THE REGULATORY APPROACH TO THE FORMULATION OF AN ACCOUNTING THEORY

By : Marthina Briliana and Amelia Dessy

The Nature of Accounting Standards

Constantly changed Provide practical and handy rules for the conduct of accountants work Generally accepted as firm rules, backed by sanctions for nonconformity Standard setting process is a comprehensive process because it involves political aspects, business aspects, and socio-cultural aspects.

Accounting Standards Consist of:

1.

2.

3.

A description of the problem to be tackled A reasoned discussion (possibly exploring fundamental theory) or ways of solving problem In line of decision or theory, the prescribed solution*

*But sometimes, there are no supporting theories and the use of ad hoc formulating approach

Reason Establishing Standards:

1.

2.

3.

4.

Provide users of accounting information with information about financial position. Provide public accountant with guidelines and rules of action Provide government with data bases on various variables that are deemed esential to the conduct of taxation, regulation of enterprises, planning and regulation of the economy, and enhancement of economic efficiency and other social goals Generate interest in principles and theories among all those interested in the accounting disciplines

Goal of Standard Setting

if economics consequences are to be pursued, then accounting policy makers must provide information signal that will direct decisions on information user. Pragmatically, this results in policy makers acting as decision makers. If a used-oriented measurement objectiveis to be pursued, then accounting policy makers must provide information to facilitate users decision making. Pragmatically, if the information provided is faithful and chosen based on user needs, it is the user that is acting as the decision maker.

Our position, that the objectives of and for accounting are fundamentally contested, arises out of recognition that any accounting contains a representation of a specific social and political context. Not only is accounting policy essentially political in that it derives from political struggle in society as a whole, but also the outcomes of accounting policy are essentially political in that they operate for the benefit of some groups in society and to the detriment of others. ...... Social welfare is likely to be improved if accounting practices is recognized as being consistently neutral, that the strategic outcomes of accounting practices consistently (if not variably) favor specific interest s in society and disadvantages others.

Entities Concerned with Accounting Standards

a.

b.

c. d.

e. f. g.

Individual and public accounting firms The American Institute of Certified Public Accounting (AICPA) The American Accounting Association (AAA) The Financial Accounting Standard Boards (FASB) The Security Exchange Commission (SEC) Other professional organization Users of financial statements

Who Should Set Accounting Standards?

Theories of regulation Regulation is generally assumed to be acquired by a given industry and is designed and operated primaly for its benefit. Two types of theory:
1. 2.

Public-interest theories Interest group or capture theories

a. b.

The political ruling elite theory of regulations The economic theory of regulation

Who Should Set Accounting Standards? (cont)

Should we regulate accounting? Yes because, Financial report need for:

Solve the conflict between owners and managers To monitor employment To be reported to the capital market public interest

*The advantages and limitation of regulation can be seen

as a process of improvement

Approach to standard setting will be examined: the free market approach

Accounting Standards Overload

Happens when: 1. Too many standards 2. Too detailed standard 3. No rigid standards, making selectivity of application difficult 4. General purpose standards failing to provide for differences in the needs of preparers, users and CPAs 5. General purpose standard failing to provide for differences between public and non public entities, annual and interim financial statement, large and small enterprises, credited and non audit financial statements

Effect of accounting standards overload

1.

2.

3.

The accountants may lose sight of their real jobs because of the excessive data required when complying with existing standard. Audit failure may result because the accountant may lose the focus of the audit and may forget to perform basic audit procedures. May lead to noncompliance with those regulation by business, with the tacit agreement of CPA

Solution to the standards overload problem

1. 2.

No change, retain status quo

3.

4.

A change from the present concept of a set of unitary GAAP for all business enterprises to two sets of GAAP, thus creating separate set of GAAP for certain entities, such as small non public entities Change in GAAP to simplify application to all business enterprise Establishing differential disclosure and measurement alternatives
A change in CPA standards for reporting on financial statements An alternative to the GAAP as an optional basis for presenting financial statements.

5.

6.

Standard setting process in the USA