In general, the international accounting community has assumed that all the accounting standards will enhance the quality of accounting statements and transactions and reduce the market participants’ asymmetry. This presumption arose due to the belief that accounting standards dictate the nature of disclosed firms besides playing an extremely significant role in the approaches used to distribute wealth in companies. On the contrary, a recent research in this field has indicated that an idle accounting standard to take care of these crucial roles rarely exists. The affected parties have therefore been pushed into making movements lure the standard setters to make adjustments that will take care of their predicaments. Indeed, the responsibility of these standard setters is not only to find the right accounting solutions but also to make healthy choices among the different views of groups and individuals’ conflict of interest (Wyatt 2004, p.28).
This need of proper accounting standards has prompted several private regulators into developing their own standards subject to their needs and formal public consultation. Although many people consider this approach as political, several interested parties have pushed it further into lobbying the standard setting bodies. Lobbying process is beneficial, because it gives directions towards a good understanding of the institutional standard setting features. Lobbying on the accounting standards has had an upper hand since the International Accounting Standards Board (IASB) has finished restructuring the International Accounting Standards Committee’s (IASC) composition. Besides this, IASB seeks to put in place a better performing International Financial Reporting Standards (IFRSs) that will spear head a high level convergence with other eight leading national accounting standard setters through a formal liaison process (Wyatt 2004, p.28).
Lobbying on Standard Setting in Accounting
According to Avner (2002, p.26), lobbying is a focused way of advocacy to sway the legislators’ decision making. In reference to accounting standards, lobbying engages identifying, promoting and embracing a certain course of action. It targets towards administrative and legislative activates. Currently, lobbying takes two strategies including direct and indirect lobbying.
Direct lobbying is the primary strategy, whereby the lobbyists meet the accounting standard making bodies or legislators and persuade them to consider their concerns. In order to achieve this objective, lobbyists must meet some conditions. They must prove that they are reliable and trustworthy; otherwise, the lobbyists will not be given future access to the legislator’s network. Besides this, lobbyists should not use threats or impose pressure to pave the way to their course of action and should understand that bribery is no option here (Avner 2002, p.17).
On the other hand, indirect lobbying embraces the use of letters as a campaign strategy. Lobbyists encourage other interested parties to write letters that advocate for changes in certain circumstances. The parties send these letters to the legislators with a hope that it would influence their decision making. In most cases, this strategy is the best for extremely large groups that can write many letters to encourage collective bargain (Avner 2002, p.17).
Another strategy used, but to a lesser extent, is the public relations campaign. This strategy is not frequently used, because it is more expensive than the above discussed strategies, and people cannot control its effectiveness easily. Furthermore, another strategy that encourages the influence of legislator members and friends can also be used. The members and friends get the motivation to join the campaigns of the lobbying groups with the hope that their presence in groups will influence the standard maker (Avner 2002, p.17).
Impact of Lobbying on Standard Setting in Accounting
Collett & Hrasky (2001, p.172) say that states feel the impacts of different lobbyists and pressure groups differently. Mostly, the developed nations such as the United Kingdom, the United States of America and Australia have had the greatest benefit from these impacts.
One of the organizations that have significantly felt the impacts of lobbying is the Securities and Exchange Commission (SEC), which investors funded to protect them during the stock market crash in 1929. Primarily, investors established SEC to assess and evaluate the corporate documents, full marketplace disclosure, check the stock exchange rates and impose strict penalties in case of violation of any of its terms and conditions (Weetman 2001, p.86). Since its formation, several lobby groups and other interested groups influence the operations of SEC. In particular, the latest SEC law called Sarbanes-Oxley Act is receiving an ever mounting pressure (Wyatt 2004, p.28).
It was due to this pressure and public concern that the U.S. Congress passed a law which checked on the operations of SEC. This law required the chief executive to confirm the accuracy and implications of any corporate financial standards. Additionally, it requires the chief executive to seek the companies’ consent on such standards. The companies must attest that the set standards give proper controls to prevent fraud. This provision has given companies mandate to fail collectively to follow some SEC measures besides filing lawsuits against SEC on the basis of going against the provisions of the constitution (Weetman 2001, p. 90). In particular, several lobby groups and powerful industries such as the American Bankers Association, the U.S. Chamber of Commerce and the American Electronics Association affected these lawsuits (Washington Post, 2005).
Despite the fact that SEC is a government regulatory body and thus it obtains funding from the government, it receives most of its pressure from Congress. Lobbying has therefore shaped up the movements of SEC by ensuring that it triggers an approach that will give the best accounting standard settings and give ratification to other corresponding laws once the affected companies give consent to its scope and content (Weetman 2001, p.100). With the passing of the administration of SEC laws, the Congress’ efforts do not end there, but it also supervises SEC supervision (Collett & Hrasky 2001, p.172).
Lobbying has also defined strict boundaries within several accounting bodies. For instance, lobbying in the U.S. initiated a public discussion as to whether or not SEC should be engaged in making foreign policies such as human rights policies and international weapon production. Some economists argued that SEC could participate in these policies through baring some firms, particularly from Russia and China, from operating in the U.S. Eventually, this debate reached its peak when the U.S. Congress intended to restrict ‘global bad actors’ from accessing the international stock market. In particular, the U.S. wanted to de-list Petro China, a Chinese oil manufacturing company, from the New York Stock Exchange (Weetman 2001, p. 90). SEC declared its stand, but pressure groups insisted that it should observe its boundaries. They argued that the creation of SEC was to take care of accounting standards but not to make policies. In an official statement, some pressure groups stated that SEC did not adhere to the entire provisions of the proposal. They argued that SEC is not legally entitled to turn down foreign companies’ requests to access the American market. Furthermore, they claimed that SEC had a responsibility of ensuring that all American investors get relevant information on different companies operating within the different states and ensure that shares were at their disposal should need arise (Weetman 2001, p. 90).
