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Advanced Corporate Accounting - Sutton's views on the lobbying and the process of Accounting standard setting
Political involvement in the process of standard setting is not a new topic for research. Since 1970 a number of scholars have made their studies on different dimensions of political involvement in regulation setting process. Some researchers like Sutton (1984) studied the process of lobbying and how these powerful lobbyists change the whole process of standard. Although as per the governing body the whole process of standard setting is for bringing uniformity in financial information released by different organizations but is this reality? This essay discusses in detail the factors associated with the process of standard setting and provides arguments in favor of Sutton's statement.
Accounting standard setting plays an important role in conveying users that how, when and where the financial information of a company is disclosed. As we know that there are various users of financial information so its obvious to have diverse and conflicting interests of users hence there rarely exists an accounting standard which is acceptable to all the users. That's the reason the modern researcher like Deegan (2006) states that accounting standard setting is a political process, which means standard setting is not as simple as it seems, there are complications associated in its root. There are people or some corporate powers which dominate the process of accounting or in the other words we can say that they lobby for or against a particular accounting standard to be imposed or already imposed by a standard setting body. Accounting standard setters have often been criticised for giving undue influence to individual, mostly corporate, actors and being subject to regulatory capture. Recently there were criticisms of increasing political interference in the process of accounting standard setting. This essay discusses in detail the process of lobbying in setting accounting standards and identifies public and/or political organizations which have veto power over accounting standards. This essay also presents a wide view of the political process which influences the standard setting process and to identify situations where companies and managers have incentives to engage in political lobbying of the accounting standard setter, i.e. to try to influence accounting standards by approaching political actors instead of participating in the due process of accounting standard setting. In this essay we also discuss the hierarchy in standard setting in USA, UK and Australia and political lobbying in these countries. Now the basic question arises why managers of big corporations indulge themselves in process of standard setting, according to Burgstahler and Eames (2006) Managers or corporations may wish to retain the ability to conceal unpleasant financial information or the ability to manage earnings to present constant growth or positive financial results. In order to do so they have incentives to exert influence on financial reporting standards. Major international accounting standard setters follow a due process approach giving companies the ability to express their views and have them taken into account. However, managers pursuing one of the objectives mentioned above generally do not wish to express their preferences in full view of the investing public. Instead, they may use good personal contact to political decision-makers in order to gain leverage over the standard setter. In the present discussion we will be explaining the process of standard setting and what are the factors which mainly affect the process of standard setting.
Why Politics is involved in the process of standard setting, historical perspective
Now the question arises why standard setting has become politicized is there any hope that politicization of accounting standards will come to the end. To find these answers and to analyze the issues raised by Sutton (1984) we have to discuss in brief the theories related to the regulation of accounting standards. Researchers like Watts and Zimmerman (1978), Smith and Warner (1979) were of the view that regulations are not required to control the economy, according to them the organizations have enough incentives to provide credible information about their organization to the stakeholders. They argue that if the mangers don't provide the required information to stakeholders then the stakeholders will act in a way to make the organization out of the market which the organization can't afford. So these researchers argue that market itself control the standards of accounting information according to its need and they further argue that the demand of standardization of accounting information is raised by those groups who want to control the market for their own benefits. While other researchers like Cooper and Keim(1983), Demski and Feltham (1976) don't agree with the view provided by above mentioned researchers, they argue that so called free market theory lead to the market failure and there will be a chaos as accounting information provided by the organizations on the need of their users will differ considerably, they argue that to make the accounting information user friendly the regulation is must. They further argue that in the absence of regulation and minimum standards of financial reporting, firms may fail to disclose adequate information or could possibly engage in creative accounting practices. Whatever may be the argument; if we have a look at the present worldwide market we come to a conclusion that all the economies adopted the second view of regulation. Now the question arises, is the process of standard setting relate to fairness or justice for stakeholders? Are there any financial motives behind it? Had it been for social justice and fair deal for stockholders the standard setting process would have been simple and unarguable. Do the accounting standards treat powerful or heavy stakeholders in the same way as ordinary stakeholders? Probably in actual market situation the answer is no, but in ideal market conditions the answer is yes. As general purpose financial report affect the behavior of those who have access to them, so accounting standards can have wide range of economic consequences which means it has got the power to affect economic relationships and distribution of wealth among individuals and groups. Particular accounting standards imply that a different distribution of economic welfare would exists in the absence of particular accounting standard concerned. For example, if compensation plans tie a portion of manager's salary to accounting income or rate of return on asset then the managers have incentives to choose accounting policies and to lobby for or against alteration to accounting standards to protect or increase compensation payment. The same case is true with the industries also, if the industries feel that a particular accounting standard if implemented will bring a negative growth for the business of that industry then they will be lobbying against that standard. So here is the politics enters in the process of standard setting, in a nutshell it can be said that in addition to public interest, social justice or fair deal to stakeholders there are the powers that really play a dominant rule in the process of accounting standard setting. These powers are termed as lobbyist by Sutton (1984) and whenever lobbyist perceive that their economic interest are in threat then they intervene the standard setting process which is known as politicization of accounting standard setting. The best example of lobbying is failure of Australian government to protect their citizens from the harmful and poisonous effect of asbestos as Mitchell (2004) writes that powerful asbestos lobby forced the government to implement rules in their favor and didn't allow the government to go for public interest.
