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

? [THE IMPACT OF LOBBYING ON STANDARD SETTING IN ACCOUNTING] Abstract In this essay, the impact of lobbying on standard setting in accounting is critically evaluated and discussed. Also, in the evaluation of the impact of lobbying on standard setting in accounting, various examples have been used to support the inferences that have been made. Introduction Lobbying involves the activities that businesses carry out for the intention of influencing the government or providing advice to other businesses on how to influence the government. Within the United Kingdom, government includes the central government, local government and the devolved government. The government may also refer to staff or members of the House of Parliament or a devolved legislature, ministries, officials and public authorities (PRCA, 2013). According to UKPAC (2013), lobbying refers to attempting to influence or advising others to influence the UK Government, devolved administrations, parliament and local governments. Therefore, lobbying refers to all the actions that interested parties carry out so as to influence the rule-making bodies (Frattini, 2007, p, 7). This paper critically evaluates and discusses the impact of lobbying on standard setting in accounting. In this evaluation, various examples about the impacts of lobbying on standard setting in accounting have been used to support the inferences of the essay. Lobbying and Legitimacy among Standard Setters According to Frattini (2007), lobbying on standard setting in accounting ensures that there is assurance and legitimacy among standard setters. The process of standard setting should be characterised by provision of financial information, which will be acceptable and useful to all parties (Tulsian, 2006). Therefore, if a standard setter, especially a government body formulates measurement rules that are designated to support government policies, the integrity and credibility of the standard setter would be threatened, regardless of the fiscal merits of the measurement rules (Ma, 2000, p, 97). As lobbyists pressure standard setters over the credibility of standards, the standard setters will seek to formulate accounting standards in an innovative manner (Schmidt, 2002). Since the parties that are affected by various accounting standards are diversified and there are no adequate conditions for guaranteeing the legitimacy and credibility of a standard, lobbying on standard setting in accounting becomes necessary. This is because ensuring procedural safeguards and inclusiveness in standard setting may be difficulty (Peters, Forster, & Koechlin, 2012, p, 492). As a result, standard setters they develop the best, possible accounting standards to secure acceptance of the standards by stakeholders. The conflict that may exist between the standard setters and stakeholders may be used strategically to influence legitimacy and credibility among accounting standard setters (McKay, 2006, p, 2). Therefore, lobbying on standard setting in accounting ensures that assurance and legitimacy among standard setters is enhanced. Lobbying and Revelation of Information about Future Standards Implementation Lobbying on standard setting in accounting allows all the stakeholders to participate in the process of setting standards, and measures the interest about an issue. For instance, when some stakeholders oppose a particular accounting standard, they raise their concerns by advising the government and other interested parties to influence the amendment or removal of the standard (Godfrey & Chalmers, 2007 and Holgate, 2006). This means that more information about the controversial standard has to be provided by the relevant standard setter. Therefore, lobbying on standard setting in accounting reveals information pertaining to the potential implementation problems and costs of future standards (Frattini, 2007, p, 7). Companies and other stakeholders who will be affected by the accounting standard will be concerned, in case they feel that it might be difficulty to implement the standard or related standards in future (Collier & Agyei-Ampomah, 2008 and United States General Accounting Office, 2001) . Standard setters may not have first-hand experience on the future effects of a standard, but business organisations may have information about how they might be affected by the standard in future, in relation to the market environment. It is only through lobbying that such concerns about the potential implementation problems and costs of future standards are revealed. Lobbying and Amendment of Standards in Favour of Some Stakeholders Lobbying on standard setting in accounting is a process that is politically influenced. Secondly, lobbying is aimed at aiding certain businesses to achieve and safeguard their interests. Therefore, lobbying may lead to the amendment or setting of standards that may benefit some stakeholders at the cost of others. For instance, large and influential organisations may lobby against a certain standard so as to obtain benefits from their operations. An excellent example of this scenario is a case where a standard setter may formulate an accounting standard that requires companies to recognise an item as an expense in their end-year financial statements. This standard may be opposed by small businesses while it might be supported by large organisations because of various reasons. Small organisations are likely to oppose the standard because recognition of an item as an expense may reduce the profits reported significantly (Epstein & Jermakowicz, 2010). In turn, this will adversely affect the small firms’ potential to acquire credit. On the other hand, large organisations may support this standard because it would allow them to report less profit. Reporting less profit will enable large organisations to address issues such as the pushing for more salaries for employees by trade unions. Therefore, influential stakeholders use lobbying to influence