Lobbying on Standard Setting in Accounting - Assignment Example

Impact of lobbying on standard setting in accounting Contents Introduction 1 Issues involved: Lobbying on standard setting in accounting 2 Analysis: impacts of lobbying on standard setting 4 Arguments 6 Conclusion 7 References 9 Introduction The accounting framework is standardized by the Financial Standards Accounting Board (FASB) through various rules and regulations in the field of accounting in order to provide consistent financial information to the users of the financial statements. The Securities and Exchange Commission (SEC) overviews the functions of the FASB in line with its objective of ensure a level playing ground for the public investors. The chairman of SEC is selected through political appointment by the federal government (Amershi, Demski and Wolfson, 1982, p.22). Thus, it is less likely that chairman would not be influenced by the activities of lobbying in the field of setting accounting standards. The lobbying activities in the field of accounting standard setting is directed at influencing the FASB in providing more flexibility to the firm in their accounting practice with no attention towards the safeguarding the long term interests of the firm as well as the investors (Andre, Cazavan-Jeny, Dick, Richard and Walton, 2009, p.24). The intentions of the lobbies are guided by narrow interests of enhancing short term economic value of the firm by allowing relaxations in the accounting standards which are contradictory to the rules and regulations prescribed by FASB. This piece of work is aimed at analyzing the impacts of lobbying on standard setting by FASB in accounting practices of the firms. Issues involved: Lobbying on standard setting in accounting The process of standard setting in accounting is guided by the rules and regulation of Financial Accounting Standards Board (FASB). The issues involved in the process of standard setting in accounting bring to light the influence of politics and activities of lobbying on setting the standards for accounting (Ball and Foster, 1982, p.165). The activities of lobbying in the setting of standards in accounting explains that politics and lobbying have a direct influence over the activity of standard setting as in the financial policy framework of the organizations. The lobbying activities include purposeful intervention with an aim to manipulate the setting of accounting standards with the help of economic activities so that the economic value added to the company could be enhanced (Beresford 1, 1997, p.90). This is, however, viewed to be inconsistent in accordance with the guidelines of the Financial Accounting Standards Board (FASB). The activities of lobbying is aimed at derailing the standard setters from the achieving the objectives as set by the Financial Accounting Standards Board though reporting of consistent financial statements. FASB recommends improvement of transparency in accounting by setting the standards on accounting procedure and providing flexibility in the process of reporting financial statement and accounts. The issues related to lobbying on standard setting in accounting arise when the Congress is influenced by the politically influential constituents which are misdirected to achieve self motivated interests (Beresford 2, 2001, p.85). The lobbying by the accounting firms in the process of standard setting could also lead to improve of accounting standards being set by their clients. This is achieved by addressing the areas of ambiguity in the accounting rules prescribed by Financial Accounting Standards Board. The various issues in case of lobbying in the area of setting accounting standards highlight the interests of the companies to reduce costs and attain flexibility in financial reporting (Bertomeu and Cheynel, 2013, p.814). For example, the accounting standards set by FASB requires the company account to be reviewed on a periodic basis by the auditors. The activities of lobbying are thus aimed to reduce the cost of audit, litigation for the increasing audit requirements as prescribed by the accounting standards. The Securities and Exchange Commission (SEC) also plays an important role in the field of accounting standard setting. The mission of SEC is to achieve a level playing ground for the investors and has supported FASB in situation where FASB has been influenced by political pressures in the past to manipulate the standard setting norms in accounting. An example of the SEC’s support towards setting of standards in accounting is the implementation of SAB 101 rule which has reduced the company’s ability to manage the total earnings of the firm when excess of revenue recognition by the companies was perceived. This was done to strengthen the activity of financial reporting of the firms (Bertomeu and Magee, 2011, p.217). Moreover, the SEC being a government regulatory agency often faces political influence from the ruling parties in the government especially on issues that are inconsistent with the FASB rule. An example of such political influence includes the cancellation of SFAS 19 rule by SEC in the 1970s after it was implemented by FASB. By cancellation of the FASB rule, the oil companies were allowed to apply full cost accounting after the same was disallowed by FASB (Collins, and Dent, 1979, p.42). The Securities and Exchange Commission is also chaired by individuals who are introduced through political appointments. The consistency in the decision making on the part of the chairman is less likely as he/she is also guided by political intentions (Brown, 1981, p.236). Analysis: impacts of lobbying on standard setting The impacts of the activities of lobbying on the accounting standards setting process have been explained as follows. The lobbying activities in the process of setting account standards is aimed at derailing the standard setter from the right direction of fulfilling the economic interests of the firm as well as protect the interests of the investors through implementation of the accounting standards (Deakin, 1989, p.137). The accounting standards are implemented by the Financial Accounting Statements Board (FASB) in accordance with the US GAAP, i.e. generally accepted accounting principles. The accounting standards limit the accounting alternatives for the firms and aim to strengthen the preparation of financial statements and accounts (Dechow, Hutton and Sloan, 1996, p.16). The accounting standards mandate the review of the financial statements and accounts on a periodic basis and the reporting of financial statements in timely manner to protect the interest of the investors which is the mission of the SEC. The activities of lobbying have been guided by the interest of the political parties and influencing the SEC and the FASB in modifying the accounting standards. The manipulation of the accounting standards as a result of intentional intervention through lobbying activities has impacted both the companies as well as the public (Farber, Johnson and Petroni, 2007, p.22). The politically motivated interest towards lobbying with the accounting standards have resulted in the loss of net worth of the companies and at the same time has exposed the investors to the risk of non-level playing ground. The intervention by the method of lobbying in the field of accounting standards have negotiated with the SEC and the FASB in the areas of cost accounting