Basically, the global accounting community has assumed that all accounting standards would improve the quality of accounting statements and transactions along with minimising the asymmetry of the market participants. The reason behind such assumption is owing to the belief that the accounting standards state the nature of the disclosed organisations besides performing a vital role in the methods used for distribution of wealth in organisations. However, a recent research in the field has mentioned that an idle accounting standard in order to look after these vital roles is rarely present (Bamber and McMeeking 2016). The affected parties are, thus, compelled to undertake movements, which lure the standard setters in making adjustments for looking after the predicaments. Indeed, the standard setters have the responsibilities of determining accurate accounting solutions along with undertaking healthy choices among the varying group views and conflict of interest among the individuals.
Such requirement of appropriate accounting standards has promoted numerous private regulators to develop their own standards for formal public consultation and meeting their needs (Baudot 2018).Despite the fact that this approach is considered to be political, various interested parties have pushed the same further into lobbying the bodies of standard setting. Lobbying process is advantageous, as it provides directions towards a sound understanding of the features of global standard setting. Lobbying on accounting standard exercises upper hand, as the “International Accounting Standards Board (IASB)” has completed restructuring the composition of “International Accounting Standards Committee (IASC)”. Besides, IASB intends to implement better performing “International Financial Reporting Standards (IFRS)”, which would spear head greater level of convergence with eight other leading national standard setters of accounting by using a process of formal liaison (Baudot, Demek and Huang 2018).
In the words of Brouwer, Hoogendoorn and Naarding (2015), lobbying is a focused technique of advocacy for swaying the decision-making of the legislators. With emphasis to the accounting standards, lobbying includes detecting, embracing and promoting a course of action by targeting towards legislative and administrative activates. At present, in includes two strategies, which are direct lobbying and indirect lobbying.
Direct lobbying is the basic strategy, in which the lobbyists contact the accounting standard making legislators or bodies and the latter parties are persuaded for considering their concerns. For fulfilling this objective, it is necessary for the lobbyists to fulfil certain conditions (Chakravarthy 2018). They need to prove their credibility and reliability and if this is not the case, the lobbyists would not be provided future access to the network of the legislators. Besides, it is not desirable for the lobbyists to exert pressure or impose threats for paving the path to the course of action and they need to understand that they could not take any bribe.
Indirect lobbying, on the contrary, embraces using letters in the form of a campaign strategy. The lobbyists motivate the other interested parties in writing letters, which advocate for modifications in various situations. These letters are sent to the legislators with the intention of influencing their decisions. In majority of the cases, this strategy is deemed to be effective for big groups, which have the ability to write various letters for boosting collective bargaining (El-Firjani and Faraj 2016).
Public relations campaign strategy is another strategy used; however, it is not too popular. The reason is that this strategy is more costly than the above two strategies and it is not possible to control effectiveness easily. In addition, another strategy encouraging the effect of legislator members as well as friends could be used. By motivating the members and friends, they join the lobbying group campaigns with the goal that their group presence would affect the standard makers (Friedman and Heinle 2016).
According to the research work of Hoffmann and Zuelch (2014), states feel the effects of different pressure groups and lobbyists in a different manner. The developed countries such as UK, USA and Australia have been benefitted mostly from these effects. One organisation that has felt the effect of lobbying immensely is the Securities and Exchange Commission (SEC) that is funded by the investors in order to protect from the stock market downfall in 1929. The main reason that SEC has been established is to analyse complete marketplace disclosure, corporate documents, verification of stock exchange rates and imposing stringent facilities, if any terms and conditions are violated. Since the time of establishment, there have been different lobby groups as well as other interested parties that affect the SEC operations. More precisely, the current SEC regulation, which is the Sarbanes-Oxley Act, is facing increased pressure (Königsgruber and Palan 2015).
Owing to the public concern and other pressures, the US congress passed a law in order to check the SEC operations. According to this law, the chief executive is needed to confirm the implications and accuracy of the corporate financial standards. In addition, the chief executive is needed to obtain the consent of the organisations on these standards. The organisations need to attest that the standards provide effective controls in order to prevent fraud. Such provision has mandated the organisations to fail collectively in following few measures of SEC along with lawsuit filings against SEC on the basis of going against the constitution provisions (Morley 2016). More precisely, different powerful industries as well as lobby groups like the US Chamber of Commerce, the American Electronics Association and the American Bankers Association influenced these lawsuits.
Even though SEC is a government regulatory organisation and receives funds from the government, it faces immense pressure from Congress as well. Therefore, lobbying has shaped up the SEC movements by assuring that an approach is triggered, which would provide suitable settings of accounting standards along with providing ratification to the other corresponding regulations after obtaining the consent of the affected organisations to content and scope (Müller 2014). By passing the SEC law administration, the efforts of the Congress are not finished, as it supervises the SEC.
