Effect of Politics and Regulation to Accounting Profession - Essay Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: EFFECT OF POLITICS AND REGULATION TO ACCOUNTING PROFESSION There has been a lot of regulatory pressure and political influence on the accounting profession leading to increased concern by the ACCA in the process of accounting standards. According to Godfrey and Langfield-Smith (2005), it is noted that political influence leads to conflicts of interest on accounting standards as to which practice is the best (public interest model). This influence is attributed to the government's influence on the process of setting accounting standards and its responsibility for resource allocation and distribution. Thus, the government has a direct impact on determining how the country’s GDP is calculated and how the resources of the country are distributed. Financial information disclosure in Australia is a highly politicized process as institutions are influenced by people with political power on which financial information is to be reported by the institution at the close of a financial year. This practice is likely to make an accounting professional manipulate the accounting information to misinform the stakeholders of a company and general public about the company, under the instructions of the management which are coaxed by politicians. According to Bushman and Piotroski (2006), a false image of the company can be portrayed and hence mislead the shareholders and other potential investors. As a result of misrepresentation of the entity, the company may eventually face financial distress and fall. The accounting professional compromises the accounting ethics that advocate for high levels of integrity and honesty in financial reporting, and most probably he or she can lose his or her credibility as an accountant, be sacked or miss future chances of employment. According to the positive accounting theory, managers have a tendency of making good predictions of good and favorable real world events and convert them into financial and accounting transactions (Hopwood, Mellor and O'Brien, 2005). The political cost hypothesis holds that a manager would adopt accounting procedures that defer reported earnings from the current to a future period, in an attempt to reduce the political costs faced by the organization. This is the case where increased profitability attracts more political heat on the firm, and taxes and tighter regulations are consequentially imposed on the firm. The accounting manager therefore goes against the set accounting standards. The Australian Accounting Standards Board, which is a government agency that is mandated to set accounting standards. This agencies are government-controlled and funded to ensure that standards match with those of the international accounting bodies as well as the prevailing economic environment (Lehman, 2009). Since the government officials politically appoint the members of the board, they may set regulations for the accounting sector according to the political instructions that they receive from top political powers. As a result, these regulations may differ from those normally expected by the norm, leading to conflicts of interests between the board and the accounting professionals (Hopwood, Mellor and O'Brien, 2005). An accountant may, therefore, face the challenge of professional and ethical dilemma as to whether to act professionally or follow the interests of the politically constituted board. The political and regulatory framework in Australia may affect the profession of accounting as a career in the international job market. The labour demand is affected because of the fluctuating nature of the accounting standards due to a politically influenced regulatory framework. The accounting rules and regulations in Australia may differ with the international accepted accounting principles that govern the accounting and reporting of financial information (Alexander, Jorissen and Britton, 2007). The accountant may not be able to serve credibly in an internationally operating entity, and his or her career may be at risk. Political and regulation affect the career of accountants by subjecting them to fluctuations in the regulatory framework, making them unfit to serve in international organizations. Other challenges include professional and ethical dilemma in financial reporting and lack of credibility in the profession. The accountant may also lose his or her job due to political influences (Stoddart, 2000). In conclusion, we can note that political influence to accounting profession will bring more harm than benefit. Therefore, the control in setting and regulating accounting standards should be minimal. Reference: Alexander, D., Jorissen, A. and Britton, A. (2007). International Financial Reporting and Analysis. 3rd ed. Cengage Learning Business Press. Baber, W. (1990). Toward a framework for evaluating the role of accounting and auditing in political markets: The influence of political competition. Journal of Accounting and Public Policy, 9(1), pp.57-73. Bushman, R. and Piotroski, J. (2006). Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting and Economics, 42(1-2), pp.107-148. Bushman, R. and Piotroski, J. (n.d.). Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions. SSRN Electronic Journal. Godfrey, J. and Langfield-Smith, I. (2005). Regulatory capture in the globalisation of accounting standards. Environ. Plann. A, 37(11), pp.1975-1993. Hopwood, B., Mellor, M. and O'Brien, G. (2005). Sustainable development: mapping different approaches. Sustainable Development, 13(1), pp.38-52. Lehman, G. (2009). Globalisation and the internationalisation of accounting: New technologies, instrumentalism and harmonisation. Critical Perspectives on Accounting, 20(4), pp.445-447. Solomons, D. (1983). The Political Implications of Accounting and Accounting Standard Setting. Accounting and Business Research, 13(50), pp.107-118. Stoddart, E. (2000). Political Influences in Changes to Setting Australian Accounting Standards. Critical Perspectives on Accounting, 11(6), pp.713-740. The Influence of Political Forces on Financial Reporting and Capital Market Activity. (2012). European Accounting Review, 21(2), pp.417-418. How studying ACCG399 has my perspective of accounting. The accounting profession is fast developing due to increased number of companies and firms requiring accounting services. The perception of the accounting profession is very important as it has an impact on the social standing, attractiveness of the profession in the market and the society as well as the responsibility of the accounting practitioners in the society (Deegan and Soltys, 2007). The perception of the accountant to the profession affects his or her ability to deliver services effectively and develop a satisfactory career in the accounting profession. It helps the potential accountants to understand the challenges that are faced in the profession considering the international nature of the profession and dynamics in the technological environment that has a great impact on the accounting profession (Bova and Pereira, n.d.). In the study of this unit, I have understood that it is important to for an accounting student to study the theoretical framework that are accounting. These theories equip the student with the general knowledge in the accounting field that applies to the real world of business (Frost, 2007). The student can learn about the recording of financial transactions as well as how to prepare financial statements and reports for a particular entity during a certain financial year (Appendix, Tutorial 4). It is also equally important for the student to learn about the conceptual framework of accounting formulated and controlled by the International Accounting Standards Board (IASB). According to Duff (2014), the conceptual framework enables the learner to understand the basic standards underlying recordings of financial transactions and preparation of financial statements, which is in conformity the regulations and directions of the International Financial Reporting Standards (IFRS). This knowledge is essential since the accounting profession is applicable in the international financial environment, given the globalization of business organization (Lodhia, 2014). It, therefore, essential for the accounting professionals to use standardized concepts in the field to enhance accountability and transparency in the preparation of financial statements in both local and global organizations (Appendix, Tutorial 4). Another perception of the accounting profession is that accounting duties should be in a decentralized structure within the organization. This structure will increase the accountability and responsibility of the accountants at all levels, and transparency in financial reporting would be enhanced (Draz, n.d.). The accountants in a decentralized organizational structure would tend to perform their duties prudently and avoid accounting fraud and malpractice that can derail their career and even their reputation in the society (Needles, 2010) (Appendix, Tutorial 9). In my view, the accounting profession should observe social accountability in the community. According to Environmental and social accounting in Europe (2000), accountants deal with money which is the main motivator of human behavior. Therefore, accountants should observe social responsibility by preparing financial statements and reports that are honest, true and unbiased. People in the society use these reports in making financial decisions, which dictate their actions and behavior in the society. The financial information reported by the accountants also reflects the image of the organization in the society whose members are the shareholders (Stevenson, 2012). This image can greatly impact their investment decisions and may cause either success or failure of the organization (Appendix, Tutorial 11). ACCG399 has impacted my attitude positively since I have learned lot about the role of accountant, global perspective of the profession and ease understanding of domestic and international standards regulating the profession. Reference: Accounting, International Organizations and Globalization. (2007). Critical Perspectives on Accounting, 18(7), pp.875-876. Bova, F. and Pereira, R. (n.d.). The Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country. SSRN Electronic Journal. Deegan, C. and Soltys, S. (2007). Social accounting research: An Australasian perspective. Accounting Forum, 31(1), pp.73-89. Draz, D. (n.d.). IFRS or IFRS-Based Domestic Standards: Implications for China’s Future Accounting Reforms. SSRN Electronic Journal. Duff, A. (2014). Corporate social responsibility reporting in professional accounting firms. The British Accounting Review. Environmental and social accounting in Europe. (2000). European Accounting Review, 9(1), pp.3-6. Frost, G. (2007). Social accounting research: An Australasian perspective: A comment. Accounting Forum, 31(1), pp.107-111. Lodhia, S. (2014). Towards a pragmatic