1. The overriding objective of a not for profit organization.
a. The overriding objective of a not for profit organization is to provide some socially desirable needs on an ongoing basis and examples of these needs include education, medical care and some forms of transport. According to Chen (1997) the objective of not for profit organization is to relieve suffering, promote interests of the poor, protect the environment and to provide basic social services in the community.
Other objectives that a not for profit organization might have are;
Providing enhanced services to its members.
Improve efficiency and effectiveness of internal support systems.
Improve and strengthen the financial status of the organization.
Improve and maintain the quality of members to international standards.
Increase influence in the local economy and global economy.
A proposed business objective of NPOs
To improve the efficient and effective allocation of resources in the organization and the society at large. Efficient allocation of resources entails the ability to accomplish something with the least waste of time and effort and being effective means producing the expected results. Therefore this objective can be suitable for not for profit organizations because it results in increased welfare of citizens in the society.
b) The category of stakeholder which these funders would represent are donors, members and other foundations.
Their diverse interests in the financial report of NPOs are;
Major donors would want the assurance that their contributions have been applied according to their wishes.
Protection of assets entrusted to the organization.
Efficiency and effective use of resources of the organization in carrying out its objectives.
Members have an interest in how their funding has been used as well as the performance of the organization.
Funders (for example governments or foundations) want assurances that their contributions to the organization have been used in accordance with the funding submission and subsequent approval.
Their needs are met through the issuance of general purpose audited annual financial statements which are supported by annual reports. These are very good means of supporting information to stakeholders. However the financial statements may not answer all the questions of certain stakeholders. For example many funders require reporting about the use of their funds, in specific formats, as a condition of granting the funding to the organization. Hence there will be need for additional special reports of the use of funds and other important events.
c. A discussion with reference to the current conceptual framework whether harmonised international standards for financial reporting in the not-for-profit sector would be of benefit to markets and stakeholders and explain what limitations may arise with such standards.
As the trend for globalization in business becomes increasingly important for economic success, many issues arise through international business practices for corporations, governments, and investors. Due to the many conflicting codes and practices that exist between various national financial accounting standards throughout the world, international business becomes harder to analyse as information is not easily comparable between competitive industries. (Diaconu 2007) Because there is no standard international code for financial reporting around the world, many multi-national corporations are forced to reconcile their financial information to conform to multiple financial reporting standards. This process of reconciling financial information for conformity with different accounting systems can be expensive, and also make information misleading. As a result of the massive increase in international business and the difficulty of reporting accurate universal financial information, initiative has been taken to create a harmonization of accounting standards between nations. Harmonization of accounting standards between nations is a very important current issue which has many possible benefits or consequences, as well as many obstacles to overcome for success. This paper will examine potential advantages and disadvantages of a harmonized international accounting standard; discuss various obstacles associated with the creation and implementation of these standards, and provide possible solutions to overcome these obstacles.
