The Impact of Lobbying on Standard Setting in Accounting - Essay Example

THE IMPACT OF LOBBYING ON STANDARD SETTING IN ACCOUNTING by Student’s name Code+ course name Professor’s name University name City, State Date The impact of lobbying on standard setting in accounting Introduction Accounting is a broad discipline and as such, it is subjected to various frameworks which are in turn formulated by a number of bodies. The main aim of the regulation is to eradicate any inconsistencies that may arise in accounting. Over the years, the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS), Financial Accounting Standards Board (FASB), Securities and Exchange Commission (SEC) and other regulatory bodies have been responsible with the generation of accounting standards amidst the efforts of lobby groups who at times have differing preferences. This is because; the regulatory bodies provide frameworks that govern the reporting standards, the disclosure requirements of corporations and their submission of books of accounts. Due to the critical nature of the regulatory bodies scope and authority, different lobby groups find it rather important that they have an influence over the decision making process of the accounting standard setting process. As such, this paper seeks to critically evaluate the impact such lobby groups have had on the standard setting in accounting and hence evaluate the role they have played in shaping the current accounting standards (Sapru 2004). In a democratic society, lobbying is a fundamental phenomenon. It is considered as the act of trying or attempting to influence a decision that has been passed by a particular legislation body. Lobbying can be undertaken through various strategies and can either adopt the direct or the indirect form. It is undertaken by various bodies commonly referred as pressure groups or advocacy groups. The lobby groups are responsible for performing the negotiations between the interest groups and the legislation bodies. The accounting regulatory bodies are no exception and as such, the decision or guidelines they pass are subject to criticism from lobby groups (Taylor1996). Accounting bodies over the years have come up to set guidelines. Their outmost objective is to protect the interest of stakeholders who deal with the accounting reports. They hence oversee corporate disclosure requirements, regulate securities trading and also ensure inconsistencies in the discipline are minimized. Recent developments have seen lobby groups be inculcated into various decision making frameworks. This is because, the lobby groups also have the interest of the general public and as such they possess both information and expertise that would greatly enhance the final decision availed. The relationship between the account setting frameworks and the lobbyist is thus viewed as circular. This is largely pegged on the fact that, the lobbyist can join the framework or criticize it. The motive of the lobbyist is hence largely attached to the outcome. The greatest challenge that accounting bodies face attributed to the lobby groups is the likelihood of diluting regulatory principles as a result of immense pressure(Cousins &Sikka 1993). Financial Accounting Standards Board was set up in 1973. Its main objective at the time was to establish and improve accounting and reporting standards. However, over the years it has been evident that lobby groups have been trying to influence their decisions. Considering that Financial Accounting Standards Board is a non-governmental and a nonprofit making organization, the government had been the main lobby group. The decisions that are attained by Financial Accounting Standards Board have in the past depicted lobbyist activities. In some instances, the impact has been so great to an extent of queries arising on the independence of such bodies. The Financial Accounting Standards Board decisions are not free from external influence. However, the proponents like Epstein,Nach& Bragg (2009) opines that Financial Accounting Standards Board has in over 15 years been setting accounting standards not favoring any particular party in society. It is also notable that Wyatt admits that the guidelines formulated by Financial Accounting Standards Board contain lobbyist activities. In various instances, Financial Accounting Standards Board has formulated regulations that are in line with the propositions of lobby groups. Taking the 1993 incident for example, Financial Accounting Standards Board intended to regulate the stock options reporting in the books of accounts by classifying them as expenses. This was received harshly by the Congress which inturn threatened to withdraw the powers of Financial Accounting Standards Board to set accounting standards. According to a former chief accountant in Securities and Exchange Commission, Financial Accounting Standards Board had no option but to fold and retain their earlier regulation as it was (Epstein, Nach& Bragg 2009). Other than the government bodies which have been viewed as the key lobby groups, the major audit firms also influence decisions made by regulatory bodies. However, it is rather difficult to obtain the exact impact of such influence on the set standards. This is because; although democratic, some lobby activities are subtle and observe high levels of secrecy. The influence that is borne by the lobby groups is hence very clear. Due to the fact that audit firms areinvolved the accounting practice and also play a vital role in as lobby groups they have had adverse effects on the accounting framework. This is because, involving accounting firms in the standard setting process has availed the chance to circumvent the accounting regulations.Audit firms are viewed as lobby groups with ill motives. This is due to the fact they may lobby for an issue that will in the end be a loophole as they fulfill their operations. In addition, audit firms have also been toocloseto their clients and as such disregarding professionalism. In such instances, the impact of audit firms as lobby groups may call for closer scrutiny in order to ensure dilution of regulation is avoided. The big auditor firms in the past have been involved with lobbying activities with specific issues that will enhance their ability to attain their client’s needs. Due to the consultation nature of the auditor’s job, more loopholes imply greater income for the auditors. It is hence evident that having Audit firms as lobby groups was dismal. It is clear that lobby groups; government and audit firms influence the decision made by the Financial Accounting Standards