As the world continues to evolve into an interconnected marketplace, Geopolitical conflicts are no longer isolated events within local geographical locations, but instead create ripples through every industry causing changes to markets, regulations & business strategies for the entire world economy. One of the most substantial geopolitical dynamics currently exists between the United States, Iran & Israel.
While the media focuses on military actions, diplomatic processes, and stability within these regions, the impact to professional sectors, including The Accounting Profession, is substantial and wide-reaching. While accounting is generally viewed as a "stable" and "rules-based" profession, in fact, accounting is greatly affected by global market conditions, regulations, and risk factors.
The US Iran Israel conflict has created a complex environment of shifting sanctions, uncertainty within economies, fluctuating markets & heightened scrutiny from regulators. Professional accountants now must develop as strategic advisors; their roles are changing while bringing new and different managerial reporting.
This article will outline how the US-Iran-Israel geopolitical tensions are affecting the accounting profession and outline strategies accounting firms should implement to remain resilient, in compliance and competitive in these uncertain and fluctuating markets.
Geopolitical strife involving the United States, Iran, and Israel has historically produced a volatile relationship
Unpredictable economic repercussions and rapid reactions in the financial markets occur when there are escalations in conflict including sanctions, military actions and diplomatic breakdowns.
For example, oil prices often decline or increase rapidly after there are escalations in conflict; stock prices fluctuate; and investors experience swift changes in sentiment. All of these events introduce another layer of complexity that accounting professionals must navigate in an environment marked by great uncertainty rather than simply adhering to normal procedures for financial statement preparation.
For example, asset valuation becomes more difficult for companies doing business in or having a connection to the Middle East, as their investments may suddenly lose value because of geopolitical events. Therefore, accountants will have to continually reassess fair value measurements under accounting guidance (ASC 820 or IFRS 13) as a result of changes in geopolitical events. Reassessing fair value does not mean accountants will adhere strictly to accounting guidance; they will have to use judgment, perform scenario analysis, and possess extensive knowledge about the market for each asset in order to prepare an accurate fair value.
Another example of how geopolitical events will impact accounting professionals is through impairment testing, which will become more frequent and complex due to changes in accounting standards related to the evaluation of goodwill, intangible assets and long-term investments (affected by impairment testing) for companies exposed to geopolitical activity/uncertainty. Such evaluations may take into consideration many different scenarios because geopolitical activity could significantly alter a business’s ability to achieve its strategic goals.
When budgets and forecasts are made, they start to grow less trustworthy. Typical projections based on lone standard approaches, such as those derived from historic record data and un-changing proactive assumptions can potentially become out-dated. Thus, accounting departments should make use of dynamic forecasting techniques with multiple scenarios that give detailed recognition for alternative possibilities of growth and decrease in conflict scenarios.
Political tensions between the U.S. and Iran have resulted in the implementation of tighter economic sanctions, which directly affect all parties involved
The U.S. government, significantly represented through the Office of Foreign Asset Control (OFAC), has taken actions to limit trade, commerce, and finance, with Iranian persons and entities.
Economists and accountants understand that sanctions represent an added challenge along with new problems associated with our current economic system – that is, uniqueness of establishment of clients, scrutiny of transactions and ultimately, how the accountant reports those transactions. Because of the risk involved in potentially providing services to clients who end up having a sanctioned status, it will be imperative for accountants to implement robust due diligence procedures at client acceptance and acceptance of a transaction.
In regard to client acceptance, increased scrutiny of a client’s history is not only essential but is also seen as a prerequisite. Generally speaking, accountants will need to conduct a complete review of a client’s background in order to confirm that there are no links between the client and any restricted entity. This process will require thorough inspection of the client’s ownership structure, making sure that the structure is not purposefully obscured.
Transaction review represents another major component in the sanctions environment. The accountant needs to complete a thorough investigation of any financial transaction with the purpose of ensuring compliance with U.S. sanctions regulation. Transactions usually present limitations for an accountant but are complicated even further when performed in connection with multinational corporations, comprising complex supply chains and multiple areas of cross-border or multi-jurisdictional operations.
Although costs associated with complying with economic sanctions continue to rise, accountants should expect to invest in sophisticated accounting systems to assist them with compliance, along with legal expertise and training, to ensure compliance with the evolving nature of these regulations. An accountant who violates any sanctioning provisions or financial sanctions potentially faces severe penalties, including both significant monetary penalties and significant reputational harm.
In today's world, compliance is no longer just a function of back-office operations. It is now viewed as a strategic priority that requires constant focus, attention and expertise.
