Main theories that explain the politic process of accounting standard setting and regulatory process

According to Bengtssoninstitutional theory has been used in studies on accounting standard setting to complement the explanatory framework of political economy from which the economic theory of regulation followsand the focus of these studies has been on how external pressures influence the adoption of accounting standards.

Lobbying in accounting standard setting

These two major approaches of regulated and non-regulated standard setting activities are mainly discussed in this paper. The assumption is that the higher the debt level, the more the company will be stifled by restrictions and conditions imposed by creditors, and the more stringent the restrictions imposed by creditors, the greater the likelihood that the company will violate the restrictions. The management selects accounting procedure to maximize own utility and therefore Watts and Zimmerman give several factors such as taxes, regulatory procedures, and political costs etc. The Free Market approach is the main argument against the regulated approaches. The author used a sample of companies that used the full cost method because these companies would be most affected by the FASB proposal. In this context, the publication of the DPEA provides another opportunity to observe lobbying by oil companies to influence the IASB's regulation of oil industry accounting. Dodd et all, In addition they argue that even in regulated environments the corporations have direct or indirect contact and influence to regulators and so to the standard setting process. Georgiou investigated the effectiveness of multiple lobbying methods,including but not limited to comment letters. Deakin's work sought to study the process of accounting regulation in the oil industry for companies that made submissions to the FASB. Thus, according to Solomons , assuming that the standard-setting process is political, accounting standards are not necessarily guided by theoretical or technical issues but by the different interests of the affected parties, who exert pressure for individual gain. According to Taylor and Underdown public goods are which, if supplied to one person, are available to all others.

Institutional theory places organizations within a social setting and explicitly recognizes the influence of the external social environment on the internal activities of an organization, which seeks to obtain legitimacy or to retain social acceptance Kenny and Larson, Deakin's work sought to study the process of accounting regulation in the oil industry for companies that made submissions to the FASB.

This could lead in turn to underproduction and asymmetry of information. The author used a logistic regression model to test hypotheses related to the existence of restrictive financial covenants and performance-based management compensation plans and found that the empirical evidence was consistent with these hypotheses.

political influence on accounting standard-setting

This result confirmed the formulated hypothesis that companies with high earnings volatility prior tothe adoption of a new standard aremore likely to lobby.

Consequently, various interest groups, which also seek legitimacy and recognition from their peers, can freely participate in the standard-setting process of these regulatory bodies, even when the interest groups are not directly affected by a normative proposal Chatham et al.

Their results also indicated that companies submitting comments against the proposed standard were more likely to have contracts with debt covenants than companies in favor of the proposed standard.

The standard setting process is a political process discuss

The assumption is that higher profits may attract adverse attention from regulators, professional associations, media, environmentalists and consumer groups, among others Watts and Zimmerman, Because this study is based on a discussion paper the DPEA , it is not yet possible to know which opinions will ultimatelybe accepted or rejected by the IASB. More specifically, the management compensation hypothesis,also known as the bonus plan hypothesis,states that managers who receive variable compensation e. The author used a sample of companies that used the full cost method because these companies would be most affected by the FASB proposal. Ndubizu et al. This result confirmed the formulated hypothesis that companies with high earnings volatility prior tothe adoption of a new standard aremore likely to lobby. Source: Orens, Jorissen, Lybaert and Tas This study adopts the perspective of the economic theory of regulation.

Thus, according to Solomonsassuming that the standard-setting process is political, accounting standards are not necessarily guided by theoretical or technical issues but by the different interests of the affected parties, who exert pressure for individual gain.

However, there are several limitations. According to Watts and Zimmerman management plays the central role in determination of standards. Because this study is based on a discussion paper the DPEAit is not yet possible to know which opinions will ultimatelybe accepted or rejected by the IASB.

standard setting political issues

Furthermore, it is to state that disclosed financial statements are seen as public goods. The solicitation of comments on its products accounting standards from interested parties is one strategy employed by the IASB in its quest for legitimacy Kenny and Larson,

Standard setting at the iasc b is and has long been permeated by politics

Managers would effort to provide adequate and reliable information to attract investors and therefore to maximize welfare. According to Watts and Zimmerman corporations produced financial statements voluntarily, for example in the US before disclosures became an obligation by government mandate. Otherwise, people would avoid demanding for such goods till somebody else demands it and so it will be freely available to all — so called free-rider problem. A necessary further step is to assume that those interests will have an impact in the output of the standard setting process. Regarding the debt covenant hypothesis, Watts and Zimmerman argue that managers of companies that have higher degrees of debt are more likely to use accounting methods that increase profits. Notwithstanding this acknowledgment that 'lobbying' is a much more comprehensive concept in practice, due to methodological constraints,this study considers a lobbying strategy to be a strategy that uses the submission of public comment letters in response to public consultation of standard-setting bodies. Institutional theory places organizations within a social setting and explicitly recognizes the influence of the external social environment on the internal activities of an organization, which seeks to obtain legitimacy or to retain social acceptance Kenny and Larson, Finally, their evidence showed that companies with performance-based management compensation plans were more likely to provide comments in favor of the proposal than companies without performance-based management compensation plans Georgiou and Roberts, In addition, an overview of the different regulated and non-regulated approaches is given. The reader can find a brief introduction to the discussion about accounting regulation after the crisis. This theory suggests that the actions of organizations should be understood as attempts to obtain legitimacy and to maintain credibility with external constituents Fogarty, The assumption is that the higher the debt level, the more the company will be stifled by restrictions and conditions imposed by creditors, and the more stringent the restrictions imposed by creditors, the greater the likelihood that the company will violate the restrictions. The author used a sample of companies that used the full cost method because these companies would be most affected by the FASB proposal.
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Applying Theory to Accounting Regulation