Accounting Standards - Assignment Example

1. “As so often when regulation falls short of what it promises, the ‘solution’ is to reinforce failure by more of the same” Page 69, Myddleton (2004) Unshackling Accountants, IEA fHobart Paper 149. Comment: According to Prof. D. R. Myddleton (2004) in his paper Unshackling Accountants, accounting regulations were actually spurred by corporate scandals. In an attempt to stem off accounting scandals from happening again in the future, regulators implemented more stringent accounting and other regulations. Yet, as Prof. Myddleton stated, the evidence that misleading disclosures caused the investors to lose their investments is very little. These regulations actually stemmed from the fact that the regulators are averse to risks and want to avoid getting the blame when things become worse. If we analyse them deeper, these regulations are not really the solutions to the problems. The accounting standard setters for both the United States and the United Kingdom have always implied that the stakeholders are the ones who should actually benefit from standards (McLeay and Riccaboni, 2002). However, both standard setters fell short “of giving a definition linked to public interest” (McLeay and Riccaboni, 2002) due in part to the changing definition of the ‘true and fair view’ phrase. But according to Myddleton in his 2005 article “What’s Wrong with Modern Accounting?” this phrase has been overshadowed by the need of the regulators to show that they still know best and that accounting principles should actually be mandatory and compulsory. The result, Myddleton (2005) believes, is an overregulation which requires everything to be followed right down to the very “last comma of…Accounting Standards”. In fact, accounting regulations are so diverse and so many that it is now harder by the day to keep track of all of them, which makes it difficult to ensure 100% compliance on all the standards. Despite this, the regulators implement more and more regulations in the hopes of stemming what they perceive as market failures. What these regulations may have achieved, instead, is to make matters worse. As a matter of fact, according to Johan Norberg (2008), these regulations were actually passed to address the problems of yesterday but they can actually become the source of big problems of the future. He cited the Sarbanes-Oxley (SOX) Act of 2002 which introduced “new costs for American companies, fewer public offerings and a flight of talented directors”. The annual costs (on the average), according to a 2003 and 2004 study conducted by a law firm, of a public or registered company have went up by almost 100% after the enactment of SOX (Stephens and Schwartz, 2006). The regulations introduced through SOX in 2002, instead of preventing future accounting scandals, may actually become detriments to the development of the capital market (which is what it is trying to protect in the first place). Thus, the solution has actually become a problem. In cases such as these, overregulation may happen, showing that the regulators did not really balance the need to have a solution against the need to let the market flow unrestricted. With this, the regulators are just setting the stage for another market failure, regardless if such failure will be caused by another accounting scandal or a financial crisis such as the one that we’re experiencing right now. 2. “A non-problem followed by a non-solution: perhaps that sums up the history of accounting standards” Page 14. Myddleton (2004) Unshackling Accountants, IEA Hobart Paper 149. A Look at the History of UK Accounting Standards (with a Comparison of the History of U. S. Accounting Standards) According to Robert Day (2000), the accounting regulations in the UK arose “as a response to social and economic factors as well as individual events”. The development of the accounting standards in UK can be traced as early as the 17th century when businesses were small and personally run by their owners. Accounting then could be limited to mere record-keeping and the records were solely for purposes of the owners. Things changed after the Industrial Revolution, when businesses became bigger, more complex and incorporated more owners. Accounting then became a means for these non-management owners to analyse the operations of the corporations that they own. During this time, however, accounting was still the prerogative of the shareholders and the directors and was not of public domain. Thus, from 1844 to 1929, “very little progress would appear to have been made in the development of accounting through government led regulation” (Day, 2000). The 1930s to the 1940s saw the regulators and the public, in general, clamouring for more transparent disclosures and more fairness in disclosing financial results. Things finally came to a head when the Companies Act of 1948 was issued. The said Act was the start of a new era in the field of accounting. Since then, the accounting regulations in the UK became more rapidly developed. In the 1990s, the “UK accounting standards have been issued by the Accounting Standards Board” (ICAEW, 2009) or ASB. At the same time, the International Accounting Standards Council or IASC was born. In 2001, the IASC changed to the International Accounting Standards Board or IASB as the UK-based publicly-listed companies started to shift to the International Financial Reporting Standards (IFRS). Currently, the publicly-listed companies, as well as the other companies who voluntarily adopted the standards, apply the IFRS while other companies still apply the UK accounting standards. As stated in the previous page, the development of UK’s accounting standards and regulations were characterised by factors unique to its situation. In contrast, the U. S. GAAP rose from the aftermath of the Great Depression of the 1920s. While the Companies Act of 1948 provided the legal basis for the accounting policies in the UK, the U. S. have the Securities Act of 1933 and the Securities and Exchange Act of 1934, two statutes that “formed the legal basis of disclosure policy” and created “a new agency – the Securities and Exchange Commission – to enforce the rules” (Litan and Wallison, 2000). Like the UK accounting principles, the authority to set new accounting standards was delegated to the accounting professionals, with the government playing the role of interventionist when the need arises. However, unlike the UK accounting principles (which have evolved to, in some cases, the IFRS), the U. S. GAAP is still the only accounting standards followed in the U. S. Matters may change when the U. S. converges with IFRS but until then, the U. S. GAAP are the principles followed by U. S.