Accounting Standards - Essay Example

Accounting Standards Politics have a lot of influences when setting the acceptable accounting standards. People who have their economic personal interests have used politics to set accounting standards, which are beneficial to them. For example, the political difference between the Republic of China and the United States of America has seen different accounting standards in the two countries. In china they follow the Chinese Accounting Standards (CAS) while companies in the United States of America follow the Genarally Accepted Accounting Principles (GAAP). Phelps (2003), states that a political influence is one of the serious problems facing accounting standard setting. This is because political influence will tend to make the standards in a certain way either to benefit some people or to be damaging to some. Some countries have come up with their own accounting standards which are somehow different from the internationally accepted standards. By doing so, they favor their respective economy for it to do better than the other economies. Members of the Financial Accounting Standards Board responded to accusations that they had given in to political pressure by saying that they could not do anything to stop political influence, but they were lobbying for the independence of the Financial Accounting Standards Board from political influence and that more should be done to stop political influences from interfering in accounting standards issues (Phelps, 2003). Politically influencing accounting standards has resulted in negative effects. For example, the current economic crisis in Europe and other countries can be partly attributed to political influence in the standardization on accounting (Botzem, 2012). Since governments influenced on accounting issues such as lending, banks gave out a lot of money without following the internationally accepted guidelines of accounting. This led to enormous debts and fallouts leading to companies and business institution falling. It also resulted in job cuts and general poor economy. Another effect of political influence on accounting standardization is that it results in some people gaining a lot of income at the expense of others suffering tremendously huge loses. This happens when the standards are intentionally set to benefit some people thereby making them to benefit from intentional manipulation of standards. This goes against the accounting principle which stipulates that all accounting standards should be of equal benefit to all parties. According to Botzem (2012), political influence on standardization of accounts results in increased fraud, criminal activities, terrorism and money laundering. This is because people involved in fraud and money laundering use political influence to make changes in accounting standards in order for them to legitimize their illegal income. This has played a huge role particularly in the drug business, money laundry and terrorism. Terrorist activities have been funded through accounting loopholes created as a result of political influences. Drug lords and money launders have used political influence to create loopholes in accounting standards for them to legitimize the money there have acquired through their illegal business. Executives of large business organization have used political influence in accounting standards to avoid releasing poor results. This results in investors and stockholders losing their money since they invest in companies which fail to post financial accounts revealing loses. Investors and stockholders invest a lot of funds in business organizations that are falling without their knowledge hence losing a lot of money. Political influences in the setting of accounting standards have limited and hindered international trading. This occurs  as a result of different accounting standards in different regions. Some business organizations have been limited to doing business with other firms in their respective regions due to the presence of different accounting standards in different regions. Politics should not be involved in accounting standards as they will have the effect of undermining the integrity and fairness of the standards. Accounts are a very critical framework of any economy and should accounts standards should be handled extremely carefully. Governments should put very strict laws to avoid any kind of influence that would affect accounts standards. Governments should come up with harsh penalties, which include prison time to discourage politicians indulging themselves in issues concerning accounting standards. Setting of accounting standards should be left to independent accounting organizations like the International accounting standards Board. Only the professionals who understand the consequences of accounting standards should be involved in setting of accounting standards. 2 In order for accounting to achieve the principle that stipulates that accounting should be fair to all parties involved, harmonization of accounting standard internationally is extremely crucial. Lately, its importance has increasingly been advocated by many organizations. According to Crespo (2005), one such organization is the European Economic Community (ECC). The harmonization process began in the 1970s. It was marked by the formation of the International Accounting Standards Committee (IASC) in 1973 (Crespo, 2005). At the time, it was the intention of the International Accounting Standards Committee (IASC) to put up internationally accepted accounting standards. They thought that these standards would be implemented and accepted worldwide. However, this was not the case. They failed to reach an agreement on different methods of measurement. In 1976, a guideline on disclosing financial information was released by the Organization of Economic Co-operation and Development (OECD). The European Union emphasized on the development of common European company laws between 1970’s and 1980’s (Crespo, 2005). The International Accounting Standards Committee started consulting with other organizations in early 1980’s to allow for further inputs in the international standard-setting. 1984 was a huge landmark for account standards when the London stock exchange put forward a condition that; any international company that wanted to be listed in the London stock exchange and was not incorporated in Ireland or the United Kingdom, had to follow the guidelines of the International Accounts Standard Committee when preparing financial statements. From 1987 to 1993 is known as the second stage of Harmonization of standard accounting. This second stage started with the International Organization of Securities Commissions (IOSC), joining the International Accounts Standard Committee. In 1988, FASB also joined International Accounts Standard Committee. Later the United States of America Securities and Exchange Commission played an important role in harmonization of accounting standards by joining the International Accounts Standard Committee. In 1999, both IOSCO and IASC Jointly formed a work plan which saw the drawing up of core standards. It recommended that all members of IAS be listed in all global markets. According to Gaspar (2005), in 1989 the IAS gave out its guidelines on the presentation and preparation of financial statements. By doing so, it limited the amount of other accounting treatments. In 1990s, the European Union began to participate by becoming an observing member of the International Accounts Standard board. The third development phase of harmonization of accounting Standards was between 1993 and 1998. This is the time when International Accounts Standard Committee