BE-130: The Impact of Politics on Financial Reporting Standards

This essay critically evaluates the statement that standard setting at the IASB is permeated by politics, examining the impact of political context on accounting regulations. It explores the nature of accounting regulations, the influence of lobbying by corporations and political bodies, and the impact of ignoring social, political, and environmental contexts. The essay discusses the IASB's processes, its adoption in various countries, and the democratic processes it undertakes, highlighting the interplay between domestic and international pressures. It references key literature and concludes that the IASB's standard-setting is significantly influenced by political power and the broader context of a country, affecting the adoption and implementation of accounting standards. The essay emphasizes how these factors shape financial reporting practices globally.

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BE-130 CURRENT ISSUES IN FINANCIAL REPORTING

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Introduction
The accounting regulations determining the nature of financial reporting process carried
out by business entities worldwide are developed by the standard-setters such as IASB
(International Accounting Standards Board) and the US Financial Accounting Standards Board
(FASB). The standard-setters are largely focusing on converging of the standards for achieving
harmonization in the global financial reporting process. However, the standard-setters are facing
political pressures that are driven by the government of various countries restricting the
convergence of the accounting standards. In this context, the present essay presents a critical
evaluation of the statement ‘Standard setting at the IASC/B is and has long been permeated by
politics’. This has been carried out by examining the nature of processes and practices of IASB
and the impact of political context on development process of accounting regulations.
Impact of Political Context on Accounting Regulations of IASB
International Accounting Standard Board (IASB) has provided in their conceptual
framework the objectives of general purpose financial reporting. These objectives make sure that
reporting entity provides useful information to the existing and potential investors, lenders, and
creditors. The main accounting standard setters such as IASB, FASB (Financial Accounting
Standards Board and UK ASB (United Kingdom Accounting Standard Board) has main
objective to provide all such information to the investors that seem useful and act in the best
interest of the investors. Same has also been provided in objectives of conceptual framework of
accounting.
Nature of Accounting Regulation
All bodies of standard setters’ claims that their respective accounting regulations are
neutral as they are not impact by the external bodies. It means while drafting the accounting
standards only interests of investors, lenders and creditors has been kept in place and no other
external bodies such as political members, big companies and person in charge has any influence
over the provisions of the accounting standard. Accounting regulations are mainly defined in
conceptual framework by IASB and it has certain objectives that fulfill the needs of users of the
financial information. So it can be said that accounting regulations are framed keeping defined
objectives and upon such objectives all the accounting standards are developed (Daske, Hail,
Leuz and Verdi, 2008). Lastly, accounting regulations are developed technically means every
regulations some base and it some meaning behind including in the accounting standards. So it
can be said that accounting regulations has three main defined nature i.e. it is neutral, has clear
objective and technical (Barth, Landsman and Lang, 2008).
Impact of Broader Recognition of Political Nature of Accounting Regulation
During the past few decades political lobbying has increased a lot and it has seen that
standards are framed to satisfy the needs of political bodies. In United States, there have been
cases where it has found that Securities and Exchange Board (SEC) takes active interest in the
accounting standard and it prevents listed companies from deviating from generally accepted

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accounting principles (GAAP). No other SEC body in any country takes such interest in the
accounting standard setting or makes an authority with the accounting setter body. Political
lobbying take place mainly due to self interest of accounting preparers and people who is in
power i.e. government. It is not all as lobbying is also due to influence of corporations which
give raise a question on the nature of accounting regulations. Accounting setters such as IASB
and FASB claims that their accounting standards does not got impacted by power and politics
but is not true as bodies like SEC and corporations have direct or indirect interest in the
regulations of accounting. It critically proves that accounting regulations are not neutral and they
are framed under the influence of political bodies and big corporations (Shields, 2014).
In the article by Ahmad (2015), it has been mentioned that lobbying takes place at both
IASB and FASB. The research by Ahmad shows that large corporations tends to write more
comment letters to IASB and try to influence the judgments of accounting setters. It was
critically mentioned in the article that 23 out 27 companies selected as respondents are larger in
size and tends to politically influence the provisions in accounting standards. It has mentioned
that highest cases of political lobbying have been observed in the Australia, Hong Kong, and
Switzerland (Ahmad, 2015). The empirical analysis of research showed that major factors that
causes the lobbying is the cost, dominant nature of corporations and political command on
specific criteria. In United States many cases of political lobbying has been reported in the
accounting of oil and gas accounting. In year 1990, a case has been reported where International
Accounting Standard Committee (IASC) has suggested accounting principle of last in first out
and said that it should be applied by the companies. But under the political pressure this principle
has been granted for tax purposes in countries like Italy, Germany, Japan, and South Korea. This
happen because delegation from these countries have voted against the suggestion by the IASC
(Ahmad, 2015).
Impact of Ignoring Social, Political and Environmental Context on Accounting Standard-
Setting
IASB and FASB are two main bodies that frame the accounting regulations all over the
world and IASC consists of members from each country. The role of committee is to set the
accounting regulations that favor the accounting users all over the world. But there are three
main dimensions that create issues with setting up the accounting regulations and they are social,
political and environmental. Ignoring these dimensions will critically disrupt all the accounting
regulations as all such dimensions judge the nature of accounting regulations. If accounting
regulations ignore social criteria and frames standards than such regulations will seems to be
binding on the companies without having prejudice to the relevant accounting context. Similarly
other dimensions are ignored such as political and environment than it will not be possible to
frame accounting policies that all countries can follow (Hopper, Lassou and Soobaroyen, 2017).

