Corporate Failures and Accounting Standards

CONTEMPORARY ACCOUNTING 1
Introduction
The predictable advantages of the accounting standards are compelling. The
accounting standards are adopted by the entities across the world to enhance the comparisons
and transparency of the financial statements and an overall reduction in the financial
statement preparation costs. Further, the varied range of the stakeholder groups gain useful
insight about the management of affairs of an entity. For instance, it is significant to note that
the arguments presented in the favour of the adoption of the International Financial Reporting
Standards (IFRS), as cited by Brown, (2013) are advancing the quality and comparability of
financial reporting practices, promoting the expansion of national capital markets, thereby
leading to successful integration international markets. However, the corporate failures have
yet taken place in varied regions and industries owing to combination of the loopholes of the
accounting standards and misuse of the powers by those in the position.
The following assignment is aimed at analysing the progress of the accounting
standards over the years. The said evaluation will be done with the aid of the description of
the major corporate failures and how the same have shaped the accounting standards. Further,
the assignment will shed light on the complexity of the accounting standard setting process in
terms of the political lobbying.
Corporate crises and post-crisis developments in accounting
regulations/standards
The most significant characteristics of a corporate entity is the separate legal identity,
which separates the ownership from the management. Thus, the managerial body of an entity
has the prime responsibility to implement the relevant accounting standards in the business
functions and preparation and presentation of the financial information. Section 298(1) of the
Corporations Act accords the same as in case of the Australian context, likewise global
regulations state on the same lines. The accounting standards facilitate a framework within
which business entities are supposed to prepare the financial reports for the dissemination to
the public. The impacts of the accounting standards are considerable and the same lead to the
enhancement of the quality of financial reporting by entities as stated under Part 3.6 of the
Corporations Law. The primary benefits of the accounting standards can be deduced to be
provision of better picture, quality assurance, comparability and transparency. In spite of the
benefits as listed above, there have occurred numerous corporate failures owing to conflict of

CONTEMPORARY ACCOUNTING 2
interest on the part of the owners or management leading to violation of rights of the other
stakeholder groups of businesses. Some of the chief corporate failures eras and their impact
on the accounting standards have been elaborated as follows.
As the FASB began its operations in 1973, initially the Board considered twenty-
seven initial agenda items, out of which only seven were pursued. The initial objectives of the
conceptual framework project did not comprise of the resolution of the accounting issues, but
included the setting of stage for future problem solutions (Detzen, 2014). Pre Enron era of
corporate failures is popularly termed as the era of the creative corporate failures. It is
significant to note that the corporate pictures reveal information to the extent the same are
painted, as there is also been left a room for the enhancing of considerations taken into
account as per the financial policies, exercise of professional judgements. Thus, financial
performance is achieved by exploiting breaches within legislation. This was followed by the
most popular failure that is widely remembered and lessons have been learned from the same
is that of the United States most popular energy company namely Enron. The company is in
news and literary works since the publication of its financial results in October 2001, which
disclosed a loss of a $638m in the income statement (da Silveira, 2013). Further, the debts
amounting to $1.2bn were highlighted that were previously not part of the balance sheet of
the entity. Some of the chief reasons that contributed to the said scandal are the mark to
market accounting approach for revenue recognition from the sale of natural gas contracts,
simultaneously inflating the current earnings; creation of the special purpose entities, off
balance sheet financing arrangements and others (Li, 2010). The company had established 12
business entities to abuse the US accounting rules in relation to the special purpose entities,
and facilitate the debt to be shifted off the balance sheet. Yet another major corporate failure
was that of the Vivendi Universal (France) where the Vivendi Universal’s (VU) had aimed at
obtaining approval for a further corporate acquisition from the European Commission, and
thus forced disposal of BskyB shares. It is significant to note that while the US GAAP
addressed the accounting rules for such a transaction, the same were missing specifically
from the French GAAP. Thus, the incident highlights the corporate failure in France. Yet
another incidents are related to the Australian corporate climate concerning the entity One
Tel. The major reasons for the said corporate failure were inefficient corporate governance
practices, the financial statements comprised of errors, low quality earnings of the entity,
combined with the low audit quality.