and IOSCO finally came up with a list of standards to be used in presentation and preparation of financial statements., There have been many approaches to realizing the harmonization of accounting standards. One such approach is the “one-size fits all approach”. This is an approach that stipulates that accounting standards should be uniformed, not engineered for any party’s Specific needs. It emphasizes ion uniform standards for the benefit of the economy at large. For instance, a uniform accounting standard eases the burden of raising capital. This is because uniform accounting standards enables an investor to compare financial statements from different economies. Since the statements are standardized, the investor is able to choose the good investment opportunities. This draws investors to an economy hence making it easier for companies to raise capital. Uniformed accounting standards also help in limiting fraud and other criminal activities, for example, money laundering and drug trafficking. This is because when there are uniform accounting standards, there will be no loop holes for people to take advantage of and steal from and investors (Saudagaran, 2009). Criminal activities such as terrorism and drug trafficking will be easy to spot since money laundering will be very hard to pull off under uniform accounting standards. A uniform accounting standard helps promote peace around the world. This is because; business institutions and companies around the world are able to do business more freely as a result of uniform accounting standards (Deegan, 2009). These interactions involve people travelling to different countries. While travelling businessmen are able to forge firm bonds with their business counterparts from other countries hence promoting peace. Governments around the world are able to interact through doing business together. By doing so, they promote peace among the countries by setting a good example to their citizens on international co-operation (Vuskane, 2010). 3 The Positive accounting theory is a theory in financial accounting that uses real events to make accounting prediction. A research was done using the theory to show how the prices of shares changed in response to the revealing of accounting information. It does so by explaining and predicting how business institution will react to the proposed accounting standards and actions which business organizations will undertake as accounting policies. The theory predicts outcomes by accepting the fact that economic consequences result from accounting standards. Under the positive accounting theory, business organizations maximize their chances of survival by organizing their accounts efficiently. The theory views business institutions accumulation of contracts they have entered. According to the theory, firms will minimize contract costs by choosing accounting policies that minimize contract costs. It also takes in fact that managers require flexible accounting policies which are more adaptable to change. The theory helps in displaying the opportunistic behavior of managers where they make decisions based on their personal gains. According to Rankin (2012), positive accounting theory is based on three hypotheses. They include; bonus plan, debt covenant, and political cost hypothesis. In the bonus plan hypothesis the theory stipulates that business organizations will choose accounting policies that focus on current earnings in order to get bonus plans. Through this, business institutions increase their bonuses during that current period. The debt covenant hypothesis stipulates that when a business organization is about to violate debt covenants, management is likely to choose accounting policies that report on earnings from the future to the current period. By doing so, the business establishment will avoid violating debt contracts. In the political cost hypothesis, positive accounting theory stipulates that a firm’s manager will choose accounting procedures that report on current earnings if the political cost is high. This is because high profits can increase political tension leading to higher taxes and new regulation especially for big business organizations that report very high post tax revenues. There are various ways in which firms and business organizations can achieve positive accounting. They can achieve this by good timing when adopting new account standards by changing their current policies on accounting and adapting the recommended accounting standards by the International Accounting Standard Board (ISAB). They should also change real-time variables such as repairs, maintenance and advertisements. They should also manage their accounts discreetly. Finally, they should capitalize on their operations expenses. According to Mattessich (2007), there are various reasons why particular accounting methods are chosen by many firms. This is can be attributed by the hypothesis put forward by positive accounting theory. For example, firms and business organizations choose particular accounting policies to avoid high taxes and newly imposed regulation. When governments discover that firms are going to make very high profits in the future, they impose very high taxes and tough regulations to increase their revenue from these firms. They avoid this by using the political cost hypothesis where they choose accounting policies that report current incomes and not on the future expected income. Firms also choose certain accounting policies to attract more investor. Business organizations will use accounting procedures that will post revenues that are expected in the future hence a lot of investors take the opportunity to cash in on the huge profits expected in the future (Belkaoui, 2004). Business organizations and companies are expected to choose accounting policies that shift reports on earnings from the future to the current period in order for them to increase their bonuses for the current period. Standardization of accounts internationally is an issue of great importance. Each and every country should follow the accounting standards that have been put up by the International Accounting Standards Board (ISAB). The board should also be protected from political pressure in order for it to put up accounting policies that are of equal benefits to all parties. When accounts are standardized most economies in the world will see a steady growth as explained in the research done in 1968 by Paul and Brown. Good accounting principles will be adapted generally by business organizations and firms throughout the world. This will result in stake holders, investors and shareholders having correct and trustworthy financial statements hence they will make sound investing decisions resulting in growth of the general economy. References Belkaoui, Ahmed R. Accounting Theory. Belmont: Cengage Learning, 2004 Craig, Deegan. Financial Accounting Theory. New York. McGraw-Hill, 2009. Crespo, Milagros G. Public Expenditure Control in Europe: Coordinating Audit Functions in the European Union. Camberly: Edward Elgar, 2005. Gaspar, Julian E. Introduction to Business. Boston: Cengage Learning, 2005. Phelps Richard P. Defending Standardized Testing: Applied Psychology. London: Routledge, 2005. Previts, Gary J. Research in Accounting Regulation. Amsterdam. Elsevier, 2008 Rankin, Michaela. Contemporary Issues in Accounting. New Jersey: Wiley, 2012. Tarantino, Anthony. Governance, Risk, and Compliance Handbook: Technology, Finance, Environmental and International Guidance and Best. New Jersey: John Wiley & Sons, 2008. Vuskane, Linda. The adoption of International Accounting Standards in Germany. Santa Cruz: GRIN Verlag, 2010. Read More