Impact of Lobbying on Standard-Setting in Accounting - Essay Example

? Impact of lobbying on standard setting in accounting Contents Contents 2 Introduction 3 Theoretical Framework of Political Influence 3 Models of Standards setting 5 Empirical Evidence of the process of Lobbying 6 Criticism of the lobbying process 7 Conclusion 8 References 9 Bibliography 11 Introduction The influence of politics on the process of accounting has been a widely debated topic of discussion. The accounting standards boards of all the countries of the world have always involved themselves into various kinds of politics, both at the national as well as the international level and this had its effect on the course of the formulation of the standards. These standards setting have a very significant role in the determination of the profitability of the different businesses that follow these accounting standards. The meaning of political influence has been interpreted in different places in various forms. However the most appropriate definition of influence is the intervention in the entire process of standard setting with a definite purpose. This kind of intervention is generally carried out by an economic agent (Zeff, 2002, pp. 43-54). The goal of the person is to make the make affect the outcome of the accounting process which would not be in tune with the missions of the accounting standards board’s like FASB or IASB. The main motive behind the entire process is to increase the wealth of the entity or to inflate the results or the financial performance of the business. The influence of political forces is not however limited to lobbying but is extended to other forms of power influence (Ramanna, 2008, pp. 253-281). This essay makes an attempt to analyse the theoretical framework behind the entire situation and in the later half justify the theories in light of the present day example. Theoretical Framework of Political Influence As stated in the introductory section of the essay, the wealth maximisation motives are entailed in the concept of purposeful intervention of the political forces. Thus the politics would have an adverse effect whereby the people who would be involved in the standard setting process would move away from the ideal way to achieve the goals. In other words, the influence of political forces would defy the mission that is set by the accounting standards Boards. For example the mission of FASB is to carry out the accounting procedure as per the conventional accounting norms. Along with that the FASB aims at making the entire process a transparent one. The managers of an organisation should not be provided with such flexibility that would allow them to move away from the desired goals of the FASB. In the United States for example a lot of intervention on part of the government is notice which may alter the ways in which the accounting process would be carried out in the various organisations across the country (Day, 1999, pp. 293-319). According to the various scholars who have carried out their research on this topic state the fact that the firms and the business managers generally take part in the lobbying process along with the government mainly because of the fact that they want the profits of their companies to be maximised. There are several avenues through which the managers undertake this kind of operations (Ball, 2009, pp. 277-323). The accounting firms are also active participants in the process of lobbying. Their role is in the manipulation of the reporting standards. This would include the specification of the various areas of accounting that have remained ambiguous till date and therefore has provided the reason for discrepancy in the financial reporting of the various companies. These firms work on behalf of their clients. It is most likely that the accounting and audit firms would not look into the interest of the respective clients. Hence whether the accounting firms would work in favour of the regulatory bodies is subject to discussion. There may be numerous angles for this. First of all the accounting firms may be truly acting from the point of view of the society and hence may be altruistic. Secondly they might have their self interest to fulfil. If the firms favour the companies and help them to make more wealth out of the manipulation of the reporting standards, the accounts firm would again popularity among the other companies as the one fulfilling the needs of the clients. Finally the firms can look for ways to reduce their own cost in the reporting process. Therefore the phenomenon of political lobbying would aim something which the accounting standards boards of the different countries would not aim at (Sunder, 1988, pp. 31-41). The regulatory bodies of the government may also have a role to play in this regard. Since the accounting standards board and the regulatory body of the government are bodies that have been set up with a motive of social welfare, the mission of both of these bodies would be aligned. For example the Securities and Exchange council of the United States have made dominantly participated