Contemporary Accounting Theory

This study analyzes the impact of corporate crises on accounting standards and the role of political influence in setting accounting standards. It provides examples of how corporate scandals have led to improvements in accounting regulations. The study also discusses the lobbies and influences in the accounting standard-setting process.

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Running Head: CONTEMPORARY ACCOUNTING THEORY
Contemporary Accounting Theory
Student’s Name
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CONTEMPORARY ACCOUNTING THEORY
Executive summary
This study aims at analyzing the corporate crisis era and their contribution to the setting
of accounting standards. Moreover, the report outlines the political lobby that is influential
during the setting of accounting standards. Finally, the study provides for example of political
influence on accounting standard setting in the world. The study used journal reviews to come up
with the report as well as the findings of this study. The study found out that every corporate
crisis leads to an improvement in the accounting standards. Moreover, the study found out that
political influence [plays a major role in the drafting and setting of accounting standards.
Introduction
A corporate crisis is an event, or a situation or even an initiative by the public which
threatens the capability of a company to operate its businesses effectively. A corporate crisis can
lead to the escalation of a disaster or into long term business growth impediment if the crisis is
not handled by all the involved parties with sensitivity and efficiency. Most of the crises have
their roots at the local levels, nevertheless. They can affect a company or an industry nationwide.
Recovery from these crises requires maximum preparation for different unknown scenarios such
as cybersecurity to employee criminal actions (Müller, 2015). During the past decades, an end of
a crisis era leads to the development of accounting standards which are used to mitigate such
incident in future.

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How corporate crises/failures in every era lead to improved accounting
regulations/standards for financial reporting in the subsequent periods
The Satyam Scandal
In 2009 there was an issue which was discovered to be affecting the financial
performance of the firm. This fraud case of Raju was a clear indication of the unethical side of
the Satyam to compliance to accounting standards, lack of corporate responsibility, management
duty negligence as well as criminal activities. Raju the chairman of the company was alleged to
have been falsifying more than thirteen thousand ghost workers in the company (Bhasin, 2013).
The ghost workers had been allocated a monthly wage of four million United States dollars. The
money which was generated by the misrepresented employees was deviated and used by the
chairman to fund a purchase contract of a piece of land. The chairman admitted to the fraud and
e was arrested, charged with fraud, inside trading, embezzlement as well as forgery.
From this scandal, it can be clearly seen that Satyam was providing a space for corruption
through the misrepresentation of more than thirteen ghost workers. Having a master’s degree
from Ohio University Raju was supposed to act according to professional ethics and in
accordance with the provision of the provision. , moreover, Raju was aware of the right thing and
the wrong act. His act of entertaining fraud knowingly was an act of ethical standards violation.
Moreover, this case of Satyam also violated the corporate social responsibility standards as the
actions of Raju were negatively affecting the shareholders of the company and more so the
economy as a whole. Satyam through Raju acts was violating social, financial and community
responsibility (Vishwanath & Narapareddy, 2014). In addition, the Satyam scandal represented

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the lack of transparency as the company neglected moral reasoning in the creation of
dependability, trustworthiness, and organization credibility.
Indian Corporate stakeholders were given a cataclysmic jolt by the Satyam scandal of
2009. Resulting from misconducts on bleach of accounting standards and acting unethically
knowingly Raju, who was the chairperson of the company, was sentenced for seven years. The
shocking news was that price water coopers the auditors of Satyam had not realized whether the
fraud of more than Rs 7000 had occurred. The neglecting by the auditor firm as well as the scale
of the scandal brought to light the loopholes which existed in the nations land regulatory
framework which deals with the directors and company auditors (Singh, Kumar, & Uzma, 2010).
After the scandal, several reforms were made and a committee was formed to suggest reforms of
corporate governance and ethics in software service companies (Vishwanath & Narapareddy,
2014). In 2009 the SEBI committee issued a discussion paper with the following provisions;
1. The voluntary international financial reporting standards adoption
2. Chief financial officer appointment requirement such as by qualification, background, and
experience
3. Auditors rotation after every five years to ensure that familiarity doesn’t lead to
mismanagement as well as malpractice (Bhasin, 2013).
Moreover, the ministry of corporate affairs in India released corporate governance
voluntary guidelines. The guidelines dealt with the directors' independence, audit committee
roles and responsibilities, the policy of whistleblower, roles, and responsibility of the board of
companies, office separation of the chairman and the chiefs executive officer for independence