social accounting. Accounting Forum, 38(4), pp.288-290. Needles, B. (2010). Accounting Education: The Impact of Globalization. Accounting Education, 19(6), pp.601-605. Stevenson, K. (2012). The Changing IASB and AASB Relationship. Australian Accounting Review, 22(3), pp.239-243. Appendix Tutorial 4 (n.d), Measuring Accounting’s Value: A Normative Perspective Tutorial 9 (n.d), Exploring the Notion of Success and Effective Reward Systems Tutorial 11(n.d), visually exploring what it means to be Professional Changes Required In Accounting Framework to Support Future Societies. The accounting field has some theoretical and conceptual frameworks that govern the conduct of accountants and their professional duties of preparing financial statements and reporting to authorized bodies and the public in general. The conceptual frameworks are developed and established by both the local and international accounting regulatory bodies (Chorafas, 2007). According to Gao and Wu (2014), the Australian Accounting Standards Board (AASB) is responsible for developing, issuing and regulating Australian accounting standards and related pronouncements. In the international environment, the International Accounting Standards Board (IASB) that established the International Financial Reporting Standards (IFRS) have the mandate of developing the conceptual framework in which the accounting profession should be practiced by establishing the standards for preparing and reporting financial information in all organizations internationally. This body is important considering the current trends of the globalization of business operations operating in different countries as branches or subsidiaries (Kim, Lin and Chen, 2015). The international regulatory standards are meant to reduce operating costs of the companies and increase their profitability through the comparable and efficient allocation of limited resources. They also help in protecting the shareholders’ interests in the company through fair and faith disclosure of crucial information for informed decision making. Also, the standards are meant to increase the transparency of the companies in information disclosure to auditors and the governments to ensure that the organizations pays fair taxes to the government since they are key sources of income (Kim, Mannino and Nieschwietz, 2009). However, many companies in most countries have not adopted the International Financial Reporting Standards (IFRS). In Australia, the level of adoption of the standards can be described as “near convergence” to the IFRS in the financial systems. This slow adoption of the IFRS can be attributed to the complexity of the standards that are difficult for the accounting and audit professionals to comprehend, understand and apply efficiently (Ren, 2011). This issue is a common case for the small and local companies in Australia, which have not yet ventured into the international markets (Spraakman, n.d.). Another reason for the companies to fail to adopt the IFRS fully is a contradiction between the local standards by bodies such as the Australian Accounting Standards Board (AASB) and the International Accounting Standards Board (IASB). It is therefore clearly evident that the frameworks of the accounting profession need to be changed to support future societies both locally and the international perspective. The theoretical framework of accounting needs to be changed to accommodate current and emerging trends in the field of accounting, given the globalization of business organizations and the rapidly changing technological environments (Wang, 2011). The conceptual framework of accounting at both local and international level should harmonized to ensure that conflicts of interest does not exist in the application of the IFRS in different countries. This process calls for consultation at both levels during setting of the accounting standards. The regulators and setters of standards should address the complexity of IFRS at both national and international levels that hinder the application of the standards by local firms that have not yet globalized their operations (Wagenhofer, 2015). As suggestion, there could be simple international accounting standards that can accommodate small and medium companies. Reference: Chorafas, D. (2007). Risk management technology in financial services. Burlington, MA: Butterworth-Heinemann. Duff, A. (2014). Corporate social responsibility reporting in professional accounting firms. The British Accounting Review. Gao, Z. and Wu, W. (2014). Predicting long-term earnings growth from multiple information sources. International Review of Financial Analysis, 32, pp.71-84. Jordan, A. (1999). The impact technology is having on the accounting profession. Journal of Accounting Education, 17(2-3), pp.341-348. Kim, D., Lin, S. and Chen, T. (2015). Financial structure, firm size and industry growth. International Review of Economics & Finance. Kim, H., Mannino, M. and Nieschwietz, R. (2009). Information technology acceptance in the internal audit profession: Impact of technology features and complexity. International Journal of Accounting Information Systems, 10(4), pp.214-228. Ren, B. (2011). Financial Crisis and the Cyclical Changes of Financial Supervision. International Journal of Financial Research, 2(2). Social and Environmental Accounting and Reporting in Emerging and Less Developed Countries. (2010). Accounting Forum, 34(3-4), p.236. Spraakman, G. (n.d.). The Impact of Information Technology on Management Accounting Practices. SSRN