Accounting and Developing Countries

Now, more than ever, accounting is becoming a vital tool for developing countries. As governments are centralized the need for budgets and accounting systems to manage them is growing. Countries such as Russia, China, India and Brazil are entering the world scene as the new leaders in the foreign market. This article will attempt to discuss some of the ins and outs of accounting in regards to international markets as well as examining the accounting needs of developing countries.

As U.S. investment in developing countries continues to grow, there ought to be a focus on the accounting and information systems that are being used. Proper budgets must be created and maintained in order for a country to experience stability and prosperity. The World Bank, IMF and IASB have begun pushing for a unification of accounting practices as well. Some of the frequent problems of third world accounting are poor internal controls, inaccurate records and poor management accounting. This can lead to erroneous financial statements and inaccurate budgeting; thus hamstringing the full growth potential of any country.

Updated and proper accounting and auditing practices help companies understand why they may or may not be doing well with particular demographics. Large companies like Procter & Gamble and DuPont were unable to gain a foothold in India after trying to introduce huge quantities of cheap to make products. Through good accounting practices they were able to deduce that they should have been charging a higher price instead of relying on bulk sales being made. Such financial and accounting knowledge can help budding economies that are beginning to industrialize.

However, a roadblock to change is the fact that developing countries do not have a large capitalist class and must rely on their governments for information distribution as well as work opportunities. Unfortunately, not all governments are corruption free nor do they always have their population's best interests in mind. Resources are often limited and this leads to temptation to misallocate these resources by those in power. Political stability and proper use of power is needed to help foster policy change regarding accounting and financial management. While this fact is not within an investor's control, it is important to consider before making any financial investments in companies located abroad.

Good management of a country's wealth is fundamental to its growth and development; resources have to be managed effectively because they are limited. In developing countries, there tend to be dated accounting systems which are not used in appropriate fashion; this is especially true with countries that have been formerly colonized. In his article, Enthoven sites three specific factors that hamper developing countries: (1) adherence to their origin of accounting influence, (2) outdated regulations and inadequate knowledge regarding auditing standards and (3) a lack of teachers at the professional level as accounting research is rarely pursued. A couple suggestions are offered to help deal with each of these issues. Keep in mind, there is a plethora of ideas and possibilities available and there is no one correct method of change.

Firstly, there must be a desire to change current practices and research better methods of accounting. A developing country must realize there is a problem before they attempt to address it as well as a willingness to change the current situation; there has to be an incentive to change. The misuse and misunderstanding of accounting and auditing procedures can often go overlooked and as noted above, this leads to inefficient resource use and flow of cash assets.

Next, developing countries need to reform their currently outdated programs. The easiest way is to simply ask for help from a nearby developed country. Countries such as Kenya, Ghana, Malawi and Uganda have all done this and are seeing marked improvements in their financial management and accounting sectors. This is not an expensive proposition and most developed countries are more than happy to oblige. The U.S. and other developed countries can assist by sending over accounting professionals and teachers to help train accountants in developing countries. There is also the option of having the developing country send groups of students to the U.S. and getting them trained and certified to return to their country to help teach new generations of accountants.

In short, while change is important to foster growth, there is no clear route to success. Several factors may help contribute to a nation's economic growth or decline, but if a developing country is willing to combine and try different paths it is better positioned for growth than it previously was. While accounting practices may not jump to the forefront of any conversation when discussing lesser developed countries, it is a small but intricate piece to the overall picture for prosperity.

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