University of California
Type of paper: Thesis/Dissertation Chapter
Politics and Accounting Standards
Politics and Accounting Standards
The growth of an enterprise is very important for both internal and external stakeholders. It can be expressed by showing the true and fair view of a company using the financial reports that shows the actual capital allocation of the enterprise. Therefore, financial accounting is very important and it enhances the success of the business. In this context, both the definition and the body that is involved in setting the standard are important in helping to understand clearly the meaning of financial accounting. Financial accounting is the process of preparing and establishing a report on the financial information of an enterprise (.Ball, Ray, 2006).
It also shows the true and fair view of the financial statements which are cash flow statement, balance sheet and profit and loss statement. These statements are very essential for the enterprise stakeholders. Financial accounting takes into consideration the management of the business for example, its assets, liabilities and capital(Ball, Ray, 2006). Furthermore, it states its real capital and debts to enable the enterprise stakeholder evaluate the performance of the business. The true and fair view of financial accounting can be achieved by following the rules and policies that govern the people setting the rules.
The rules or rather the standards apply internationally to help ensure that the accounting standards used across the world are uniform (Armstrong, et al 2010). These are the professional regulatory bodies that are responsible for setting the standards for example the International Accounting Standards (IAS), and International Financial Reporting Standards (IFRS) among others. The board that is responsible for setting the standard is the Financial Accounting Standard Board (FASB) among other interested parties(Ball, Ray, 2006). FASB formulates a process that is followed so that it can be able to help in setting new accounting standards. First, the board has a duty to set up a committee that prepares an outline of the task at hand. Secondly, the committee board prepares the objectives for the board comments.
After this, the board gives its view on the task outline and then passes it to the committee which in return prepares a discussion paper which entails the committee’s statement of the application proposal standards. Eventually, the committee also obtains views from interested parties and after their view is in the favor of the principle, they go ahead in drafting an exposure and the draft is then published as the IFRS(Ball, Ray, 2006).
In order, for these standard to be effective and efficient, they are categorized into varies group therefore making it easy for the accounting. The IAS is classified into many classes for example,under the IAS 10, events that occur after the balance sheet date,should not be part of the balance sheet. Every company is required to prepare a balance sheet at the end of the year. Therefore, any entity trying to avoid or present a misleading financial statement is liable and the board provides the contents of the balance sheet. Under the IAS 19, which talks about retirement benefit costs, and the board takes into consideration the accounting of the benefits accruing from the retirement (Aboody, et a l 2004).
The board has a duty to see that no corruption is being practiced and therefore, companies are required to show the true and fair value in terms of the retirement costs. This prevents corruption of the prominent politicians. The IAS 17talks about accounting for leases. It is very important for a company to account for every lease taken since it is a liability. This is made possible because the board provides policies and procedures to be followed in disclosure of the account on lease. Lease is an expense for the company and if not accounted for can lead to false financial statements (Aboody, et a l, 2004).Furthermore, IAS 33talks about earnings per share,whereby all the companies are required to show their profit in terms of profit earned from share. The earning per share is used to the performance of the company which is based on the shares. It is also important for the shareholders.
Most company and influential parties do not support this standard and therefore it is criticized.IAS 39 is a financial standard which requires that accounting should have recognitionand measurement of assets as well as liabilities. It states that all the entities should take into account of all the assets, liabilities and equity of the business and no relevant material should be left out(Ball, Ray, 2006). The profit, loss and capital should be stated as they appear without any alterations. The IFRS is also divided into classes but in this context, the IFRS 13 is considered. This standard is concerned with the true and fair value of an entity (Armstrong, et al 2010). Itrequires all the entities to state real profit or loss incurred in their financial reports. However, accounting is not sparedfrom criticism and the board experience pressure for different organization that are not in agreement with the standard. Political pressure is one of the areas whichexert pressure on the board. The standards of accounting requires the organizations or the enterprise to show the true and fair view of the performance of the business (.Ball, Ray,2006).Due to this, most business operating under a loss stand a chance to be wound up and there will be no investors interested in the business.
The political pressure that is experienced under the various accounting standards is in terms of legislations which they politicians enact. Some of the legislations contradict the accounting standards whereby businesses in a certain country are required to follow certain regulations in addition to the IAS and IFRS. This creates pressure on companies to try and evade the application of the IAS and IFRS in their reporting. The accounting standards are set to helpindicate the real performance of the business and therefore many world trading entities are affected by this since the competitors are in watch (.Ball, Ray,2006). The amendment of the standard brought about the reclassification of the IFRS and IAS so as to favor the entities that make losses in trading.
It has been noted that politicians own businesses across the world and closely monitor their businesses the best way they can so that they can make more profits (Armstrong, et al 2010). Therefore, considering that the politicians have the capacity of adjusting the laws on businesses as they deem right, there is likelihood that the policies that they will formulate do not match or support the accounting standards available (.Ball, Ray,2006). What this means is that there will be a lot of pressure on the accounting standards in terms of trying to ensure that the politician-owned businesses adhere to the reporting standards.
The other way through which politics may put pressure on the various accounting standards listed and discussed above is through the selection of the board members to the FASB (Armstrong, et al 2010). Politicians using their powers on formulation of policies may be inclined to have people in the board that will take care of their personal interest by formulating standards which are not supportive of all businesses equally. This means that whenever there are new standards to be introduced which can be beneficial to the whole business world, the politicians will always influence the final decisions that the board will make pertaining to the new accounting standards (Aboody, et a l 2004).
The other issue which is part of the political pressure and interference with the standards is that of political incentives, whichthe major reason for the reclassification of the accounting standards. It is to be noted that the growth of country’seconomy is important but in case where the growth does not reflect the true economic situation, the information shown does not indicate the true and fair values of economy (Aboody, et a l 2004). The same case applies to banks which hold government equity and using the reclassified standards will not show the true and fair value. Therefore, when politicians offer incentives to the board members through corrupt ways and with intentions of promoting their interests, the pressure on the standards continue to mount hence prevents the proper application of the standards.
Therefore, in conclusion on the effects of politics and politicians on the formulation and application of the financial accounting standards, it can be noted that there is need to prevent political interference on the FASB as well as other regulatory bodies which formulate the standards. The accounting standards are quite important in ensuring proper and accurate information which can be relied upon is produced and reported by companies and organizations.
Aboody, D., M. E. Barth, and R. Kasznik. 2004. Firms’ voluntary recognition of stockbasedCompensation expense. Journal of Accounting Research 42: 123-160.
Armstrong, Christopher S./Barth, Mary E./Jagolinzer, Alan D./Riedl, Edward J. (2010). Market Reaction to the Adoption of IFRS in Europe.The Accounting Review, Vol. 85, No. 1, pp.31–61.
Ball, Ray (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, Vol. 36, Special Issue, pp. 5–27.