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IASB Operating a Democratic Process or considering the diverse voices about the problems
faced
IASB is undertaking the efforts at both domestic and international level for meeting the
various interests of its stakeholders. IASB aims to develop high quality globally accepted
accounting standards for proving investors the information that is comparable, transparent and
reliable. The accounting regulations developed by the IASB are influenced pressures under the
domestic level. The standard accounting regulations are developed by considering the views of
different opinions of accounting experts in relation to the problem faced at a global level. The
IASB gathers the views and opinions of different accounting experts such as auditors and other
accounting professionals by issuing comment letters Daske, Hail, Leuz and Verdi, 2008).
Thus, it can be said that the accounting regulations are developed by the IASB not
domestically but by considering the views of different stakeholders. However, the nature of the
accounting regulations influenced at the domestic level due to political conditions present within
a particular country. For example, the Australian business entities develop their financial reports
as per the IASB standards but the application of these standards is influenced largely by the
domestic accounting regulation such as Corporations Act (James, 2009).
IASB Processes and the reason of its Adoption in many Countries
IASB accounting standard-setting process is an open due process. All the meetings
involved are carried out in public and are also webcasted. It involves the participation from the
national accounting standard-setting bodies and regional bodies, academics and other parties that
are influenced by the process of accounting standard development. This is followed by release
of a discussion or research paper that is developed with the purpose of gathering opinions from
the interested parties about the standard development decision of the IASB. This is followed by
developing an exposure draft that is issued for public consultation. It may also involve
developing a re-exposing proposal before taking the final decision to develop an accounting
standard (Daske, Hail, Leuz and Verdi, 2008). The adoption of the IFRS is influenced largely by
the actions of special-interest lobbyists and the regulators. The adoption of IFRS within a
country is significantly influenced if other countries within geographical regions have also
adopted it. This is because to strengthen their competitive position by gaining the benefits from
the adoption of IASB standards in comparison to domestic standards. Also, a country is more
likely to adopt the IFRS standards if its trade partners also follow the IFRS. This is because it
enables the global comparability of the financial information and thus facilitating the investors to
take adequate decisions (Königsgruber, 2010). The IASB standards have gained recognition at a
global level for adoption as they are enabling the member countries to promote transparency,
accountability and efficiency within the financial markets. They enable the investors to take
informed economic decisions and this leads in maximizing the capital allocation (Hope and
Kang, 2006).

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Conclusion
It can be stated from the overall discussion held within the essay that accounting
standard-setting process of IASB is largely influenced by the political power. The political
context of a country has an important implication in the international decision-making regarding
the adoption of accounting standards. This involves considering the tradeoffs between the
perceived benefits and costs that are to be realized with the adoption of a particular accounting
standard that influences the decision taken by the national standard-setting body for its final
implementation.

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References
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Barth, M. E., Landsman, W. R., and Lang, M. H. 2008. International accounting standards and
accounting quality. Journal of accounting research, 46(3), pp. 467-498.
Daske, H., Hail, L., Leuz, C., and Verdi, R. S. 2008. Mandatory IFRS reporting around the
world: Early evidence on the economic consequences. Journal of Accounting Research, 46 (5),
pp. 1085‐1142.
Hope, O. and Kang, T. 2006. Empirical evidence on jurisdictions that adopt IFRS. Journal of
International Accounting Research 5, pp. 1-20.
Hopper, T., Lassou, P., and Soobaroyen, T. 2017. Globalisation, accounting and developing
countries. Critical Perspectives on Accounting, 43, pp. 125-148.
Jamburia, M.and Lankevičiūtė, V. 2015. Political Influences on the IASB Accounting Standard-
Setting: The Case of the Leases Standard. [Online]. Available at:
http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=7440908&fileOId=7441043
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generally accepted accounting principles to international financial reporting standards. Journal of
the International Academy for Case Studies, 15(5).
Königsgruber, R. 2010. A political economy of accounting standard setting. Journal of
Management & Governance, 14(4), pp. 277–295
Shields, K.E. 2014. International Accounting Standard Setting: Lobbying and the Development
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