Auditing

A frequently used tool in strategy evaluation is the audit. Auditing is defined by the American Accounting Association (AAA) as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of cor­respondence between these assertions and established criteria, and communicating the results to interested users.”¹⁴

Auditors examine the financial statements of firms to determine whether they have been pre­pared according to generally accepted accounting principles (GAAP) and whether they fairly represent the activities of the firm. independent auditors use a set of standards called generally accepted auditing standards (GAAS). Public accounting firms often have a consulting arm that provides strategy-evaluation services.

The new era of international financial reporting standards (IFRS) is approaching in the United States, and businesses need to go ahead and get ready to use iFRS. Many U.S. compa­nies now report their finances using both the old GAAP and the new iFRS. “if companies don’t prepare, if they don’t start three years in advance,” warns business professor Donna Street at the University of Dayton, “they’re going to be in big trouble.” The GAAP standards are comprised of 25,000 pages, whereas the IFRS comprises only 5,000 pages, so in that sense IFRS is less cumbersome.

This accounting switch from GAAP to IFRS in the united States will cost businesses millions of dollars in fees and upgraded software systems and training. Certified public accountants in the united States need to study global accounting principles, and business schools should go ahead and begin teaching students the new accounting standards. Most large accounting firms and multinational firms favor the switch to IFRS, saying it will simplify accounting, make it easier for investors to compare firms across countries, and make it easier to raise capital globally. But many smaller firms oppose the upcoming change, believing it will be too costly; some firms are uneasy about the idea of giving an international body the authority to write accounting rules for the united States. Some firms also would pay higher taxes because last in, first out (LIFo) inventory methods are not allowed under IFRS. the international accounting Standards Board (IASB) has publicly expressed “regret” over the slowness in the united States of adopting IFRS.

The U.S. Chamber of Commerce supports a change, saying it will lead to much more cross­border commerce and will help the united States compete in the world economy. Already the European union and 113 nations have adopted or soon plan to use international rules, including Australia, China, India, Mexico, and Canada. So, the united States is likely to adopt IFRS rules, but this switch could unleash a legal and regulatory nightmare. A few u.S. multinational firms already use IFRS for their foreign subsidiaries, such as united technologies (ut), which derives more than 60 percent of its revenues from abroad and is already training its entire staff to use IFRS.

Movement to IFRS from GAAP encompasses a company’s entire operations, including auditing, oversight, cash management, taxes, technology, software, investing, acquiring, merg­ing, importing, exporting, pension planning, and partnering. Switching from GAAP to IFRS is also likely to be plagued by gaping differences in business customs, financial regulations, tax laws, politics, and other factors. One critic of the upcoming switch is Charles Niemeier of the Public Company Accounting Oversight Board, who says the switch “has the potential to be a Tower of Babel,” costing firms millions when they do not even have thousands to spend.

Others say the switch will help u.S. companies raise capital abroad and do business with firms abroad. Perhaps the biggest upside of the switch is that IFRS rules are more streamlined and less complex than GAAP. Lenovo is a big advocate of IFRS, as it desires to be a world com­pany rather than a u.S. or Chinese company, so the faster the switch to IFRS, the better for them. The bottom line is that IFRS is coming to the united States, likely sooner rather than later.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).