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and checks and balances system. The ministry released other guidelines on directors such as the
tenure of office, formal letter appointment issuance, a limit on the number of companies a person
can act as a director as well as the evaluation and remunerations (Vishwanath & Narapareddy,
2014). After the 2009 Satyam scandal a new company law was made in 2013 under the
Companies Act 2013. This law consisted of the provided recommendation but SEBI committee
as well as the ministry of the corporate affair.
Madoff investment scandal
Another corporate crisis arose in 2008 which was the stock and security fraud in 2008 by
Madoff. Bernard Madoff was the chairman of NASDAX and also the founder of the street wall.
In 2008 Madoff admitted that all the wealth management arm of Madoff investment security was
only a Ponzi scheme (Pozza Jr, Cox, & Morad, 2009). He had founded his stock investment firm
in 1960 and remained the chairman until his arrest. His two sons alerted the federal authorities
about their fathers Ponzi scheme and he was arrested for operating the largest private Ponzi
scheme. Madoff admitted that his firm had a liability which exceeded 50 us billion dollars
(Smith, 2010). The prosecutor estimated the economic fraud at 64.8 billion dollars. Based on
his total account amount of money it was recognized that more than clients were affected by the
fraud. Further, it was said that Madoff had ignored had evaded tax.
The freeze of Madoff investment business had a great negative impact on more
organizations which had to temporal lily close. Madoff had tricked investor through his largest
Ponzi scheme. The court ruling offered for the repayment of all the investor’s returns but they
never received their returns. Madoff was jailed for 150 years and fined 170 billion dollars as

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restitution (Zask, 2014). The funniest part of this fraud is that it was revealed several months
after the 2008 United States financial collapse.
Madoff fraud of 2008 gave rise to the comprehensive due diligence. This brought to the
deep research of an investor on the clarity and the insight of where they are investing their
money. More concentration and assistance on due diligence have been applied to the clients in
assisting them to collect the due diligence questioners which are more relative to their security as
well as technology practice. This has been done to satisfy the request of investors in researching
and obtaining more knowledge, through due diligence the investors are able to invest without
any fear and they also invest with confident and piece of mind (Dimmock & Gerken, 2011). In
the recent pasty SEC has adopted additional requirements on reporting which are to ensure that
the Madoff fraud never repeats itself again.
Another policy which has been approved is the ruling that requires stock security brokers
to fill quarterly detailed reports on how they treat and maintain customers in terms of cash and
security. Since the Madoff security and stock exchange fraud the SEC has continued to take
measures and decisive steps which are aimed at reducing the chances of fraud in the market
among the standards that the agency has put forward includes; a recommendation of revitalizing
and enforcement, encouraging cooperation which is strong among the insiders, internal control
improvement, seeking of more resources, the integration of broker deals and examination of
investment advisors and finally expansion of the target training among others to improve the
operation of the stock exchange market (Dimmock, & Gerken, 2011). Moreover, the agency has
set standards which allow investors to conduct a risk-based test on the various financial firms in
the industry.

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Cendant corporation scandal of 1997-1998
This company was formed as a result of the merge of Hospitality Franchise System and
the CUC International Inc. three months of the operation of the company reports leaked that
there existed accounting abnormalities’ in the company. It was observed that the profits which
had been recorded for over three years of more than $640 billion were only fictional. The
company had been getting involved in creative accounting practices of inflating the stocks of
CUC to over five hundred United States dollars (Beneish, Lee & Nichols, 2012). Resulting from
this fraud the chairman of the company was arrested and sentenced.
This scandal was associated with the omission of different figures in the cash flows of the
company. This scandal broke the standard of fair and accurate recording in the financial reports.
Moreover, this scandal was also connected with poor corporate governance, and transparency
which is required during disclosure. Several rules and accounting standards were set by the
company including a standard which required that two-thirds of the company directors to be
independent (Mulford & Comiskey, 2015). Through this, the company was seeking the
improvement of the independence of the board of directors.
Enron scandal
The company was involved in the wrong financial recording and reporting in 2001. The
company had more debts than it published. As a result, this was used as a technique to maintain
their stakeholders. The accounting fraud discovered led to a drastic fall in the company’s stock
by more than 98%. Through this fall the employees’ pension as it was tied to the stock of the
company (Li, 2010). This scandal invited a new wave in United States of new accounting
regulation, standards and legislation which were designed to improve the financial reporting of

