Just about two weeks ago it was reported that Hewlett-Packard had to write down somewhere in the neighborhood of $8.8 billion, stemming from an acquisition of a United Kingdom based software company, Autonomy. Accounting improprieties within the acquired company seem to be at the heart of the issue and HP claims the fraudulent numbers account for over 5 billion of the write down. Two of the “Big Four” accounting firms were brought in to perform due diligence for the deal but the inconsistencies still managed to slip through. This is an extremely public example that calls into question the different accounting standards practiced in different countries and how those should be reconciled.
The International Financial Reporting Standards, known as IFRS, are the accounting guidelines for many nations around the world with the goal of being the globe’s universal reporting language. However, the United States still has its reservations and a few of the subtle differences may have played a role in HP’s deal gone bad. Under IFRS, “sales” are booked when a sale is probable while U.S. GAAP has more stringent revenue recognition requirements. While it is near impossible to tell how much this alone played into the write down, the issues that emerge from the difference in standards plague international business and until they cease to exist, more international deals have the potential to underperform. As the International Accounting Standards Board continues to push IFRS, they hope that accounting irregularities across the globe will see a decline as convergence increases.
What can be done now? The adoption of IFRS by the United States and having universal accounting standards throughout the world is an ever more important component in the dynamics of international business. It can streamline reporting financial statements for multinationals that currently spend an inordinate amount of time and resources to comply with country specific reporting standards in each country they operate in. It will also lower the barriers that exist between countries that effect business internationally. Investments in foreign companies will become much easier when the reporting standards are universally known and comparable to other countries. For businesses that operate on a global level the biggest advantage may come from actually understanding what you are getting when you acquire a company. HP relied on auditors to do their job but if the nuanced differences between U.S. GAAP and IFRS did not exist they may have had a better understanding on how Autonomy was operating. As the world flattens the need for comparable accounting standards must do the same.