Electronic copy available at: http://ssrn.com/abstract=1410084

1

االردن كمثال: انعكاسات التوافق المحاسبي الدولي على االقتصادیات الناشئة

ریاض جاسم العبداهللا. د.أ مالك أحمد الشرایري مملكة البحرین /جامعة البحرین المملكة المتحدة /جامعة درھام

الملخصسبباتھا فأن االكثر اھمیة ھو بالرغم من أھمیة ظاھرة التوافق المحاسبي الدولي وم

استمراریة الجدل بشأن إنعكاساتھا ومضامینھا والنتائج المترتبة عنھا وباالخص في االقتصادیات فالجدل ما زال محتدمًا وعلى اشده بین المؤیدین والمعارضین لموضوع مثل ھذا بسبب . الناشئة

معایرة / شكل من اشكال العولمة ونمطیةاالنطباع المتولد من ان التوافق المحاسبي الدولي ما ھو إالوبالتالي فمن المنطقي االستفسار عما إذا كانت المعاییر المحاسبیة الدولیة، التي یفترض . غیر مرنة

انھا جزء من حقل معرفة إجتماعي كالمحاسبة، المتأثرة والموجھة من قبل الدول المتقدمة ھي ممكنة ففي حالة االردن نرى . لي لالقتصادیات الناشئة كاالردنالتطبیق وفي نفس الوقت تعكس اسلوب مثا

من ناحیة خطوات طموحة بأتجاه تطبیق االصالحات االقتصادیة، بما فیھا االستعانة بالشركات متعددة الجنسیة، التي تحتاج الى ان یكون االردن شریكًا إقتصادیًا فعاًال ومستجیبًا لمتطلبات شراكة

ولكن من ناحیة أخرى ھناك تخوف . بتطبیق المعاییر المحاسبیة الدولیةمن ھذا النوع كااللتزام إن حالة . مشروع من ان المعاییر المحاسبیة الدولیة قد تؤدي الى تغییرات جذریة في الثقافة االردنیة

كحل ممكن لحالة محلیةاالردن تمثل وضعًا مثالیًا القتراح تطبیق مفھوم العولمة المكیفة بالثقافة الالحاصل بین مؤیدي العولمة ومناھضیھا المستندین باالستقطاب جمود الفكري والتطبییقي المتأثرةال

. الى امكانیة التأثیر السيء لعولمة المحاسبة على ثقافات البلدان المختلفة

The Reflections of the International Accounting Harmonization on Emerging Economies: Jordan as an Example

Malek A. R. Alsharairi Prof. Riyadh J. Al-Abdullah Durham University, UK The University of Bahrain, Bahrain

Abstract:

Beyond the phenomenon of international accounting harmonization and its causes, there still a debate on its reflections, implications and consequences, especially in the emerging economies. In addition, there are proponents and opponents for such a topic as it looks like a form of globalization and a rigid standardization. Therefore, it is questionable whether international standards driven by the advanced countries for a social science like accounting can be installed and are optimal for emerging economies with the Jordanian case taken as an example. With this example, it is apparent that there are ambitious steps in applying the economic reform regime on the one hand, however it lacks the large Jordanian multinational companies (MNCs), which are one of the most vocal parties in demanding a cosmopolitan set of accounting standards, on the other hand. The case of Jordan reflects an ideal situation for the use of glocalization as a possible solution for the stagnation in accounting thought and practice influenced by the extreme polarization between the proponents and opponents accounting globalization.

Electronic copy available at: http://ssrn.com/abstract=1410084

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1. Introduction The international accounting harmonization is considered to be a new accounting

phenomenon presented by some advanced countries. This phenomenon started to take

place effectively in 1970's and continues till present (Choi et al, 1999). Demands for

greater comparability and transparency in financial reporting have arisen due to the

increase of international business activities and the greater participation in the global

financial markets. If a firm selects accounting policies that are consistent with

international standards, it will increase the quality of reporting in terms of transparency

and comparability with other companies using the same set of international standards.

Nowadays, advocates of global accounting uniformity believe that the emergence of the

so-called economic globalization and the urgent need for huge capital markets to finance

the governmental privatization policies are major justifications for developing and

adopting international standards for accounting. It could be argued that such standards

would facilitate comparisons among companies’ financial performance across countries

and consequently enhancing the efficient allocation of resources in an increasingly global

capital market. In promotion for such an argument, in 1998, Sir Bryan Carsberg,

Secretary-General of the International Accounting Standards Committee (IASC)

comments on the need for one set of global accounting standards:

“…So the use of different accounting rules in different countries

limits the efficiency of the capital markets in attracting investment

funds to the applications where they will earn best returns and

therefore has some depressing effect on economic growth in general”1

(Eccher and Healy, 2000: 1).

After stimulating the appetite for the need of harmonizing the international accounting

standards to reach a global uniform of financial reporting practices, the IASC was

launched in London in 1973 (Epstein and Mirza, 2001). The goal of the IASC, which

1 “Global Issues and Implementing Core International Accounting Standards: Where Lies IASC's Final

Goal?” Remarks of Sir Bryan Carsberg at the 50th Anniversary Dinner, Japanese Institute of CPAs,

Tokyo, 23 October 1998.

