The accounting regulations determining the nature of financial reporting process carried out by business entities worldwide are developed by the standard-setters such as IASB (International Accounting Standards Board) and the US Financial Accounting Standards Board (FASB). The standard-setters are largely focusing on converging of the standards for achieving harmonization in the global financial reporting process. However, the standard-setters are facing political pressures that are driven by the government of various countries restricting the convergence of the accounting standards. In this context, the present essay presents a critical evaluation of the statement ‘Standard setting at the IASC/B is and has long been permeated by politics’. This has been carried out by examining the nature of processes and practices of IASB and the impact of political context on development process of accounting regulations.
International Accounting Standard Board (IASB) has provided in their conceptual framework the objectives of general purpose financial reporting. These objectives make sure that reporting entity provides useful information to the existing and potential investors, lenders, and creditors. The main accounting standard setters such as IASB, FASB (Financial Accounting Standards Board and UK ASB (United Kingdom Accounting Standard Board) has main objective to provide all such information to the investors that seem useful and act in the best interest of the investors. Same has also been provided in objectives of conceptual framework of accounting.
All bodies of standard setters’ claims that their respective accounting regulations are neutral as they are not impact by the external bodies. It means while drafting the accounting standards only interests of investors, lenders and creditors has been kept in place and no other external bodies such as political members, big companies and person in charge has any influence over the provisions of the accounting standard. Accounting regulations are mainly defined in conceptual framework by IASB and it has certain objectives that fulfill the needs of users of the financial information. So it can be said that accounting regulations are framed keeping defined objectives and upon such objectives all the accounting standards are developed (Daske, Hail, Leuz and Verdi, 2008). Lastly, accounting regulations are developed technically means every regulations some base and it some meaning behind including in the accounting standards. So it can be said that accounting regulations has three main defined nature i.e. it is neutral, has clear objective and technical (Barth, Landsman and Lang, 2008).
During the past few decades political lobbying has increased a lot and it has seen that standards are framed to satisfy the needs of political bodies. In United States, there have been cases where it has found that Securities and Exchange Board (SEC) takes active interest in the accounting standard and it prevents listed companies from deviating from generally accepted accounting principles (GAAP). No other SEC body in any country takes such interest in the accounting standard setting or makes an authority with the accounting setter body. Political lobbying take place mainly due to self interest of accounting preparers and people who is in power i.e. government. It is not all as lobbying is also due to influence of corporations which give raise a question on the nature of accounting regulations. Accounting setters such as IASB and FASB claims that their accounting standards does not got impacted by power and politics but is not true as bodies like SEC and corporations have direct or indirect interest in the regulations of accounting. It critically proves that accounting regulations are not neutral and they are framed under the influence of political bodies and big corporations (Shields, 2014).
In the article by Ahmad (2015), it has been mentioned that lobbying takes place at both IASB and FASB. The research by Ahmad shows that large corporations tends to write more comment letters to IASB and try to influence the judgments of accounting setters. It was critically mentioned in the article that 23 out 27 companies selected as respondents are larger in size and tends to politically influence the provisions in accounting standards. It has mentioned that highest cases of political lobbying have been observed in the Australia, Hong Kong, and Switzerland (Ahmad, 2015). The empirical analysis of research showed that major factors that causes the lobbying is the cost, dominant nature of corporations and political command on specific criteria. In United States many cases of political lobbying has been reported in the accounting of oil and gas accounting. In year 1990, a case has been reported where International Accounting Standard Committee (IASC) has suggested accounting principle of last in first out and said that it should be applied by the companies. But under the political pressure this principle has been granted for tax purposes in countries like Italy, Germany, Japan, and South Korea. This happen because delegation from these countries have voted against the suggestion by the IASC (Ahmad, 2015).
IASB and FASB are two main bodies that frame the accounting regulations all over the world and IASC consists of members from each country. The role of committee is to set the accounting regulations that favor the accounting users all over the world. But there are three main dimensions that create issues with setting up the accounting regulations and they are social, political and environmental. Ignoring these dimensions will critically disrupt all the accounting regulations as all such dimensions judge the nature of accounting regulations. If accounting regulations ignore social criteria and frames standards than such regulations will seems to be binding on the companies without having prejudice to the relevant accounting context. Similarly other dimensions are ignored such as political and environment than it will not be possible to frame accounting policies that all countries can follow (Hopper, Lassou and Soobaroyen, 2017).