Electronic Journal. Wagenhofer, A. (2015). Exploiting regulatory changes for research in management accounting. Management Accounting Research. Wang, L. (2011). Impact of Information Technology on Accounting. AMR, 219-220, pp.1224-1227. Drawing a parallel between social context and accounting The accounting discipline is core to every business whose objective is to maximize profits and minimize the costs. The managers of organizations use the financial information in financial statements and reports to make informed decisions on which projects they can undertake so as to maximize their profits. On the other hand another hand, accounting has some harmful impacts on the society. For example in the cases where the activities of the organization have detrimental impacts on the society. Accounting is fundamental in achieving the goals of every business. Financial accounting produces key business documents such as the income statement that indicates the financial performance of the organization over an accounting period, and the balance sheet that shows the financial position of the organization at the end of a certain accounting period (Gallhofer and Haslam, 2007). The information contained in these documents is extremely important in making business decisions, and without it would very hard to run the business. Also, management accounting enables managers of an organization to measure their performance towards achieving the business goals, and it is a form of motivation for them to be more productive. Accounting is also important to the society if the businesses observe social responsibility through creation of jobs and conservation of the environment (Macintosh and Shearer, 2000). According to Bonacchi (2009), growth, and profitability being the major goals of most businesses, the business managers tend to overlook the impacts of their business activities to the society in which they operate and the environment at large. The businesses are often focused on making higher profits, and they fail to measure, monitor and report to the relevant stakeholders the social and environment impacts of their business activities (Luther, 2003). Many global problems facing countries and their citizens are attributed to businesses that are ignorant about the impacts of their practice to the society and the general environment (Poullaos, 2004). These hazards include global warming caused by environmental pollution and the resultant terminal illness such as cancer and asthma. A case study to illustrate the harmful side of accounting is taken for Australia, which has huge deposits of coal seam gas. The country is estimated to have 437 million hectares of land covered by coal seam gas or applications, with many gas companies being attracted to do gas mining in most parts of Western Australia. The business of gas mining is profit oriented, the gas companies having signed contracts worth more than US$200 billion to supply gas to some countries in twenty years’ time (Wake Up World, 2011). They plan to establish between thirty to forty wells of gas in the area and their argument for the case is that they will create more jobs for the people. However, the gas mining industry has many negative impacts on the society and the environment. The companies forcefully evict people from their residential and agricultural land, and they compensate them for US$ 1500, which they are unwilling to accept. The worst part of it is that the law says that the people can do nothing against them. Gas mining causes environmental pollution due to the emission of the coal gas into the atmosphere, which resultantly causes chronic diseases such as cancer to the people (Yarahmadi and Bohloli, 2015). In conclusion, it can be argued that accounting is both harmful and helpful to the business and the society. Business organizations should, therefore, work to reduce the negative impacts of their activities on the society and the environment. Reference: Bonacchi, M. (2009). Corporate Social Responsibility: Readings and Cases in a Global Context. European Accounting Review, 18(3), pp.641-644. Gaffikin, M. (2014). Accounting Methodology and the Work of R.J. Chambers (RLE Accounting). Hoboken: Taylor and Francis. Gallhofer, S. and Haslam, J. (2007). Exploring social, political and economic dimensions of accounting in the global context: the International Accounting Standards Board and accounting disaggregation. Socio-Economic Review, 5(4), pp.633-664. Luther, R. (2003). Uniform accounting periods: an historical review and critique. Accounting History, 8(2), pp.79-100. Macintosh, N. and Shearer, T. (2000). The accounting profession today: A poststructuralist critique. Critical Perspectives on Accounting, 11(5), pp.607-626. McRae, T. (1971). The Behavioural Critique of Accounting. Accounting and Business Research, 1(2), pp.83-92. Mintz, S. (2006). Accounting ethics education: Integrating reflective learning and virtue ethics. Journal of Accounting Education, 24(2-3), pp.97-117. Poullaos, C. (2004). Globalisation, accounting critique and the university. Critical Perspectives on Accounting, 15(4-5), pp.715-730. Tinker, T. and Puxty, A. (1995). Policing accounting knowledge. Princeton: M. Wiener Publishers. Wake Up World, (2011). 60 Minutes Australia - Fracking - The Coal Seam Gas Land Grab. [online] YouTube. Available at: https://www.youtube.com/watch?v=PELxZ3K2o0c https://www.youtube.com/watch?v=yzFL4f5JWTc [Accessed 4 Nov. 2015]. Yarahmadi, H. and Bohloli, A. (2015). Ethics in Accounting. ijafr, 5(1). Read More