Comparability of Accounting and Auditing in NAFTA Countries

By Fitzsimmons, Adrian P.; Levine, Marc H. et al. | The CPA Journal, May 1995 | Go to article overview

Comparability of Accounting and Auditing in NAFTA Countries


Fitzsimmons, Adrian P., Levine, Marc H., Siegel, Joel G., The CPA Journal


With the increase in interregional trade and investment as a result of the North American Free Trade Agreement (NAFTA), U.S. investors will need to have a greater familiarity with financial statements prepared in accordance with Canadian and Mexican GAAP. In addition, efforts are needed to increase the comparability of financial reporting among NAFTA members to help users evaluate a company's performance. For example, a cross-country comparison using a traditional indicator, such as a price-earnings ratio, would be meaningless, or worse, misleading if the underlying accounting is not comparable.

The process of harmonizing accounting standards among NAFTA members has already begun. The Canadian Institute of Chartered Accountants (CICA)--the most important professional accounting body in Canada--the Mexican Institute of Public Accountants (MIPA)--the only organization in Mexico that issues statements on accounting principles, and the FASB have been conducting a joint project comparing the conceptual frameworks from which their respective accounting standards are promulgated. The three standard setters recently announced the issuance of a report that highlights the results of the joint study. Copies of the report are available (at $11 each) from the FASB order department.

The CICA and FASB are also cooperating with the intent of narrowing differences in accounting standards. They have formed a binational task force to advise them on issues regarding the joint Canada-U.S. project on disaggregated disclosures. In May 1993, the FASB issued an Invitation to Comment on disaggregated disclosures jointly with the CICA's Accounting Standards Board (AcSB). That document draws extensively from the CICA's Research Study, Financial Reporting for Segments, and the FASB's Research Report, Reporting Disaggregated Information. The Invitation to Comment is part of the first phase of a joint standard setting project between the CICA and FASB intended to develop common standards on disaggregated disclosures.

In addition to harmonizing accounting standards, there is also an initiative to extend licensing to the professionals of other NAFTA countries. Partly as a consequence of the predecessor U.S./Canada free trade agreement, the AICPA and the CICA have developed special examinations for CAs and CPAs interested in becoming licensed members of the other professional body. In November 19943, the AICPA administered the first such examination, while CPAs took the first shortened CA examination in May.

Standard-Setting in NAFTA Countries--A Comparison

Canada. Because of the proximity and close ties between the U.S. and Canada, there are already many similarities between the generally accepted accounting principles of the two countries. The AcSB prepares the CICA Handbook that contains the conceptual framework, auditing standards, GAAP, and reporting practices of Canada. Its authority to promulgate Canadian GAAP is derived from Canadian national corporate and securities legislation that requires financial statements of Canadian companies be prepared in accordance with the guidelines and requirements of the CICA Handbook.

Even though Canadian GAAP is comparable to U.S. GAAP, it is generally not as extensive. Where Canadian GAAP has not been coded in a certain area, a Canadian practitioner generally utilizes other sources of guidance such as research studies, abstracts of the AcSB, authoritative Canadian literature, etc., and then uses professional judgment as to what constitutes fair presentation.

Mexico. MIPA issues statements on accounting principles through the Accounting Principles Commission (APC) made up of public accountants and representatives of the National Securities Commission, Stockbrokers Association, banks, and other financial organizations. Most large Mexican companies comply with Mexican GAAP, and those quoted on the stock exchange are required by law to comply. Mexican GAAP prepared by the APC is also generally less comprehensive in topical coverage, less detailed, and less specific than U. …

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