amendments or formulation of accounting standards that will favour them while other stakeholders suffer adverse and costly effects. The amendment or formulation of favourable standards for some companies while other firms incur costs due to the effect of such standards is achieved when political influence is exerted by governance mechanisms imposed on the standard setter such as monitoring bodies, degree of delegation and veto power. The standard setter may also be financed, if it is a private body to influence standard setting (Mourik & Walton, 2013, p, 254). This means that influential organisations will offer to fund the operations of private standard setters with an aim of obtaining the advantage of forcing the standard setter to compromise to their needs, failure to which they may withdraw their funding. Lobbying and Compromises and Exceptions Lobbying on standard setting in accounting involves powerful players. These parties include major stakeholders, some of which are influential organisations, allied to the government or other influential authorities. The main objective of accounting standard setters such as FASB is to build up a superior, universal theoretical framework that provides a robust foundation for formulating future accounting standards (Wilson & Adler, 2012, p, 67). Contrary, to this objective, lobbying on standard setting in accounting leads to accounting standards that include compromises and exceptions, that contradict the conceptual basis. For instance, lobbying led to the amendment of accounting standards in the recognition of changes in the fair value of financial instruments in income, or directly in equity, which is sometimes referred to as other comprehensive income. Another standard whose conceptual basis has been contradicted by lobbying is the standard on expensing of management stock options in income or only disclosure. This has led to the introduction of the smoothing of pension liabilities with the corridor approach devise (Mourik & Walton, 2013, p, 254). Groups can lobby the government to enforce their needs. A perfect example in this case entails the events that involved European financial institutions, specifically, French banks which used former Prime Minister Jacque Chirac, in relation to avoid IAS 39, recognition and measurement of financial instruments (Papadopoulos, 2011, p, 8). At that time, the European Reporting Advisory Group was set up. The European Reporting Advisory also established a Technical Expert Group, which was composed of accounting profession representatives, stock exchange regulators, financial analysts, financial statement preparers and accounting standard setters. The Accounting Regulatory Committee is responsible for making a final decision on endorsement of IASB standards for use in the European Union (Alexander & Archer, 2008). The Accounting Regulatory Committee also comprised of government representatives, each from every European Union member state. The chair of the Accounting Regulatory Committee is a representative of the European Commission, meaning that the Accounting Regulatory Committee has a political element. When it was endorsed to determine whether the Accounting Regulatory Committee would be given powers to set and influence IASB standards, all the standards except IAS 39, recognition and measurement of financial instruments were endorsed. The accounting standard, IAS 39, recognition and measurement of financial instruments received partial endorsement because of lobbying by four European Union member states’ banks. The countries whose banks instituted a lobby on IAS 39 are Italy, France, Germany and Belgium. This shows that lobbying on standard setting in accounting can be done by groups which force the government to give their needs priority. Lobbying and Changing of Accounting Standards Lobbying on standard setting in accounting can lead to a change or changes of accounting standards. For instance, groups can use their power to advise others so as to influence accounting standard setters to an extent that accounting standards are changed. The objective of catalysing a change in accounting standards by these groups or organisations is organisational gain in financial statements reporting. Lobbying has led to a change in some of the accounting standards. A perfect example where a standard was changed is the treatment of stock options. The change in the accounting standard for treatment of stock based compensation can be explained in a few steps. First, the IASB made a requirement that stock options are expenses, and should be recorded as such. While drafting FAS 123, Accounting for Stock Based Compensation, FASB also stated that stock options should be treated as expenses and be recognised as expenses in financial statements (Dowers & Masci, 2003, p, 222). This provision did not last long to be implemented in the operations and reporting requirements for organisations. Lobbying on standard setting in accounting led to the change of this accounting standard. That is why in the final version of FAS 123, Accounting for Stock Based Compensation, as created by FASB, the initial standard was changed via lobbying on standard setting to fulfil business interests and the interests of politicians (Dowers & Masci, 2003, p, 222). This resulted into a compromising situation where FASB had to change the accounting standard, as per the needs of businesses and politicians. The compromise opted for a disclosure in the footnotes of the financial statements, instead of recognising stock options as an expense, as suggested by FASB’s initial position (Dowers & Masci, 2003, 222). Another example of successful lobbying involves accounting for business combinations and intangibles. The key intangible involved in this case is goodwill. FASB was advised by the SEC to address the issue of business combinations and the treatment of intangible assets such as goodwill, during these combinations. As a result, FASB formulated a standard which required that the pooling-of-interests