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became the International Accounting Standards Board (IASB) in March 2001, is to create

a single set of understandable and enforceable global pronouncements –International

Accounting Standards (IAS) are issued by IASC, then the International Financial

Reporting Standards (IFRS) are issued by the International Accounting Standards Board

(IASB) (the new name of IASC) – (IASB, 2005) that will help increase transparency,

consistency and comparability in accounting numbers across the globe.

A lot of enormous objectives are assumed to be accomplished through the issuance of

internationally harmonized standards. However, important questions concerning the

impact and the effects of international accounting harmonization in some applying

societies are raised and need to be answered. For instance, the standards developed by the

international regulatory body, the IASB, are primarily based on those standards for

countries with highly developed capital markets, such as US and UK. Nonetheless, these

international standards are still under the stage of development, analysis, comparison and

argument. Furthermore, they have not ascended yet to the level of theory.

Beyond this phenomenon and its causes, there are also various reflections, implications

and consequences, especially in the emerging economies (Eccher and Healy, 2000). In

addition, there are proponents and opponents for such a topic as it looks like a form of

globalization. Therefore, it is questionable whether such standards can be installed and

are optimal for developing economies with the Jordanian case taken as an example. With

this example, it is apparent that there are ambitious steps in applying the economic

reform regime on the one hand, however it lacks the large Jordanian multinational

companies (MNCs), which are one of the most vocal parties in demanding a

cosmopolitan set of accounting standards, on the other hand. The impact of international

accounting harmonization, therefore, is questionable in developing countries.

In this paper, we provide a literature review and a theoretical basis on the potential

reflections by the international accounting harmonization with shedding a light on the

Jordanian case. Our argument in this paper based on the fact that accounting as a social

science is a product of its environment and that the international accounting

harmonization is being perceived as a globalizing force. In the next section we provide an

analytical frame and a literature related to the topic. Then the concept of globalization is

discussed considering both proponents’ and opponents’ perceptions. Afterwards, we give

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a glance on the role of multinational companies in the international harmonization before

discussing the dimensions of the global accounting between the comparative approach

and the uniformity approach. Finally, analytical view is presented on the Jordanian

context in terms of the related regulations, the economic regime and the reaction toward

adopting IAS/IFRS then ending with a conclusion.

2. The Objectives It is beyond doubt that the concept of accounting globalization, which has been stemmed

from the international accounting harmonization, suffers from strong polarization

between its proponents and its opponents. The main declared objectives, as suggested by

its proponents, include improving transparency, consistency and comparability across the

globe which hopefully will lead eventually to movements of capital and all countries

would greatly benefit. The opponents driven by strong accounting globalization phobia

would argue that the above declared goals are not the real ones. It is culture which is

targeted with the ultimate goal being a complete domination and hegemony by western

world on the emerging economies. Our main objectives in this paper are to highlight the

different perspectives and the reflections of the international accounting harmonization

and demonstrate that a possible solution may be acceptable to the polarizing parties

through introducing the concept of glocalization. Jordan is used as an example for the

possibility of applying glocalization since both indigenous factors (historically developed

and accommodated culture and other distinct features in the structure) and exogenous

factors (being active partner at the global arena for economic reform and development

requirements) apparently have an interaction and greatly possibility of integration.

The second main objective is to demonstrate the possibility of striking a compromise

between two powerful factors impacting and causing stagnation to the applicability of

IAS/IFRS; national environment (more preferably called cultural dimensions)

evolutionary and historically modified and IAS/IFRS tailored specifically to serve the

social, political and economic interests of highly developed capitalistic western nations

with totally different evolutionary and historically modified cultural roots from those of

emerging economies.

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3. The Methodology The methodology in any scientific endeavor represents the philosophical tools used to

advance an argument. The main orientation of this research is positively based. However,

positivism here is not based on induction and statistical tools; instead it is mainly based

on logical empiricism since our generalizations are empirical ones. This means that

deduction is used. However, the premises used in the deductive system are not

hypothetical postulates but inductively generated generalizations. For example, the

statement that “accounting system in any country is influenced by various cultural

elements” is an inductively derived generalization that is based on observations made in

the past. The statement that “globalization in accounting leads to less cost for adopting

advanced accounting systems by developing countries” is also an inductively derived

generalization. Therefore, using and combining these inductively derived generalizations

lead to a more relevant theoretical basis which may open more horizons to further

research.

4. Analytical Frame and Literature Review The so-called process of harmonizing international accounting standards is viewed by

many researchers as a tool of globalization (Al-Abdullah, 2000; Kirby, 2001; Rasheed

and Hussein, 2002; Diaconu and Coman, 2006; Baker and Barbu, 2007; Baskerville and

Hay, 2007) and, consequently, this topic became debatable taking the controversial

consequences of globalization specifically on the developing countries (Drache, 1999;

Henry, 2003; Mott, 2004) and sometimes going conservative further by claiming that

harmonization process is structured according to the capitalism, which comes from

powerful economic lobbies resulted from globalization (Rasheed and Hussein, 2002). In

reviewing the literature in this paper we find more focus on the technical issues of the

harmonization process and its consequences and implications afterwards.