Lobbying has described stringent boundaries within various accounting bodies. For example, lobbying in US raised a public discussion regarding whether or not SEC needs to be involved in undertaking foreign policies like global weapon production and policies related to human rights. It has been argued by some economists that SEC needs to involve in these policies by barring some organisations, especially from China and Russia, from operating in US (Quaglia 2014). Later on, the debate has increased at the time the US Congress aimed to restrict international bad actors from accessing the global stock market.
More precisely, the US aimed of delisting Petro China, which is a Chinese organisation, from the New York Stock Exchange (Pelger 2016). SEC announced its stand; however, the pressure groups stated that SEC needs to observe its boundaries. They have argued that SEC has been developed for looking after the accounting standards rather than designing policies. As a result, few pressure groups cited that SEC did not conform to the overall proposal revisions. According to them, no legal title is provided to the SEC of turning down the requests of the foreign organisations for accessing the US market. Along with this, it has been claimed that SEC is responsible to assure that all the US investors obtain relevant information on various organisations within the various states along with ensuring that shares have been at their disposal in times of need.
As per Reuter and Messner (2015), another US-based accounting organisation is “Financial Accounting Standards Board (FASB)”, which has felt the effect of accounting standard setting. The accounting stakeholders formed FASB in 1973 having the primary aim of setting accounting standards, which fulfil the global requirements. After its establishment, different pressure groups have put pressure via lobbies. Such pressure has affected significantly the accounting standards developed by FASB.
The lobby groups have used the auditors as well as the US government in order to put pressure to FASB. For example, the Congress has offered measures directly for checking on FASB or uses SEC. In the year 1979, an act was passed by the Congress stopping both SEC and FASB from compelling any organisation into utilising unflattering accounting approach in relation to drilled holes (Stockenstrand and Nilsson 2016). Along with this, the Congress had snatched power from FASB, after a proposal was put forward that share options need to be treated in the form of expenses in comprehensive income statements.
It is inherent that many governments extend support to the pressure that the lobbyists have exerted to standard setting regulators for public benefits. However, if effective measures are not put in place for determining the impact of such pressure to the standards of accounting, there would not be realisation of expected benefits. For example, such pressure has impeded attempts made for accomplishing global convenience and an effective extent of quality on the part of the standard setting regulators. The failure of these bodies to submit to lobby group pressure has threatened to transfer their accounting regulations from one standard to another. For example, a Swiss organisation called Novartis, has written a letter to the IASB head by threatening that if the standards of goodwill amortisation are not changed, they would switch to GAAP from IFRS (Teixeira 2014). This clearly denotes the fact that some organisations might utilise lobbying for their own benefits and not for the global community.
In a similar manner, some organisations having more influence in their industries use lobbying for eliminating the credibility of globally accepted accounting regulations. For example, in 1992, the “International Accounting Standards Committee (IASC)” was pressurised to abolish the LIFO method. Even though “International Organisation of Securities Commission (IOSCO)”, US and Canada accounting bodies completely opposed the elimination, certain firms use political pressure for influencing the elimination. Such pressure later compelled various accounting bodies to infer that the government would utilise LIFO in income tax and tax rules. Even though IASC has been one of the major supporters to harmonise global accounting standards expecting to obtain the most articulate and committed exponents, lobbying with the help of political pressure has achieved success in failing the Comparability or Improvements Program of IASC (Wingard, Bosman and Amisi 2016).
The power of numbers exerted with the help of pressure groups made various groups of standard setting in accounting relax their strong rules in accounting regulations. For example, lobbies have been used by the “American Bankers Association (ABA)” for driving the FASB in relaxing their market security standards. ABA has utilised the letters that the Chairman of the Federal Reserve Board, Treasury Secretary, Chairman of the Federal Deposit Insurance Corporation and two Senators of US have sent to FASB (Young 2014). Even though SEC extended strong support to FASB, FASB was managed to be pushed by ABA in relaxing its stand on marketable securities along with admitting that it needs to be presented at fair value by considering the same as earnings. There are numerous bankers protesting against the regulation having the fear of the volatility of earnings, as regulations are directed into earnings. In providing response, the “Statement of Financial Accounting Standards (FAS)” and Exposure Draft proposed an accounting standard No.115, which formulated portfolio securities available for sale. In addition, it would have the ability of transferring the change in annual fair value to the shareholders (Baudot, Demek and Huang 2018).
In the research work of Brouwer, Hoogendoorn and Naarding (2015), it has been found that another lobbying that lead to massive industrial reaction was the Exposure Draft of FASB in 1992. According to this draft, the organisations are needed to confer share options on staffs for providing fair value estimates of the records available and expenditure in the income statement. As a result, the trade unions and organisations from different industries have sought the assistance of the members of “House of Senate”. Consequently, these organisations have asked the members of the Senate to undertake actions, which could hinder the progress of the proposal of FASB. Owing to this pressure, a resolution has taken place undertaken by the Senate that compelled the FASB in curbing its progress relation staff accounting initiative.