According to Weetman (2001, p. 89), Financial Accounting Standards Board (FASB) is another U.S. based accounting body that has felt the impact of lobbying on standard setting in accounting. Accounting stakeholders established FASB in 1973 with a primary objective of setting accounting standards that meet international requirements. Ever since its formation, several pressure groups have exerted pressure through lobbies. This pressure has significantly influenced the accounting standards set by FABS.
Lobby groups have made use of auditors and the US government to exert pressure to FASB. For instance, the Congress has either directly provided measures to check on FASB or uses SEC, a government institution. In 1979, the Congress passed an act that stopped both FASB and SEC from pushing any company into using “unflattering method of accounting for drilled holes” (The Economist 2002, p.67). Furthermore, the Congress had to take away power from FASB when it came up with a proposal that stock options should be treated as expenses in comprehensive statements of financial income (Weetman 2001, p. 90).
It is obvious that several governments are supporting the pressure exerted by lobbyists to standard setting bodies for the benefit of the public. However, if proper measures to ascertain the effect of such pressure to the accounting standards will not be put in place, the expected benefits will not be realized. For instance, this pressure has impeded efforts made to achieve international convenience and a better degree of quality by the standard setting bodies. Failure of standard setting bodies to succumb to pressure from lobby groups has threatened to switch their accounting conventions from one standard to another. For instance, Novartis, a Swiss company, wrote a letter to Sir David Tweedie, the head of IASB, threatening that if IASB will not change its goodwill amortization standards they will switch from IFRS to GAAP. This means that some companies might use lobbying for their individual benefit but not for the benefit of the international community (The Economist 2002, p.67).
Similarly, some companies that have a greater influence in their industry in most countries have used lobbying to erode the credibility of some internationally accepted accounting conventions (Levitt & Dwyer 2002, p.13). For instance, in 1992, International Accounting Standards Committee (IASC) was under pressure to do away with LIFO (last in first out) stock taking method. Despite the fact that several other international standard setting standards such as International Organization of Securities Commissions (IOSCO), and Canada and the U.S. accounting bodies fully opposed the elimination, individual firms used political pressure to effect the elimination. This pressure later forced several accounting bodies to conclude that the government will use LIFO in tax rules and income tax alone. Although IASC that was one of the main supporters of harmonizing international accounting standards expected to get their most committed and articulate exponents, lobbying through political pressure succeeded in failing IASC’s Comparability/Improvements program (Weetman 2001, p. 103).
The power of numbers exhibited through pressure groups has made several accounting standard setting groups relax their strong rules in accounting conventions. For instance, the American Bankers Association (ABA) used lobbies to push Financial Accounting Standards Board (FASB) to relax their standards on market securities. ABA used letters sent by the Federal Reserve Board’s chairman, the Secretary of the Treasury, Federal Deposit Insurance Corporation’s chairman, and some two United States Senators to FASB (Rutherford 2007, p. 14). Despite the fact FASB had a particularly strong support from SEC, ABA managed to push FASB to relax its hold on marketable securities and admit that it should be presented at its fair value and the yearly be considered as earnings. Several bankers protested against this regulation with a fear that the earnings volatility will result due to taking the regulations directly into earnings. In reaction to this, Statement of Financial Accounting Standards (SFAS) and Exposure Draft came up with an accounting standard No. 115, which created the available for sale portfolio securities which can transfer their yearly fair value change to shareholders (The Economist 2002, p.67).
Zeff (2002, p.47) gives another lobbying that spiked fierce reaction from industry was FASB’s Exposure Draft drafted in 1992. This draft required firms to confer stock options on employees to give fair value estimate of the available records and an expense in the income statement. This made companies and trade unions from several industries seek the help of prominent House of Senate members. Consequently, these companies asked senate members to make moves that could frustrate the progress of FASB’s proposal. This pressure resulted to a resolution made by the Senate, which made FASB stop its progress in employee accounting initiative. The Senate used its grave economic status to argue out a false point that the intended growth fully relied on employee entrepreneur. Pressure exerted by the Senate and other lobby groups became so unrelenting and intense to the extent that SEC chairman urged FASB to relax its stock proposal since it could jeopardize the private sector at the end of the day, the pressure became so unbearable that FASB had to issue SFAS No. 12. This standard required companies to use footnotes in disclosing the dilution on stocks while making report earnings.
In other cases, pressure from lobbies and pressure groups and political parties has lead to several governments to either withdraw, or threaten to withdraw, vital support or funding from the accounting standard setters. Furthermore, this pressure has lead to appeals by lobbyists through carrying out dialogue in the public media. In the recent years, the pressure from lobbyists has escalated to a level that has considerably intimidated the powers of the standard setting bodies (The Economist 2002, p.67).
Lobbying has impacted differently on setting accounting standards just as observed in the above discussion. Stakeholders expect that these lobbies will help to shape accounting conventions and principles. However, if the public and other stakeholders do handle these lobbies properly or allow excessive politics in the issue, the gains will lose essence. Senior companies might make use of politicians to spoil accounting principles for their own benefit.