in the lobbying process but their missions have merged with that of the FASB mission (Beresford, 2001, pp. 73-86). The SEC has aimed at the protection of the investors of the companies. The FASB has the aim to make the accounting standards transparent so that the investors are provided with the right information about the financial health of the companies they have invested in. However, the SEC being the governmental agency would have the problem of political pressures of the parties in action. Thus it might have to take certain positions that would not be consistent with the standards set by the FASB. Models of Standards setting From the point of view of economic theory the regulations in any market are set by the government and the people who are in the power. These people often make changes in the pricing that a company would be able to set or quotas on the quantities that could be sold. Thus the decision making regarding the allocation of resources in this case would rest on the political powers. The aim of the accounting standards board is therefore to remain free of the influences as much as possible to make the accounting process fair in every way (Haring, 1979, pp. 507-519). The public interest model is one of the most important models that are being used widely. According to this model the benevolence of the entities that would set the standards would be reflected so that the socially efficient model of decision making could be achieved. The validity of this model can be accepted a long as the standard-setters are interested in the welfare of the common people and their interests (Kieso, Weygandt and Warfield, 2007, p. 738). The regulatory capture model is another popular model of standard setting which hold that the firms tend to capture the regulator who would formulate the standards in such a way that would fulfil the interest of the firms only in maximisation of their wealth. For example it has been argued that the major accounting firms are influenced by the judgment of the FASB which guides them to either fulfil their own interests or work for the interest of their clients. However many researcher argue that the standards that the FASB sets is based on the market standards (Redding and Bahnson, 1998, pp. 49-54). By the particular accounting process the companies would be able to fulfil the market-based objectives as well as throughout the process of financial reporting. Empirical Evidence of the process of Lobbying The reporting standards that the FASB would set would affect more than 14 thousand companies that are listed in the stock exchanges of the United States and thus come under the purview of the SEC. Most of them follow the US GAAP as their accounting standards. It has been claimed that over time the US GAAP has concentrated more on the setting of the rules and has been influenced by the SEC (Deakin, 1989, pp. 137-151). Thus compliance has become a very important aspect of the agenda of the US GAAP. The various scandals that took place during the early 2000 may have taken place due to this change in the trends of the accounting procedures. The agenda of the boards however have varied and the process differed. The issues that the FASB set are generally put forward by the Financial Accounting Standards Advisory Committee (FASAC). This is done with the help of a survey so that the consensus of the common people and the businesses in a country can be obtained. The Emerging Issues Task Force (EITF) also plays a dominant role in the setting of the accounting standards. Along with these, intensive meeting with the various stakeholders groups are carried out in which the bodies like the SEC are present (Gorton, 1991, pp. 29-41). However, various unsolicited contacts are made in the process which may be considered as political influences. The international bodies of the standards setters located in the various countries of the globe like New Zealand. UK, United States as well as Australia have a dominant position in the influencing of the IASC (Burrows, 1996, pp. 13-19). Thus the issues on the international standards setting get an attention from all the super powers of the globe. Most of the businesses these days have multinational operations and they have their operations in most of these countries. Therefore the countries have their stake in influencing the entire process (Puro, 1984, pp. 624-646). Researchers have found out that the member of the FASAC is instrumental in influencing the agenda of the FASB (Van Riper, 1994, pp. 74-84). Thus a link and a relation can be found between the agenda of these two sets of bodies. The body of the FASAC comprises of the preparers, financial as well as the auditors. So most of the members come from the accounting and finance community and have their own self interest (Miles and Bhambri, 1983. pp. 212-34). Criticism of the lobbying process At the present day most of the businesses are run on the grounds of fair corporate governance standards. The ethical grounds on which the businesses run would be hampered in case there is presence of political influence. In certain