Cause of lobbying and opportunities for lobbyist, an analysis of researches
There are various researches based on this topic where the researchers have studied regarding lobbying and the various factors on which it depend. Some researchers like Francis (1987), Schalow (1985), Ang et al (2000) came to conclusion that size of an organization is one of the consistent cause for lobbying. Other researchers like Dhaliwal (1982) and Deakin (1989) found that debt is equally important for lobbying but in contrast some other researchers like Sutton(1988), Schallow (1995) and Ang et al (2000) found that there is no importance of debt in the process of lobbying. So whether lobbying depend upon corporate debt or not this issue remains inconclusive as the results of the researches based on this topic doesn't come to a final outcome. Similarly few researchers like Dechow et al (1996), Hill et al (2002) that management compensation scheme as one of the cause of lobbying and they found positive correlation between management compensation scheme and the process of lobbying but at the same time some other researchers like Dhaliwal (1982) and MacArthur & Groves(1993) found that there is no relation between management compensation plan and lobbying process. So whether the process of lobbying depends upon management compensation scheme is still inconclusive. The studies made by MacArthur (1996) define lobbying quite narrowly as the submission of formal comment letter, but Georgiou & Roberts (2004) define lobbying in wide perpective they had included comment letters, formal and informal meetings and conversation with the standard maintaining board or staff. Georgiou & Roberts (2004) argue that during the process of lobbying the companies can be grouped into three categories: those who lobby against the proposal, those who lobby for the proposal and those who don't lobby at all. The researchers like Hill et al (2002) and Sutton(1988) don't consider the non lobbyists, they take only two categories.
Some other researchers like Watts and Zimmerman (1990) and Sutton (1984) studied in detail the factors on which the lobbying depends. According to Waats and Zimmerman (1990) political cost of a company is dependent on its size and same thing is true for lobbying behavior of a company. This fact was also studied by Sutton (1984), according to Sutton(1984) large firms face relatively lower lobbying costs and obtain relatively greater benefits from successful lobbying while also having a higher probability of influencing the standard setting process. Similar researches are done by other researchers like Larson (1997), Smith (1993) to find the other factors which influence lobbying behavior in standard setting process like US listing, debt covenant and management compensation plan. It is suggested by Dhaliwal (1982) that the capital structure of a firm is an important determinant of its management's lobbying position on an accounting standard. Due to protective covenants in loan agreements, firms with higher leverage will oppose accounting standards which either decrease reported income or increase volatility of reported earnings.
