Problems Caused by Accounting Diversity

The diversity in accounting practice across countries causes problems that can be quite serious for some parties. One problem relates to the preparation of consolidated financial statements by companies with foreign operations. Consider General Motors Corporation, which has subsidiaries in more than 50 countries around the world. Each subsidiary incorporated in the country in which it is located is required to prepare financial statements in accordance with local regulations. These regulations usually require companies to keep books in local currency using local accounting principles. Thus, General Motors de Mexico prepares financial statements in Mexican pesos using Mexican accounting rules and General Motors Japan Ltd. prepares financial statements in Japanese yen using Japanese standards. To prepare a consolidated financial statement in US dollars, the parent company must convert the financial statements into US dollars and also convert the financial statements of its foreign operations into US GAAP. Each foreign operation must either maintain two sets of books prepared in accordance with both local and US GAAP or, as is more common, in the reconciliations case, considerable effort and cost are involved in company personnel developing the expertise to convert the accounting rules of one country to that of another.