-based companies. 3. “The business world is simply too complex for a single set of rules to effectively describe economic reality for all enterprises…” Warren Buffet in, Lawrence A Cunningham, The Essays of Warren Buffet: Lessons for Investors and Managers, John Wiley, 2002, p.223. Discussion: The current efforts to converge the U. S. Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) and the general thrust towards a single set of accounting standards have given rise to debates and arguments on whether or not such a move will really help the business world. Advocates for a single set of accounting rules say that this will improve transparency all around. According to Joseph Fuller (2002), the creation of a common language will improve transparency and will give managers a deeper understanding on how their individual performances affect the performance of the company. A professor in The University of Auckland (2009) and former member of the International Accounting Standards Board, Liz Hickey, believes that the need for these high quality global accounting standards is highlighted and made urgent by the increasing “integrated nature of capital markets, the mobility of capital and the global nature of the financial crisis”. The most recent spate of adoption of IFRS in Europe further solidified the conviction that adopting a global set of accounting standards (such as the IFRS) will result to a positive net benefit all around. In a study conducted by Chris Armstrong, Mary Barth, Alan Jagonlinzer and Edward Riedl (2009), the over-all response of the investors who experienced the European adoption of the IFRS was perceived to be positive because these investors anticipated an over-all increase in the quality of information reported. Despite these positive responses to a truly global single set of accounting standards, there are those who still think that adopting a single set of global accounting standards will not address the problems in the business world. As Warren Buffet pointed out (as quoted by Joseph Fuller, 2002), the business world is a complex one and it has a lot of realities; a single set of accounting rules may not really be adequate to address all of its concerns. Paul Miller (as quoted by David Bogoslaw, 2008), an accounting professor in University of Colorado, would actually favour different standards, rather than to depend on a single set of weak ones. Miller also believes that this single set of standards would actually “stifle much-needed innovation given that most of the existing accounting standards are more than 60 years old”. Others pointed out that big companies and small ones should have different accounting and disclosure requirements since the former have business peculiarities not commonly found in the latter (a fact that was recognised by the IASB when it issued the IFRS for Small and Medium Enterprises (SMEs). Lastly, other people also believe that the actual conversion process from the current GAAP to the global accounting standards would be so difficult and so expensive, the costs may very well exceed the benefits, particularly if these benefits are not really of interest to the companies involved (i.e. such as U.S. SEC registered companies that are not a publicly-listed one and therefore have no interest in issuing globally competitive financial statements). Works Cited: For Question Number 1: 1. McLeay, Stuart and Riccaboni, Angelo (2002). Contemporary Issues in Accounting Regulation. Massachusetts: Kluwer Academic Publishers. Available at: http://books.google.com.ph/books?id=fsghfqGy97oC&printsec=frontcover#v=onepage&q=&f=false. 2. Myddleton, Prof. D. R. (2004). Unshackling Accountants. The Institute of Economic Affairs Hobart Paper 149. Available at: http://www.iea.org.uk/files/upld-book241pdf?.pdf. 3. Myddleton, Prof. D. R. (2005). What’s Wrong with Modern Accounting. Management Focus Spring – Issue 22. Available at: http://www.bengin.net/paperse/whats_wrong_with_modern_ accounting.html. 4. Norberg, Johann (2008). Regulators Cannot Avert Next Crisis. The Australian as published by CATO Institute. Available at: http://www.cato.org/pub_display.php?pub_id=9696. 5. Stephens, Lynn and Schwartz, Robert G. (2006). The Chilling Effect of Sarbanes – Oxley: Myth or Reality? The CPA Journal. June 2006 Issue. Available at: http://www.nysscpa.org/cpajournal/2006/606/infocus/p14.htm. For Question No. 2 1. Day, Robert G. (2000). UK Accounting Regulation: An Historical Perspective. Bournemouth University. School of Finance & Law Working Paper Series. Available at: http://ibal.bmth.ac.uk/pdf_docs/296.pdf. 2. Litan, Robert E. and Wallison, Peter J. (2000). The GAAP Gap: Corporate Disclosure in the Internet Age. USA: AEI Press. Available at: http://books.google.com/ books?id=rC2JCIrLmb8C&printsec=frontcover#v=onepage&q=&f=false. 3. The Institute of Chartered Accountants in England and Wales (ICAEW; 2009). Knowledge Guide to UK Accounting Standards: History and Development. Available at: http://www.icaew.com/index.cfm/route/156255/icaew_ga/en/Technical_and_Business_Topics/Guides_and_publications/Knowledge_guides/em_UK_Accounting_Standards_em#standards/. For Question No. 3 1. Armstrong, Christopher S., Barth, Mary E., Jagonlinzer, Alan D. and Riedl, Edward J. (2006). Market Reaction to the Adoption of IFRS in Europe. Accounting Review, Forthcoming. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm? abstract_id=903429. 2. Bogoslaw, David (2008). Global Accounting Standards? Not So Fast. BusinessWeek. 13 November 2008. Available at: http://www.businessweek.com/investor/content/nov2008/ pi20081112_143039.htm. 3. Fuller, Joseph (2002). The Accounting Transparency Gap. Harvard Management Update May 2002. Available at: http://www.monitorventures.com/news/ofinterest/The% 20Accounting%20Transparency%20Gap.pdf. 4. The University of Auckland Business School (2009). Single Set of World Accounting Standards Only Answer to Arbitrage. 12 August 2009. Available at: http://www.business.auckland.ac.nz/Schoolhome/News/Singlesetofworldaccountingstandardsonlyansw/tabid/1816/Default.aspx. Read More