Political, Economic & Social effects of Accounting Standard Setters
‘The view that accounting standard setters consider the economic, political and social consequences of accounting standards is consistent with the view that accounting reports if compiled in accordance with accounting standards and other generally accepted principles, will be neutral and objective’
Prices start at $10
Prices start at $12
Prices start at $120
Prices start at $11
Objectivity and neutrality are the ultimate goals of general purpose financial reporting. However, there are many factors involved that make this goal almost impossible to attain. Economic, political and social issues are huge influences on the Accounting Standard-setting process, and these influences spill over into everyday accounting, with personal gain often ahead of reliability and objectivity. Users of financial reports have demands that need to be satisfied, and regulatory boards involved in Standard setting have done their best to ensure that information is clear and reliable.
Considering these factors, Accounting does not exist in a vacuum, Accountants are human beings, not robots and the profession has strict guidelines and heavy penalties for unprofessional or fraudulent activity. It is thus clear that every attempt is made to acknowledge the operating societal factors, gauge the impact they have on different industries at different times and move from that point. The result than, has to be, the best attempt at a neutral and objective report by the professional accountant.
Economic, political and social issues are powerful driving forces within any society. These issues, therefore, need to be focused on when major decisions in industries, are being made. One industry that heavily relies on, and incorporates economic, political and social issues in its’ decision-making, is that of Accounting. The Accounting profession is made up of many standards and regulatory boards that govern the way in which entities maintain their general-purpose financial reports.
Accounting standards set minimum benchmarks of the quality required in financial reporting. They specify that reporting entities shall prepare general-purpose financial reports and that these reports will comply with Statements of Accounting Concepts (SAC’s) and Accounting Standards (Accounting Handbook 2001, SAC1, pg. 3). The ‘objective of general purpose financial reporting’, (Accounting Handbook 2001, SAC2, pg. 13) is that all general purpose financial reports are prepared to provide users with information about the reporting entity, which is useful for making and evaluating decisions about the allocation of scarce resources (Accounting Handbook 2001, SAC1, pg. 4).
These reports ‘should’ be neutral and objective, free from bias, allowing users to make informed decisions. Considering that the process of ‘setting’ these Accounting Standards incorporates economic, political and social factors, it is almost impossible for financial reporting to be totally objective and neutral and totally free from bias. Although in theory, we would like to believe that financial reports, took a neutral and objective view, it is unlikely that in practice this could ever be attained with the huge influences that economic, political and social (external) issues have in our personal and business lives.
The identified, major, influencing issues on Accounting Standard setting are the very same factors which have always and will continue to influence modern society, economic, political and social issues. These modern sociological issues impact all aspects of life and Accounting Standards too, must acknowledge them and be thus influenced.
Economic issues are those which relate to the production, distribution and use of wealth and income; Political issues refer to or are connected with political parties, or their principles, aims and activities; and Social issues are ones which affect the lives and relationships of human beings who live in a community (The Macquarie Dictionary, 1985).
Each of these issues has their own agendas, but as we can appreciate from our own life experiences it is possible that some of these issues can interrelate. ‘..To judge from current discussions of the standard-setting process, accounting can no longer be thought of as non-political. The numbers that accountants have, or at least are widely thought to, have a significant impact on economic behaviour (Solomons, D., 1978, Journal).
Economic, political and social groups all have information needs to be satisfied through general purpose financial reporting. This is highlighted further when stated that the ‘economic or political importance/ influence refers to the ability of an entity to make a significant impact on the welfare of external parties. The greater the economic or political importance of an entity, the more likely it is that there will exist users dependent on general purpose financial reports as a basis for making and evaluating decisions (Accounting Handbook 2001, SAC1, pg. 7).
Accounting standards are set so as these dependent users will find the information in these reports to be relevant and reliable. ‘Accounting rules, therefore, affect human behaviour’ (Solomons, D., 1978, Journal), but in response, we can argue that human behaviour also affects Accounting rules.