method of accounting for business combinations should be eliminated, and that there should be mandatory amortization of goodwill. As formulated by FASB, the amortization of goodwill should be carried out over a maximum of twenty years. This provision made by FASB, would have made the standard similar to the provision of the IASC on the treatment of intangibles such as goodwill, during business combinations was it not because of lobbying on standard setting in accounting. Therefore, the industry opposed the issue of mandatory amortization of goodwill, during business combinations, and this led to placement of an appeal to members of Congress for relief. FASB had to formulate another draft for this standard, treatment of intangible assets during business combinations, with different requirements. In the new provision, a periodic impairment test for goodwill was proposed while amortization was disallowed. Therefore, the pooling-of-interests method was outlawed, and in its place was the periodic impairment test for goodwill (Zeff, 2002, p, 51). Conclusion Lobbying on standard setting in accounting involves the activities of various organisations, especially stakeholders, aiming at influencing accounting standard setters (Luca, 2012). Lobbying influences the formulation and implementation of some accounting standards. Based on this critical evaluation, lobbying on standard setting in accounting has both positive and negative impacts. The impacts of lobbying on standard setting in accounting affect both the stakeholders and accounting standard setters. There are two major advantages associated with lobbying on standard setting in accounting. First, lobbying on standard setting in accounting ensures that there is assurance and legitimacy among standard setters. The pressure that lobbyists pose to accounting standard setters leads to improvement in the formulation of accounting standards. In turn, legitimacy and credibility of accounting standard setters are enhanced. Lobbying also pushes for innovation among accounting standard setters. Secondly, lobbying on standard setting in accounting offers an opportunity to all the stakeholders to take part in the process of setting accounting standards. It also determines concerns about an issue to establish the possible implementation problems and costs of future standards. On the other hand, lobbying on standard setting in accounting leads to the amendment or change of accounting standards, in favour of some stakeholders. That is why some organisations have benefited from favourable standards, which have been formulated through lobbying while others incur costs due to the effect of such standards on them. Lobbyists use various mechanisms to achieve their objectives in lobbying. These mechanisms include governance mechanisms imposed on the setter, such as monitoring bodies and financing of the standard setter, if it is a private body to influence the process of accounting standard setting. It should also be noted that lobbying leads to compromises and exceptions. Commanding and powerful organisations can use lobbying to have their priorities considered in the formulation of accounting standards. Finally, lobbying on standard setting in accounting can result into change of accounting standards. References Alexander, D., & Archer, S., 2008. International Accounting/Financial Reporting Standards Guide 2009. Chicago : CCH Press. Collier, P. M., & Agyei-Ampomah, S., 2008. Management Accounting: Risk and Control Strategy. Oxford : CIMA Press. Dowers, K., & Masci, P., 2003. Focus on Capital: New Approaches to Developing Latin American Capital Markets. Washington, D.C: Inter-American Development Bank Press. Epstein, B. J., & Jermakowicz, E. K., 2010. WILEY Interpretation and Application of International Financial Reporting. Hoboken: Wiley and Sons Press. Frattini, G., 2007. Improving Business Reporting: New Rules, New Opportunities, New Trends. Milano: Giuffre? Press. Godfrey, J. M., & Chalmers, K., 2007. Globalisation of Accounting Standards. Cheltenham : Elgar Press. Holgate, P., 2006. Accounting Principles for Lawyers. Cambridge: Cambridge University Press. Luca, F. D., 2012. Lobbying and a Single Set of Accounting Standards Worldwide: the Stock Options Accounting Case. Retrieved from http://www.wbiconpro.com/106-Ferdinando.pdf Ma, R., 2000. Financial Reporting in the Pacific Asia Region. Singapore : Singapore Institute of Management Press. McKay, A. M., 2006. The Effects of a Competitive Lobbying Environment on Policymakers, Demanders and Outcomes. Ann Arbor: ProQuest LLC Press. Mourik, C. v., & Walton, P., 2013. The Routledge Companion to Accounting, Reporting and Regulation. New York: Routledge Publications . Papadopoulos, P., 2011. Approaches and Theories to Standard Setting in Accounting. Mu?nchen : GRIN Verlag GmbH Press. Peters, A., Forster, T., & Koechlin, L., 2012. Towards Non-State Actors as Effective,Legitimate, and Accountable Standard Setters. Retrieved from https://ius.unibas.ch/uploads/publics/9592/20100219154312_4b7ea38025c0e.pdf PRCA., 2013. Definition of Lobbying. Retrieved from http://www.prca.org.uk/assets/files/Definition%20of%20Lobbying.pdf Schmidt, M., 2002. On the Legitimacy of Accounting Standard Setting By Privately Organised Institutions in Germany and Europe. Schmalenbach Busiess Review, pp. 171-193. Tulsian., 2006. Fin Accounting (Du Bcom) 2E. New York: Tata McGraw-Hill Education Press. UKPAC.,2013. UKPAC: Definition of Lobbying and Related Matters. Retrieved from http://www.cipr.co.uk/sites/default/files/Definition%20of%20Lobbying.pdf United States General Accounting Office., 2001. Financial Management FFMIA Implementation Critical for Federal Accountability: Report to Congressional Committees. Wahington D.C: DIANE Publishing Company. Wilson, R. M., & Adler, R. W., 2012. Teaching IFRS Wilson Adler. New York: Routledge Publications. Zeff, S. A., 2002. Political” Lobbying on Proposed Standards: A Challenge to the IASB. Accounting Horizons, pp. 43-54. Read More