The Senate has utilised its critical economic status to argue out a false claim that the desired growth entirely depend on the staff entrepreneur. The pressure that the Senate has exerted as well as other lobby groups have been highly unrelenting and intense, due to the Chairman of SEC has urged FASB in relaxing its stock proposal. The reason has been to jeopardise the private sector and with such unbearable pressure, FASB has been compelled to issue SFAS No.12. According to this standard, the organisations are needed to utilise footnotes to disclose the stock dilution at the time of undertaking report earnings (Reuter and Messner 2015).
In other situations, the pressure exerted by pressure groups, political parties and lobbies resulted in several governments to withdraw crucial support from the standard setters in accounting. Along with this, such pressure has resulted in appeals from the end of the lobbyists through making dialogue in public media. In the past few years, the pressure has risen to an extent, which has intimidated severely the power of the standard setting regulators.
Conclusion:
Lobbying has varying impact on formulating accounting standards, as evident from the above discussion. The stakeholders expect that the lobbies would assist in shaping the accounting principles and conventions. However, if these lobbies are managed appropriately or excessive politics are allowed in the issue by the public and other stakeholders, there would be loss of essence in gains. The senior organisations might use the politicians in spoiling accounting principles for their personal benefits.
References:
Bamber, M. and McMeeking, K., 2016. An examination of international accounting standard-setting due process and the implications for legitimacy. The British Accounting Review, 48(1), pp.59-73.
Baudot, L., 2018. On Commitment Toward Knowledge Templates in Global Standard Setting: The Case of the FASB?IASB Revenue Project. Contemporary Accounting Research, 35(2), pp.657-695.
Baudot, L., Demek, K.C. and Huang, Z., 2018. The accounting profession’s engagement with accounting standards: Conceptualizing accounting complexity through Big 4 comment letters. Auditing: A Journal of Practice and Theory, 15(1), pp.29-33.
Brouwer, A., Hoogendoorn, M. and Naarding, E., 2015. Will the changes proposed to the conceptual framework’s definitions and recognition criteria provide a better basis for IASB standard setting?. Accounting and Business Research, 45(5), pp.547-571.
Chakravarthy, J., 2018. Ideological diversity in standard setting. Review of Accounting Studies, 66(8), pp.1-43.
El-Firjani, E.R. and Faraj, S.M., 2016. International Accounting Standards: Adoption, Implementation and Challenges. In Economics and Political Implications of International Financial Reporting Standards, 56(5), pp. 231-250.
Friedman, H.L. and Heinle, M.S., 2016. Lobbying and uniform disclosure regulation. Journal of Accounting Research, 54(3), pp.863-893.
Hoffmann, S. and Zuelch, H., 2014. Lobbying on accounting standard setting in the parliamentary environment of Germany. Critical Perspectives on Accounting, 25(8), pp.709-723.
Königsgruber, R. and Palan, S., 2015. Earnings management and participation in accounting standard-setting. Central European Journal of Operations Research, 23(1), pp.31-52.
Morley, J., 2016. Internal lobbying at the IASB. Journal of Accounting and Public Policy, 35(3), pp.224-255.
Müller, J., 2014. An accounting revolution? The financialisation of standard setting. Critical Perspectives on Accounting, 25(7), pp.539-557.
Pelger, C., 2016. Practices of standard-setting–An analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting. Accounting, Organizations and Society, 50, pp.51-73.
Quaglia, L., 2014. The European Union, the USA and international standard setting by regulatory fora in finance. New Political Economy, 19(3), pp.427-444.
Reuter, M. and Messner, M., 2015. Lobbying on the integrated reporting framework: an analysis of comment letters to the 2011 discussion paper of the IIRC. Accounting, Auditing & Accountability Journal, 28(3), pp.365-402.
Stockenstrand, A.K. and Nilsson, F., 2016. Learning by lobbying: The role of networking in banks’ interpretation and implementation of accounting standards. In Extending the business network approach, 56(3), pp. 283-299.
Teixeira, A., 2014. The International Accounting Standards Board and evidence-informed standard-setting. Accounting in Europe, 11(1), pp.5-12.
Wingard, C., Bosman, J. and Amisi, B., 2016. The legitimacy of IFRS: An assessment of the influences on the due process of standard-setting. Meditari Accountancy Research, 24(1), pp.134-156.
Young, J.J., 2014. Separating the Political and Technical: Accounting Standard?Setting and Purification. Contemporary Accounting Research, 31(3), pp.713-747.
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