Initially, one may ask why national accounting standards differ among various nations.

Ding, Jeanjean and Stolowy (2005) emphasize the role of culture as an explanatory factor

underlying differences between national accounting standards and IAS/IFRS through

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selecting sample of 52 countries2.They show that culture even matters more than legal

origin (common law/civil-law) in explaining divergences from IAS/IFRS and, therefore,

opposition to IAS/IFRS is not exclusively driven by contractual motives, a claimed

technical superiority, or legal origin, but also by diversity in cultural factors. Al-Ani

(2004) provides evidence on the relationship between the cultural framework, which is

important in building the accounting theory and accounting practices, and financial

reporting system.

Ideally, it could be argued that a world-wide integration of economic, legal and political

systems is required to achieve optimum accounting uniformity and comparability, and

alternatively, if these cultural, political, legal and economic dimensions are taken into

considerations whilst the harmonization process, many harmful reflections are likely to

evolve (Ball et al, 2000; El-Jajawy, 2000).

Internationally speaking, on assessing the efforts on international accounting

harmonization, Carmona and Trombetta (2008) and Garrido et al (2001) suggest that the

IAS/IFRS constitute a significant step forward in the process of accounting

harmonization. However, there still a need to continue working towards greater formal

harmonization. To attain the required higher level of harmonization, it could be suggested

to allow more policy options (Tarca, 2003) in the international standards in order to

mitigate the gaps and to converge different national standards. Carmona and Trombetta

(2008) suggest that the current standards are flexible enough to enable the application of

IAS/IFRS to countries with diverse accounting traditions and varying institutional

conditions. However, major changes are expected in the expertise, the educational

background and training programs held by accountants, and in the organizational and

business models of accounting firms (Carmona and Trombetta 2008; McGee and

Preobragenskaya 2004; McGee and Preobragenskaya, 2003). Nonetheless, there is still

far to go in the comparability of accounting measures across countries and regions,

knowing the fact that a complete and perfect comparability would also require a uniform

set of international manager and auditor incentives (Ball et al, 2000)

Eccher and Healy (2000) examine the usefulness of applying IAS in a transitional

economy, considering China as a case, and they claim that IAS are based largely on UK

2 It is worth to mention that Morocco and Iran are included in the sample.

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and US accounting standards, in addition, the absence of effective controls and

infrastructure in China to monitor the additional reporting judgment available to

managers under IAS. This illustrates the potential incompatibility between the IAS/IFRS

and a transitional environment on which these standards are applied.

The same sort of argument is addressed by some empirical evidence, which also suggests

the high level of proximity between IAS/IFRS and US-GAAP explicitly (Eccher and

Healy, 2000; Leuz, 2002) or implicitly (Dunagploy and Gray, 2005) in terms of the

resulted accounting information under each set of standards. Dunagploy and Gray (2005)

found that the difference statistically in key financial ratios between US-GAAP and

Japanese-GAAP (after being revamped in line with IAS/IFRS) is not significant and Leuz

(2002) emphasize the same result after finding that the differences in key financial

variables in the financial statements prepared under IAS and those prepared under US

GAAP firms are statistically insignificant and economically small.

However, an interesting evidence provided by Christensen, Lee and Walker (2007) on

examining the economic consequences for UK firms of the European Union's decision to

impose mandatory IAS/IFRS. They find that mandatory IFRS adoption does not benefit

all firms in a uniform way but results in relative winners and losers. As of January 1,

2005, all European Union companies with shares listed on securities exchanges are

required to prepare their consolidated accounts in accordance with IAS/IFRS (Baker and

Barbu, 2007). In this occasion, the role of multinational companies (MNCs) in

demanding, supporting and disseminating the international standards (Ruder, Canfield,

and Hollister, 2005) could be found mentioned in the literature since 1973. Savoie (1973)

warns the increased power of MNCs, which has raised a lot of criticism and he suggests

that harmonization of the world standards should be the response.

In a more focused view within the context of Jordan, Al-Jajawy and Noor (2003)

examine the application of IAS/IFRS in the Jordanian environment, the role of auditors

and companies in the application, and the role of universities and other academic

institutions to improve the compatibility and harmony. They found that the academic

environment varies in the level of compatibility with IAS/IFRS, and the practical

environment varies in the level of application of IAS/IFRS as well. They conclude that it

is necessary to focus more on the study of factors and elements to achieve more

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appropriate compatibility and perfect application of IAS/IFRS. Moreover, the

compatibility between the legal infrastructure and the plugged in accounting standards is

one of the most basic requirements to allow these standards work properly in serving

accounting profession. Al-Abbadi (2003) highlights this issue in Jordan by studying and

analyzing the degree of compatibility of the items of the Jordanian income tax law, with

the requirements of the IAS/IFRS and examining the extent of commitment of the

Department of Income Tax to the use and application of the IAS/IFRS. His evidence

states that there is no compatibility between the income tax laws and IAS/IFRS in many

aspects, and as a result there is a great difference between the auditory profit and the tax

profit. Therefore, he recommends that the sample system should be applied in a better

way when considering the IAS/IFRS and taking them into account in tax regulations and

laws.

