Politicization of Accounting Standards - Essay Example

POLITICIZATION OF ACCOUNTING STANDARDS Politicization of accounting standards Accounting is the process of identifying, communicating, measuring and recording economic information to influence judgment and decision making processes by users of economic information. Accounting also refers to the process of identifying, recording, analyzing and reporting financial transactions of an enterprise or a business. Accounting is well acknowledged and known to be an important aspect of in the society. The society is the origin of accounting hence accounting is socially developed and socially constructing. Accounting influences accounting and accounting is influenced by the society (Hines 1988). According to Riley (2012)1, the main purpose of accounting is to report on entities’ financial position and to show the financial performance of an entity over a particular period. Accounting information has a wide scope of users. These users consist of shareholders, government, creditors, suppliers, customers, public, employers, competitors, investors and managers of a business or an organization. Due to its wide scope of users, accounting information plays an important role in influencing various business decisions made in industries, companies, government offices and business entities. Accounting process follows numbers of values that enable accounting information to be reliable and useful to users. The essential ethics in accounting include honesty and integrity, faithfulness and trustworthiness, dependability and reliance and ability to care for others (Connell, 2002). 2 Accounting provides many benefits to users in different areas of the economy in Today’s World. First, accounting information and knowledge is widely used in all job specialties. Auditors apply accounting techniques in studying financial statements in the process of evaluating integrity and accuracy of enterprises. Secretaries use accounting information in carrying out different tasks in their organizations. For example, secretaries manage check books and order statements in different companies using accounting knowledge. Executives also use accounting information in financial statements in judging performance and success of companies and organizations. Executives use accounting information in determining growth rates of their companies and the profit margin obtained. Accounting information and techniques are important for individual and personal benefits. Use of accounting information enables individuals to assess, manage and control personal finances adequately. In addition, individuals may apply accounting techniques and knowledge in making financial decisions involving investments, interest rates, taxes and other financial activities. Proper monitoring and control of accounting information should be appropriately performed through setting up reliable, common and appropriate accounting standards due to its vast importance. However, the accounting professional is currently facing several problems in its application and management. Some of accounting problems include contradicting policies, poor and bias management of accounting standards and legitimacy and politicization of accounting standards. These issues in accounting result to ineffectiveness, biasness, inconsistence and lack of accountability in accounting. In addition, some of these accounting problems have adverse effects on members of the society. Politicization and legitimacy of accounting standards is a major problem that is causing a great problem in the society. Politicization of accounting standards refers to influences in formation or implementation of accounting standards by politicians, prominent businessmen, big companies or associations in order to protect their interest. Some accountants have reported that accounting firms that manage accounting are influenced by some groups to act in their interest. Politicization of accounting standards occurs where firms and businesses support or give fund to accounting regulatory bodies. Funding and supporting accounting bodies’ make the bodies considerate of views of the funding company hence they act in line the companies’ views and requirements. Legitimacy refers to process through which a body or an entity conforms to rules and requirement of another body or organization. According to Albrecht (2010)3, leaders of accounting firms and companies such as Securities and Exchange Commission (SEC), FASB and IASB have publicly stated that the process and stages of setting accounting standards should and must be free and devoid from the influence of some companies that have personal interests. This clearly indicates that accounting standards are influenced by political groups of people or companies that aim at obtaining benefits from the formation of set standards. Enactment of accounting standards has economic consequences on different firms using accounting standards. The economic consequences of enacting new accounting policies possess great opportunities to firms that are able to affect the FASB or IASB in various ways. There are different cases where accounting standards have been influenced to act in their own interest. One of the prominent cases where the politicization of accounting standards setting occurred was in the formation of the accounting standards for the extraction industries. A committee was set up to come up with the appropriate method of accounting for pre-production activities that extraction companies carried out. The two main methods of accounting proposed were successful effort methods and the full cost method. The successful effort method states that costs associated with exploration and evaluation activities can be capitalized only if there is successful discovery. If the discovery is unsuccessful, the exploration and evaluation costs will be recorded as incurred expenses. However, the full cost method recorded all cost incurred in exploitation and evaluation as the cost of production or be capitalized whether the discovery was successful or not. Exploitation industries preferred using the full cost method even if it was consistent with accounting principles because the full cost method revealed that the company has higher capital that in the application of the successful efforts method. According to Cortese 4(2013), the Steering committee formed to establish the accounting standards revealed that IASC/ IASB faced influences from other companies such as KPMG. For example, the Chairman of the Steering committee was a partner of KPMG. In