International Accounting and Finance
The essay will first address the increasing role of capital markets in the economy. Also cited are ways of ensuring continuity and effective functioning of capital markets. Issues of good financial reporting systems will also be critically addressed. To exhaustively tackle this, the article will be broken down into various sub-topics related to main topic
Key words: Capital markets, primary markets, secondary markets, securities, International monetary fund, European Union, global economic governance, market intermediary
International Accounting and Finance 2009/10
The global economy has increased in the current global economic and financial regime. But there is a lot of crumbling of the respective foundations. This affects both trading and financial organizations. The available institutions are under unlimited pressure. Concerning trade there is increasing number of countries undermining the world trade organizations (WTO) by the implementation of preferential trade organization (PTO). On the other side of finances, the international monetary fund has been weakening over the decade, although the current crisis has revived it. Generally the weaknesses of these global economic institutions are as a result of policy implementation by the transatlantic powers. For example the European Union and the United States of America are involved with issuing policies that tend to weaken the already existing financial institutions.
When it comes to trade there is a very large gap between the official rhetoric, highlighting the importance of the multilateral organizations and the policy of trade practices. This contributes to the weakening of the world trade organizations. The authority vested to transatlantic powers is working towards blocking the progress in the international monetary fund concerning the policies of lending. More to this the European Union is continuing to pester overrepresentation which is not justified according to the international monetary fund governance policies and related structures.
Capital market can be defined as a market for securities. In this case securities refer to debt and equity. In such markets business enterprises and government is allowed to grow funds which are long term in nature. Simply it can be defined as a market in which money or capital is given for not less than one year. Growing of short-term funds is usually done on other markets such as money markets. Examples of capital markets are; the stock market also known as equity securities and the bond market which is a debt market. This implies that capital markets revolve around equity securities and debt. There are specific organizations that oversee the capital markets to that the investors into this markets are protected against fraud and other investment issues that may crop in during the time of investment. These organizations are known as financial regulators and they include the UK’s Financial Services Authority and the U.S. Securities and Exchange Commission and are the key policy markers on capital market issues.
Capital markets can be grouped into primary capital market, a market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debit or equity based securities. This market is facilitated by underwriting groups. These groups consist of investment banks that usually sets a beginning amount range for given securities and also they over see the sale directly to investors. The issuing company receives proceeds of cash from the sale. The cash is then used to fund operations or grow the business. Different exchanges have different levels of basic requirements and which must be met before a security is sold. The moment the first sale is made, any other trading is said to be secondary capital market, in which existing securities are sold and bought among investors or traders. This is done through securities exchange, over-the-counter or through any other means. This is the bulk of trading on daily bases revolves.
Primary markets are more volatile than secondary markets since it is difficult to clearly and accurately determine the demand of an investor concerning a new security unless the security is traded for several days. The main payers in the capital market are; those who are issuing, big institutions of investors such National Insurance Board, insurance companies, pension funds, trust funds, stock exchange, unit trust corporations and capital venture companies. There are also supporting players such as brokers, traders and investment bankers (Brown, 2005).
Role of capital markets in modern economy
A well organized and functional capital markets are crucial to any modern economy. With such an argument it could be deduced that slow development of these capital markets in any given region has a serious effect on the pace of growth in the region economically. Regions or countries with developed capital markets tend to have higher levels of capital formation. Such regions grow very fast and are in a position to provide better and reliable financial services to its entire population. Such countries enjoy greater and stable financial and economical prospects in long-term. The beneficiaries of an effective and efficient capital market are bond issuers, the investors in such stable systems, intermediaries and the concerned regulatory authorities (Brown, 2005).
A well operating capital market plays an important role in modern economy such as; one improving the efficiency of the market by proving a firm foundation which is effective and efficient in allocating of funds for investment across any given economy. This means that big and well established capital markets ensures that forces of the market are brought down on a large proportion of the transactions which are financial in nature in the economy. This is not the case in systems which are dominated or financed by bank (Information Content of Voluntary Corporate Disclosure).
Secondly capital markets leads to improved access to investment funds by facilitating efficient intermediation to finances by mobilizing domestic savings to be used on infrastructure and investment projects from a large investor pool. The cost of capital for those firms that are able to access bond markets can be lowered. Thirdly capital markets provide reduced systematic risk to the economy by making sure that the banking sector does not grow larger hence resulting to concentration of credit risk in one area that is banking. Simultaneous existence of both capital markets and banking sector assists each to behave as a barrier for the other (Brown et al, 1999).
Generally capital markets present an accessible and economical variety of financial instruments that encourage longer-term stable savings which are widely distributed throughout the market. They also create an opening for the larger population to get involve in the corporate sector and through ownership of securities they share in their wealth. To ensure efficient and effective capital market there is need to have a good financial reporting and infrastructure.
