Lobbying's Impact on Accounting Standard Setting: A Critical View

This essay critically examines the impact of lobbying on accounting standard setting, drawing upon relevant academic literature and providing illustrative examples. It begins by highlighting the global accounting community's assumption that accounting standards improve the quality of financial statements and reduce market asymmetry, while acknowledging research indicating that standards are rarely ideal due to conflicting interests. The essay discusses lobbying as a focused advocacy technique, distinguishing between direct and indirect lobbying strategies. It analyzes the effects of lobbying on organizations like the SEC and FASB, noting instances where lobbying efforts have influenced regulations and standards. The essay also addresses concerns about lobbying being used for self-serving purposes rather than the benefit of the global community, potentially undermining the harmonization of global accounting standards. Ultimately, the essay emphasizes the need for effective measures to manage the impact of lobbying on accounting standards to ensure the realization of expected benefits.

Running head: FINANCIAL ACCOUNTING POLICY AND PRACTICE
Financial Accounting Policy and Practice
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Introduction:
Basically, the global accounting community has assumed that all accounting
standards would improve the quality of accounting statements and transactions along
with minimising the asymmetry of the market participants. The reason behind such
assumption is owing to the belief that the accounting standards state the nature of the
disclosed organisations besides performing a vital role in the methods used for
distribution of wealth in organisations. However, a recent research in the field has
mentioned that an idle accounting standard in order to look after these vital roles is
rarely present (Bamber and McMeeking 2016). The affected parties are, thus,
compelled to undertake movements, which lure the standard setters in making
adjustments for looking after the predicaments. Indeed, the standard setters have the
responsibilities of determining accurate accounting solutions along with undertaking
healthy choices among the varying group views and conflict of interest among the
individuals.
Such requirement of appropriate accounting standards has promoted numerous
private regulators to develop their own standards for formal public consultation and
meeting their needs (Baudot 2018).Despite the fact that this approach is considered to
be political, various interested parties have pushed the same further into lobbying the
bodies of standard setting. Lobbying process is advantageous, as it provides directions
towards a sound understanding of the features of global standard setting. Lobbying on
accounting standard exercises upper hand, as the “International Accounting Standards
Board (IASB)” has completed restructuring the composition of “International Accounting

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Standards Committee (IASC)”. Besides, IASB intends to implement better performing
“International Financial Reporting Standards (IFRS)”, which would spear head greater
level of convergence with eight other leading national standard setters of accounting by
using a process of formal liaison (Baudot, Demek and Huang 2018).
Lobbying on standard setting in accounting:
In the words of Brouwer, Hoogendoorn and Naarding (2015), lobbying is a
focused technique of advocacy for swaying the decision-making of the legislators. With
emphasis to the accounting standards, lobbying includes detecting, embracing and
promoting a course of action by targeting towards legislative and administrative
activates. At present, in includes two strategies, which are direct lobbying and indirect
lobbying.
Direct lobbying is the basic strategy, in which the lobbyists contact the
accounting standard making legislators or bodies and the latter parties are persuaded
for considering their concerns. For fulfilling this objective, it is necessary for the
lobbyists to fulfil certain conditions (Chakravarthy 2018). They need to prove their
credibility and reliability and if this is not the case, the lobbyists would not be provided
future access to the network of the legislators. Besides, it is not desirable for the
lobbyists to exert pressure or impose threats for paving the path to the course of action
and they need to understand that they could not take any bribe.
Indirect lobbying, on the contrary, embraces using letters in the form of a
campaign strategy. The lobbyists motivate the other interested parties in writing letters,
which advocate for modifications in various situations. These letters are sent to the

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legislators with the intention of influencing their decisions. In majority of the cases, this
strategy is deemed to be effective for big groups, which have the ability to write various
letters for boosting collective bargaining (El-Firjani and Faraj 2016).
Public relations campaign strategy is another strategy used; however, it is not too
popular. The reason is that this strategy is more costly than the above two strategies
and it is not possible to control effectiveness easily. In addition, another strategy
encouraging the effect of legislator members as well as friends could be used. By
motivating the members and friends, they join the lobbying group campaigns with the
goal that their group presence would affect the standard makers (Friedman and Heinle
2016).
Impact of lobbying on standard setting in accounting:
According to the research work of Hoffmann and Zuelch (2014), states feel the
effects of different pressure groups and lobbyists in a different manner. The developed
countries such as UK, USA and Australia have been benefitted mostly from these
effects. One organisation that has felt the effect of lobbying immensely is the Securities
and Exchange Commission (SEC) that is funded by the investors in order to protect
from the stock market downfall in 1929. The main reason that SEC has been
established is to analyse complete marketplace disclosure, corporate documents,
verification of stock exchange rates and imposing stringent facilities, if any terms and
conditions are violated. Since the time of establishment, there have been different lobby
groups as well as other interested parties that affect the SEC operations. More