cases like the issue of oil and natural gas industry the political influences cannot be tracked directly but it is present in the way the businesses are run. In case of any alterations of the rules of the accounting standards the manufacturing firms and the various other businesses oppose because it contradicts their intension in the profit maximisation motives (Brown, 1981, pp. 232-246). The various techniques of accounting help the companies avoid the corporate taxes or the mandatory disclosure requirements in a number of ways. This may work against the interest of the investors. In the international scenario as well the companies take part in the lobbying process for currency translations or the transfer pricing techniques which may help the companies in the avoidance of the taxes across the different countries as well as hedging the country risks. At the present day when the entire accounting community is moving towards a uniform framework by adopting the principles of IFRS, this kind of lobbying for the self interest would lead to conflict among the companies across the different nations who are taking part in the process of convergence. When the IFRS is formulated on the basis of ethics and moral standards, interference of the political forces would hamper the mission and the goals of this board. Conclusion Thus it is certain that the political, legal and the economic forces have a major role to play in the process of the accounting standards setting. However, there are very little facts to testify the statement. According to most of the scholars the process of accounting standards setting grow out of the process of which is mainly driven by the forces of the market. Thus the political and economic influences would inevitability be present in the entire issue. The accountant opine that the source of all the political scandals that have taken place in the US business environments was caused due to the various relations of interest that are set between the political and regulatory framework on one hand and the financial and accounting standards board on the other . References Ball, R. 2009. Market and political / regulatory perspectives on the recent accounting scandals. Journal of Accounting Research. Vol. 47, pp. 277-323. Beresford, D. R., 2001. Congress looks at accounting for business combinations. Accounting Horizons, Vol. March, pp. 73-86. Brown, P. R. 1981. “A descriptive analysis of select input bases of the Financial Accounting Standards Board.” Journal of Accounting Research, Vol. 19, pp. 232-246. Burrows, G., 1996. The Foundation: A History of the Australian Accounting Research Foundation 1966-91. Caulfield, Victoria, Australia: Australian Accounting Research Foundation. Day, R.G., 1999. “Accountability, Accounting Regulation and the Principal Agent Model’. The Journal of Interdisciplinary Economics, Vol. 10, pp. 293-319. Deakin, E. B., 1989. Rational economic behavior and lobbying on accounting issues: Evidence from the oil and gas industry.” The Accounting Review, Vol. 64, pp. 137-151. Gorton, D. E. 1991. The SEC decision not to support SFAS 19: A case study of the effect of lobbying on standard setting. Accounting Horizons. Vol. March, pp. 29-41. Haring, J. R., 1979. “Accounting rules and “the accounting establishment.” Journal of Business, Vol. 52, pp. 507-519. Kieso, D. E., Weygandt, J. J. and Warfield, T.D., 2007. Intermediate Accounting. New York: John Wiley & Sons. Miles, R. H. and Bhambri, A., 1983. The Regulatory Executives. California: Sage Publications. Puro, M., 1984. “Audit firm lobbying before the Financial Accounting Standards Board: An empirical study.” Journal of Accounting Research, Vol. 22, pp. 624-646. Ramanna, K., 2008. “The implications of unverifiable fair value accounting: Evidence from the political economy of goodwill accounting.” Journal of Accounting and Economics, Vol. 45, pp. 253-281. Redding, R. J. and Bahnson, P. R., 1998. The FASB: The People, the Process, and the Politics. Burr Ridge, IL: Irwin/McGraw-Hill. Sunder, S., 1988. “Political economy of accounting standards.” Journal of Accounting Literature Vol. 7, pp. 31-41. Van Riper, R. 1994. Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process. Westport, CT: Quorum Books. Zeff, S. A., 2002. “Political “lobbying” on proposed standards: A challenge to the IASB.” Accounting Horizons, Vol.16 (1), pp. 43-54. Bibliography Buckmaster, D. and D. Hall, 1990. "Lobbying With the FASB: The Case of Accounting for Pension Terminations and Curtailments," The Journal of Applied Business Research, Vol. 6(2), pp. 23-31. Dhaliwal, D.S.,1982. "Some Economic Determinants of Management Lobbying for Alternative Methods of Accounting: Evidence From the Accounting for Interest Costs Issue." Journal of Business, Finance & Accounting, Vol. 9(2), pp. 255-265. King, R. D., and O’Keefe, T. B., 1986. “Lobbying activities and insider trading.” The Accounting Review, Vol. 61, pp. 76-90. Watts, R. L., and J. L. Zimmerman. 1983. “Agency problems, auditing, and the theory of the firm: Some evidence.” Journal of Law and Economics, Vol. 26, pp. 613-634. Read More