An Analysis of Corruption, Taxation and the IASB: The Effect on Global Competitiveness

By Wilhelm, Paul G.; Wilhelm, Jana P. | Advances in Competitiveness Research, Annual 2010 | Go to article overview
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An Analysis of Corruption, Taxation and the IASB: The Effect on Global Competitiveness


Wilhelm, Paul G., Wilhelm, Jana P., Advances in Competitiveness Research


INTRODUCTION

Accounting standards are one piece of the regulatory, institutional, and governmental mix that influences the transparency of financial information available within a country. Arising within separate historical and cultural contexts, accounting standards differ from country to country. Some sets of standards are detailed, some vague; some are consistent with tax rules, some legislated; some are based on more objective criteria, some rely on practitioners' judgment. These differences affect the level of accessibility of financial information within a society and can inhibit or give freer reign to corruption in that country. In particular, this article compares the perception of corruption in countries based on the Corruption Perception Index (CPI) produced by Transparency International with measures of the strength of their accounting standards based on the international accounting standards (IAS) of the International Accounting Standards Board (IASB), using the recent International Forum on Accountancy Development's (IFAD) GAAP study. Two measures of harmonization between national and international standards display a significant association with the CPI. Countries with higher levels of perceived corruption have more violations of IAS due to the lack of specific rules and fewer violations of IAS due to inconsistencies.

This research provides an important link between accounting and corruption perceptions. In some areas of the world, engaging in corruption is essentially unavoidable (Getx and Volkeman 2001). Previous studies have demonstrated the effect of corruption on the economic well-being of nations (Mauro 1995), but the mechanisms by which corruption persists despite its deleterious effects are less clear. Institutional regulation such as accounting standards can act to cover up corruption if standards allow sufficient latitude and lack of comparability. An alternative to local accounting standards became readily available upon the completion of a comprehensive core set of accounting standards by the IASB in December 1998. The subsequent endorsement of these standards by the International Organization of Security Commissions in June 2000 and the European Union's (EU) commitment for its members to use IAS by 2005 have provided a catalyst for change.

CORRUPTION AND ACCOUNTING

Corruption is typically measured as "the misuse of public power for private benefits" (Lambsdorff 2001a, 4).

In general corruption arises when government officials have a role in allocating profit opportunities such as import quotas, licenses, or government contracts. There is empirical evidence regarding the phenomenon of corruption. There is less corruption:

* Where there are fewer trade restrictions

* Where there are no favoritist government policies

* Where national resources are more abundant

* Where civil servants are better paid

* Where more is spent on education

* Where more is spent on public investment

* Where there is higher economic growth

* Where there is more political stability

* Where there is less bureaucracy

* Where there is strong legislative and judiciary systems. (Mauro 1998)

* Where there is less inflation (Paldam 2001)

* Where lower rates of change in foreign direct investment exist (Robertson & Watson

* 2004)

* Where there is higher economic freedom (Miles, Feulner and O'Grady 2005)

Accounting has a role in many of these areas, but the nature of the link between accounting and corruption has been little studied. Specific, comprehensive, and comparable accounting standards are an anathema to the corrupt.

Direct comparison company-to-company across borders allows enterprises to compete fairly in international capital markets and reduces the uncertainty component in their cost of capital. The corrupt seek to disguise the inefficiencies created and thus foster this uncertainty.

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