The public accounting industry, due to rapid changes in the global landscape, will grow internationally while remaining flat domestically. This is due to the two major facets of globalization and its effect on the industry. These facets are the globalization of markets and the globalization of production. The globalization of markets is the creation of one world-wide marketplace due to deregulation of international trade. This gives accounting firms the ability to sell their services anywhere in the world. The globalization of production is the ability to take advantage of goods and services, sourced from different nations. This allows accounting firms to outsource their services to areas where labor is less expensive, reducing costs and thus increasing profitability. The public accounting sector is affected by both facets differently. Furthermore, the global landscape has changed more rapidly over the last twenty five years than any other time in history.
This is due to a combination of two major vehicles; technological advances and regulatory reform. The impact of these new technologies and regulations has rewritten the role of the traditional accountant. Traditionally accountants were used mainly for financial data entry; the new accountant is a consultant, an auditor and an advisor as the industry moves away from financial accounting and towards managerial accounting. Globalization has occurred more rapidly in the last thirty years than any other time in history for two very distinct reasons, the advancement of technology coupled with government deregulation of markets. Technological advances effecting the globalization of the accounting industry include improvements in the travel industry, the advent of the internet and the rise of cellular technology. These advances have improved record keeping abilities, created the ability to instantly share financial information and the increased ability to handle multiple corporate contracts simultaneously.
The Pathways Commission, a joint project between the American Accounting Association and the American Institute of CPA’s, released its final report in July 2012 finding: Complex business transactions and globalization continue to change the business environment. Additionally, technology’s rapid development introduces new opportunities and challenges. Enhanced technological skills are increasingly important for businesses’ success and, therefore, for future accountants. Fraud control, risk management, and specialized skills will be needed. Regulation will certainly evolve and be complicated by global operations. All of these changes increase the need for both knowledge and skills that meet the changing environment.
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As a result, the importance of lifelong learning is magnified.” (Pathways Commission, 2012, p. 133) Based on this reading, The Pathways Commission believes that the accounting field is changing before our eyes due to the change in the global marketplace. This evolution of the field will require accountants to be proactive in learning new skills to keep up with these changes. The commission argues that the increase in skills required by the accounting industry as a whole will, in turn, require an increase in the amount of accountants in the industry. They believe the increase in global trade will bring about higher government regulation regarding corporate accountability, in turn inflating the demand for future accountants. (Pathways Commission, 2012) Intuit, the company behind leading accounting software QuickBooks, released a report on their view of the future of accounting.
Similar to the findings in The Pathways Commission report, ‘2020 Report: Future of the Accounting Profession A New Mindset and Model for Thriving in a Connected World’ views the future accountant to be better connected and more informed in the global marketplace. The report states: Globalization will be the norm, as small businesses use web access, real-time manufacturing, and mobile marketing to reach across borders for customers and suppliers. Accounting professionals who are knowledgeable in international standards, regulations, and processes will thrive. Accounting firms will increasingly rely on each other’s capabilities and collaborate to compete more effectively in the international marketplace. (Intuit, 2011, p. 9)
The basis of the Intuit report, similar to the Pathways findings, is that due to globalization accountants will need to be better trained, more knowledgeable, have understanding of international differences and utilize continuing education to ensure they remain competitive in the industry. The advent of the internet and the rise of cellular technology have revolutionized human communications. These technological developments have shrunk the global landscape and allow information to be sent immediately. These instant mediums for communication allow public accountants to work remotely, no longer requiring an on sight presence. Furthermore having the ability to pull up financial information immediately has increased the transparency in managerial accounting decisions, reducing the role of the traditional accountant. In the not so distant future automation will also reduce the role of many lower-level accounting functions, such as data entry and bookkeeping. Successful accountants will be high-level and require many skill sets, including auditing, consulting and decision making.
