The Politics Of Accounting Standard Setting: Analysis And Critique Essay.

Standard Setters and Stakeholders

And yet, by ignoring the role of power and politics in standard-setting, this perspective seems to be missing a critical part of the story. Standard setting at the IASC/B is and has long been permeated by politics.’Critically discuss the above statement. Your analysis should be supported by relevant references and appropriate examples.The essay must not exceed 1,500 words, excluding footnotes and bibliography.

Given that accounting and accounting regulation are often considered or presented as being neutral, objective and technical (see Morgan, 1988), what does this quote suggest about accounting regulation In your opinion, does this affect claims to neutrality or objectivity or the technical nature of accounting What would be the impact of broader recognition of the political nature of accounting regulation What is the impact of ignoring the social, political and environmental impacts of accounting and accounting standard setting It is also worth considering the way that the IASB operates. Do they operate a democratic process Do they hear from different and diverse voices about the problems that they address What are their processes Where do they come from Why have so many countries adopted their standards How have they gained so much power.

The question requires you to show a good awareness and understanding of the literature that you have been asked to read and the ideas that you have been exposed to, so a good starting point would be the literature and discussions that you have already been introduced to. It is an opportunity to show your investigative and analytical skills.

It is good to identify the key literature and key words in the quote. You should try to unpack the key words and question if accounting can be apolitical, objective and neutral, or is subjective, informed by different interest and political in nature due to its impact.

Please identify authors who offer different arguments including mainstream authors, critical authors and publications from standard setting organisations (the IASB, the FASB and others). Alongside the literature that should be cited in your assignment it would also be good to include examples in the production of some accounting standards that can be from the literature or from various professional bodies’ websites. The assignment should contain arguments from different sides, evidence and a conclusion connected to the original points.Your essay should have a good structure: an introduction which specifies the purpose of the essay together with an indication of the structure (signposted), some understanding of the concepts, some illustration of the issues with examples and finally end with a summary and discussion.

Standard setters particularly the IASB and the UK Accounting Standards Board have made commitment to act for the interest of the stakeholders so that they can use the conceptual framework and unite their standards (Hines, 1988). However, the political lobbying is determined by preparers and involves government self-interest. This might result the standard setters in modifying their position by running the danger of reducing and leaving behind the implicit principles of standards.

The concept of financial consequences is used to explain the effect of bookkeeping information on the behaviour of decision making, administration, investors and creditors. Those that have conferred their interest in understanding how decision making behaviour is carried out would create burden on the standard setters by not approving the standards covering the objectionable feature (Hopper, Lassou and Soobaroyen, 2017). This results in politicization and comprises of writing letters or providing oral testament relating to hearings arranged by the standard setters to uncover the tentative opinions of public commentaries.

The essay would critically discuss the politics involved in standard settings and would critically represents the standard setting at IASC/B (Martinez-Diaz, 2005). The essay would also provide the documented instances of political lobbying. The essay would consider the politicization of the FASB’s efforts to converge with the IASB standard setters and would offer a concluding remarks as well.      

Political petitioning on the proposed accounting standard setters has been a long standing occurrence in the UK. Nevertheless, other standard setters have encountered such political petitioning and in recent years the IASB have encountered politicization on the matters related to accounting for share based payment and fiscal instruments (Morgan, 1988). It appears more probable to interrupt the future standards that deals with insurance, leases and performance reporting.

According to Pacter (2012) there are circumstances where the standard setters have proposed to issue standards on topics that are yet to be covered or to eradicate or abruptly cut down the accounting treatment of items under the current standards. The probability of politicisation would increase in particular nations given the proposed standards were to either reduce the earnings of company or make their earnings trend highly instable. In other nation where profits are associated with the income tax for example in Germany, corporate firms lobbied in contradiction of any events in the German implementation of the EEC’s fourth directive which would raise their earnings. It is the responsibility of the standard setters to understand when and to what level the politicization resulted in lawful matters which in the lights of conceptual framework needed attention in preparing the standard.

Politicization of Standard Setting

According to Tarca (2012) listed companies that are operating in the main capital markets, there are numerous motivations which is mainly associated to revenue and pressure of earnings from top management. The managers of company are held to account by the security analyst whose public announcement of earnings forecast increases the performance bar of measuring the semi-annual and yearly reports to shareholders.

If the company announces its earnings on per share of mere few cents less than the estimated figures then its price of shares may be severely impacted. Another motivation is associated to how the compensation of the managers are made. Ever since the 1980 top executives are showered with bonuses that are based on the incomes and with options of stock whose value is improved by the solid records of incomes. When the executive sense that the standard setters may change accounting in a manner that would jeopardize the generosity of compensation package, they would ultimately fight such change violently.  

When the executives of company raises objections to the initiative of standard setting particularly when complaining the governmental or decision-making divisions of administration for respite they do not mention any self-serving reasons for supporting their cause (Wang, 2014). While dealing with the legislation they does not argue to the concepts of accounting issues. Instead the standard preparers raise the level of discourse for public policy. For example, the projected inventiveness would smother the business activity or may make it difficult for the well-known businesses to increase and thrive by gaining adequate capital based on the strong records of incomes and earnings.

The government have also indulged in politicisation of the projected accounting standards. If it is understood that the political standard would result the companies to account lower or highly instable earnings, then they may abandon the plans for development by concealing the asset in capital goods (Sikka, 2018). Following the launch of United Kingdom and Ireland’s first standard setting committee, the bookkeeping standard steering committee started taking matters of accounting concepts more seriously. Politicisation was evident in the attempt that was made by the ASSC so that it can set the standards on the inflation accounting. During the time of increasing concern over the inflation the ASSC introduced the discussion paper where in addressed an argument relating to the use of current purchasing power accounting.