To shed light on the capital markets and financial statements effects of adopting the

international standards, the literature shows that some accounting information under the

international standards are generally value relevant, some other information (such as the

adjustments to income) are generally value irrelevant compared to the same information

provided based on the national standards as in Germany for example (Hung and

Subramanyam, 2004). Empirical evidence, which is provided by Assa'aideh (1997) on

investigating the impact of adopting IAS in Jordan on the usefulness of accounting

information to market investor, reveals a significant improvement in the correlation with,

and the predictive ability of financial leverage of equity market risk measures and he

concludes that adopting IAS has been partially effective, however, fewer methods and

choices in IAS and more compliance with them are still needed in order to limit the

management ability to manipulate published accounting information which reduces its

usefulness to market investors. Nonetheless, an inconsistent evidence provided by

Juhmani (1998), who examines the effect of introducing IAS on the Jordanian stock

exchange during the period 1990-1991. Juhmani (1998) finds that the adoption of IAS

does not increase the information content of financial statements. He also presents

evidence that although IAS adoption has little influence on Jordanian domestic-owned

firms' share price reactions, there is a considerable effect on foreign-owned firms' share

prices.

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This quick glance on the literature shows the interrelationships between globalization,

MNCs and harmonization and that establishing a global set of accounting standards

cannot be done by only translating these standards into different languages without

considering the substantial cultural, legal, economic and political variables (Diaconu and

Coman 2006).

5. Globalization Vs Glocalization: Proponents and Opponents of

Globalization Cancelling the customized-nationally standards and replace them by having one set of

standards to be applied on the globe sounds much related to the term globalization.

However, more than one definition of globalization can be found and they are different

explicitly but they all have the same essence, which is the "integration", "convergence" or

"intensification" of worldwide aspects in some sense Many writers (Kiely and Marfleet,

1998; Mott 2002; Graham and Neu, 2003) agree that globalization is best defined by

David Harvey as "a compression or overcoming of both distance and time, and noting the

variety of effects this has on social and cultural relations" (Harvey, 1989:240). Within

accounting literature, prior research on economic globalization has focused on the role of

financial market liberalization and the harmonization of accounting standards in

encouraging the spread of common practices (Al-Abdullah, 2000; Al-Jajawy, 2000;

Graham and Neu, 2003; Ghadar, 2004). So far, globalization is still a debatable topic

under the shadow of the distinct cut rural backgrounds. To the vast majority of

economists, political scientists, and political commentators globalization is a "friendly

force" (Gundlach and Nunnenkamp, 1996), leading the world ultimately to the era of

converging world economies, converging institutions as democracy becomes a universal

norm, and cultural richness as people of different background interact more frequently.

However, this view has been opposed by many. For example, Branko Milanovic in World

Bank argues that:

"We shall show here that this view of globalization is based on one

serious methodological error: a systematic ignorance of the double-

sided nature of globalization, that is systematic ignorance of its

malignant side" (Milanovic, 2002:3).

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In the above stated argument, there is an obvious indication to the double-sided effect of

globalization which leads theorists, thinkers, commentators and critics to ramify into two

groups; proponents and opponents regarding the potential cultural and economic impacts.

Proponent Perception:

Proponents suggest that the ultimate openness under the umbrella of globalization offers

better chances for developing countries to catch up with the industrialized countries as

well as to achieve an economic reform, especially after the emergence of Washington

Agreement in 1989, which was suggested by the American economist John Williamson,

in a form of Ten Recommendations toward the broken-down communistic countries

(Kikso, 2002). Globalization is perceived by its proponents as a mean to ease the inflow

of capital and technology, thus, helping to increase the rate of factor accumulation

beyond the level to be financed by domestic savings (Gundlach and Nunnenkamp, 1996).

Others argue that countries that rank high in economic freedom and trade openness also

rank high on social (e.g. infant mortality, longevity, etc.) and economic indicators (GDP

growth, GDP per capita, income share of the poorest, etc.) (Mejia-Vergnaud, 2004). They

believe that those countries with greater barriers to trade and economic activity exhibit

high poverty and low levels of human development. Moreover, they argue that critics of

globalization have conveniently chosen to ignore the obvious link between closed

markets and corruption. Therefore, in a corrupt and closed economic environment, the

gains from economic activity are more likely to be captured by elites, and then, increase

economic inequality (Mejia-Vergnaud, 2004). Some suggest that the improvement

toward welfare is a direct result of the increase in globalization in both developing and

developed countries. However, this requires an open market, protection of private

property rights, the rule of law, privatization of public assets and limited government

intervention. These suggestions with an empirical study taking the following social

indicators into consideration: 1) individual rights (measured by child labor and human

development), 2) income distribution, 3) health, 4) the environmental effects, 5) gender

equality (Quinlivan and Davies, 2003).

The implication for accounting would be obvious then. As any other globalization tool,

accounting would work well for everybody and everybody would accordingly be well-

off.

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However, globalists believe that globalization also reduces the degrees of freedom of

economic policy making in developing countries (Gundlach and Nunnenkamp, 1996),

and they support the economic policies that assist disadvantaged and poor countries

through both: multilateral grants (not loans) and trade policies that would create millions

of jobs (Quinlivan and Davies, 2003).