There are many potential advantages associated with harmonization of accounting standards. The world economy could benefit through increasingly educated investment decisions which would lead to overall global economic growth. Accounting information can be interpreted by experts to reduce the risk of investment. One of the main tools used in financial analysis is the comparability of financial information for similar businesses in competition. Internationally adopted accounting standards would increase this ability to compare similar industries and make investment decisions less risky through greater intelligence. A standardization of international accounting information would facilitate easier interpretation for financial experts all around the world seeking to invest internationally. This increased ability to interpret information could potentially result in an overall increase in educated global investment. Another potential benefit from the harmonization of international accounting standards would be the reduced costs associated with multi-national corporations who must reconcile their accounting information for multiple accounting standards. (Diaconu 2007) Countries with scarce resources could also take advantage of international accounting standards, because they would not have to invest resources creating and regulating national accounting standard-setting agencies. In order to be listed on credible stock exchanges, businesses must abide by the financial reporting requirements of the stock exchange it wishes to sell securities through. Stock exchanges around the world could profit from a harmonization of accounting standards, as more companies begin to adopt the international standard, they will become eligible for listing. As the amount of listings grows on the stock exchanges so will the volume of securities transactions. (Marion and Cengage 2001)
Although there are many promising advantages of harmonization, there are also many potential disadvantages. One possible disadvantage of harmonization can be seen through the role culture plays in developing national accounting standards. Countries may view compliance with international accounting standards as a threat to their nationalism and view compliance as submission to the will of other countries. A major condemnation of harmonization comes from underdeveloped countries who view harmonization as an obligation placed on them by countries with superior economies. Another disadvantage of harmonization is the vast amount of disparity that exists between different countries accounting practices. The abundant differences in accounting practices world-wide would surely lead to substantial changes for any country who adopted the international standard. These substantial changes would lead to many expenses for businesses in countries conforming to a new international standard. Another common criticism of harmonization is the argument that an international accounting standard will not be flexible enough to deal with all the dilemmas faced by nations with differing problems and circumstances. National accounting standards can be modified as situations change, and policies can be implemented without consent of all the nations involved in an international accounting system. (Diaconu 2007)
I have outlined some of the advantages and disadvantages that could possibly arise from implementing a harmonized international accounting standard. Now I will examine some of the barriers that prevent harmonization from proceeding. Many countries have different accounting methods which are regulated in different degrees by their government. Some countries use professional organizations to set accounting standards, whereas others are regulated strictly by the government, and some countries such as the U.S. use both professional organizations and the government to set accounting standards. The differences seen in the accounting standard-setting bodies of the world give rise to the question: Who will write and regulate the international standard of accounting? The U.S. is the largest economy in the world and could be an easy answer to this question, but there are many critics of the FASB standards used in the U.S. Many believe that U.S. accounting standards are overly complicated. Another barrier of harmonization is the argument that capital markets have already adjusted to international business without a set standard. Many believe harmonization is not necessary and present systems are working well enough. (Diaconu 2007)
There are many potential advantages and disadvantages of international harmonization of accounting standards, as well as many obstacles restricting implementation. Many companies in the European Union submit to International Accounting Standards, and many other corporations reconcile financial information to provide IFRS financial statements as well as U.S. GAAP. Because the U.S. is the largest economy in the world many international companies adopt U.S. GAAP financial statement to increase ability to trade with the U.S. Companies in the U.S. must always conform to U.S. GAAP and reconcile any other financial statements to meet the GAAP requirements. One possible solution to the problem of setting international accounting standards would be to provide a choice between the two most popular systems: the American GAAP or the European IAS/IFRS. As more companies favour one method over the other that method will eventually become the international standard. (Diaconu 2007) There are many possible solutions to implement harmonization, but in the end, complete harmonization of accounting principles will probably never be realized. There are too many variables to account for and too many groups of people in political power with too much to lose. (Weber 1992)
, thus providing investors with information that is accurate, timely, comparable, and reliable" (Pologeorgis). First, it will provide consistency across international markets. This will allow accountants to analyse companies across the globe regardless of the country in which they operate. Additionally, investors will easily be able to compare financial statements of international corporations since all companies will be adhering to the same set of standards. This will lead to an increase in international investments and overall economic growth.
Although there are numerous advantages to the harmonization of accounting standards, there are a few drawbacks related to the process as well. These include the length of time it will take to implement the new standards and the costs relating to the process. Accountants, management employees, and investors will have to educate themselves on the new accounting information, which will be costly to many corporations. Companies will also have to design new internal controls as the existing controls in place will become obsolete. Another hurdle of harmonizing accounting standards will be the unwillingness of countries to commit to a uniform code as many of them have different political, economic, and ethical systems. Another negative effect highlighted by Grant Houston in The Disadvantages of Harmonizing Accounting Standards is the impact it will have on small businesses in the United States (Houston). The compliance costs associated with the transition to new accounting standards will inhibit the expansion and growth of many small businesses across America.
