Cases of Political lobbying in Accounting standard setting

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Accounting standard setting plays significant role in conveying users that how, when and where the financial information of a company is unveiled. As we know that there are various users of financial information so it is apparent to have diverse and conflicting interests of users, hence there rarely subsists an accounting standard which is acceptable to all the users. Major international accounting standard setters follow a "due process" approach giving companies the ability to articulate their opinions and have them taken in to consideration. However, managers pursuing the particular objectives do not desire to convey their preferences in full view of the investing public. As an alternative, they may utilize superior personal contact to political decision-makers in order to gain weight over the standard setter to alter the decision in their favour. The political nature of accounting standards has long been recognised (Zeff, 1972; Moonitz, 1974; Fogarty, 1992) and there has been continued debate over the role of government in the area of setting accounting standards. In the present essay, we will be discussing about "Accounting Standard setting is a political lobbying process, and as such offers several opportunities and means for interested parties to influence its outcomes" and respond to the given questions.

Term 'political lobbying' - in simple words:

There is no special definition for the term "political lobbying". But it has been defined in a different way by various authors and research professionals. Following are few quotes

According to G Woodstock lobbying means

"The deliberate attempt to influence political decisions through various forms of advocacy directed at policymakers on behalf of another person, organization or group".

Lobbying on accounting issues has been defined as a collective term for the actions taken by interested parties to influence the rule-making body (Sutton, 1984)

Lobbyist could be any association of individuals or organizations, professional bodies usually well organized attempts to influence the decision of government or efforts to influence the votes of legislators, generally in the lobby outside a legislative. The effort may be a direct appeal to a decision maker in either the executive or legislative branches, or it may be indirect (e.g., through attempts to influence public opinion). It may include oral or written efforts or persuasion, campaign contributions, public-relations campaigns, and research supplied to legislative committees, and formal testimony before such committees.

Uncomplicatedly, we can define "political lobbying" as (in concern to accounting standard setting), 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. For example, if the industries sense that a particular accounting standard if implemented will bring a downbeat for the business of that industry then they will be lobbying against that standard. So here is the politics enters in the development of standard setting, in a nutshell it can be assumed that in addition to public interest, social justice or fair deal to stakeholders there are the powers that really play a overriding rule in the process of accounting standard setting.

These powers are termed as lobbyist by Sutton (1984) and whenever lobbyist recognize that their economic interest are in danger then they intrude the standard setting process which is known as politicization of accounting standard setting.

The best case in point 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 favour and didn't allow the government to go for public interest."

"Accounting standard setting in Australia is a purely political lobbying process" - why?

Australian companies contain a history of lobbying the Federal Government in concern to accounting standards. The main reason of government attachment in setting accounting standards comes from corporate crumple such as HIH in Australia and Enron in the US. The formal reason argued by government in its involvement in accounting regulation is to defend public interest. However, politic and lobbying that comes from private interest is more dominant than the original efforts to defend public interest.

To escort my point of view, I am highlighting the issue of the Australian adoption of International Accounting Standard and lobbying behaviour. The case explaining how lobbying be successful to delay adoption of IASs in Australia.

Political influences in the efficiency and effectiveness of accounting regulation.

Australian accounting regulations seem to be close to the government or political approach in its setting process. It was stated in CLERP (Corporate Law Economic Reform Program) Proposal No. 2 that:

"the ultimate objective for the setting of accounting standards in Australia should be the production of high quality accounting standards that facilitate Australian business by leading to lower costs of capital and enabling Australian companies to compete on an equal footing overseas, while also maintaining investor confidence".

As stated in the proposal: the government involvement in setting accounting standards is to reach a high quality of accounting standards and to lead the lower costs of capital.

In addition, it is expected to win in international competition. On the other hand those efforts are wound up by private interest lobbying that is more powerful and close to political process.

Interest groups lobbying had influenced in the CLERP and their reaction when it was published resulted in considerable alteration to the CLERP proposals. For example the interest groups lobbying appeared to support essential modification that Australian accounting standards should take up IASs. It came from ASX as argued by Richard Humprey (CEO of ASX) that those international standards would advantage companies and capital market. In this case ASX expected that the exercise of IASs would be a mode to protect and expand its business. ICAA also supported the adoption of IASs by saying argument that defraying the costs by sharing them with other countries and adopting international standards must have been a smart alternative. Other interest group lobbying is G100 (a body of the chief financial officers of Australia's largest corporations). They argued that they were upset with Australian standard setting and felt their views were being ignored. G100 seemed to be confidence that because they were players in a global field so that adopting the IASs in Australian accounting would formulate fiscal intellect. AASB and AARF also encouraged the changes by arguing that Australian standard setting formation should follow the U.S. or U.K. model with an independent board, adequate financial support and integrated research unit.

In contrast the supports in adoption of IASs became to be fragile when CLERP No. 1 was anticipated. It was stated in the CLERP that:

"Australian accounting standards are not understood in, and are out of step with, the major capital markets in the U.S.A., U.K. and Europe, thereby was resulting in higher cost of capital for Australian business".

Therefore one of the outcomes expected by government in its reform of accounting standards (as stated in CLERP No. 1) is to accomplish clear and relevant policy framework for the development of accounting standards to make certain they are approachable to changes in commercial practices, meet the needs of users without being excessively heavy, and improve Australia's international competitiveness. Furthermore, it is also to improve institutional arrangements for standard setting process that will make sure that the process operates in a responsive, efficient and effective manner, thereby enabling all relevant stakeholders to participate while maintaining the independence of the process. As a result CLERP No. 1 recommended that Australia should put an end to issuing its own standards and move quickly to adopt IASs issued by International Accounting Standards Committee (IASC). It should be started on 1 January 1999. The interest groups reaction was distinguish to their earlier arguments. The G100 did not have the same opinion with the date proposed for adoption of IASs or with issuing exposure drafts (ED) identical to those of the IASC. The disagreement also came from ICAA that the adoption of IASs was premature. Other interest groups that disagree to the proposal were Australian Institute of Company Directors (AICD), Australian Bankers' Association (ABA), accounting firms, etc. Interest groups lobbying influences again in accounting regulation. They succeeded in delaying the date of IASs adoption in Australia to 1 January 2005. Therefore it has been proved that if government involves and controls in the setting accounting standards the process will be closer to political process and the lobbying of interest groups will influence significantly.