The effects of globalization on developing countries which are perceived by globalists

can be summed up and summarized as follows:

1- Developing countries are economically benefited from the industrialized countries.

2- Easing the inflow of capital and technology into developing countries.

3- Increasing the rate of factor accumulation beyond the level to be financed by

developing countries domestically.

4- Earning a high rank on social indicators as well as economic indicators.

5- Squeezing poverty and maximizing the levels of human development.

6- Reducing corruption which is combined with the closed economic environments.

7- Contributing to economic equality.

8- Improving social welfare represented by human development, gender equality,

income distribution, health and environmental conditions.

9- Creating more job vacancies and contributing to employment.

10- Attaining multilateral grants.

11- Losing the freedom of making an economic-policy decision.

Opponent Perception:

In view of the fact that opponents of globalization suggest that the globalizing movement

is being led by capitalism, which is related to pure Euro-American origins, it will not be

surprising to find that most anti-globalists are from developing countries. The central

argument of anti-globalists that there are "invisible hands" behind globalization aiming at

demonstrating supremacy on developing countries by advanced counties (Sulaiman,

1999; Ragheb, 2001; Al-Abdullah, 2000; Tahoon, 2003; Ghadar, 2004). They also argue

that globalization is a kind of colonialism or imperialism permitting one party to control

another one. The former produces informational tools, methods and techniques in order to

spread facts, knowledge, values, culture, standards and rules from its "own" perspective

to the latter. Then ultimately the following clear classification of the world comes up.

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Producing party (an active sender) that controls and imposes its environment

conceptually and materially and, on the other hand, consuming party (a passive recipient)

which is fascinated by the easiness of obtaining information, knowledge, entertainment

and other products. (Tahoon, 2003). This relationship between the producing and

consuming parties impairs the equilibria at different levels of flow of "things" leading

more poverty in the developing countries and more richness in the advanced countries.

Consequently, the gap between the rich and the poor countries is getting wider. Even

capital flows into developing countries, sometimes, have considerable negative effects on

economies. Examples of economic crises resulted from the liberalization of capital flows

are obvious in Mexico (1994), South East Asia (1997), Russia (1998) and Brazil (1999)

(Khateeb, 2002; Titawi, 2002).

According to the Islamic philosophy, economic activities are bounded by many ethical

values and principles that prohibit unfairness, deception, usury, monopoly and so on. This

philosophy does not consider "profit maximization" as the highest goal of economic

activity as it is in the case of the capitalistic system. Thus, any activity that does not agree

with these high values would be prohibited and not allowed by Islam. Since the economic

globalization is considered to be an extension of "unfair" capitalism, then the Islamic

system is conservative and cautious of this phenomenon.

The effects of globalization which are perceived by anti-globalists on developing

countries can be summed up and summarized as follows:

1- There are "invisible hands" behind globalization aiming at demonstrating

supremacy on developing countries by advanced counties.

2- Globalization is a kind of colonialism and imperialism.

3- Globalization allows advanced countries to spread its knowledge, values, culture,

standards and rules to developing countries.

4- Globalization impairs the equilibria at different levels. This implies more poverty in

developing countries and more richness in advanced countries.

5- Economic crises can be resulted from liberalization of capital flows.

6- International organizations are established to impose certain plans, rules and

conditions on the Third World but in behalf of the advanced countries.

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7- International organizations and advanced countries trick the developing countries to

uncover their markets, resources and other information through the promotion for

"transparency".

8- Globalization is an extension of "unfair" capitalism.

9- Globalization impairs the ethical values of Islamic philosophy and, thus, it is

resisted by the Islamic system.

From an accounting perspective, the anti-globalists argue that accounting is employed in

the globalization process and it would then disseminate western values around the globe.

So they would discredit accounting globalization benefits and accordingly would raise an

obvious red flag pertaining to the detrimental effects of accounting globalization on

cultural, economic, and political aspects of most countries of the world.

Glocalization as a reformed Globalization:

While globalization is critiqued as a biased power, a new concept arose, glocalization.

The term was modeled on Japanese word dochakuka, which originally meant as a concept

arose to help mitigate the conceptual difficulties of global-local relationship (Khondker,

2004). The word and the concept came from Japan and it is composed of Globalization-

Localization. It is defined by Wordspy3 “the creation of products or services intended for

the global market, but customized to suit the local cultures.” (Khondker, 2004). For more

illustration, if a marketing plan of an international restaurant series recommends to adjust

the menu according to each country’s distinct cultural and social norms this can be

described by glocalization, i.e. a global product is modified to fit the local “endogenous”

system. If these international products are introduced to different societies as they are

without any adjustments, probably they will not sell.

In the accounting harmonization literature, we could not find any previous use of this

term, which has been intelligently used by many researchers in the social, political and

even psychological sciences to describe the need of “indigenization” whilst the process of

globalization because it raises questions about the applicability of social scientific ideas

and concepts (Khondker, 2004). One basic question arises here as an example on the need

of employing this concept in the accounting harmonization –at least at this stage of the

process-, do all countries have the same regulatory, legal and taxation frames? Some

3 http://www.wordspy.com/words/

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studies show that incompatibilities can be found between the applicable code of tax and

the international standards of accounting (Al-Abbadi, 2003) for example, which implies

the need of either having “glocalizable” international standards or then local legal

modifications will be urgent.

