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

RUNNING HEAD: The Impact of Lobbying The Impact of Lobbying on Standard Setting in Accounting of Date 1. Introduction Knowing the impact or influence of something on another thing could be a way determining the desired status of the latter thing. This paper presupposes the existence of an impact of lobbying on standard setting and this would become more evident meaningful after a critical examination and discussion of their relationships with relevant examples. 2.1 What is standard setting in accounting and its purpose? Standard setting is the enactment or improvement of accounting standards for financial reporting. These enacted or improved accounting standards are used guidelines in the preparation of the financial statements (Rezaee and Riley 2009: 274). Since these standards must be complied, under the pain of “penalties” or consequences, companies or entities subject to it are necessarily interested on how should the guidelines or rules of action be made. Standards just like any other laws could be favorable to one person or group but may be unfavorable to another person or group. Standard setting therefore implies a balancing act in terms of its effect among different interested individuals or groups. 2.1.1 What the institutions are involved in standard setting in accounting? Two institutions must come together to have the accounting standards set or financial reporting standards accomplish the latter’s purpose. These are the United States Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). SEC was established was created first in 1934 by the U.S. Congress while FASB’s creation followed in 1973. While SEC is basically an independent regulatory agency which should afford or allow investors information or facts about their investment before buying and while holding the same (Securities and Exchange Commission, 2011. , FASB is an independent, private and not-for-profit organization and recognized authoritative by the SEC (Financial Accounting Standards Board, n.d.). While the first is a government agency which implements laws enacted by congress and the second a private and non-profit organization, both must be independent. It must be observed however that the ultimate power rest with the US Congress acting through the SEC. Although SEC has an influence on FASB because former needs to recognize the latter and the ultimate purpose of the financial reporting standards is still regulation, a necessary government functions. Thus the relationship of SEC and FASB was described by a writer whereby the first is considered irritant and the second is described as an oyster and the financial reporting standard that will get implemented is a pearl (Kieso, et al 2010:23). Although it is the FASB that establishes the reporting standards, it is SEC that gives teeth or force for these standards by requiring compliance with the said guidelines from companies or firms over which is has the jurisdiction. Since the resulting financial statements must be prepared based on the financial reporting standards, in addition to mandatory disclosure requirements by SEC, the required submissions of quarterly and annual reports of by firms or companies give the standards produced the quality of pearl which cannot be ignored by the companies supervised and regulated by the SEC. 2.2 What is lobbying on accounting standard setting? What is its purpose? The aim of lobbying is to influence legislation and since it is done by groups of individuals advocating a common cause. The advocacy therefore of each interest group consists of reasons or justifications why a certain direction must be chosen in making the financial reporting standard for its perceived benefits to society as a whole. Behind the benefits which these interest groups sell to the public are their own interest which would affect the their survival and for the triumph of rights which they believed are well protected by laws like the rights to information, right put up viable business organizations for the efficient functioning of the economy, right of shareholders or owners to have the chance to recover the investments they make in business organizations, and other rights. With advocacy as cause in lobbying, there is therefore a need to identify, embrace and promote said cause and to target the playing field of law–making and or administering the same (Avner, 2002, p. 26). It is on the strength of the reasons coupled with being trustworthy and reliable for the causes of interest groups that lobbying takes is significant role. The lobbyists can choose direct lobbying which involves actual "meeting and communicating with politicians and government servants" and information relevant to the issue must be made available these politicians (Devereuz & Peirson-Smith 2009: 98). The interest groups can also choose as an alternative or in addition indirect lobbying as an alternative strategy. This type of lobbying entails "a grass roots campaign or working from ground upward (Devereuz & Peirson-Smith 2009: 98). The influence of interest groups may be better understood by what they are also called -- pressure groups. Such groups are not only normally expected but they should be considered as fundamental phenomenon of societies where democracy processes are involved (Schneier 2006: 37). It can be argued that the relationship between government and interest groups could be characterized as spherical or symbiotic. Thus interest groups can choose which role to do in law or guideline-making. It can choose to join or not to join by just criticizing. In both cases they still influence standard setting in the process. Since the SEC and FASB will be eventually be evaluated by the acceptability of the guidelines set, the two institutions cannot ignore the participation made by the interest groups. The joining or not joining by the interest groups has to depend on what the interest group is trying to achieve in the particular situation. Interest group can form movements as well as join or form political parties to a vehicle in conveying their messages and interest. Interest groups came about where individual power had to decrease in favor of more group power (Holtzmann, 1966). 