Australian adoption of international accounting standard and lobbying behavior of interested parties
The international harmonization of accounting standards in Australia has been under way since the 1970's. Initially in Australia, the idea of undertaking such a program was introduced by the Australian accounting professional bodies - the Institute of Chartered Accountants in Australia [ICAA] and CPA Australia [CPA]. According to Parker (2002) if we see the history of accounting standard setting in Australia then we see that in the period between 1973 and 2002, it was a policy of comparability, being replaced by a policy of harmonization and convergence or in the other words replaced by one of adoption of International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) by 1 January 2005. The AASB finally released, in April 1996, their new policy statement revealing their stance on international harmonization of accounting standards. According to ASCPA & ICAA hand book the Policy Statement 6International Harmonization Policy allowed the AASB to formalize their international harmonization objective and the strategies that they employ in pursuing that objective. In this statement, it was stated that the globalization of capital markets has resulted in an increased demand for high quality, internationally comparable financial information. The objective of harmonisation was to move towards the development of internationally accepted standards to adopt in Australia. The Board considered that in the short to medium term, this would not be achievable, so they assigned themselves the task of making sure that compliance with Australian accounting standards would result in compliance with International Accounting Standards. There were some benefits of harmonization as claimed by accounting bodies as comparability and quality information for international capital markets decision making (based on the argument that resources will flow to those entities who are more productive); removing international barriers to capital flow and increasing understanding for foreign investors; reduce reporting costs for multinationals; more meaningful comparisons for international public sector but if we study the point of view of other researchers then we get that adoption of accounting process was a different story. Stoddart (1999) claims that the Federal government at that time needed to establish some credibility in the business world, and the structure of setting accounting standards provided an opportunity, being a relatively small, but highly visible, technical area where major participants were dissatisfied with the current arrangements. At that time Stoddart(1999) predicted that the Government would benefit in terms of adopting International standards as Government was transferring power to a foreign body on which government was not having any control. Stoddart claims in her discussion paper that the adoption of accounting standard was not needed for public interest but government needed it to gain popularity by tackling this new issue. Stoddart argue that the adoption of International Accounting Standard could be seen as a reward to the Australian Stock Exchange (ASX). Howieson (1998) also made a similar study and found that adoption of international standard was a reward for ASX as well as US stock exchange. provides discussion of this reward to ASX, as well as the rewards that it could potentially offer to the US stock exchange. He argues that ASX was benefited in terms of increased listings from foreign companies and retaining our Australian companies listed on ASX. Stoddart (1999) argues that the ASX lobbied for full adoption of IAS and the ASX at that time was the main instigator in the push towards full adoption of IAS. He argues that ASX was so anxious about the introduction of IAS in Australia that it even provided funding over two years for this program, and even threatened to stop the funding, in December 1997, if full adoption of IAS did not eventuate. So from the above discussions we come to a conclusion that the adoption of international accounting standard may be beneficial to general public or smaller Australian businesses to some extent but there is no doubt in accepting the fact that ASX and some big corporations were the main beneficiaries of the adoption of international accounting standards in Australia.
The present essay discusses in detail the views of Sutton (1984) on political impact on the process of accounting standard setting as well as lobbying by the powerful bodies or large corporation for or against any regulation to be implemented by standard setting bodies. Although the basic motive of regulation or implementing a new standard is public interest which means that standard setting bodies wants to make financial documents more understandable, more comparable to the final users. Anybody can't deny from this fact that process of regulation has forced the corporations to provide all the necessary information to the users which is really good for the users. But on the other way we have to accept this truth also those standard setting bodies sometimes play in the hands of powerful players of market. These powerful players of the market e.g. Large corporations, independent bodies like ASX have the enough power to force government/standard setting bodies to implement laws in favour of them. As in our discussion we took the example of Asbestos industry in Australia, powerful oil industry of the world, the conclusion from the discussion clearly indicates that most of the time the motive of applying any rule or accounting standard was political nor social for the fairness and justice to the general stakeholders. We came to a conclusion in our discussion of adoption of international accounting standard in Australia that though there were numerous benefits by the adoption of international standards but in actual who was getting benefited- the big Australian companies which wants to get listed in worldwide stock exchanges or ASX which will be making a big money as the companies from all over the world will get listed here. Though users are also getting benefited in the way that they can trade shares in the open market, the foreign companies report is easily understandable and comparable with Australian companies which makes investment task easier for them. But the weight age of benefits to the large corporations and ASX is far more than other social benefits achieved by the international harmonization of the accounting standards. This is easily proved by this fact that ASX funded the whole process of international adoption of accounting standards in Australia and it convinced the federal government for the adoption. So from the facts discussed in the above essay and on the basis of various researches carried by number of researchers from all over the world we can conclude that although standard setting process is a social one and it fulfils the social obligations but it is mainly dominated by the political forces or political lobbies which put pressure on standard setting bodies on the process of implementing accounting standards. So finally it can be concluded that Scutton's view on political lobbying in accounting standard setting process are true but there is a need to find out some more factors on which the process of lobbying depends and what can be recent changes on the trend of political lobbying with revolution in global market and information technology.
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