6. The Multinational Companies (MNCs): a Key Player As it is mentioned above, globalization means a closer international integration of

markets and production, or, in general, the liberalization of the trade. This means that

firms can place their production around the world, and source inputs from different

countries. This would be better by harmonizing the atmosphere of international

environment regarding many aspects. Governments, laws, rules, accounting standards,

norms, cultures, technologies and languages are examples. It is noticeable that this kind

of business, international or multinational, has emanated from globalization. It refers to

Multinational Companies (MNCs), Multinational Enterprises (MNEs) or sometimes

Transnational Companies (TNCs). The simplest definition of MNC is "a business

organization operating in more than one country" (Miller, 1979:3; Kiely and Marfleet,

1998:50). However, the definition constructed by Professor Raymond Vernon of Harvard

University is widely used. It depicts an MNC as a "parent" or dominant enterprise

controlling the operations of a network of foreign corporations and furnishing them with

"common" objectives, strategies and resources (Miller, 1979).

US-based MNCs responded to particular conditions; market saturation in some sectors, a

developed international communications and transportation system, and growing

economic challenge to the US from Europe and Japan (Kiely and Marfleet, 1998; ILO,

1981). European and Japanese companies have followed the steps of the US companies to

increase the direct foreign investment. This has resulted in some giant MNCs whose

assets are comparable to some developing countries GNPs and they started to dominate

some important decisions on the international arena. During the 1970s, the growing

problems associated with the emergence of MNCs, as well as international accounting

diversity, began to attract interest. These resulted in the establishment of IASC in 1973.

At the same wise, the U.N. Economic and Social Council focused on this area by

15

appointing a study group which eventually led to the creation of a U.N. Commission on

Transnational Corporation in 1976 (Evans et al, 1985).

Views regarding the effects of multinationals on the developing economies vary,

supposing one of them is a host country4. These opinions can be categorized into two

categories; the optimistic versus pessimistic view. In the optimistic view, three types of

effects may be distinguished (1) net macro-economic impact, such as adding to total

national income and to the host government's revenue and foreign exchange availability,

(2) horizontal impact, which is the impact of MNCs on other enterprises that compete

with them or are otherwise linked to them through various market-structure mechanisms

and (3) vertical linkage impact, which is the impact of MNCs on employment in other

enterprises directly linked to them in the production chain, by selling or buying from

them (ILO, 1981).

On the other hand, MNCs are charged with some concerns, as a pessimistic view, by

developing countries. An example of these concerns, which is not all-inclusive, such as

having the power to be above any government and abrogating the sovereignty of the local

government, competing unfairly, fostering technological dependence, lacking social

responsibility, destroying stability of labor markets, disrupting foreign exchange markets,

exploiting local resources and capital and evading taxes (Miller, 1979).

From an accounting perspective, since the international accounting harmonization

primarily serve this kind of organizations, it could be argued that accounting

harmonization ease the spread of MNCs, and at the same time, support greatly the spread

of IAS/IFRS in all the host countries where their subsidiaries operate. Therefore, a debate

regarding the association between the international accounting harmonization and MNCs

might arise also when the positive and negative effects of MNCs are taken into

consideration.

7. Global Accounting: Uniformity Vs. Comparative As a result of the growing importance of financial and economic globalization5, more

awareness by the accounting profession has recognized the need to establish a uniform

set of accounting standards that would be valid at the international or global level.

4 Host country is the country in which a subsidiary operates and is located. 5 The concept of Globalization and Economic Globalization is discussed in Part 2 of this chapter.

16

More specifically, it could be said that globalizing or internationalizing of accounting is

induced by the following four critical factors: 1- Multinational enterprise6 operations, 2-

Globalization of money capital markets, 3- International nature of some technical

accounting problems, and 4- Historical antecedents (Choi and Mueller, 1984).

When talking about international, global, universal or world accounting, there is

confusion in the literature regarding these concepts. A good definition for the purpose of

this study is set by Weirich et al as follows:

"International accounting is considered to be a universal system that could be

adopted in all countries. A worldwide set of generally accepted accounting

principles (GAAP), such as the set maintained in the United States, would be

applicable to all countries. This concept would be the ultimate goal of an

international system" (Weirich et al, 1971:80).

It could be said that, on one hand, an ideal condition is to have a complete "uniformity"

of accounting standards in order to be adopted by all countries around the globe. On the

other hand, a concept of "comparative international accounting" directs international

accounting to understand, study and analytically classify national accounting systems as

has been done in the other social sciences such as economics, politics and laws. This

involves an awareness of the international diversity in corporate accounting,

understanding of the accounting standards and practices of each country, and assessing

the impact of diverse accounting practices on financial reporting.

Many have investigated the determinants and factors influencing the accounting

standards, practices and financial reporting. For example, Nobes and Parker (1991) have

set the following seven factors that may explain the financial reporting differences

internationally: 1- Legal systems, 2- Providers of finance, 3- Taxation, 4- The accounting

profession, 5- Inflation, 6- Theory, and 7- The accidents of history. Belkaoui (1985)

believes that five environmental factors are affecting the determination of accounting

standards, namely; 1- cultural relativism, 2- linguistic relativism, 3- political and civil

relativism, 4- economic and demographic relativism, and 5- legal and tax relativism.

