Accounting Standard Setting - Case Study Example

Name : xxxxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : Accounting standard Setting Tutor : xxxxxxxxxxx Accounting standard setting is a political lobbying process, and as such offers several opportunities and means for interested parties to influence its outcomes Introduction The main obstacle in the Accounting Standard setting path is a set of political influence that may be elicited by any board plan to lay down precise accounting treatments, get rid of alternative treatments, enforce supplementary disclosure necessities, or tighten the permitted interpretations. "Political" lobbying means self-interested considerations by preparers and others that can be disadvantageous to the interests of investors and other users, an incident that has been associated with the term "economic consequences” (Financial Economists Roundtable 2002). Accounting standard setting process in Australia The first process involves a technical matter being identified by an international organization, e.g. International Accounting Standards Board (IASB) or the International Financial Reporting Interpretations Committee (IFRIC). Australia has implemented International Financial Reporting Standards (IFRSs) from 2005, aligned with planned direction from the Financial Reporting Council. Consequently, matters regarding IASB work program and the IFRIC work program are also incorporated on the AASB work program, even though the level of participation by the AASB varies matter-by-matter and can be substantive or non-substantive. A technical matter can also be recognized by the International Public Sector Accounting Board (IPSASB). The AASB directly supervises the IPSASB work plan and takes on work on chosen topics, base being their importance to public sector financial reporting in Australia (Jacobs 2002). (Jesse 2006) The second process involves the AASB identifying technical matters needing any consideration. Matters identified in regard to profit bodies are the IASB or the IFRIC for consideration. The matters that affect non-profit bodies, either public or private sectors are tackled domestically or passed on to the IPSASB. After the idenfication of the subject matter, the AASB develops a project proposal. The project proposal has an evaluation of possible benefits of carrying out the project, the involved expenses, the available resources and possible timing. The AASB then evaluates the proposal and decides if the project is worth and should be incorporated in its work program. If the board opts not to add the issue to its program, the Board can opt to officially report the verdict as a Board Agenda Decision. The verdict is recorded and an official Agenda Decision is given out. After the subject matter has been incorporated in the agenda, AASB discusses program papers. The program papers tackle a number of issues, possible advances and timing outputs. After completion of the research, the AASB develops connected documents for any comments from the public and dialogue with stakeholders through documents like: Exposure Draft-This document contains the proposed standard and contains polished proposals when compared to Invitations to Comment, Discussion Papers and Consultation Papers. An Invitation to Comment-The purpose of this document is to seek for feedback on wide proposals and may have a discussion paper or discussion paper. Draft Interpretations- This document contains all proposed interpretation. Discussion Paper- It summarizes a broad range of potential accounting plans on a certain topic. Discussion papers, consultation papers and comparable documents can be given by the AASB, the IASB, or other typical setters. The AASB can decide to give international documents in Australia for remark, possibly with an Australian preamble added to clarify the framework (Peter 2003). The procedures that AASB utilizes during consultation with stakeholders consist of, Roundtable discussions- Where by AASB may opt to have official discussions with different stakeholders in relation with proposals offered for remarks. Consultative Group- This group gathers different groups to increase their contribution within standard-setting procedure. Those in the consultative group are delegates of parties concerned with and influenced by financial reporting necessities. Members of this group offer opinions to the AASB on key technical matters, the AASB’s work agenda, project main concerns and due procedure. Focus Groups- The User Focus Group consists of delegates of fiscal statement users like investors and investment experts, equity and those who analyze credits, credit grantors and ranking bodies. Focus Group improves the AASB’s consultation with this important group of users of fiscal statements. In Private Sector, Focus Group has representatives from those who prepare financial statements, donors, credit grantors and community bodies in that area. Focus Group is the main resource for the AASB in tackling NFP matters in the private sector. Project Advisory Panels- the AASB can choose stakeholders to a project review panel: a grouping of persons who are professionals in a certain topic. Panel members are requested to offer advice and remarks to staff and to the AASB members as program papers are created to tackle the subject matter. Interpretation Advisory Panels- the AASB develops Interpretation Advisory Panels as needed on a topic-by-topic base. The function of Panels is restricted to preparing optional opinions on the subject matter and, where suitable, suggestions for contemplation by the AASB. Panel membership usually consists of preparers, users, auditors and regulators in order to stand for a broad range of views. The result of AASB’s consideration regarding some matter becomes the issuance of a statement like standard, interpretation or conceptual structure document. On the other hand, the AASB can also opt to tackle the subject matter by offering its opinions regarding the matter in the minutes of a certain meeting or in an official Board Program Decision (Cox 2007). Pronouncements relevant to for-profit units will be steady with International Financial Reporting Standards (IFRSs) given out by the International Accounting Standards Board. This is to make sure that universal function financial statements availed by for-profit bodies in harmony with AASB standards will as well be in harmony with IFRSs. The AASB has a transaction impartiality policy under which related transactions and proceedings should be accounted for the same way by all kinds of bodies, may be in the for-profit subdivision, the not-for-profit private subdivision, or the public subdivision – except if there is a reasonable rationale to be different in certain conditions. The AASB deems the precise requirements of not-for-profit bodies in the private and public areas during preparation of new and revised IFRSs for implementation in Australia. The AASB takes contributions gotten from Australian organizations and from people into account during the preparation of its submissions to the international organizations. The AASB then performs official submissions on documents given out for remarks by the IASB and IPSASB, to make contributions to the setting of first rate