Future accountants will no longer handle tax returns or bookkeeping because of a combination of lower cost automation and outsourcing options. The task of outsourcing decisions will likely be influenced by accountants, if not made entirely by them. The accountant will handle larger business decisions based on the reporting, including many managerial and consulting functions. Today two former consulting arms of the previous “Big Five” are ranked within the top 10 outsourcing consulting firms in the world by the International Association of Outsourcing Professionals. Accenture, spun off from the consulting division of Arthur Anderson, ranked as the number one outsourcing consultant in the world, while Capgemini, formerly the consulting division of Ernst and Young, ranked eighth. These firms are able to offer some of the best outsourcing consultancy in the world due to their experience, sheer size and brand recognition. (IAOP, 2012) Even today time and attendance systems, such as ADP and Peoplesoft allow companies to monitor and track wages of hourly employees instantly and remotely.
These systems reduce the need for Payroll bookkeepers by automatically creating accounting entries directly from the time clock to the payroll expense account on the balance sheet. By utilizing automated attendance tracking systems companies are able to move payroll clerks from on-site to a lower wage location around the globe. This require fewer payroll accountants due to automation and outsourcing, as one payroll clerk is now capable of managing the payroll processing of multiple physical locations, reducing the demand for payroll clerks. Government deregulation is the second cause for the recent growth of global markets. In China the reform era of the late 1970’s and early 1980’s used three principals to forever change the countries place in the global landscape. These principals were rural privatization, consolidation and privatization of the industrial sector and opening China up to foreign direct investment. This reform era led to ten percent growth in China, causing the greatest reduction in poverty in the history of mankind. India, seeing the success in China’s economic stance, adopted a similar stance in 1991 with its Liberalization, Privatization and Globalization model.
This opened the doors to international trade by reducing tariffs and allowing foreign direct investment. Combined India and China are home to over one third of the world population. These two new markets alone have created a stir worldwide as companies compete to enter the playing field for a chance to cater to their people. The formation of the European Union in 1993 created a single market in Europe. This market uses a single monetary unit, allows for free trade between members and has turned twenty seven competing economies into one large, united economy. Less collective than the European Union, the North American Free Trade Agreement, commonly known as NAFTA, was passed in 1994, removing trade regulation between the United States, Mexico and Canada. As of 2012 the United States has free trade agreements with 17 countries. This deregulation has created a global marketplace with less government interference in international business.
The globalization of markets has created new market opportunities for accounting firms. According to Charles Hill from the University of Washington “The globalization of markets refers to the merging of historically different and separate national markets into one huge global marketplace.” (Hill, 2012, p. 6) These opportunities caused a rapid consolidation of accounting firms in the 1990’s via mergers to gain competitive advantage in the new global marketplace. According to the thesis of Jim O’Neil, chairman of Goldman Sachs asset management, growth markets will buoy the global economy. He believes that these economies will see enormous growth, while the world’s biggest economies, the United States and Europe, will remain flat. These growth markets have the biggest opportunity for the accounting industry. James Turley, global chairman and CEO of Ernst and Young, said “A lot of people are surprised to learn we have 10,000 employees in China ... for the size of the market, however, it should be closer to 30,000." (as cited by Voigt, 2009)
The tremendous potential being seen in the growth markets, such as China, will continue to increase the demand for accountants in these countries. For this to occur; firms will need to have a stronger network of accountants to rely on for standards differences between nations. With this in mind the accounting industries major players merged to form bigger, more globally competitive brands. (Voigt, 2009; O’Neil, 2011) Since 1989 we have seen the public accounting industry shrink from eight major players to todays “Big Four.” The majority of this consolidation was not due to lack of demand, but rather to merge firms creating competitive advantages by increasing their sheer size, brand recognition, and ability to complete large tasks. The last of these mergers occurred in 1998 leaving five major public accounting firms intact. Arguably the largest disaster in the history of public accounting occurred in 2001. A titan of the energy industry, Enron, was found using regular accounting fraud to over value its books at $100bn. Enron’s hired public accounting firm, Arthur Anderson, was indicted on charges of document shredding related to their audit on Enron. This left us with what is known today as the “Big Four” accounting firms.
