Neutrality And Politicization Analysis

SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the

At the end of the last century, accountants began to organize and become a profession as state societies and boards of accounting debuted. At that time a few companies began to issue financial statements; however, there were no established standards, codes of ethics, or generally accepted principles. Practitioners wishing to represent the economic reality of an entity had to rely on professional judgement. Over time, the profession evolved so that committiees emerged to address these issues, and practitioners voluntarily abided by their guidance.

Accounting standards are important. For example, if accounting is considered as the language of business, accounting standards are its grammar. Properly developed and implemented, they can encourage business expansion and help regulate the economic system. High-quality accounting standards can facilitate the flow of information from businesses to a range of different users. These include investors, banks, creditors, the revenue commissioners, regulators, employees and the general public. The availability of accounts prepared in accordance with recognized accounting standards encourages trade by promoting confidence in businesses.

The field of accounting is constantly evolving. This is true not only for the theory of accounting itself but also the entities that govern its theory and practice. Presently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are faced with some of the biggest challenges to date. To understand the significance of these two boards, it is necessary to understand their histories, relations between the boards, and the standards that they set. Also how the knowledge of these boards and the field they lead, gained through the masters of science in accountancy

Financial Reporting Council: The Use of a Sector Neutral Framework for the Making of Australian Accounting Standards

In 1973, the Financial Accounting Standards Board (FASB) was created and their mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.” (FASB.org, 2009a). The FASB is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. Therefore, the FASB plays a vital and important role in protecting the financial well being and the overall stability of our

Gray identified four widely recognised accounting values that can be used to understand a nation’s accounting practices, which are professionalism, uniformity, conservatism and secrecy (Doupnik & Perera, 2015, p. 37). Professionalism verses statutory control is understood to be the difference between a nation’s preference for either individual professional judgement and self-regulation

Lobbing of commercial and political interests in the establishing of the standards is a fact, which leads to believe that there might be large groups of the financial information users, who are interested in the particular way of reporting. If it is beneficial to them and to the market without compromising any ethical issues related to the financial reporting, if the market gains from such interests, than the standards should be formed under such influence. The question is who is going to decide if there are benefits. I guess, this is the area where the real politic starts. At this level of decision making, I think there should be people free of any political or economic pressure. However, more often commercial and political interests do

D Solomons, The Political Implications of Accounting and Accounting Standard Setting, Accounting and Business Research, 1983

The FASB has the mission of create and improve the accounting standards and the financial reports by the nongovernmental organizations, offering useful information that allows investors and other users to make decisions. The implementation and improvement of the standards is made taking into consideration the opinion of all the parties interested and it is supervised by the Financial Accounting Foundation’s Board of Trustees. This process open to the public participation warranty the transparency into the standards-setting process. Therefore, the FASB issue a variety of reports requesting feedbacks on its standards setting activities. (FASB, Standard-setting process, n.d.)

It is very difficult for political and social goals to not influence US accounting standard setting. According to Solomons (1978, p. 65) quoting Charles Horngren, “the setting of accounting standards is as much a product of political action as of flawless logic or empirical findings. Why? Because the setting of standards is a social decision. Standards place restrictions on behavior; therefore, they must be accepted by the affected parties…getting acceptance is an exceedingly complicated process that requires skillful marketing in a political arena.” When a person or group of people see an issue that they feel needs to be addressed, they are going to want it handled in the way most desirable to them and their position. Hand in hand with

The article "The Politicization of Accounting: The impact of politics on accounting standards" by David Solomons discusses the relationship between the field of accounting and politics. Government agendas are meant to work towards achieving economic growth, both on a micro and macro level. Since the Financial Accounting Standards Board (FASB) has the ability to create policies that aid the government with their goals, the FASB are obligated to use their power to benefit the government, the economy, and in turn the greater public. Both politicization and neutrality have benefits, but each have the potential to solely benefit certain stakeholders, becoming exclusionary to other interest groups. The reason that the politicization or neutrality of accounting standards is so widely debated is because of the varying opinions regarding what the standards should accomplish. Neutrality and politicization have an inverse relationship where there is a trade-off between the two; losing information neutrality results in more politically influenced standards, while maintaining impartiality results in less politicization. The most crucial trade-off that exists in this relationship is the one between relevance and reliability. Information neutrality leads to more reliable information because neutrality eliminates bias of any single stakeholder. Therefore, when accounting standards are free from political influence they are more likely to benefit the greatest amount of financial statement

The accounting profession is often seen as being restricted by various rules and regulations, standards presented by professional boards, and the passage of time. The accounting profession is regulated by the Securities and Exchange Commission (SEC) (Gibson, 2011). Though much of the regulation of the profession has been privatized at the direction of the SEC, it is under the regulation of the SEC that Generally Accepted Accounting Principles (GAAP) are determined (Gibson, 2011). Nevertheless, the profession is subject to substantial regulation with numerous rules, principles, bulletins, and standards (Gibson, 2011).

There are many aspects to be considered in regards to accounting regulations such as economic, social, and political factors. These factors prohibit the issue regarding regulations form being clear cut or easy to decipher. The economic, social, and professional perspectives in which the issue can be viewed from often have significantly different vantage points and often represent competing interests. However, without regulation it is difficult to maintain a healthy economy and provide individuals a fair chance at achieving their own financial objectives. Therefore, while not all regulations effectively serve their stated purposes, the goal for regulators and legislators should be to improve the effectiveness of regulations and not to try to do away with them completely. In the last decade there have been many examples of how deregulation has worked to destabilize the global economy.

Regulation is defined as a set of rules that is designed to control and govern conduct by authority (Deegan 2009, p.59). On the basis of this definition, Deegan (2009, p.59) has defined regulations relating to financial accounting as rules that are developed by independent authoritative body to govern the preparation of financial statements which are accounting standards. Since decades ago, there have been arguments for and against the existence of accounting regulations. With a stance of pro-regulation, this essay is going to examine the reasons that financial accounting and reporting should be regulated and the merits of accounting regulations.