While others, such as Arpan and Al Hashim (1984), suggest these determinants as only

6 The concept of Multinational enterprise (MNE) is discussed in Part 2 of this chapter.

17

four, namely; 1- the differences in accounting uses, users and preparers, 2- socio-cultural

differences, 3- legal and political differences, and 4- economic conditions.

Given these determinants of accounting standards while assessing the logic, applicability

or relevancy of both uniformity and comparative concepts, it is noticeable that

uniformity, as an ideal state, requires a maximum level of homogeneity for the

international environment in terms of culture, language, policies, civilization, economics,

demographics, laws and taxing systems in order to achieve the optimum compatibility

between the standards and the environment, whereas the comparative theorem of

international standards seems to be more logical but serves at the national level, and

might not be useful internationally.

Such a debate does exist between those favoring "uniformity", and those preferring a

"comparative" analysis of different national accounting systems. The argument of those

supporting the comparative standards that accounting is influenced by accounting

objectives, cultures, policies and techniques result from the environment factors in each

country since these environmental factors differ significantly between countries. It would

be expected that the major accounting concepts and practices in various countries would

also differ. Therefore, the environmental conditions affect the determination of

accounting standards as it is shown above. However, there is an internationally organized

trend toward uniformity which is represented by the process of International Accounting

Harmonization.

International Accounting Harmonization:

Indeed, the starting point of the efforts of international accounting standards setting in

1959 is credited to Jacob Kraayenhof7, who urges that the work on international

accounting standards ought to begin. In 1961, "Groupe d'Etudes"8 was established in

Europe to advise European authorities on matters concerning accounting. Then in 1966

Accountants International Study Group was formed by professional institutes in Canada,

United Kingdom and the United States of America (Choi et al, 1999). In June 1973,

IASC was founded to be charged with the issuance of IAS, but later it changed its name

into IASB, which has issued the IFRS (IASB, 2005).

7 A founding partner of a major European firm of independent accountants. 8 An association of practicing accounting professionals.

18

During this phase, a debate regarding two concepts associated with the efforts of the

uniformity of accounting standards namely, "standardization" and "harmonization" has

been existed. In fact, it could be said that the term "standardization" has some rigidity

since it implies no flexibility in a given set of standards, then incompatibility with

different applying environments might arise. Generally, standardization means the

imposition of a rigid and narrow set of rules, and may even apply a single standard or rule

to all situations (Nobes and Parker, 1991).

Therefore, using the word "harmonization" sounds more favorable to remove this rigidity

since harmonization is defined as a process of increasing the compatibility of accounting

practices by setting limits on how much they can vary (Choi et al,1999). Thus,

harmonization implies a reconciliation (bringing together) of different points of view.

This is more practical and logical when the formation of accounting standards at the

global level takes place.

A third related concept, which is not commonly used, has appeared and used especially in

the European literature is "normalization". English "standards" being called "norme" in

French, the process of "standardization" is translated by "normalization" (Barbu, 2004:5).

According to Barbu's opinion (2004), normalization is situated between harmonization

and standardization.

However, it is argued that every country has its own sets of rules, philosophies, and

objectives at the national level aiming at protecting or controlling the national resources.

This aspect of nationalism gives rise to particular rules and measures which ultimately

affect a country's accounting system. It is suggested that harmonization requires: (1)

recognizing these national particularities, (2) attempting to reconcile them with other

countries' objectives, and (3) correcting or eliminating some of these barriers in order to

achieve an acceptable degree of harmonization (Belkaoui, 2004).

This agrees somehow with the scientific logic suggested by Al-Abdullah (2000), in which

he argues that determining the causes and providing explanations and justifications is a

must to conclude a scientific result. Otherwise, globalization of accounting could suffer a

complete absence of scientific logic.

19

It is fair to mention that international harmonization could have the following advantages

and disadvantages (Choi et al,1999; Al-Abdullah, 2000; Epstein and Mirza, 2001;

Belkaoui, 2004).

Advantages of international harmonization:

1- The comparability of international financial information.

2- Set-up cost and time saving for those countries which have no adequate codified

standards of accounting and auditing.

3- Time and money saving that is spent to consolidate divergent financial information,

which could lead the international financial markets to be more efficient.

4- The tendency for accounting standards throughout the world to be raised to the

highest possible level and to be consistent with local economic, legal and social

conditions9.

Disadvantages of international harmonization:

1- International standards could not be flexible enough to handle differences in national

backgrounds, traditions and economic environments.

2- It would be a politically unacceptable challenge to national sovereignty.

3- Tax-collection systems vary internationally. Since this requires diversity in

accounting standards and systems used internationally, it creates "standards overload".

4- Corporations that must respond to an ever-growing array of national, social, political

and economic pressures are hard pressed to comply with additional complex and costly

international requirements.

8. Harmonization and the Context of Jordan Jordan has become a member of the board of IASC since 1988 (IASB, 2005). The Jordan

Association of Certified Public Accountants (JACPA) recommended the adoption of IAS

in the 1988 and 1989 fiscal years but mandated them for 1990 and beyond by its Board of

Management' Decision number (54) on March 13, 1989 (Assa'aideh, 1997).