Board. However, in the recent past, Financial Accounting Standards Board has developed a mechanism where all stakeholders air their views in a transparent manner. The issue at hand is whether all views will be considered with the magnitude they deserve and as such treated with fairness (Kwok& Sharp2005). Accounting policies are fundamental to corporations as they are key determinants to how corporation allocates their resources, revenue and investments. Over the years, it has been widely accepted that the accounting policies derived are a product of compromise and bargain between the political class and the corporations.Pressure emanates from the political arena aiming to influence the decisions of accounting regulatory bodies. Pressure from politicians and lobby groups on the accounting frameworks is mainly because the standards and concepts that are handled by the framework are fundamental to corporations. The accounting regulatory bodies hence have the goal to retain objectivity amidst the influence and pressure that emanates from the political elite. Taking the extractive industries for instance, there were two main methods that were adopted in accounting (Katz 1985). The full cost method and the successful efforts methods. The full cost method involved capitalizing all the initial costs and writing them off against the total revenue availed. In the successful efforts method, only the pre-production costthat is directly linked to the project is set off against the revenue derived from the project. Since 1960’s, there has been sharp controversy between the two frameworks. Over the years, lobby groups have pressured the adoption of successful efforts method. Recently, the accounting framework after much consultation and consideration has adopted the policy. The impact of lobby groups is hence felt far and wide in the accounting discipline. The accounting standard setters have to inculcate the views and opinions of lobby groups as they at times enhance the final decision availed (Stoddart, 2000). It is quite clear that immense lobbying pressure to the accounting standard setters emanates from the political scene. For instance, International Accounting Standards (IAS) 39 gave rise to mixed reactions globally. Europe for instance suggested withdrawing its financial support to the body if the regulation on financial instruments is not amended. Recently the International Accounting Standards Board (IASB) faced lobbying on the issue of share based payments and other financial instruments. The accounting standard setters are hence tasked with the obligation to evaluate the magnitude of the lobby activity and as such act accordingly. In the 1990, fair value accounting sparked sharp controversy between the standard setting bodies and the lobby groups in the United Kingdom. With regards to the standard setting in the accounting framework, lobbying is of critical importance. Taking the instance of International Financial Reporting Standards (IFRS), on share based payments, the transactions were under regulated. This was before the lobbyist focused on addressing the issue. There was a great influence on the International Financial Reporting Standards that was attributed to the lobby groups and as such, the efforts of the lobby groups gave rise to the International Financial Reporting Standards 2 that now clearly regulates share based payments (International Accounting Standards Board, 2004). Lobby groups have largely been viewed as key influential factors to the accounting standard setters. This implies that in some situations, the opinions of lobby groups have been considered when formulating accounting policies. In the United Kingdom for instance, in 1973 Generally Accepted Accounting Principles (GAAP) policy was adopted to regulate matters relating to deferred tax. This move was aimed at harmonizing financial transaction between the United Kingdom and their United States counterparts. Due to the inflation levels that arouse in the coming years there were strong political objections over the accounting treatment of deferred tax. In 1976, a lobby group on behalf of 60 companies articulated complaints. The major issue was the claim that, given the prevailing economic conditions, the deferred tax balance of companies was continually rising. It would also be complex and costly to calculate. The report also indicated that the deferred tax policy was inequitable to shareholders and as such many of the companies would not comply with the regulation(Stoddart, 2000). Later the same year around October, the deferred tax policy was reviewed and current cost accounted was inculcated to enhance the treatment of depreciation and the cost of sales. Further amendments were made the following year to trim the amount of timing differences to only those that arose in the short term. This was exactly what the industry required at the time. In 1978, the whole policy that governed deferred tax was replaced and the partial deferred tax treatment or policy was endorsed. It was evident that the United Kingdom government was also displeased with the earlier framework as it was displaying a wrong amount of tax obligation in the accounting records. In addition, the clearing banks were also not enthusiastic with the earlier framework as it would have required them to take a substantial charge at a time against their own shareholders’ equity. The three bodies; the big industry players, the United Kingdom government and the clearing banks were hence responsible in the lobbying activity. The impact of their activities was hence clear in that the regulatory frameworks changed and adopted more friendly policies that would protect the interest of all stakeholders. As a result, the harmonization efforts by the United Kingdom and the United States accounting bodies weregreatly undermined. This is due to the fact that the Generally Accepted Accounting Principles that governed transactions in the United States called for full treatment while the new policy adopted in the United Kingdom had endorsed partial treatment of deferred tax. In the 1990’s the United Kingdom accounting council was yet again challenged by lobby groups. This time the policies governing securitization accounting, government’s private initiative and the framework governing operating losses in acquisition accounting were amended(Shultz & Lopez, 2001). In contemporary business practice, the major impeding factor to convergence of the standard setters is the lobbyist activities. This implies that the activity of lobby groups is the major stumbling block to the attainment of accounting policy harmonization