.S. federal government oversight of the audit process and the preparation of the financial statements. In addition, users of financial statements have justifiably become more skeptical in their acceptance of “audited financial statements.” Our discussion of “Earnings Management” provides background on how and why companies manipulate their reported financial performance. In addition, the items in each major topic area discuss how accounting issues and accounting choices impact the general issue of corporate governance.

This introductory discussion has briefly described financial accounting and the accounting standard setting process, has explained who uses financial accounting information, and has introduced the organizations (and their acronyms) important to the practice of accounting. The next major topic area formally introduces the centerpieces of financial accounting—the financial statements.

Questions Exercises