CONTEMPORARY ACCOUNTING 3
The events in the Enron, WorldCom, Vivendi Universal, One-Tel, Xerox and others
have led to the far reaching repercussions in the form of fall of the stock markets, entities
been declared as bankrupt, shattering of the investor confidence, and regulators being
encouraged to devise and propose more stringent means of preparation and dissemination of
the financial information (Markham, 2015). Consistent questions were raised regarding the
effectiveness of the existing rules and institutions in terms of corporate governance and
disclosure of information, not only in United States, but also at global level including
Australia. One of the major transformations that have been witnessed pose the Enron scandal
was the enactment of the Sarbanes Oxley Act. The effect is such that efforts have been made
to hasten the global regulation of the world’s capital markets. Accordingly, from the
discussions conducted above, it can be stated that over the years, the accounting profession
has evolved tremendously from the initial establishment of the regulatory bodies to the
convergence interests. The corporate failures like above, have shaped the various aspects of
the accounting standards. For instance, some of the accounting standards that have been in
highlight owing to the stated corporate failures are on lines of revenue recognition,
measurement and presentation of leases, measurement of the Property, plant and Equipment
and others. The chief accounting standard that underwent transformation, post the political,
regulatory, media and expert scrutiny was the IFRS 15 in international context and AASB
115 in the Australian context for the recognition of the revenues.
Thus, the above stated eras of the corporate failures have led to the various
developments in the various accounting standards. The current set of accounting standards
have started following the convergence approach, though the full convergence has yet not
been achieved, yet the efforts and the projects are on the said lines only. The modern set of
revised standards cover numerous business aspects such as the transactions with the related
parties, maintenance and the disclosure of apt corporate disclosure structure, establishment of
the sound internal control system and likewise. In addition, the regional corporate laws,
securities exchange commission, stock authorities have increasingly requiring the corporates
to abide by their duties and responsibilities of maintenance and preparation of the account
books and financial statements.

CONTEMPORARY ACCOUNTING 4
Critical evaluation of the lobbies/influences in the accounting
standard setting process
The term political lobbying or influence is referred to as the decisive intervention by
an economic entity in the several of processes of accounting standard-setting. The outcome of
that process is the focus of the said intervention, so as to facilitate an increment in the
economic value of that particular entity. The yet another aim is the accomplishment of other
purposes that are not on the same lines as that of the objectives of the standard setting
controllers such as FASB, AASB, and others (Königsgruber, 2010). It is significant to note
that the accounting standard setting process is a comprehensive process which involves a
series of steps such as the public discussions, invitation of commentary letters, consultations,
discussion by the experts and other related activities. Such a comprehensive framework not
only indicates importance and expected impact of the new standards, but also ensures the
legitimacy of the processes. The lobbying occurs in various forms such as the submission of a
comment letter by the interested party in the process. It is vital to note that the conflict of the
limited number of resources available for the satisfaction of the stakeholders and the
unlimited number of consumer needs; is also applicable in the accounting profession as well
(Stenka & Taylor, 2010). With the existence of the various definitions of income and capital
and methods for their measurement, the onus to make the choice from the options available
lies with the preparers of financial statements in relation to provision of the useful
information to the users of the financial statements (Zeff, 2012). It must be noted that the
smallest of change in the accounting standards may lead to the substantial alteration in the
flow of the economic benefits to affected stakeholders. Thus, the comprehensive standard
setting process lead to the reduction of the risk of conflicts among various stakeholder groups
such as that of auditors, users, prepares, regulators and others, as the same are invited in the
participation in the preparation stage of the new accounting standards (Hansen, 2011).
The literature on the political lobbying has evaluated the motivation of participants
which comprises of varied attitudes, objections, opinions, and suggestions. In context of
lobbying, the submission of the comment letter depicts the fact that expected benefits are
more than incurred costs. This means that there is an existing belief in the minds of the
lobbyist that they can potentially influence the attitude of a standard setter in a particular
scenario (Orens, Jorissen, Lybaert & Van Der Tas, 2011). The model devised by (Sutton
1984) in context of lobbying indicates that the pressure of lobbying in the form of comment