2.4 How do interest groups influence on accounting standards setting in the US based on experience? 2.4.1 Interest Groups and the SEC The SEC was founded for the protection of investors in response to the stock market crash of 1929. The agency is empowered to examine corporate documents submitted as required by law. It also can regulate stock exchanges in the US, require full disclosure of market-related information from companies through registration. Its power implement the various law comes with its power to exact compliance since it can impose penalties for violations (Securities and Exchange Commission 2011). Sarbanes Oxley Act (SOX) of 2002 requires chief executive to attest to the accuracy of the corporate financial statements. It also requires companies to certify that controls are in place to prevent fraud. In reaction of powers exercised by SEC, constitutional questions have reached the courts. One example involves the SEC’ the company’s clearance which could be perceived as partly in favor of increased shareholder rights (Corporate Policy 2007). Those who questions SEC’s power included some powerful industry and lobby groups, including the US Chamber of Commerce and the American Bankers Association (Washington Post 2005). 2.4.2 Interest Groups and the FASB Different pressure groups have done moves to cause outcome of FASB’s standard setting process decided in their favor. These groups include the US Government and the group of auditors as represented by Big Five. McEnroe & Martens (1998) cited study questioning the independence of the FASB. Questioning the independence implies not agreeing to the objectivity of the standards that will be passed by the FASB, comparable to questioning the independence of a court in its fairness. The same charge of having bias was imputed against FASB by a sufficient number the participating CFOs from the top 500 US companies for the failure of board not to evaluate all suggestions equally. More than half of the same CFO accused the SEC and less than half blamed the Big Five auditors. However, a perfect balance of some standards reflective of lobbyist activities with the FASB’s conceptual framework was noted (Wyatt, 1989, p. 97) The impact of lobbying on standard setting should not be surprising since the purpose of lobby groups is indeed to influence a decision maker in favor of a specific opinion or cause. Since lobby groups are part of democratic rights of citizens, the latter’s forming themselves into groups are just expected to happen. Congress either directly addresses the FASB or uses the SEC, being a government institution, for its purposes. The legislative power of Congress in making laws affecting r SEC and FASB is plenary as it is an in dependent branch of government which cannot be restrained even by the President of the United States and Supreme Court of the same country. It can therefore stop the implementation of an accounting method that it would consider detrimental to business. This can be seen in what happened in 1979 in stopping the use an accounting method (The Economist 2002, p. 67). The same can be said of a FASB proposal in 1993 about accounting stock options as expenses, where FASB standard-setting power may just be taken away under the police power of the state (Sharma 2009: 88). The standard setter of accounting is assigned to FASB and whether interest groups can really influence the work of the latter depends on what they can do. If the lobby groups finances the operation of the FASB and surely the lobby groups would be more in a position to influence the work of the FASB. It is said the one who has the money has the power. A question that should be answered is what finances FASB operation? As an independent body, it can generate its own fund by levying fess on companies. The SOX gave the SEC more overseeing power over the FASB and changed the FASB’s funding in answer to numerous major corporate and accounting scandals such as the cases of Enron, Tyco International and World Com. FASB is envisioned to have a firmer legal status under the SOX and it would be allowed to have self-funding from levied fees on public companies. SEC however needs to approve the board’s budget first (Smith, 2007: 9) and this has the effect of setting or influencing collection of fees (Young 2003 A-27)and how the fees would be used to finance the cost of operation of the board. The big auditor firms are believed to be discharging a major role in the standard setting process. Although it is hard to know the exact impact of influence, their form of lobbying is more subtle and secret. Wyatt (2004) complains auditors becoming too convenient with clients (Wyatt 2004 p. 96) that contributed to accounting scandals because of circumvention of reporting standards. What is directly blamed as cause of coziness with clients is evolution of consulting services provided by auditors in addition to auditing them. Investment bankers and security analyst that put pressure on companies to show grow for the formers’ interest were also blamed as evidenced by bloated revenue and understated expense in relation to time by acceleration and delay respectively (Wyatt 2004, p. 99). (Wyatt (1989, p 98) cited Statement no. 87 among others as an example of lobbying output tinted with undue or unfair influence. However FASB benefits from lobbyists’ inputs for the board as it gets a broader view over the issue. By developing a way participation by all public companies through the latter’s opinion in a transparent way, the lobbyists’ contributions became clearer. Doubts were raised whether all inputs have the chance of being treated equally (McEnroe and Martens 1998: 53) 2.5 Illustration on the how and why lobbying could happen in standard setting The issue of fair value