Consider for example the impact of supply chain disruptions and their related accounting issues
The Middle East is an important player in global trade, specifically surrounding energy and shipping. Therefore, if there is any type of disruption (military action or political instability) it will affect supply chains immediately.
Supply chain disruptions for companies mean delays in getting products, higher costs, and uncertainty. From the accountant's perspective, the accounting issues tied to the supply chain disruptions create challenges around various areas such as: inventory valuations, cost accounting and revenue recognition.
Inventory valuation can become very challenging if input costs are rapidly changing, in which case a company may need to change their latest costing methods or relating to market prices, they may need to analyze how their inventory is valued and reflected on their financial statements. This can have a significant impact on profitability and could directly impact the financial statements presented to investors.
Another issue that is affected by supply chain disruptions is revenue recognition. Revenue recognition will become increasingly complicated due to delayed shipment of product, change orders to contracts and uncertainty about when product will be delivered. Accountants must analyze the two accounting principles (ASC 606 and IFRS 15) carefully to determine if they recognize revenue or if they will defer the revenue.
Cost accounting will need to be calculated continually. Additional costs being incurred such as increases in freight/transportation costs, higher insurance premiums and higher prices for raw materials will need to be properly accounted for and allocated. Collaboration between accounting and procurement and operations will need to occur continuously.
The fluctuating price of oil and its ripple effect
Iran is one of the world's largest oil producers, which gives it a significant influence on the global energy market. As a result, anytime there is an increase in hostilities against Iran, oil prices fluctuate, which then impacts many different industries around the world.
The volatility of oil prices presents significant challenges for accountants as they attempt to manage costs, keep accurate financial records, and implement risk management strategies. Companies that produce or consume a large amount of energy, such as manufacturers, airlines, and shipping companies, are most affected by the volatility associated with oil prices.
The shifting of costs related to operating a company causes a potential lack of predictability in those costs, which makes it harder for a company to determine what profit margins will be and how to plan their budgets. Therefore, accountants must monitor closely how oil prices will change, so that they can then amend their financial projections to allocate enough funds.
Many energy-intensive companies utilize the hedging strategy as a way to manage their risk with regard to fluctuations in the price of oil. Hedging can provide stability, but at the same time hedging adds complexity to the accounting process. Accountants must ensure that they comply with the accounting rules for the measurement and disclosure of derivative instruments used for hedging oil prices.
In addition to directly impacting costs, the volatility of oil prices can have an impact on inflation, interest rates, and the overall economy, all of which affect financial reporting.
Geopolitical context presents day to day, the risks from cyber security are increasing due to the influence of cyberwarfare in modern-day conflict
Many commercial entities including financial institutions are often common victims of these cyber-related threats, along with being vulnerable to threats such as US accounting firms that deal with large amounts of sensitive information.
Cybercriminals (hackers) can target their victims using various methods, including data breaches, ransomware attacks, and systems' having services disrupted. Oftentimes, the implications of suffering a cyber incident present dire consequences ranging from financial damages if your business interruption occurs, loss of potential customers as well as damage to your company's reputation.
For the accounting profession; Cyber security has moved beyond just being an IT-related risk, it has now become part of the core of your firm's risk management program. Therefore, firms need to have robust processes to protect client data and implement business continuance plans.
As companies face increased scrutiny from auditors as a result of past, present and potential future cyber incidents, organizations must demonstrate that their company has adequate controls in place to minimize any related cyber incidents.
Therefore; the accounting profession continues to see an increase in the demand for IT Audit and Cybersecurity Advisory Services, which reflects and is representative of; the continual growth of technology affecting the accounting profession.
With the constant growth of geopolitical strife, countries have started implementing tighter regulations in several areas around finance reporting, securing compliance and transparency
As a result, accounting professionals are facing challenges associated with navigating through various regulatory changes.
Companies may find that they have to disclose additional information related to their exposure to geopolitical risks. In addition to increased disclosures, auditors are being asked to assess various geopolitical factors when assessing risk level and developing audit procedures for financial reporting purposes. For example, when assessing the impact of sanctions, supply chain disruptions and market volatility, financial audits must consider the effect on all relevant financial statements.
With the additional challenges of complying with regulations across different jurisdictions, multinational corporations must often work through regulatory compliance conflicts which produce additional complexity for their accounting functions.
To remain compliant, companies must continually develop knowledge and adaptability surrounding regulatory guidelines, as well as invest in expertise related to regulations.