Moreover, Article number (42) of Chapter (6), which is issued by the Board of

Commissioners of the Securities Commission pursuant to Articles (9) and (53) of the

9 Choi et al refer this point to Turner, John N. (1983). International Harmonization: A Professional Goal. Journal of Accountancy. January, pp. 58-59.

20

Securities Law, No. (23) for the year 1997, states that all entities subject to the

Commission's monitoring shall apply IAS issued by the IASC, unless there is a conflict

between these standards and the legislation in force in Jordan, otherwise, the national

legislation shall supersede, then the Directives of Disclosure and Auditing and

Accounting Standards issued under No. (1) for 1998 (JSC, 2005). The aims of these

directives, referring to Jordanian Securities and Commissions (JSC), are to maintain fair

dealing in securities, enhance the trust of investors and savers and achieve transparency

in the market in line with international standards.

Furthermore, the Jordanian legislation mandates the application of the international

standards. According to the Articles (62), (75), (184), (195), (201) and (208) of The

Jordanian Companies Law No. (22) for the year 1997 with its latest modifications, there

are explicit indications of subjugating each of the limited liability companies, closely

held (private) corporations and publicly held corporations to provide their accounts and

financial statements in accordance with the internationally accepted standards, at the

same vein, the auditor is responsible to follow the international auditing standards to

examine the companies' appliance of the international accounting standards.

It is fair to mention that economic reform have become a part of the overall economic

package that the government adopted in the early nineties and after the economic crisis

that affected the country.

The economic reform process in Jordan initiated in 1989, through signing arrangements

with the International Monetary Fund (IMF). However, the period 1999-2008 marked

with remarkable reform effort under the new regime of King Abdullah II, who made

economic reform one of his top priorities and launched a many initiatives and projects

aiming at promoting economic development (Alissa, 2007). This period has also

characterized by an accelerated economic developments at the global scene in terms of

globalization, increasing of competition, lifting of tariffs and administrative barriers to

liberate international trade, capital flows, the communications and information

revolution, privatization process and a dramatic involvement of the Jordanian economy in

the global economy (ASE, 2005; MOF, 2005). Thus, the Jordanian choice is to open up

to the world through the international economic tools such as adopting international

standards -including IAS/IFRS- and developing partnership agreements by signing three

21

free trade agreements with the United States, in 2000, and the European Union, effective

2002, and gained accession to the World Trade Organization (WTO) in 2000 (Alissa,

2007).

The concept of glocalization perfectly fits the Jordanian situation. On the one hand, there

are deep national cultural roots, which include Islamic rules, collectivism, social harmony

and integration, and on the other hand the economic reform is consistent with various

economic developments and requirements (i.e. the use of international standards)

imposed at the international arena. This inevitably imposes a type of fittingness on the

international accounting standards. The end result of such modifications (fittingness) is

the glocalization of IAS/IFRS. This allows a compromise to be achieved between the

indigenous and exogenous culture in order to prevent the ultimate social, political and

economic upheavals and uncalculated radical changes brought about by the mere

translation of IAS/IFRS and at the same time avoids being behinds closed doors; thus

missing any opportunity to fit oneself and take advantages of the huge developments in

accounting thought and practice associated with highly developed IAS/IFRS.

9. Conclusion and Recommendations The international accounting harmonization is perceived as a contemporary phenomenon

with questionable reflections, implications and consequences, especially in the emerging

economies. The increasing debate on this issue ramifies commentators into proponents

and opponents as it has been being viewed as a tool of globalization and creating rigid

standardization following the Western domination. Therefore, it is controversial whether

international standards for a social science like accounting, which are also driven by the

advanced countries, can be installed and are optimal for emerging economies with the

Jordanian case taken as an example. With this example, it is apparent that there are

ambitious steps in applying the economic reform regime on the one hand, however it

lacks the large Jordanian multinational companies (MNCs), which are one of the most

vocal parties in demanding a cosmopolitan set of accounting standards, on the other hand.

Generally, the distinctiveness of each country and the differences among them should be

taken into consideration in the process of setting international standards. A new concept

can illustrate and facilitate this situation, glocalization. In the accounting harmonization

22

literature, we could not find any previous use of this term, which has been intelligently

used by many researchers in the social, political and even psychological sciences to

describe the need of “indigenization” whilst the process of globalization. Therefore,

IASB should permit more flexibility when setting any standards to actually harmonize,

but not standardize, the international standards then international standards should be

examined and tested before adopting them, to ensure their impact and appropriateness

while applying.

Finally, economic globalization could have double-sided effects. While it holds many

economic benefits, it should be dealt with carefully to ensure that this does imply drastic

cultural and economic impacts. These impacts could evolve in case of hosting the huge

foreign MNCs as well. However, going back since the start of economic reform process

in Jordan through integrating the Jordanian economy in the global economy and through

getting the accession into many international organizations and partnerships, it could be

concluded that the Jordanian choice of being involved in the international accounting

harmonization is a justified choice and a consistent policy with the current economic

regime.

23

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