IASB is undertaking the efforts at both domestic and international level for meeting the various interests of its stakeholders. IASB aims to develop high quality globally accepted accounting standards for proving investors the information that is comparable, transparent and reliable. The accounting regulations developed by the IASB are influenced pressures under the domestic level. The standard accounting regulations are developed by considering the views of different opinions of accounting experts in relation to the problem faced at a global level. The IASB gathers the views and opinions of different accounting experts such as auditors and other accounting professionals by issuing comment letters Daske, Hail, Leuz and Verdi, 2008).
Thus, it can be said that the accounting regulations are developed by the IASB not domestically but by considering the views of different stakeholders. However, the nature of the accounting regulations influenced at the domestic level due to political conditions present within a particular country. For example, the Australian business entities develop their financial reports as per the IASB standards but the application of these standards is influenced largely by the domestic accounting regulation such as Corporations Act (James, 2009).
IASB accounting standard-setting process is an open due process. All the meetings involved are carried out in public and are also webcasted. It involves the participation from the national accounting standard-setting bodies and regional bodies, academics and other parties that are influenced by the process of accounting standard development. This is followed by release of a discussion or research paper that is developed with the purpose of gathering opinions from the interested parties about the standard development decision of the IASB. This is followed by developing an exposure draft that is issued for public consultation. It may also involve developing a re-exposing proposal before taking the final decision to develop an accounting standard (Daske, Hail, Leuz and Verdi, 2008). The adoption of the IFRS is influenced largely by the actions of special-interest lobbyists and the regulators. The adoption of IFRS within a country is significantly influenced if other countries within geographical regions have also adopted it. This is because to strengthen their competitive position by gaining the benefits from the adoption of IASB standards in comparison to domestic standards. Also, a country is more likely to adopt the IFRS standards if its trade partners also follow the IFRS. This is because it enables the global comparability of the financial information and thus facilitating the investors to take adequate decisions (Königsgruber, 2010). The IASB standards have gained recognition at a global level for adoption as they are enabling the member countries to promote transparency, accountability and efficiency within the financial markets. They enable the investors to take informed economic decisions and this leads in maximizing the capital allocation (Hope and Kang, 2006).
Conclusion
It can be stated from the overall discussion held within the essay that accounting standard-setting process of IASB is largely influenced by the political power. The political context of a country has an important implication in the international decision-making regarding the adoption of accounting standards. This involves considering the tradeoffs between the perceived benefits and costs that are to be realized with the adoption of a particular accounting standard that influences the decision taken by the national standard-setting body for its final implementation.
References
Ahmad, A. 2015. Lobbying in Accounting Standards Setting. Global Journal of Management and Business Research: D Accounting and Auditing, 15(3), pp. 1-5.
Barth, M. E., Landsman, W. R., and Lang, M. H. 2008. International accounting standards and accounting quality. Journal of accounting research, 46(3), pp. 467-498.
Daske, H., Hail, L., Leuz, C., and Verdi, R. S. 2008. Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46 (5), pp. 1085?1142.
Hope, O. and Kang, T. 2006. Empirical evidence on jurisdictions that adopt IFRS. Journal of International Accounting Research 5, pp. 1-20.
Hopper, T., Lassou, P., and Soobaroyen, T. 2017. Globalisation, accounting and developing countries. Critical Perspectives on Accounting, 43, pp. 125-148.
Jamburia, M.and Lankevi?i?t?, V. 2015. Political Influences on the IASB Accounting Standard-Setting: The Case of the Leases Standard. [Online]. Available at: https://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=7440908&fileOId=7441043 [Accessed on: 11 November, 2018].
James, M. L. 2009. Accounting for global entities and the effect of the convergence of U.S. generally accepted accounting principles to international financial reporting standards. Journal of the International Academy for Case Studies, 15(5).
Königsgruber, R. 2010. A political economy of accounting standard setting. Journal of Management & Governance, 14(4), pp. 277–295
Shields, K.E. 2014. International Accounting Standard Setting: Lobbying and the Development of Financial Instruments Accounting. [Online]. Available at: https://etheses.whiterose.ac.uk/7904/1/Thesis_Karin_Shields.pdf [Accessed on: 11 November, 2018].
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