accounting standards. Regarding the remarks taken from the stakeholders in Australia, the AASB asks for official remark letters that are submitted and other contributions from stakeholders concerning the AASB’s own applications and relation to different consultative documents given out by the ISAB and the IPSASB. The AASB takes into account these contributions during the submission process to the IASB and the IPSASB and in creating and owning its pronouncements (Samuelson 1999). This process also consists of implementation and compliance. The AASB supervises the execution of accounting standards and interpretations in Australia. In several instances, this results into adjustments to domestic AASB standards or to surrendering to the IASB or the IPSASB to suggest changes to international standards. The compliance of the standards with accounting standards and interpretations is supervised as wel by other bodies which consist of, Central, State and Territory Government controllers Australian Securities and Investments Commission (ASIC) Australian Prudential Regulation Authority (APRA) The Institute of Chartered Accountants in Australia (ICAA) National Institute of Accountants (NIA). CPA Australia (CPAA) Finally, the AASB gets back the feedback from these bodies that help in evaluating if there is any necessity of the standards to be amended. Aspects of the accounting standard setting process involving political lobbying and interested parties The main aspect could be in situation where managers or organizations may be willing to maintain the capacity to cover up any objectionable financial information or the probability of managing earnings to the current continuous growth or positive financial outcomes. In order to be in a position to accomplish this, such managers and corporations normally have incentives to put forth influence on financial reporting standards. Key international accounting standards setters tag along a due procedure approach giving organizations the opportunity and capability of expressing their opinions and have them taken into consideration (Jacobs 2002). However, managers and corporations after above goals basically are not of the opinion of expressing their preferences in full view of making investments in the public. Instead, they may opt to make use of reliable private contact to political decision makers in order to gain weight or leverage over the standard setter. For instance, the intervention of the whole process by Congress is taken with much seriousness by the Standard Board. Consequently, such activities have a very negative effect on the objectivity and unbiasedness of financial information reported in accordance with the standard hence politically influenced. Political lobbying also costs of comment letters sent to those setting the standards. The use of the comment letters is associated with the use of other means of political lobbying. Even if there is justification of use of the comment letters, many organizations use them as the overall lobbying pose. This is because more lobbying may be done behind the back and recent job has begun to make use on monetary contributions to politicians as a stand in for political lobbying. Organizations that posses the incentives to lobby against the exclusion of pooling as an acceptable accounting process for business combinations can be connected through political contributions to Congress people and people in governments who get involved against the Financial Accounting Standards Board (FASB) proposal regarding this matter. Organizations under political lobbying expenditures have their interests on several accounting issues which are normally under consideration by the FASB. Therefore there is political influence in regard to accounting standards more so in a private sector standard command. In the cases where decisions are determined by court judges and other professional practitioners, the organizations and managers get a chance to influence the accounting process on maybe legislative or the interpretative level. In most case where the government has veto power over the standard, the political lobbying process is very easy when it comes to influencing standard settings (Zeff 2005). Implications of political lobbying on the reliability of financial reporting There has been consistent evidence that politicians pay in any case lip service to allow accounting standard to stay in private sector. This fact can be included in the model through includes the costs of political interference in when entire standard setting process. All actors utility function will be Ui =-/s –si/-Cik=/>0.Where Cik =/> O stand for costs to actor k if actor i is involved in the setting of the standard. Cii indicate that is very costly for even the political actor alone to be involved during the standard setting. This could be the case since the political actor puts itself in criticism beyond its field of expertise or of politicizing an area that has its own experts. The overall results of the costs are balanced non intervention zone in the region of every political actor’s bliss whereby the costs of intervening surpasses the advantages of getting standards near one’s preferences. The continuous political interference process leads to a asymmetry in which obligations allows auditing firms to keep on to being compensated for intentionally and deliberately employing valuation and itemization regulations that produce misleading reports without wholly exposing themselves to consequences their customers face for hiding unpleasant information (Mussavian 1998). Conclusion Accounting standard setting has a vital role in handing over users that how, when and where the financial information of an organization is unveiled. However, there are financial information users so it’s apparent to have varied and conflicting interests of users therefore there seldom exists an accounting standard which is satisfactory to all the users. That is why it has been concluded that accounting standard setting is a political process, which means standard setting is not as easy as it seems, there are impediments allied to its root. There are individuals or some organizational powers which control the development of accounting or lobby for or against a certain accounting standard to be implemented or already implemented by a standard setting body. Bibliography  Jesse M., 2006, Managerial Power and Rent Extraction in the Design of Executive Compensation, University of Chicago Law Review, Chicago. Cox, D., 2007. The PCAOB and the Metrics for Accounting Measurements, Duke University, Durham. Mussavian, G., 1998.  “A Brief History of Market Efficiency,” European Financial Management, Vol. 11/103. Financial Economists Roundtable, 2002, Statement on the Crisis in Accounting, Auditing, and Corporate Governance, Financial Economists Roundtable Chicago. Jacobs, J., 2002.  Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, Random House, New York. Samuelson, A., 1999, “Consumption Theory in Terms of Revealed Preference,” Economical, Vol. 4/ 15. Peter W., 2003, Auditing as Independent Verification, University Press, Sydney. Zeff, A., 2005, Political Lobbying on Proposed Standards: A Challenge to the IASB,” Accounting Horizons, Vol. 8/54.    Read More