‘Accounting is coming to be regarded as an interesting endeavour. Accounting is slowly starting to be related to the pursuit of particular economic, social and political interests..’ (Arrington, C.E. & Puxty, A.G., 1991, vol 2) Thus, aligned with these ‘interests’ is a need for financial reports that are a ‘true and fair’ record in the view of a particular group at a particular point in time.
Financial reports intend to meet the information needs of common users who are unable to command the preparation of reports tailored to satisfy specific information needs (Shanahan, J., 1990). Most entities publish financial reports that state the profitability and financial position of their company.
Potential investors use these financial reports to assess the strengths or weaknesses of the company and these financial reports may also be examinable by potential creditors to determine the company’s ability to repay loans. Because unlike the Tax Office, financers, or ASX who can all demand information in any form they want it, users of general purpose financial reports expect the information in these reports to be as neutral and objective as possible.
Society as a whole through its government and citizen groups, also make use of financial information. Because general purpose financial reports reflect the current or future state of the company to current and potential stake/shareholders. Company accountants can prepare these reports reflecting huge economic, political or social influences, allowing groups in the community to be largely impressed, (i.e. Lobby groups, Environmental groups, Trade Unions etc.) but possibly not entirely well informed.
These reports are regulated by the standards set out by the Australian Accounting Standards Board (AASB), Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange Ltd (ASX). Standards place restrictions on behaviour: Therefore, they must be accepted by the affected parties. Acceptance may be forced or voluntary or some of both (Solomons, D., 1978, Journal).
Verifiability, objectivity, lack of bias, neutrality, and accuracy all relate to reliability. And reliability is the ultimate goal of the professional accountant. Reliability is, however, not the same as impartiality nor does it mean that the report is essentially objective. It is a complex task, which is in need of on-going and sophisticated refinement by the individual and the profession.
Every policy choice represents a trade-off among different individuals preferences, and possibly among alternative consequences, regardless of whether the policymakers see it that way or not. In this sense, Accounting policy choices can never be neutral (Committee on Social Consequences, 1978, pg. 24). Users of information expect a high level or ‘reliability and objectivity’ in regards to these financial reports. Interestingly, accountants often see themselves as engaged in an objective, value-free, technical enterprise, representing reality “as is”.
But in fact they are subjective “constructors or reality” (Morgan, G., 1988, vol 13). Users should be aware that accounting can never be truly objective, and that the accountants are really in the business of trying to persuade others that his/her concepts and figures, “give a true and fair view” when in reality this view is as partial as any other (Morgan, G., 1988, vol 13). So why do users of financial information still say they prefer it to have a high degree of reliability, if information cannot be neutral, it, therefore, cannot be reliable.
The issue of the non-existence of neutrality and objectivity in Accounting reports has an inverse effect on the matter of ethics. As professionals, accountants have an obligation to themselves not just to comply with accounting standards but, to adhere to high standards of ethical conduct. (Hilton, R.W., 2000, pg. 21) This means they have a responsibility to be competent, confidential, have a high standard of integrity and ‘objectivity’. The lack of objectivity is an ethical behavioural matter as well as an Accounting Standards matter.
There is no universal agreement about the desirability of Accounting Standards (Solomons, D., 1983, vol 13). The Australian Accounting Board have as their primary objective, improving the quality of financial reporting by Australian reporting entities. The Board’s primary responsibility is to develop Accounting Standards in respect of general purpose financial reporting that is ‘true and fair’ for all users. The Board consults with members of its broadly constituted consultive group to increase the involvement of various interested groups in the standard-setting process. (Accounting Handbook 2001, Policy Statement xxii)
Members form interest groups of economic, political and social areas raise issues and provide advice to the board on project priorities and matters of relevance. These interest groups influence the way in which the board views possible Accounting Standards. In practice as well as in theory, the social welfare impact of accounting reports is closely monitored.
Therefore it is no surprise that the financial accounting standards board is a political body and, consequently, that the process of selecting an acceptable accounting alternative is a political decision. If the social welfare impact of accounting policy decisions were ignored, the basis for the existence of a regulatory body would disappear (Solomons, D., 1978, Journal).
