Accounting Standard Setting

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ATPB 313 / ACTB 423
Accounting Theory & Practice

Chapter 7 SHD

Learning Outcomes

At the At the end of this lecture, students should be able to explain:

✓ The three theories proposed to understand the process of regulation – public interest, regulatory capture and private-interest theory ✓ a comparison of the free market and regulatory approaches to standard setting ✓ International standard setting

✓ Standard setting in Malaysia


• Since 1960s, accounting profession has been criticized for its weakness. Failures to solve problem faced by practitioners accountant remains unresolved and lack of independence of financial information. • This has led the profession to seek a legitimizing procedure for standard setting process (standard back up by regulatory bodies) • Q: Should accounting standards be formulated mainly by authoritative bodies or left to the free market? • Q: Why do we need government intervention in developing the standards

Nature of Accounting Standards

• Provide practical and handy rules for the conduct of accountant’s work • Standards dominate the accountant’s work
• Constantly changed, deleted, and/or added
• Generally accepted as firm rules, backed by sanctions for nonconformity (peculiarity) • Generally consist of three parts:
- A description of the problem to be tackled
- A reasoned discussion (possibly exploring fundamental theory) or ways of solving problem - Then, in line of decision or theory, the prescribed solutions

• Some reasons to establish standards:
- Provide users of accounting information with information about the financial position, performance, and conduct of a firm. This information is assumed to be clear, consistent, reliable, and comparable - Provide public accountants with guidelines and rules of action to enable them to exercise due care and independence in selling their expertise and integrity in auditing firm’s reports and in attesting the validity of these reports - Provide the government with data bases on various variables that are deemed essential to the conduct of taxation, regulation of enterprises, planning, and regulation of the economy, and enhancement of economic efficiency and other social goals - Generate interest in principles and theories among all those interested in the accounting disciplines. The mere promulgation of a standard generates a lot of controversy and debate both in practice and in academic circles

Standard Setting Approaches – Why Accounting is Regulated?

Theories of Regulation:

• What was the reason for government intervention in the market for accounting information? Answer: Three major categories of theories regulation:
- Public-interest (market failure theory): accounting standard setting is regulated because of the perception that the market is characterized by departures from the competitive ideal in ways that reduce benefits to society, so the government intervenes to nurtures the public interest - Regulatory capture theory: although the standard setting process was originally to be regulated to protect the public interest, those groups affected by accounting information battled for control of the political process to increase their wealth and/or prestige. Results shown accounting profession captured the process, where they wanted the benefits of regulation for themselves - Private-interest Theory: regulation of the process was sought by the producer group as a device for transferring profits to them, the favor then being returned in the form of votes and contribution to politicians

• The three theories provide insight into the differences in regulatory activity in different justification and the evaluation of suggestions for the reform of accounting regulation

i- Public-interest (market failure theory)

• Justifies the mandatory...
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