Question

The standard-setting process is highly political. Describe an accounting regulation that would be politically controversial, and the types of political pressures that could be brought to bear in the standard-setting process.

Answer 1

SOLUTION :

Legislating for accounting standards reduces the outcomes to one of political trade-offs of competing interests. The political process, as identified by Watts & Zimmerman (1978), involves competition for wealth distributions between different interest groups. In the accounting arena it involves politicians who have incentives to increase government resources and retain their political positions; companies who have an incentive to avoid political costs, such as increased taxes or regulations; and voters whose participation in the political process is a function of the cost of interpreting and processing vast amounts of information. Managers have incentives to adopt procedures that would decrease the political sensitivity of reported earnings and/or increase their personal wealth.

There are many groups who will lobby in the standard-setting process for preferred outcomes. The groups include trade unions, financial institutions, analysts and social groups. Individuals also lobby in the process

Overall, the political process is seen as a means of pursuing individual or group self-interest (Watts & Zimmerman, 1979).

Some ways in which organisations have lobbied to affect the requirements of an accounting standard include:

· writing responses to exposure drafts

· writing to members of the accounting standard boards putting forward their views

· making oral presentations to the boards, or to individual members of the boards

· holding meetings where key issues are discussed and ensuring that members of the accounting standard boards are invited, or get to hear of the meetings

· holding demonstrations against a proposal that they do not favour — as occurred in the Silicon Valley where executives demonstrated against proposals for accounting for executive stock options

· releasing media releases expressing their disagreement with proposed accounting regulation; these releases would then result in articles in the media or announcements over the news

· forming groups to lobby for using any or all of the above methods

· offering to provide funding to the regulatory bodies for an accounting standard that suits them.

The lobbying may also be indirect and framed in a manner that draws attention away from the direct benefits of those lobbying

NOTE : Students might choose any accounting issue as long as they can explain why it is political in the sense of affecting the wealth of parties in the political process