around the globe. For instance, the United States accounting framework Generally Accepted Accounting Principles conflicts with the International Financial Reporting Standard in that goodwill amortization according to International Financial Reporting Standard spans over 20 years. The activities of lobby groups have undermined the synchrony of the accounting standards which have consequentlydisadvantaged stakeholders. The impact of lobby groups in the United States for instance has been widely appreciated by many European firms. This is because; many European companies are adopting the United States accounting policies due to the fact that there are powerful and organized lobby groups in the United States. The European Chief Financial Officer’s deem powerful lobby activities on accounting standard setters as a source of comfort (Cortese&Irvine 2010). Lobby activities on accounting standard setters have known to exist around the globe. In the United States however, the efforts of such groups is deemed strongest. Securities and Exchange Commission has since 1930 been governing publicly traded companies as a government agency. Since 1973 the United States adopted Financial Accounting Standards Board. Whenever Financial Accounting Standards Board, the independent accounting oversight body formulates a policy, Securities and Exchange Commission expects all publicly traded companies will apply. However, lobby activities against Financial Accounting Standards Board regulations are deemed efficient with the intervention of Securities and Exchange Commission (Young2003). The most recent lobby activity in the United Kingdom on accounting standard setting bodies has been the ongoing lobby activity that has urged Accounting Standards Board to reconsider the regulation governing the small and medium sized organization and hence facilitate them to adopt International Financial Reporting Standard (IFRS). ASB has been under pressure to change the framework that governs the publicly accountable organizations. This was instigated by the fact that International Financial Reporting Standard regulations on small and medium sized enterprise only cover profit making enterprises. ASB hence deemed it necessary to define the publicly accountable entities. The lobby group has been on record claiming that they will continually adopt International Financial Reporting Standard until the complexity posed by the ASB framework is addressed. As at April, ASB was receiving views from all respective stakeholders and as such considering on reviewing the regulatory guidelines on small and medium sized organizations (Shultz & Lopez 2001). Conclusion In conclusion, it is apparent that the accounting framework has over the years evolved and is still changing. It is also rather likely that the framework will change in the foreseeable future given the dynamic nature of its concepts. It is evident that lobby groups have been involved in the transition process. The link between the lobby groups and the legislators or decision makers in the accounting standard setting is therefore present. However, the linkage is a bit difficult to detect at times due to low prevailing transparency levels or high secrecy being maintained by either party.The contribution of lobbygroups might not be visible but their influence is evident and permeates in the accounting regulatory framework and in the process of setting the standards. Many accounting frameworks are non-governmental and essentially seek to attain no profit. The lobby groups on the other hand are made up of interest groups that seek to ensure that the users of the financial statements are not exploited. The lobby groups usually include industry players, the government and other accounting stakeholders. The impact of lobbying on standard setting in accounting is evident. It is however notable that the impact of lobbying activities is largely attributed to the motives of the lobbyist. It is also notable that the activities of lobby groups have largely undermined the harmonization efforts of accounting regulatory bodies. The impact of lobby groups on accounting standard setting could be depicted as having its advantages and also has its impending drawbacks. Lobbying activities have attributed to the adoption of policies that are convenient to all stakeholders. They have ensured that stakeholder’s rights are observed and mitigated the possibilities of any form of oppression or extortion. However, if lobby groupswith wrong intentions or motives are involved the lobbying activities, there will be detrimental outcome in the accounting policies that will be derived. It is hence important that there be oversight bodies that are responsible to regulate the flexibility of the accounting regulatory bodies. This will in turn ensure that the regulatory principles will not be wholly diluted and also ensure that the accounting stakeholders will not be oppressed by unwarranted framework or regulation. Reference list Cortese, C. & Irvine, J. 2010.Investigating international accounting standard setting: the black box of IFRS 6.Research in Accounting Regulation. Vol. 22 Issue 2, p87-95. Cousins, J. &Sikka, P. 1993. Accounting for change: Facilitating power andaccountability. Critical Perspectives on Accounting.Vol. 4 Issue 1,p53-73. Epstein, B. Nach, R & Bragg, S 2009, Wiley GAAP 2010: interpretation and application of generally accepted accounting principles. Hoboken, N.J., Wiley. International Accounting Standards Board, IASB. 2004. International Financial Reporting Standards No. 2: Share-based Payments. Katz, L. C. 1985. Oil and gas: A compromise method of accounting. Journal ofAccountancy.Vol.159 Issue 6, p116-124. Kwok, W. & Sharp,D. 2005. Power and international accounting standardsetting: Evidence from segment reporting and intangible assets projects.Accounting. Auditing & Accountability Journal.Vol.18 Issue 1, p74. Sapru, R 2004, Public policy: formulation, implementation and evaluation. New Delhi, Sterling Publishers Private. Shultz, J. & Lopez, T. 2001. The impact of national influence on accounting estimates: Implications for international accounting standard-setters. The International Journal of Accounting. Vol. 36 Issue 3, p271-290. Stoddart, K. 2000. Political Influences in Changes to Setting Australian Accounting Standards, Critical Perspectives on Accounting. Vol. 11 Issue 6, p713-740. Taylor, P 1996, Consolidated financial reporting, London, P. Chapman. Young, J. 2003. Constructing, persuading and silencing: the rhetoric of accounting standards. Accounting, Organizations and Society. Vol. 28 Issue 6, p621-638. Read More