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Switching the standards for financial statements from a rulesbased system such as U.S. GAAP to a principles-based system such as IFRS could create greater ethical challenges for accountants. More professional judgment will be needed, creating more ethical gray areas that could be used to rationalize methods that show a company's financial position as being better than it may truly be.
The global thrust of economic activity has been a reality for decades. Financial markets have shown how events in one country or economic area affect entities elsewhere in the world. Despite such globalization, the accounting principles used to measure and report on economic activity have remained mostly fragmented. U.S. Generally Accepted Accounting Principles (GAAP) had long been perceived as the gold standard. Competition from foreign financial markets and companies headquartered in foreign countries led to the establishment of the International Accounting Standards Committee (IASC) in 1973. This organization promulgated international standards until 2001 when it was replaced by the International Accounting Standards Board (IASB), which began issuing International Financial Reporting Standards (IFRS).
Until 2007, the Securities & Exchange Commission (SEC) in the United States required foreign companies under its purview who used IFRS to reconcile the resulting statements with GAAP principles. Controversy erupted in November 2008 when the SEC published a road map for total conversion to IFRS by 2011. The SEC fosters promotion of IFRS as a single set of globally accepted accounting standards. It asserts this would benefit U.S. investors by helping them better understand and compare foreign investment opportunities without needing to gain familiarity with myriad national accounting standards. Efforts to achieve convergence between IFRS and GAAP have proceeded throughout this period, but significant differences still exist.
The benefits of convergence to large multinational corporations and audit firms, as well as the potentially monumental costs of converting reporting structures from one basis to another, have received their share of attention. Less understood is the highly likely expansion of ethical challenges for both preparer accountants and for auditors involved with the financial statements of public companies. IFRS is being considered as just an option for privately held...