 Hello, and welcome to the session. This is Professor Farhad. In this session, we're going to be looking at challenges caused by accounting diversity. In the prior two sessions, we looked at why diversity exists. What are some of the reasons? In this session, we're going to look at the challenges. This topic is covered in international accounting course and to a lesser degree covered on the CPA exam. As always, I would like to remind you, my viewers, to connect with me on a professional level via LinkedIn. If you don't have a LinkedIn account, I suggest you create one. If you do have one, please connect with me. You want to make sure you subscribe to my YouTube. YouTube is where I house all my lectures. I have over 1,500 accounting, tax, and auditing lectures. Please like my lectures, subscribe to the channel, share them with others, put them in the playlist, let the world know about them. If you are benefiting from my lectures, there's a good chance that other people might benefit as well. This is my Instagram account. I'm trying to grow my Instagram account. This is my Facebook account. I do have a premium product. If you're looking to study for your CPA exam and on my website, you can get in touch with me. We're going to look at this in this session at problem caused by accounting diversity. We're going to break them down into four problems. The first problem is preparation of consolidated financial statement, two access to foreign capital market, three comparability of financial statements, four lack of high quality accounting information. As always, if you listen to my lectures, every time I have a list, I'll go through that list and explain each point separately on a separate and on a separate PowerPoint slides. So let's start by the looking at the preparation of consolidated financial statements. What are the, what are the issues here? Think about if a company in the US, let's assume GM, General Motors, is a US company. It's listed on the US on the on the NYSE. Well, guess what's going to happen if they are operating in Mexico, they are operating in China, they're operating in Japan, what they have to do, they have to comply with local regulation, then they have their books and local currency, the books and local currency, they will need to be translated. That's, you know, then you have local accounting principle, then different from the listed country. So whatever they follow accounting principle, that might be different. So they have to do, they have to make an adjustment for that, and they have to make an adjustment for the currency. What does that mean for GM or for any US company? Well, there's a considerable effort that they have to make to undertake. There is additional cost, because you need to be familiar, you need to hire people that are familiar with both system, and you need the expertise in different countries accounting standard. So you need more qualified people which is going to create cost for you. But look at it, look at the silver lining from an accounting perspective. If you are an accounting student, if you're a CPA, then that's good news for you, because that's going to create more value for you and more, more, more jobs. So this is from the, the aspect of preparing consolidated because you need to combine those financial statement. Another problem is access to foreign market, foreign capital market. What does that mean? It means if a company would like to list their stock or they would like to raise money on a certain stock exchange, they have to comply with the requirement of that stock exchange. So require financial statements as per local accounting standard. For example, if you are a Japanese company, if you're a European company and you'd like to be listed on the New York Stock Exchange, you have to, you have to convert your financial statements into US GAAP. So what does that mean? Again, considerable effort and cost involved. A case in point, it's in your textbook, it's Daimler Kreisler, who was the first German company to be listed on the New York Stock Exchange, I believe in the early 80s, 92 or 93, early 90s, not 80s. What happened is this, it cost them $60 million in administrative cost, accounting legal compliance to comply with the SEC rules to convert their financial statement into GAAP, and it's going to cost them 15 to 20 million in subsequent year in disclosure costs to maintain their listing privilege on the New York Stock Exchange. So there's a lot of money being, being, being, being spent to be listed in a foreign capital market. And the reason is, is because your accounting standard, your accounting record are different than what the NYSE required. And look, they're spending money in a sense, it's non-value added because what Daimler, Daimler Benz do is, or Kreisler, is manufacturer car. So they're spending money on something other than manufacturing car. So it's considered non-value added activity. A third challenge for diversity is comparability of financial statements. What does that mean? It means when you're looking at two financial statements, for example, if you're looking at Verifone versus Verizon, you cannot compare them because they are prepared differently. There's a lack of comparability. This way, if you are an investor, that's going to adverse negatively affect you. If you're an investor, you might have to learn the system or hire someone to explain the difference between the two financial statements. If you're looking to invest in two different countries, that's going to create problems for lending institution. Because before you lend money, if you go to a foreign bank, they have to understand your financial statements, performance analysis, how you, how you measure profit might be different than how I measure profit. So if I'm looking at return on asset, return on investment to analyze, to, to analyze your performance or your debt to equity ratio, I'm going to have to find out exactly how you came up with your debt, how you came up with your equity. Okay. Also, it's going to create problems for foreign acquisition decision. If you're trying to buy a company, you're going to have to value the receivable, their sales, what is their foreign currency risk? All in all, you're going to have to do more due diligence. What does more due diligence translate into for the company? More cost. Again, more cost means less value added. Well, more cost means better for accounting. Again, looking at it from a job perspective. The fourth, the fourth challenge is the lack of high quality accounting information. Now, if you are dealing with a developed country like the US, you might have better quality, higher quality accounting information than less developed countries. Okay. Also, unless developed countries, you might have weak corporate governance. You might have a lack of high quality of accounting standard. You might have an adequate risk assessment or a lack of appropriate disclosure requirements. So those could be all issues in one way or another that are present in the accounting record of a foreign company. Okay. Why? Because they're using different accounting standard. And especially for disclosure, for example, they might have disclosure deficiency in terms of related party transaction of balance sheet financing. Maybe they don't have something called off-balance sheet financing. If something is off-balance sheet, you never know about it. Well, there's no hint in the financial statements. I'm not saying I know I said the US is a developed country, but again, the US is not perfect. No system is perfect. For example, we had this problem with off-balance sheet financing. For example, Enron. Enron had many off-balance sheet financing, which was hitting in planned site using accounting record. So I'm just saying that those issues could exist. High exposure to foreign exchange risk or they may not disclose that exposure. They may not disclose it properly under financial statements. They might invest in highly speculative assets, which they may not disclose as highly speculative. You may not know it's highly speculative. So you have to do more due diligence because there is not enough disclosure. Contingent liabilities guaranteeing foreign currency loans. You might have contingent liabilities that are not properly disclosed or you might have low slant provisions that are not properly disclosed. All of these are risks, risk of disclosure. The company is not disclosing enough because the accounting standard does not require you. Remember the secrecy that we talk about because the accounting system is value secrecy and they may think those are secret information that's benefiting the company itself, but it might harm the lenders and it might harm the investors if they don't really understand the risk that they are getting into. All in all, as you can see from all these challenges, we need a system that's going to help us understand all these financial statements. So that's why the IFRS or the international accounting standard board, they're trying to have one system or we have international convergence of financial reporting. And this is what we're going to be talking about in the next session, international convergence. How are we going to try to minimize the differences or try to harmonize all the differences into one system or try to create a single set of international accounting standard that can be followed by all companies across the globe? Not an easy factor as we talked about in the prior session about the reasons why we have accounting diversity. So it's not easy to overcome all these diversities and have one accounting system and especially cultural differences. If you have any questions about this topic, please email me. If you happen to visit my website for additional lectures, please consider donating. Good luck.