procedure, requirement of mandatory requirement for review of financial statements and accounts, etc. As a result of lobbying and the political influence over SEC and FASB, the public companies have been able to attain flexibility in cost accounting. The cost of review for the accounts in the form of audit fees has also been reduced by the companies (Francis, 1987, p.45). Although the impacts of lobbying in the area of standard setting in accounting practices have resulted in the short term economic value for the firms, it has hampered the long term interests and sustainability of the business process. The reporting of financial statements and accounts in absence of mandatory audit with an objective to reduce the cost of review of accounts have resulted in accurate information being reported to the public investors (Haring, 1979, p.510). The investors were also exposed to inaccurate information due to the relaxation of the accounting standards and the flexibility offered to the firms in the accounting practices by FASB and SEC as a result of political interventions. The activities of lobbying dislocated SEC from fulfilling its mission of ensuring the level playground for all public investors. The investments decisions made by the investors were not accurate as a result of non-compliance with the accounting standard by the firm. Thus lobbying in the area of standard setting in accounting practice have impacted the investors and exposed them to a higher risk of not getting the desired return on investment. Arguments The analysis of the activities of standard setting in accounting could be discussed and argued with reference to the various theoretical frameworks on the regulation of accounting standard setting. There are, however, two prevalent frameworks, namely the economic framework and the public welfare framework that guide the regulations of standard setting put forward by FASB in the field of accounting. The economic theory justifies the standard setting in accounting framework with the view to generate maximum revenues and profits for the organization. The political interventions in the area of lobbying in standard setting for calculating the cost of the company is aimed to achieving maximum margin for profits of the organizations (Hill, Shelton and Stevens, 2002, p.90). A reduction of cost due to the changed accounting standards and reduction of the audit requirements help the government to reduce the cost for the public enterprises. In cases, the political parties have lobbied with the SEC to bring about changes in the accounting standards (Holthausen and Leftwich, 1983, p.117). Thus the interventions in the setting of the accounting standards have been guided by the motivation and interest of the political parties and the SEC and FASB have succumbed to these political influences. The other theoretical framework is the public welfare theory which guides the regulation for setting the accounting standards. According to this theory, the political lobbies have envisaged setting of accounting standards that strengthen the investors of the public and the investors. In order to set standards for public welfare, the Securities and Exchange Commission has supported the FASB whenever it has come under the political influences of the lobbies (Ndubizu, Choi and Jain, 1993, p.287). The SEC declared the FASB as the independent body in standard setting for the public companies. The government has also declared independence of the FASB in standard setting of accounting procedures which was evidence in the mandatory funding scheme for FASB under the Sarbanes Oxley Act introduced in 2002. The Sarbanes Oxley Act introduced in 2002 requires the companies to publish their financial statements and accounts, intermediate transactions that are of high importance in view of the interests of the shareholders (King and O’Keefe, 1986, p.90). The welfare for the public is ensured by the accounting standards as they strengthen the preparation of accounts and the financial statements and provide transparency on the financial transactions carried out by the company (Kothari, Ramanna and Skinner, 2010, p.285). The standard setters ensure that the interests of the public and the investors are restored with the activities of limiting the flexibility of accounting practices by ensuring compliance with the standard accounting procedures (Ball, 2009, p.295). The generally accepted accounting principles have transformed in to a more rule based set of activities and has attained high degree of independence from the lobbying activities in the area of standard setting in accounting. The decrease of lobbying in the standard setting activities in accounting has increased the influence of SEC and FASB over the prescribed rules in accounting practice. Conclusion The impacts of lobbying activities on the setting of accounting standards have been reviewed under the theoretical frameworks of economics and public welfare in relation to the accounting practices of the firms. The activities of lobbying may be aimed at reducing the short term costs of the company through relaxation of standards set by the regulatory agencies. This is done by the reduction of costs for review of accounts, audit and thereby providing more flexibility in accounting practices. Although the impacts of lobbying show that the firms have been able to gain short term economic value through relaxation in accounting standards, the long term business sustainability of the firms are hampered due to the decline in confidence for investment among the shareholders. The lobbying of the accounting standards result in the inflated financial statements and accounts and absence of periodic audit functions result in inaccurate reporting of financial statements to the investors. The investors are impacted due to the increase in risk of investments as result of inaccurate and non-transparent financial statements. Thus lobbying with the accounting standards have resulted in adverse impacts on the firms as well as the investors. References Amershi, A. H., Demski, J. S. and Wolfson, M. A. 1982. Strategic behavior and regulation research in accounting. Journal of Accounting and Public Policy. 1(1), pp.19-32. Andre, P., Cazavan-Jeny, A., Dick, W., Richard, C. and Walton, P. 2009. 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Lobbying against proposed accounting standards: The case of employers; pension accounting. Journal of Accounting and Public Policy. 6(1), pp.35-57. Haring, J. R. 1979. Accounting rules and the accounting establishment. Journal of Business. 52(1), pp.507-519. Hill, N. T., Shelton, S. W. and Stevens, K. T. 2002. Corporate lobbying behaviour on accounting for stock-based compensation: Venue and format choices. Abacus. 38(1), pp.78-90. Holthausen, R.W. and Leftwich, R.W. 1983. The economic consequences of accounting choice: Implications of costly contracting and monitoring. Journal of Accounting and Economics. 5(1), pp.77-117. King, R. D. and O’Keefe, T. B. 1986. Lobbying activities and insider trading. The Accounting Review. 61(1), pp.76-90. Kothari, S. P., Ramanna, K. and Skinner, D. J. 2010. Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics. 50(1), pp.246-286. Ndubizu, G. A., Choi, Y. C. and Jain, R. 1993. Corporate lobbying strategy and pension accounting deliberations: An empirical analysis. Journal of Accounting, Auditing, and Finance. 8(1), pp.277-287. Read More