addition, John A. Gordon, a member of the committee was seconded to participate in the project by a KPMG office in Canada. Presence of KPMG partners in the committee gave the KPMG greater significance in making decisions regarding accounting for pre-production activities. Extraction companies such as PwC, Deloitte Touche Tohmatsu, KPMG and Ernst & Young also supported IASC/ IASB through provision of necessary resources like technical expertise, staff and committee members. These companies influenced many decisions made by IASC/ IASB in order to favor their interest in the establishment of accounting standards since they supported the accounting regulatory body with resources. During the decision making, KPMG recommended that the previous accounting method i.e. full cost method would be eliminated but be codified. In addition, OIAC had a similar comment to the one given by KPMG that there is no right or wrong in using any of the two methods in accounting for pre-production activities. However, it stressed that the two methods should be retained and each extraction company may use in accounting. Kerr-McGee also participated passively in the formation and setting of accounting standards. This is according the statement released by Kerr-McGee stating that its support was represented by the Oil Industry Accounting Committee during the setting of accounting standards 5Cortese (2013). The committee later decided to an entity may continue applying accounting standards used in past years. This decision was in line with many recommendations made by enterprises and other regulatory bodies such as KPMG, OIAC and Kerr-McGee. This reveals that decisions made by accounting regulatory bodies such as IFRS, IASB and FASB are bias and favor interest of some group. Consequently, these standards and decisions result to inequality in a society where small firms are required to act according to standards that favor big and prominent firms and companies. Legitimacy in accounting is also evident as regulatory bodies act according to recommendations of a prominent company that supports these bodies. Therefore, international bodies fail to act as independent and accountable bodies of regulating and controlling accounting standards. This causes social harm since accounting standards unequally treat firms. The global standard-setter (IASB) also faces legitimation from other regulatory bodies such as SEC, IOSCO and G20 (Kusano and Sanada, 2013)6. IASB follows regulations and policies of other accounting bodies no matter their effect to the society. Consequently, inappropriate and biased accounting standards are adopted by numerous companies and organizations in their financial operation. Adoption of these accounting policies causes social problems where firms require to spend heavily in hiring competent accountants. In addition, firms and companies are forced to follow complicated and tedious methods of accounting that are developed in favor of interests of some companies. The cost of hiring competent accountants and auditors is implicated in the prices of goods and services produced by companies and organization. Therefore, the adverse effects of adopting of inappropriate accounting policies are passed on to the society inform of high prices of goods and services. According to Younglai (2009), politicization of accounting standards was also recognized by top U.S. accounting setter. FASB chairperson Robert Herz said that politicization of accounting standards undermined public confidence in the integrity and reliability of the financial reporting. The Congress was recognized to pressure FASB to change modify accounting policies mainly the mark-to-market accounting standard that ensured banks and financial institutions record billions of dollars in write-downs. Later, the rule was modified and assets valued at current market prices. This reveals that political bodies such as the Congress influence decisions made by accounting bodies. Companies such as AIG influence accounting decisions in various regulatory bodies. For instance, in 2008, AIG’s CEO spent some time convincing the lawmakers that insurer’s credit default swaps were appropriate instead of using the mark-to-market accounting standard. After the change of accounting standards, AIG started collapsing due to credit default swaps. Consequently, the federal government incurred heavy expenses in the process of saving the collapsing company. Therefore, politicization of accounting standards may result to social harm where the society may be required to pay high taxes to finance some activities caused by poor accounting decision made by accounting regulatory bodies. In conclusion, politicization and legitimacy of the global accounting standards have negative impacts on the society. Development of biased accounting policies caused by politicization and legitimacy of accounting standards impose heavy and expensive requirements to companies and organizations. These standards require company executives to invest heavily in hiring competent and certified accountants and auditors. The high costs of hiring certified accountants and auditors are paid customers and consumers of goods and services through increased costs. Therefore, the negative effects of politicization of accounting standards have greater effect on the society than on other users of accounting information. Bibliography Cortese, Corinne. Politicization of the international accounting standard setting process: evidence from the extractive industries. University of Wollongong. 2013 http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1298&context=buspapers Kusano & Sanada. Financial crisis and legitimacy of global accounting standards. Kyoto University press. 2013 https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CDYQFjAB&url=http%3A%2F%2Fwww.apira2013.org%2Fproceedings%2Fpdfs%2FK094.pdf&ei=FqRSU9SoIcSqO5KDgJgM&usg=AFQjCNGfU8iY_2hIBYBnXElVeFVpBFt9aQ&sig2=rLgrquqUCBUOYVVXSPo2mw&bvm=bv.65058239,d.ZWU Cortese, C., I r vine, H. and Kaidonis, M. Standard setting for the Extractive Industries: A Critical Examination. Australasian Accounting Business and Finance Journal. 1(3), 2007. http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1447&context=commpapers Kinyo, Linda. Politicilization of Accounting Standards. Hubpages. 2014 http://lindakinyo.hubpages.com/hub/Politicalization-of-Accounting-Standards Albrecht, David. Economic Consequences and the Political Nature of Accounting Standard Setting. The Summa,2010 http://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/ Read More