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companies which are publicly traded. One of the most significant regulations includes; the
Sarbanes-Oxley Act (2002), which imposed harsh penalties on cases associated with destruction,
fabrication or even altering financial records. Another standard was the restriction of audit firms
from making two concurrent businesses for the same client.
Lobbies/Influences in the accounting standard-setting process
Political lobby or influence over accounting standard setting is defined as the intervention
which has a mission in the standard setting process by economic entities which are said to have a
goal of making changes in the final outcome of the standard-setting process. This is done with
the aim of increasing the economic value of the entities or the wealth of the entity. Moreover,
this can be done with an objective of achieving some private self-centered interests which are
inconsistent with the standard-setting body (Hail, Leuz & Wysocki, 2010). Political lobbying
can be classified to a different firm which might influence from accounting firms.
Even though the accounting firms are recommended to participate in the standard setting
process for a better improvement in the quality of reporting, they may be cases where the
accounting firms influence a certain standard to favor their operations. There are their reasons
why audit firms lobby the accounting standard setters; the first reason is to help them improve
financial reporting for personal gain reasons as it is the best interest an accounting firm can
express. The second reason is to help the firms achieve their own set agendas as well as interests
(Bengtsson, 2011). For instance, to strengthen guidance in specific areas to reduce the litigation
costs as well as audit costs, or lobby for standards that demands an increase in the audit fee and
other self-interests for their clients.

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A political lobby occurs in incidents where the influencers aim at shifting the position of
the standard setter from the view of what is seen as a right by the setter to what seems right to the
influencer. Considering the FASB missions which are clearly stated accounting rule should be
aimed at; moving the professional to a position more consistent with the conventionally financial
statement definitions of items which is based on the economics, the second rule is that, to
improve the transparency in the accounting field, another rule is to eliminate alternatives which
provide additional flexibility to managers in reporting. Finally, since the year, 2001 rules which
allow the achievement of convergence with the IASSB are consistent with the mission (Hail,
Leuz & Wysocki, 2010). The definition of this mission includes a different kind of interventions
that are available. It is also stated that it is not good and also not likely for Congress lawmakers’
to have an intervention in the accounting standard setting unless they seek FASB consent on
congressional help to have an influence in the process
It seems like FASB standard setting is much affected by political influence this can be
proved from the opinion of FASAC associate members. An example of this influence is the oil
and gas inflation accounting. These were one of the most controversial issues in accounting in
the 1970s. This is because the two agendas were tied up to the biggest political and economic
issue by that time. The oil and gas there was an influence in the taxation which finally; lead to a
favorable tax environment for the concerned company. Another example of political lobbying in
the process of accounting standards setting is the case of FAS 2 which was in need of some
accounts from a firm by the name R&D in a more conservatively way (Fleckner, 2008). This had
lead to adverse perceived economic consequences. In subsequent to FAS 2 request, there were a
lot of political sentiments which were positive on the issue of favorable treatment of tax on small
research companies. In this case, the losers were recognized as the winners. Political lobby

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occurred whereby the tax rate for small business was effected centrally to the FASB plan on
setting taxation standard for businesses.
In Australia political lobby in the accounting standards can be seen in the case of lease
standards where four big firms including FRC, ANC, and OLC are seen as the most influential in
the setting of short term lease proposals. Under this case, the standards were changed in
preference of the majority opinion where more than thirteen out of more than eighteen actors
opposed the short term lease capitalization. As a result, a relief on short term lease was released
in RE-ED. From this case, it can also be seen that political lobby is not only achieved
individually but also can be achieved through collective action and the decision of the actors.
Moreover, political influence can also be traced in the standards change of dual accounting
model whereby all the actors accept a few who did not give their opinion on the option of dual
(Königsgruber, 2010).
Having the largest number of influencers the single accounting model was implemented
replacing the dual accounting model by IASB single accounting. This is a clear indication that
IASB is mostly influenced by the actors who are affected by the set standard s and hence they
alter the proposed standard to a more favorable standard on their operation. Moreover, in
America several lobbies are also available which are most influential in the compliance with the
IRS standards (Burnham, 2015), another political influence is seen in Japan where the country
does not comply to the IRS standards instead they have their own standards to which their
economy operates from. Hence it can also be said that political influence in the setting of
accounting standards are also determined by the colonial rules and territories.

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Conclusion
In conclusion, it can be well seen that accounting standards setting are highly influenced
by political actors. Several corporate crises have occurred in the past decades and as a result,
several accounting standards were formed. An example of scandals which led to the setting of
new accounting standard is; the Satyam scandal of India which led to the formation of several
standards by different actors including SEBI and the ministry of corporate affairs lead into the
development of new company laws in India (Rishi & Singh, 2011). Another case is the security
stock market fraud by Bernard Madoff. Madoff stock security scandal was the largest Ponzi
scheme which had ever existed in the United States. After this scenario of Madoff scandal,
several accounting standards were implemented including the due diligence standards among
many others. On the other hand, it is evident that political lobby or influence plays a major role
in the accounting standards setting process globally. This can be evident from different cases of
IASB which includes the case of dual accounting and single accounting and also in the case of
capitalization of a short-term lease. Another case is that of FASB of the oil and gas and inflation
whereby political influence altered the judgment of the accounting standard setters.

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