Solomons observation shows that the external influences of economic, political and social factors on Accounting Standard setting are so all-encompassing that they drive nearly all actions by report-writers. A “stakeholder perspective” has grown in importance. Increasingly, organizations are becoming viewed as being as much the property and concern of employees, customers, and managers and the general public, as they are of ‘owners’ (Morgan, G., 1988, vol 13). And this stamp or style influences the ensuing accounting reports.
Accounting standards are therefore set to the guidelines of, ‘everybody has a voice and everyone wants to be heard.’ The process of setting accounting standards can be described as democratic because like all rule-making bodies the board’s right to make rules depends ultimately on the consent of the ruled (Solomons, D., 1978, Journal).
So eventually the standards are set based on the influence of external factors and to an idealism of ‘true and fair’ view, and reports are compiled in accordance with these standards, “are they neutral and objective?” Of course not! The standard-setting process has been so influenced that it would be impossible for the standards to be totally free from bias. The external influencing factors will naturally affect the accountant’s objectivity.
It would be unrealistic and naive to believe that accountants of financial reports always put the good of the community before that of their corporate clients. How ‘can ‘poachers’ simultaneously act as ‘gamekeepers’?'(Mitchell, A., et al, 1994, vol 13)
Accounting Standard setters try to enforce concepts and standards to generate high-quality reports that are neutral and objective, but the external influences that are apparent right from the time of setting the standards make this idea just that, an idea. Accountants have an obligation to not only cater to the economic, political and social issues but to try and stick to a rigid idealism of neutrality.
Compiling only reports that meet all the guidelines of the regulatory boards, and being as impartial as humanly possible. Expectations of Accountants these days are of mixed feelings, at one end is society hoping that objective and unbiased reports are ‘maintained’, and then on the other side of the spectrum are the companies who want subjective reports ‘manufactured’ to their needs.
One might ask, ‘where is the honesty, the truth?’ The competitive nature of markets, investment and fickle clients demands a “creativity” in financial reporting which is the “truth” in at least a few peoples’ view. Choices are made by human beings, who in the main can be described as consistent professionals. But who can absolutely sure when, and to what extent, one is being influenced or even manipulated by outside influences.
Accountants and Accounting Standard setters face a trade-off; either succumb to the external influences or try and fool themselves that objectivity and neutrality are attainable. As Ralph Waldo Emerson once said ‘People only see what they are prepared to see’.
LIST OF REFERENCES
Accounting Handbook 2001, Policy Statements & Standards of Accounting Concepts, Prentice Hall, pg’s. xxii – 13, Vol 1, 2001
Arrington, C.E. & Puxty, A.G., Accounting, Interests and Rationality: A Communicative Relation. Critical Perspectives on Accounting, Vol 2, 1991
Committee on Social Consequences of Accounting, Report of the committee on the social consequences of Accounting information, Sarasota, FLA: AAA, pg. 24, 1978
Hilton, R.W., Managerial Accounting, Irwin/McGraw-Hill, 4th Ed, pg. 21, 2000
Mitchell, A., et al, Ethical Statements as Smokescreens for Sectional Interests: The case of the UK Accountancy Profession, Journal of Business Ethics, Vol 13, pg. 39 – 51, 1994
Morgan, G., Accounting as Reality Construction: Towards a New Epistemology for Accounting Practice, Accounting Organisations and Society, Vol 13 No 3, 1988
Shanahan, J., Consolidations: a lawyers’ picnic, Australian Business, July 25th, 1990
Solomons, D., The Politicization of Accounting, The Journal of Accountantcy, Nov, 1978
Solomons, D., The Political Implications of Accounting and Accounting Standard Setting, Accounting and Business Research, Vol 13, 1983
The Macquarie Dictionary, Macquarie Library Pty Ltd, 1985
Cite this page
This content was submitted by our community members and reviewed by Essayscollector Team. All content on this page is verified and owned by Essayscollector Team. All comments and user reviews are moderated by Essayscollector Team. In the case of any content-related problem, you can reach us through the report button.