Accounting Standards on Firms: Lobbying

In this competitive corporate world, the importance of having a certain set of accounting standards is immense for the complete accuracy, reliability, and clarity of financial information. The trading community is increasing rapidly which requires exhibiting fewer earnings management within the company, timely loss recognition, systematic performance, and higher value relevance. Hence it requires applying accounting standards in favor of the firms. And there comes the term 'lobbying' which is widely common in setting accounting standards. In acquaintance with the term' lobbying' in accounting many researchers have come up with many views, 'All the actions which the interested parties take to influence the rule-making body. The response of those affected by financial accounting standards to new accounting rules, and the efforts of individuals and organizations to promote or obstruct such rules are described collectively as lobbying i.e. it is the systematic steps interested parties take in influencing the standard-setting bodies. Whoever is affected by such regulations, will seek to persuade the rule-makers to write the rules to his advantage.

The International Accounting bodies like- IASC, and IASB set accounting standards for us. A goal of the International Accounting Standards Committee (IASC), and its successor body the International Accounting Standards Board (IASB), is to develop an internationally acceptable set of high-quality financial reporting standards. Financial reports are considered a public commodity. Many stakeholders have an interest in that thus companies are very particular in reporting their financial information. The IASC and IASB have issued principles-based standards, and taken steps to remove allowable accounting alternatives and to require accounting measurements that better reflect a firm's economic position and performance. If we consider the standard is set by the regulatory body only, then it is not true. Every standard is set as an output of collective influence. Standard setters are seen as part of an ''accounting world' in which constituents and lobbyists interact with the standard-setting body to shape the outcome of the regulatory process.

Along with the users of financial statements, there are other potential groups of parties who also influence the standard-setting process are:

1. Preparers of financial statements;
2. Auditing firms;
3. Professional accountancy bodies;
4. European accounting standard-setters and the EFRAG;
5. The FASB;
6. The US Securities and Exchange Commission (SEC);
7. European Governments and the European Commission; and
8. Academics.

Most accounting professionals are the preceding group in the influence of the accounting standards-setting process. Thus it has been considered that accountants can govern better than any other party in setting up the standards. As Company's internal accountants are confined within the preset standards. Thus they scuffle in uncertainty sometimes. Whereas the external accountants or big accounting firms are associated with various companies around the year therefore they have adequate data on common issues faced by those companies. This helps them in taking an active part in the standard-setting process. This seems to be consistent with what has said in his paper named 'The IASB standard-setting process', some users perceive accounting standard-setting to be the task of accountants. In supporting this has also mentioned that the participation of an investment management firm in lobbying is, relatively low than any other interest group.

Watts and Zimmerman suggest that management compensation, information production costs, regulation, taxes, and political costs are factors that influence a manager's decision to lobby on accounting issues, however, the political influence in the accounting standard-setting has been in practice since the beginning. A paper by Sutton named-A DOWNSIAN ANALYSIS shows, how the financial accounting standards-setting in the UK and U.S.A have political influence on it.

The IASB has got the reputation of private standard setters around the globe. Its standards are developed through lengthy public consultation procedures which may include the undertaking of field tests, invitations to comment on exposure drafts, public round-table meetings, and public hearings. Standard-setting of this type is a political process in which interest groups lobby to affect wealth transfers.

Over the years, the size of the firm has been one of the reasons behind lobbying accounting standards settings in the UK. The large-sized companies cannot run away from political cost which has always been a burden for them. Therefore, Lobbying in setting accounting standards would benefit them substantially. Because of the size of these companies, they are considered to be resourceful in influencing the accounting standards setters. According to Georgiou Past studies consistently found the size to be positively related to firm participation in the standard-setting process.

There are certain contracts that companies make for their repayments of debts. If they violate such contracts in any means they might not get any further debts and this may lead to the future sale of their assets to repay those debts. Thus According to companies that are closer to the limits set by their covenants are likely to have a greater interest and consequently a greater level of involvement in the accounting standard-setting process than other companies.

As we know, financial accounting standards are not law but they are as powerful as law. At best, they restrict the choice of accounting methods available to management. At worst, they force companies to report financial information in a form those companies would not have chosen voluntarily. Admittedly the financial standards might not be favorable to all parties because of the variation of companies' types and modes of operation. Among many other processes of lobbying for accounting standard-setting, ‘due process' is one of them' The Australian due process, set up by the Accounting Standards Review Board and the Public Sector Accounting Standards Board is a legitimate process for the advancement and declaration of accounting standards '. Interested parties can lobby by proposing a standard for approval, can follow a formal channel, submitting comments on published ED, or going to an open hearing by the standard setters.