As stated by Botzem (2014) politics again intruded when the governing council of the accountancy bodies supported the ASSC by stating that it had accepted the statement of bookkeeping practice relating to the accounting for deferred taxes. The standard would have needed the companies to record the liability relating to all the time differences in the accounting earnings and taxable income. However, the parliament acted by imposing measure of income tax concessions (theconversation 2018). It approved 100% allowance on capital depreciation on several fixed assets and also allowed stock appreciation relief for the merchandise inventories.

Motivations of Managers and Companies

According to Burlaud and Colasse (2011) IASC/IASB engaged in politicisation by eliminating the LIFO. Prior to IASC standards becoming a requirement in numerous nations, an exhibition of special interest politicization aggrieved the board. When the IASC panel made an attempt to carry out the provision in its declaration of intent the LIFO must be removed as the accepted treatment.

This is for the reason that LIFO can be used in UK for the taxation purpose and in nations where the tax reporting and fiscal reporting were entangled, resulting the delegation of the IASC board from those nations voted contrary to the removal of the LIFO. As supposed by Barth, Landsman and Lang (2008) delegations aligned with the opinions stated within their nations that nothing to disturb the tax benefits that is conferred by the LIFO. This resulted the IASB as the part of its development projects to eliminate LIFO in its amendment of IAS 2.       

As per the Daske et al. (2008) when the IASB commenced working in 2001 the main topic of its agenda was the share based payments that comprised of the employee stock options. Before evolving the exposure draft the board again exposed the G4+1 that recommended the share based options to be expensed in every period under which the employee performed depending upon the fair values of the options at the end of every reporting period.

According to Gallhofer, Haslam and Kamla (2011) IAS 39 addressed the measurement and identification of fiscal instruments that turned out to be main political battle for the IASB. The first version of IASC was bought into the existence by IASC but it was difficult for the IASC to settle with the standard despite the fact that there were only few nations in the world where the standards of IASC actually mattered in respect of the national GAAP. Among the main dilemmas that was faced by the IASB was that, if it decides to accommodate the entire objections emerging from Europe than in its view, would have issued the standard which was less principled (Martinez-Diaz 2005). However, it became necessary for the IASB to open the door for the convergence with the FASB.

Following the events of WorldCom and Enron bankruptcies and suspected frauds, pressure mounted on the companies to undertake steps so that it restore the trust of shareholders and public. The failure of businesses at the expense of fair value stock was considered as the example of business abuse. Nonetheless, politicisation constitute a threat to the attainment of the genuine worldwide convergence of the accounting standards.   

Examples of Political Lobbying

Conclusion

On a conclusive note, ever since the 2000s, several nations have forfeited their enforcement agencies. However, the level of consistencies relating to their performance in Europe and somewhere else is yet largely flexible, partially due to their inadequate budgets and weak subsidiary legislation. In addition to this, the regulatory culture is different in every nations. Nevertheless, once the standard setters is done of higher quality and the regulatory is of higher quality not only it would increase the standard of quality reporting but would also result in rise of insistent political lobbying from the preparing community.

There arise a question whether political lobbying is the reality of the standard setting both at nationwide and global levels. With higher stakes the political opposition to disagree changes would surely gain growth with intensity. To a substantial extent, the preparers of the financial reports have turned out to be countervailing power against the standard setters that are found to have overstepped the authority.

References

Barth, M. E., Landsman, W. R., and Lang, M. H. 2008. International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498. 

Botzem, S., 2014. Transnational standard setting in accounting: Organizing expertise-based self-regulation in times of crises. Accounting, Auditing & Accountability Journal, 27(6), pp.933-955.

Burlaud, A. and Colasse, B., 2011. International accounting standardisation: is politics back?. Accounting in Europe, 8(1), pp.23-47.

Daske, H., Hail, L., Leuz, C., and Verdi, R. S. 2008. Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46 (5): 1085?1142. 

Gallhofer, S., Haslam, J., and Kamla, R. 2011. The accountancy profession and the ambiguities of globalisation in a post-colonial, Middle Eastern and Islamic context: Perceptions of accountants in Syria. Critical Perspectives on Accounting, 22 (4), 376-395. 

Hines, R. D. 1988. Financial accounting: in communicating reality, we construct reality. Accounting, organizations and society, 13(3), 251-261. 

Hopper, T. Lassou, P. and Soobaroyen, T. 2017. Globalisation, accounting and developing countries. Critical Perspectives on Accounting, 43, 125-148. 

Martinez-Diaz, L. 2005. Strategic experts and improvising regulators: explaining the IASC's rise to global influence, 1973–2001. Business and Politics, 7(3), 1-26. 

Morgan, G. 1988. Accounting as reality construction: towards a new epistemology for accounting practice. Accounting, Organizations and Society, 13(5), 477-485. 

Pacter, P. 2012. Stop and smell the roses. Australian accounting review, 22(3), 246-247. 
Perry, J., & Nölke, A. 2006. The political economy of international accounting standards. Review of international political economy, 13(4), 559-586. 

Sikka, P. 2018. Nick Clegg's plan for shareholders to tackle fat-cat pay won't work | Prem Sikka. [online] the Guardian. Available at: https://www.theguardian.com/commentisfree/2011/dec/06/nick-clegg-shareholders-fat-cat-pay [Accessed 8 Nov. 2018].

Tarca, A. 2012. The case for global accounting standards: Arguments and evidence. Available at SSRN 2204889. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2204889. 

The Conversation. 2018. 'Empowering' shareholders won't revolutionise corporate culture. [online] Available at: https://theconversation.com/empowering-shareholders-wont-revolutionise-corporate-culture-4938 [Accessed 8 Nov. 2018].

Wang, C. 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.