This may seem trivial in the globalization of the public accounting industry however the rapid consolidation of firms coupled with new regulations brought about due to the Enron scandal has left large publicly traded companies with only four firms capable of handling audits of their magnitude. Likewise it has left smaller firms less able to take on international contracts. By merging into larger companies, accounting firms benefit from brand recognition, economies of scale and greater shared industry knowledge. They also are able to take on larger clients and overseas operations. Todays “Big Four” firms dominate the global public accounting marketplace and, barring further scandal, will remain that way for years to come. These firms have the industry knowledge and networking power to handle international operations. The globalization of production has also had a profound effect on the accounting industry. Hill refers to the globalization of production as “the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production.” (Hill, 2012, p. 7)
By outsourcing its accounting functions one company to remove a very particular responsibility and places it in the hands of another who focuses only on accounting. This increases productivity and attention on specific accounting tasks while lowering costs and time spent on these tasks, allowing the original company to focus on its core. According to John Heylar’s article Outsourcing: A Passage Out of India from March 15th 2012’s Businessweek, “U.S. companies are exporting skilled white-collar jobs in research, accounting, procurement, and financial analysis.” (Heylar, 2012) He states that an entry level accountant in the United States earns $23 hourly, while in India, China and the Philippines the same level accountant can be hired through an outsourcing firm at less than $13 hourly. Heylar argues that the one saving grace for the industry is that accounting requires a greater understanding of business context and more client interactions.
Because of this Heylar argues for “Nearshoring,” a tactic of outsourcing jobs regionally to remain in the same time zone. He states that outsourcing firms can also hire entry level accountants at around $19 in Costa Rica and Argentina, more than the Indian and Chinese competition, but still a cost savings over an American accountant. (Hill 2012; Heylar 2012) The benefit of remaining in the Western Hemisphere, allowing financial officers to speak with their accountants during the work day, is greater than the savings of shipping these jobs to time zones on the other side of the globe. While many low paying manufacturers are able to benefit from nearshoring to low cost Mexico, US firms can still find profit in shipping their higher paid accounting positions to lower wage areas within the United States. This allows firms to lower costs while keeping valuable skilled jobs within the borders of the United States. This type of nearshoring benefits the company by lowering costs while keeping the offices open during operating hours and having English speaking financial professionals.
We have seen a great deal of corporate nearshoring of many big banks within the United States, sending accounting, human resources and legal jobs from New York City to the less expensive city of Charlotte, North Carolina. Two major challenges to the future of the industry due to globalization include differences in international standards and variances between government regulations. International standards vary in every corner of the globe. The European Union uses International Financial Reporting Standards (IFRS) which was designed in an attempt at becoming a universal global accounting standard. In the United States public accountants use the agreed upon standard set refered to as the US Generally Accepted Accounting Principles (GAAP). Similarly, Britain utilizes its own set of standards known as UK GAAP. China uses Chinese Accounting Standards (CAS), India uses Indian GAAP while Brazil requires its companies to report in two languages – the international IFRS and Brazilian GAAP. This discrepancy in accounting standards from nation to nation is a major obstacle for the entire financial industry.