Harmonization is a concept that will continue to be discussed with the current growth of the global economy. The idea of the United States transitioning to IFRS is still an extremely popular topic of debate in the accounting sector. Whether or not the benefits of harmonization truly outweigh the costs will be the ultimate factor in the decision.
d. From a theoretical perspective, reasons why information disclosed in these reports may be limited.
Development of international standards for financial reporting in NPOs is useful but the information provided also had its limitations. This is so because accountants find ways to improve the appearance of a company's financial statements in the eyes of its stakeholders.
Stakeholder theory suggests that the purpose of a business is to create as much value as possible for stakeholders. So for the NPO to improve its value in the business environment which it is operating it uses the historical cost principle on presenting its financial statement. However this principle has its limitations because it disregards changes of the market values. Taking an example of a deflationary period, land which was bought five years back at $5000 is assumed to have the same value but in real terms there is need for adjusting figures by the percentage of deflation so as to avoid overstating the fixed asserts.
The agency theory argues that agents are supposed to act in the sole interest of their principals. In order to meet the principal's interest accountants window dress financial statements so as to improve performance thereby limiting the usefulness of these reports. Window-dressing can be done by changing the inventory valuation method of ancillary activities such as bar trading. For instance, at year end an accountant can shift from FIFO to LIFO hence resulting in overstating the value of profit to be added to income. Method of charging depreciation can also be changed from the reducing balance to the straight line basis with the motive of reducing the current year expenditure in the first early years of purchasing the asset.
Violating the agency theory, financial statements are also subject to human error which is not the interest of company owners. In some cases even intentional manipulation of figures to inflate economic performance. This also brings another limitation as the reports may fail to give a true and fair view of the current performance of the company.
A cost benefit analysis of the increasing mandatory disclosure and another where NPOs voluntarily increase disclosure.
Mandatory disclosure occurs where the firms are required by the act to disclose their financial statements in accordance with certain principles which guide them, whereas voluntary disclosure involves the management of the organisations discloses only the information they deem feet to be published in public.
The increasing in mandatory disclosures brought about a multiple of advantages which may include the adoption to the international financial reporting standards (IFRS), according to Daske and Gebhard (2006). These IFRS are the principles, conventions or guidelines for the presentation and disclosure of financial statements. As mandatory disclosures requires organisations to use these principles, the financial statements are being given value both within the organisation and to external parties. The advantage is that, consistency is increased and comparability of the results from different sectors can ascertained. Therefore, new members can be attracted into the business if the results produced are reliable.
In addition, mandatory disclosures adopting to the IFRS lead to heterogeneity between different organisations. Thereby creating competition since the performance statistical analysis of different organisations can be effectively computed. The requirements applies to all firms in an economy which enriches the data about the operations of NPOs. As a result, informed decisions can be made which would enhances the further growth of NPOs or the decline if the performance is not viable.
However, mandatory disclosure maybe a disadvantage to NPOs since the requirements are a mandate. This reduces independence of organisations for the fact they are required to observe certain requirements. Therefore, information produced maybe be unrealistic because the firms maybe unwilling to prepare their statements in accordance to those certain rules mandated by the act. As a result, wrong information can be published which distort the decision of the general public.
Also a cost may arise due to the setting up of a standard which would guide the presentation of financial statements. Creation and amendments of standards both requires a cost. For those standards to be implemented, the standard board have to be paid for their effort. Hence, an outflow of funds.
As a result, the benefits derived from mandatory disclosure outweighs the costs since the costs are incurred in the short-run but the benefits takes a longer period of time.
On the other hand, voluntary disclosure enhances the performance of organisations. This reduces fraud, distortions and the presentations of auditors works seems to be reasonable and logical. Since employees of an organisation knows that their work is to be published, they perform efficiently and effectively so to increase market value of the firm.
In addition, voluntary disclosure may lead to improved competition edge of the organisation. The benefit would be to attract potential members for them to invest in an organisation, hence enhances the capital growth.
However, the information provided may not be of high value since management only discloses information which is positively associated with the value of the firm. The cost will be the wrong decisions which can be made basing on the wrong information.