Decision Analysis

Topics: International Financial Reporting Standards, Financial statements, Economics Pages: 7 (2557 words) Published: October 2, 2012
l 1) "Standard setting is a political process'. Explain and discuss. The essay is aim to explain why standard setting is a political process and discuss how political involvement affects the process of accounting standard setting. Accounting standard setting plays an important role in conveying users that how, when and where the financial information of a company is disclosed. Standards, particularly changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups. A change in an accounting standard or the introduction of a new standard can result in a substantial redistribution of wealth within our economy. Considering it as a political process is because of its potential to significantly affect the wellbeing of a wide range of interest groups. This model of political behavior is used by Watts and Zimmerman (1979) arguing that the political process is simply a means of pursuing individual or group self-interest. For example, the most recent example of the political process at work in standard setting is the heated debate that occurred on the issue of accounting for business combinations especially in the amortisation of the goodwill in 1996. During the years later, the FASB undertook several steps which include open hearing, deliberations, and requests for written comments from interest party to reach a satisfactory compromise between the preferred method of accounting and the anticipation of adverse economic consequences. The board’s process is similar to that of an elected political representative, a U.S. congresswoman for example, trying to determine consensus among her constituency before voting on a bill on the floor of the House of Representatives. For this reason, it is said that accounting standard setting is a political process. However, as we know that there are various users of financial information so it’s obvious to have diverse and conflicting interests of users hence there rarely exists an accounting standard which is acceptable to all the users. That's the reason the modern researcher like Deegan (2006) states that accounting standard setting is a political process, which means standard setting is not as simple as it seems, there are complications associated in its root. There are people or some corporate powers which dominate the process of accounting or in the other words we can say that they lobby for or against a particular accounting standard to be imposed or already imposed by a standard setting body. Accounting standard setters have often been criticised for giving undue influence to individual, mostly corporate, actors and being subject to regulatory capture. Recently there were criticisms of increasing political interference in the process of accounting standard setting. For example, if compensation plans tie a portion of manager's salary to accounting income or rate of return on asset then the managers have incentives to choose accounting policies and to lobby for or against alteration to accounting standards to protect or increase compensation payment. The same case is true with the industries also, if the industries feel that a particular accounting standard if implemented will bring a negative growth for the business of that industry then they will be lobbying against that standard. So here is the politics enters in the process of standard setting, in a nutshell it can be said that in addition to public interest, social justice or fair deal to stakeholders there are the powers that really play a dominant rule in the process of accounting standard setting. These powers are termed as lobbyist by Sutton (1984) and whenever lobbyist perceive that their economic interest are in threat then they intervene the standard setting process which is known as politicization of accounting standard setting. The best example of lobbying is failure of Australian government to protect their citizens from the harmful and poisonous effect of...
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