accounting as against historical accounting could further illustrate the point of lobbying involving different interests. Traditionally, accounting information is historical but with the presence of fair value accounting, there must be some interest groups who wanted to effect the change. It was therefore an issue between relevancy and reliability. Historical information supported with evidence is said to be more reliable than forecasts. However, since decision are to be made about the future, the requirement of relevance as a qualitative characteristic of accounting information may not by fully complied with or satisfied. Thus accounting standard setters would like to make balance between the two characteristics - relevance and reliability. With fair value accounting, the information may towards looking at future to towards requirement of relevancy but less of reliability. As to why standard setters have chosen to do the fair value can be considered to have come from pressure groups which wanted things to be better for their interest. For example, which group would be interested in historical based accounting? Those who would want historical accounting would be those who would go for reliability of accounting information. As to whether investors need historical information, the answer is a big yes. At the same time investors want relevance, hence they fair value information. The reason is of course is in answer to question on whether the companies have invested money of the investor. As to who choses fair value accounting would be those that would value relevance and would see things in their interests. Consider the banks or the financial institutions in their use of fair value accounting. It is argued that when the economy is booming, it would appear that values of assets would be high for the balance sheets of the banks. This would therefore mean allowing the banks to present a favorable picture of the companies which would produce the effect of signaling the attractiveness of making transactions with bank, either as investor or creditor. Bank investors would be those bank stockholders, while the creditors would include the bank depositors and other institutions that lend funds to the bank. In the case of Citigroup was able to make reclassification of investment accounts to held-maturity (Abdel-khalik, R. n.d.:3 citing CitiGroup 2008: 88). The bank avoided to recognize unrealized losses for income statement purposes, thus showing a better picture than would be otherwise. 3. Conclusion: This paper has analysed and discussed the nature and purpose of standard setting in relation to lobbying interest groups which basically want to influence then results according to what is favorable to their interests. That standard setting in accounting is expected to generate lobbying because interest groups are expected to be affected. It is only natural to influence things towards their own interest but since standard settings is guided by its purpose of giving justice to everyone, what is fair and just to all concerned is what is being approximated by FASB. The interest groups are as varied as their interests and they find their commonality to work form they given their acceptance to the standards. The influence therefore of interest groups on standard setting is actually helping SEC in its job of helping the stock market and the economy to be stabilized. This paper has also illustrated how fair value accounting as of the financial reporting standard will cause the interest groups affected to behave accordingly. 4. References: Abdel-khalik, R n.d. The Case against Fair Value Accounting. Retrieved 28 June 2011 from http://www.pdfcari.com/The-Case-against-Fair-Value-Accounting*.html Avner, M 2002, “The Lobbying and Advocacy Handbook for Nonprofit Organizations”, Amherst H Wilder Foundation, St. Paul. Citigroup. 2011. Annual Report for 2008. Retrieved June 28, 2011 from http://www.citigroup.com/citi/fin/data/q1002c.pdf Corporate Policy 2007, “No more Enrons”. Retrieved June 28, 2011 from: http://www.corporatepolicy.org/topics/Backlash.htm Devereux, M. and A. Peirson-Smith 2009, Public Relations in Asia Pacific: Communicating Effectively Across Cultures. John Wiley and Sons Financial Accounting Standards Board n.d.), “Facts about the FASB”. Retrieved June 28, 2011, from: http://www.fasb.org/facts/ Holtzmann, A 1966, “Interest Groups And Lobbying”, Macmillan, New York. Kieso, D., J. Weygandt & T. Warfield 2010. Intermediate Accounting: IFRS Edition, Volume 1. John Wiley and Sons McEnroe, J & Martens, S 1998, ‘Perceptions of Chief Financial Officers concerning FASB’, The CPA Journal, December 1998, Vol. 68, Issue 12, p52-55. Rezaee, Z. and R. Riley. 2009. Financial Statement Fraud: Prevention and Detection John Wiley and Sons Schneier. E. 2006. Crafting constitutional democracies: the politics of institutional design. . Rowman & Littlefield Schneier. E. 2006. Rowman & LittlefieldCrafting constitutional democracies: the politics of institutional design Securities and Exchange Commission 2111, “The Investor’s Advocate: How SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation”. Retrieved April 18, 2007, from: http://www.sec.gov/about/whatwedo.shtml. Sharma, B. 2009. Introduction To The Constitution Of India 5Th Ed. PHI Learning Pvt. Ltd. Smith, P. 2007. SEC Accused of intrusion into FASB. Accountancy Magazine, page 9 The Economist 2002, ‘Badly in need of repair’, The Economist, 5/4/2002, Vol. 363, Issue 8271, p66-68. Washington Post 2005, “Trade groups, firms push to ease tough federal scrutiny”. Retrieved June 29, 2011, from: http://www.washingtonpost.com/ac2/wp-dyn/A43168-2005Jan2?language=printer Wyatt, A 1989, ‘Commentary on Accounting Standards and the Professional Auditor’, Accounting Horizons, June 1989, pp. 95 - 102. Wyatt, A 2004, ‘Accountants’ Responsibilities and Morality’, The CPA Journal, March 2004, Vol. 74 Issue 3, pp. 21-28. Young, M. 2003. The financial reporting handbook. Aspen Publishers, p. A-27 Read More