Decision Analysis
l 1) "Standard setting is a political process '. Explain and discuss.
The essay is aim to explain why standard setting is a political process and discuss how political involvement affects the process of accounting standard setting.
Accounting standard setting plays an important role in conveying users that how, when and where the financial information of a company is disclosed. Standards, particularly changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups. A change in an accounting standard or the introduction of a new standard can result in a substantial redistribution of wealth within our economy. Considering it as a political process is because of its potential to significantly affect the wellbeing of a wide range of interest groups. This model of political behavior is used by Watts and Zimmerman (1979) arguing that the political process is simply a means of pursuing individual or group self-interest.
For example, the most recent example of the political process at work in standard setting is the heated debate that occurred on the issue of accounting for business combinations especially in the amortisation of the goodwill in 1996. During the years later, the FASB undertook several steps which include open hearing, deliberations, and requests for written comments from interest party to reach a satisfactory compromise between the preferred method of accounting and the anticipation of adverse economic consequences. The board’s process is similar to that of an elected political representative, a U.S. congresswoman for example, trying to determine consensus among her constituency before voting on a bill on the floor of the House of Representatives. For this reason, it is said that accounting standard setting is a political process.
However, as we know that there are various users of financial information so it’s obvious to have diverse and conflicting interests of users hence there
The essay is aim to explain why standard setting is a political process and discuss how political involvement affects the process of accounting standard setting.
Accounting standard setting plays an important role in conveying users that how, when and where the financial information of a company is disclosed. Standards, particularly changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups. A change in an accounting standard or the introduction of a new standard can result in a substantial redistribution of wealth within our economy. Considering it as a political process is because of its potential to significantly affect the wellbeing of a wide range of interest groups. This model of political behavior is used by Watts and Zimmerman (1979) arguing that the political process is simply a means of pursuing individual or group self-interest.
For example, the most recent example of the political process at work in standard setting is the heated debate that occurred on the issue of accounting for business combinations especially in the amortisation of the goodwill in 1996. During the years later, the FASB undertook several steps which include open hearing, deliberations, and requests for written comments from interest party to reach a satisfactory compromise between the preferred method of accounting and the anticipation of adverse economic consequences. The board’s process is similar to that of an elected political representative, a U.S. congresswoman for example, trying to determine consensus among her constituency before voting on a bill on the floor of the House of Representatives. For this reason, it is said that accounting standard setting is a political process.
However, as we know that there are various users of financial information so it’s obvious to have diverse and conflicting interests of users hence there