There is a variety of methods influencers follow for lobbying. Like direct, indirect, and formal, informal. And there are many steps for executing this process. (Georgiou, 2010) has mentioned six systematic stages of this process executed in IASB. These are as follows-

The first 3 early stages:

1. Agenda,
2. Drafting of the discussion paper and
3. Exposure of discussion paper

The last three late stages:

1. Drafting of the exposure draft,
2. Exposure of exposure draft and
3. Drafting of the IFRS

Lobbying is more effective in the exposure period of the discussion paper than the agenda and concerning the perceived effectiveness of lobbying, companies that lobbied the ASB considered lobbying to be more effective than companies that did not.

In explaining the Australian standard-setting 'due process', and surveying how lobbying had been done in influencing the regulatory body there was a case study of the exposure draft of 49 Accounting for Identifiable Intangible Assets (ED49) Tutticci, Dunstan, and Holmes has specified, ED49 was issued amid the tenure of the ASRB. Interested parties had the opportunity to lobby through formal channels by contributing a proposed standard for approval, submitting comments on published exposure drafts, or attending public hearings held by the standard setters. Given the existence of due process, shareholders, preparers, managers, and auditors who are financially distraught by the Introduction of a proposed standard would be anticipated to utilize the due process in an endeavor to impact the controllers. The proposals of ED49 would have restricted current accounting choices and altered reported accounting numbers.

On the other hand, a significant finding of the study by relates to the reasons for not taking part in the process which is the cost of lobbying. Hence, it was mentioned earlier, how the size of the company influences the lobbying process. Sometimes interested companies form groups to take part in the process due to the high potential cost associated with it. Nevertheless, companies do not consider the cost of lobbying as a significant reason for not taking an interest within the process.

Along with many successful lobbying instances, Sutton has also shown some unsuccessful post-exposure draft lobbying: Like the standards on leases (FAS 13 and related statements) and deferred taxation (APBO 11). As many groups had been formed when it came to lobbying, the power of lobbyists outraged one another which eventually led to zero outcomes and an unsuccessful post-exposure draft.

According to Giner and Arce The lobbying activity before the adoption of the IFRS 2 . i.e. consideration of transactions on share-based as an expense in February 2004 was effectively executed through public comment letters by the interested parties. The preparers of financial statements had more responses to ED than any other interested groups. Here the lobbying activity was based on the public choice framework.

The accounting for oil companies is put together by none other than themselves. These oil companies spend an absolute fortune on drilling and extraction activities thus they have somehow captured the USA regulatory body. The extraction industries hold a significant share of the world's capital. And in their standards-setting process, there’s a major influence of invisible power.

In the formulation of IFRS6 .i.e. exploration for and evaluation of mineral resources Cortese and Irvine have mentioned in their study, the existence of a black box where the powerful extractive industries used to influence the IASB under the veil to secure their requirements. In the extraction industry, the pre-production activities are quite costly therefore, there have been two methods employed

1. The full cost method –Includes all costs involved in the unsuccessful extractions
2. The successful method includes all costs associated with successful extractions only

Since 1960 there has been a continuous wrangle about the use of successful efforts versus full cost. The FASB's exposure draft, Financial Accounting by Oil and Gas Producing Companies, proposed to narrow accounting alternatives and require the use of the successful efforts method. Most of the constituents have been observed to support the IASC proposal to incorporate the successful efforts method in IAS for the extraction industries. But it was moreover taken after by extreme lobbying endeavors made from oil companies who used to depend on the full cost method to show more resources. However, the full cost method was eliminated and further lobbying took place against the standard. Lobbying against the standard proceeded and in what has been described as one of the '' most intensely politicized accounting arguments ever'. Finally, SEC had to incorporate the use of either the full cost or successful effort methods. According to Hodges, and Mellett the visible input into the standard-setting process, represented by exposure drafts, was examined in conjunction with the visible output, the eventual IFRS. If an inconsistency was observed or the outcome was contrary to expectations, it was inferred to be the result of unseen influences occurring within the standard-setting black box that is assumed to have high economic strength than those who have influenced it overtly. Hence we can see that IAS is not all about obvious measures that are taken in impact but it has the impact of powerful imperceptible forces.