Financial reporting and capital markets
The international Accounting Standards Board (IASB) encouraged the adoption of International Financial Reporting Standards (IFRS). As a result of this adoption companies which are publicly traded in over a hundred countries have been required to prepare their financial statements as per the requirements of IFRS. The expectation is that this number will rise to more than one hundred and fifty by the year 2011 (IASB, 2008). Adoption of IFRS standards will ensure transparency and comparability and thus the overall quality of financial reporting and the efficiency of capital markets will be improved (EC Regulation No. 1606/2002). Change from national standards to IFRS will realize the anticipated benefits and therefore improving quality of financial reporting. It will ensure uniformity and improvement when it comes to disclosure of financial statements, measurement and recognition practices and differences arising from a range of national standards in different companies will be eliminated.
It is true that there are other determinant factors that affect the quality of a financial report of which many of the factors are attached to the institutional infrastructure of a country (SEC, 2000; FEE 2001) but the adoption of IFRS will enhance quality. These factors may include external auditors which are independent, public enforcement organs and law courts. Generally this helps in making sure that the capital markets are free from frauds and are separated from the judicial systems. Although there are a lot of developments in the auditing sector as far as standards and quality is concerned the differences in the countries enforcement bodies and systems act differently in comparison to application of IFRS (FEE, 2001; CESR, 2007). The big issue here is whether there is influence of the benefits of IFRS by the differences in these specific countries (Basu, Hwang, & Jan, 1998).
International accounting standards
International accounting standards refer to standardized and harmonized accounting practices which is a fundamental. International accounting to achieve this, the process required the involvement of both technical and political will. Standards committee which was set to produce accounting standards which are international in nature was founded between 1973 and 1987. The first draft had twenty six standards. The body managed to have consistency in its production and new projects were started with time. This resulted to publication in the next three or five years’ time. Following an inevitable accumulation of projects, the body attended to almost eight projects at the same time. In 1980, the number of projects was reduced and having encountered some delays the outstanding drafts decreased. The fluctuation was partly related to the challenges of some of the topic like segment reporting, how to lease, benefits of retirements and the issue of business combinations. But the projects led to reliable standards in many countries.
The committee opened the way for the international Accounting Standards Board and its International Financial Reporting Standards, since 2005 the two boards have been dominating over the issues of financial reporting of thousands of companies in the European Union and in many other countries. The international standards form a basis for the operation of capital markets and its financial reporting. The standards demonstrated by this body play an important role in putting the capital markets in order. These include their foundation, formation, means of operation, change of membership and restructuring. The standards also present a guided procedure on the issues of developing sound and efficient financial reporting system or infrastructure (Journal of Accounting and Public Policy, 2007).
Effective corporate governance
According to the frame work of corporate governance each market intermediary should establish corporate governance. The free work is supposued to include a board which ensures effective monitoring and management of the capital markets. It also ensures that there is timely and accurate information available on all matters concerning the market intermediary. This includes the financial structures. Its performance, the owners and who governs it. The board is required to put in writing every information concerning all the operations in that capital market. It is also the work of the board to ensure that management is reviewed, accounts audited, major capital expenditures inspected and corporate performance given at least quarterly. The board also is mandated to review its corporate governance at least once per year.
The bard is supposed to be responsible and at the same time accountable for the conduct and general performance of the market intermediary. Also the direction and control of the capital market is purely in the hands of the board. The board is also allowed to delegate duties to committees of the board or to management but this should not overtake its duties as a board. Effective corporate governance should ensure through the board that, the board gives strategic direction, maintain the integrity of its both accounting and financial recording and reporting systems. This includes also the internal audit and appropriate systems to ensure risk management is well taken care of and operational control is in place. It should also maintain full and effective control and man implementation of the laid down strategies and plans. The board should ensure that it concurs with the capital markets regulations (Dieter, 2009)
Strong internal controls
The board should be responsible for the internal controls of the capital market and also set policies on internal control of the capital markets. The board should also check to ensure that the system is functioning properly. To ensure strong internal controls the board should prepare procedure manuals that can be used to implement its policies and controls. The board should also appoint a compliance officer who should be monitoring compliance with the regulations of the given or ruling authority. The compliance officer is supposed to rectify any weaknesses in the systems. To ensure transparency the board should also appoint an internal auditor who is separate from the compliance officer who should not be involved with any function that is being audited. The internal auditor should adopt an internal audit program with the assistance of the audit committee or board. The work of the auditor is to prepare an annual report to the audit committee or to the board. This ensures polices of capital markets are followed to the letter (Reporting Standards in the EU).