Shyam Sunder’s 2010 publication in the Journal of Accounting and Public Policy states: “It is widely believed that uniform written standards will result in improved financial reporting; better governance and stewardship of business, not-for-profit, and governmental organizations; and better informed and more efficient financial markets directing capital toward productive deployment.” (Sunder, 2010, p. 100) This argument for a set of international standards, as sought by the IFRS, is important to eliminate confusion between national differences in accounting standards. Sunder says that many accountants believe that implementing one set of standards globally will benefit all businesses. Charles Hill believes the future of accounting will lead to only two major accounting bodies the FASB in the United States and the IASB across the rest of the globe. Furthermore Hill states that the FASB and IASB are making strides to align their standards, “suggesting that differences in accounting across countries may disappear eventually.” (Hill, 2012, 647) (Sunder, 2010; Doupnik & Perera, 2012; Hill 2012)
A second challenge facing a global accounting market is variance in government regulation. In addition to knowing each nations accounting standards, global accountants must consider each countries different laws regarding accounting, have vastly dissimilar tax codes and varied inflation rates. Many countries have code-laws governing corporations which regulate every financial statement required along with the necessary format of each. In other countries, such as the United States, the accounting industry creates and monitors its own accounting standards. The benefit of the latter is that the standards set forth by the industry are more clear than the basic standards set forth by the government. Taxation differences between nations is also a challenge, as each nation sets its own tax code. “The difference between tax and accounting income gives rise to the necessity to account for deferred income taxes, a major issue in the United States in recent years. Deferred income taxes, for many German companies, do not exist at all. This is also true in other code-law countries such as France and Japan.” (Doupnik & Perera, 2012, p.29)
Lastly inflation rates between vary between countries. Companies that do business in multiple nations with different inflation rates will cause difficulty when one branch is in a high inflation country while the other is not. Because of the variance between countries, accountants need to be skilled in adjusting for inflation by marking up assets and expenses, but this increases the taxation amount on these countries due to inflated assets. (Doupnik & Perera, 2012)
The government in China, the world’s largest growth market, recently imposed new standards on international accounting firms. The new regulations, unveiled in May of 2012, require foreign firms to appoint a Chinese national as their chief partner for their Chinese operations. There is fear that China’s government will take this one step further and require all foreign partners in accounting firms doing business in China be Chinese national. The timetable is currently set that only twenty percent of a firms accountants doing business in China may be of non-Chinese decent. This is to allow Chinese nationals in this relatively new industry in China to become better educated and more knowledgeable to become senior partners in these major firms. Furthermore business within China is different than anywhere else in the world, with some state run businesses not operating to make a profit, but only to gain market share for the country. With loose business standards, operating an auditing business in China can be seen as dangerous.
In 2011, Deloitte, the “Big 4” firm with the most employees, found this out. Deloitte had been aggressive going after Chinese contracts to penetrate the growth market as much as possible. The company found themselves involved in fraud investigation, having signed off on the business practices of Chinese companies China Media Express, Longtop Financial and QiHoo 360. Although there is tremendous potential for the accounting industry to grow in China, this shows the need for greater scrutiny while performing audits there than anywhere else in the world as Chinese accounting practices are a known concern. (Rabinovitch, 2012) In conclusion changes in global markets and global production have changed the accounting industry.
The increase in global markets has caused the industry to reduce re-establish itself with fewer players in the game, each with more pieces in the game. It has also caused an increase for the need for global knowledge including a shift from a previous data entry mindset to a new, global outlook, creating a need for greater international awareness. The globalization of production has led to the outsourcing of many basic accounting functions. This allows accountants to focus more on managerial and consultative approaches and less on the financial data entry mindset of the job. The new, global accountant must be multi-disciplined, knowledge seeking and progressive to stay competitive in the new global economy.
Daupnik, T., & Perera, H. (2012). International Accounting. New York, NY: McGraw-Hill. Heylar, J. (2012). Outsourcing: A Passage Out of India. Retrieved from http://www.businessweek.com/articles/2012-03-15/outsourcing-a-passage-out-of-india Hill, C. (2012). International Business: Competing in the Global Marketplace. New York, NY: McGraw Hill. International Association of Outsourcing Professionals. (2012). The 2012 Global Outsourcing 100 and The World’s Best Outsourcing Advisors. New York, NY: IAOP. Intuit. (2011). Intuit 2020 Report, Future of the Accounting Profession, A New Mindset and Model for Thriving in a Connected World. Mountain View, CA: Intuit. O’Neill, J. (2011). The Growth Map: Economic Opportunity in the BRICs and Beyond. New York, NY: Penguin. The Pathways Commission. (2012). The Pathways Commission: Charting a National Strategy for the Next Generation of Accountants. Anaheim, CA: The Pathways Commission. Rabinovich, S. (2012). China Unveils Accounting Sector Overhaul. Retrieved from www.ft.com/cms/s/0/64311374-9a65-11e1-9c98-00144feabdc0.html#axzz2DdTE4s4a Sunder, J. (2010). Adverse effects of uniform written reporting standards on accounting practice, education, and research. Journal of Accounting and Public Policy, Volume 29, 99-114. Voigt, K. (2009). Accounting Grows in Shrinking Economy. Retrieved from http://edition.cnn.com/2009/BUSINESS/11/12/accounting/
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