Foreign currency volatility can create complications for a business when recording international currency transactions or preparing consolidated financial statements
Geopolitical unrest can produce rapid changes in currency rates, making it difficult to keep track of foreign currency gains and losses and report their effect on financial results accurately.
Multinational companies must also translate their reported results when they prepare consolidated financial statements. Fluctuations in exchange rates will affect the reported results of multiple entities and companies, even if those entities have steady financial operating results.
To reduce their exposure to foreign currency fluctuations, many companies enter into foreign currency hedging arrangements. When companies engage in hedging their foreign currency exposure, they are subject to additional accounting requirements and disclosures.
Geopolitical developments have significant effects on the confidence of financial markets and investors
Investment activity typically decreases during periods of geopolitical unrest as investors are more cautious about making an investment.
Accounting firms that provide assurance, accounting and client accounting advisory services will see an increase in demand for those services and products due to geopolitical uncertainty. Valuation services, transactions (mergers and acquisitions), and raising capital are areas of concern due to geopolitical instability.
In times of uncertainty about the ongoing value of a business, creating projections of future cash flows, growth rates, and discount rates can be very difficult, and those assumptions must be reasonably supportable by the facts.
Through the due diligence process, prospective investors conduct extensive research to better understand the extent of their potential risks. Therefore, accounting professionals are important in ensuring appropriate due diligence occurs.
Geopolitical uncertainties are driving companies to rethink their workforce strategies in the accounting profession
Currently, companies are seeking to improve their efficiencies and to create more resilient operations.
Outsourcing and offshoring of accounting activities has significantly increased. Countries such as India continue to be primary sources of accounting talent, providing a cost-effective and scalable source of workforce.
With the growth of remote work opportunities, many companies are creating global workforces and working across time zones, leading to enhanced efficiency and less reliance on one geographic location.
Specialized skills are in high demand, and companies must have expertise in compliance, risk management, data analysis, and technology to remain competitive.
For many individuals' livelihoods and daily routines, living under conditions of uncertainty, such as increased geopolitical tension, changes the level of importance attributed to accountancy in society. The role of accountants is defined by:
Organisational need for strategic guidance in an uncertain environment.
Accountants providing scenario analysis support to organisations to prepare for different potential outcomes through risk analysis, evaluations of options, and provision of actionable insights from that analysis.
Focus on providing risk advice through threat recognition and the development of risk mitigation strategies.
Organisations developing business continuity plans to allow ongoing operations during disruptions to normal business processes.
These changes in accountancy represent a fundamental change in the practice of accountancy from a transactional focus to a strategic advisory focus.
Geopolitical situations also give rise to ethical concerns and expectations by stakeholders for ethical, responsible and accountable business practices, particularly within conflict-an affected area
The growing importance of Corporate Social Responsibility (CSR), the focus on ESG (Environmental, Social and Governance) Reporting, and increased social and ethical responsibility demonstrate how the public now expects and demands organisations to CSR and practice ethical behaviour with respect to their interaction with people in different geographical areas.
Therefore, the involvement of professional accountants in ensuring that published corporate, social and environmental disclosures are relevant, reliable and represent faithful representation requires not only technical expertise and knowledge but also professional behaviour and personal integrity.
As the complexities of doing business grow, the use of new technologies is becoming a major area for investment by accounting firms
These new technologies include automation, artificial intelligence (AI), and data analytics which are all significantly changing how accounting is performed.
Automating repetitive tasks frees up time for accountants and allows them to concentrate on areas with higher value for their customers, such as providing business advice or tax planning. AI can also help with data analysis, risk assessment, and detecting anomalies within the data.
In addition, firms can use cloud-based solutions to allow their employees to work remotely or collaborate better together; thus making firms more agile and adaptable.
The use of technology is now essential and has evolved into a key enabler of business success in our ever-changing business environment.
The U.S. and Iran are both being challenged to compete economically with their respective governments
In addition, their recent military actions in the region have changed the way businesses operate, impacting everything from financial reporting to evaluation, strategy, and strategic decision-making.
With these developments, accounting professionals face a number of challenges and opportunities. Among them are increased complexity, increased risk, new regulations, increased compliance requirements, and increasing opportunity to provide value-added services through the use of technology.
Those firms who will succeed in the current environment will reflect this transformation by investing in people and expertise, reinforcing their compliance policies, and developing new technologies.
As the world becomes less predictable, accountants are increasingly playing a vital role in contributing to the stability of the global economy through the provision of timely, reliable, and useful financial information; ensuring compliance; and providing guidance to senior management for strategic decision-making.