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precisely, the current SEC regulation, which is the Sarbanes-Oxley Act, is facing
increased pressure (Königsgruber and Palan 2015).
Owing to the public concern and other pressures, the US congress passed a law
in order to check the SEC operations. According to this law, the chief executive is
needed to confirm the implications and accuracy of the corporate financial standards. In
addition, the chief executive is needed to obtain the consent of the organisations on
these standards. The organisations need to attest that the standards provide effective
controls in order to prevent fraud. Such provision has mandated the organisations to fail
collectively in following few measures of SEC along with lawsuit filings against SEC on
the basis of going against the constitution provisions (Morley 2016). More precisely,
different powerful industries as well as lobby groups like the US Chamber of Commerce,
the American Electronics Association and the American Bankers Association influenced
these lawsuits.
Even though SEC is a government regulatory organisation and receives funds
from the government, it faces immense pressure from Congress as well. Therefore,
lobbying has shaped up the SEC movements by assuring that an approach is triggered,
which would provide suitable settings of accounting standards along with providing
ratification to the other corresponding regulations after obtaining the consent of the
affected organisations to content and scope (Müller 2014). By passing the SEC law
administration, the efforts of the Congress are not finished, as it supervises the SEC.
Lobbying has described stringent boundaries within various accounting bodies.
For example, lobbying in US raised a public discussion regarding whether or not SEC

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needs to be involved in undertaking foreign policies like global weapon production and
policies related to human rights. It has been argued by some economists that SEC
needs to involve in these policies by barring some organisations, especially from China
and Russia, from operating in US (Quaglia 2014). Later on, the debate has increased at
the time the US Congress aimed to restrict international bad actors from accessing the
global stock market.
More precisely, the US aimed of delisting Petro China, which is a Chinese
organisation, from the New York Stock Exchange (Pelger 2016). SEC announced its
stand; however, the pressure groups stated that SEC needs to observe its boundaries.
They have argued that SEC has been developed for looking after the accounting
standards rather than designing policies. As a result, few pressure groups cited that
SEC did not conform to the overall proposal revisions. According to them, no legal title
is provided to the SEC of turning down the requests of the foreign organisations for
accessing the US market. Along with this, it has been claimed that SEC is responsible
to assure that all the US investors obtain relevant information on various organisations
within the various states along with ensuring that shares have been at their disposal in
times of need.
As per Reuter and Messner (2015), another US-based accounting organisation
is “Financial Accounting Standards Board (FASB)”, which has felt the effect of
accounting standard setting. The accounting stakeholders formed FASB in 1973 having
the primary aim of setting accounting standards, which fulfil the global requirements.
After its establishment, different pressure groups have put pressure via lobbies. Such
pressure has affected significantly the accounting standards developed by FASB.

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The lobby groups have used the auditors as well as the US government in order
to put pressure to FASB. For example, the Congress has offered measures directly for
checking on FASB or uses SEC. In the year 1979, an act was passed by the Congress
stopping both SEC and FASB from compelling any organisation into utilising unflattering
accounting approach in relation to drilled holes (Stockenstrand and Nilsson 2016).
Along with this, the Congress had snatched power from FASB, after a proposal was put
forward that share options need to be treated in the form of expenses in comprehensive
income statements.
It is inherent that many governments extend support to the pressure that the
lobbyists have exerted to standard setting regulators for public benefits. However, if
effective measures are not put in place for determining the impact of such pressure to
the standards of accounting, there would not be realisation of expected benefits. For
example, such pressure has impeded attempts made for accomplishing global
convenience and an effective extent of quality on the part of the standard setting
regulators. The failure of these bodies to submit to lobby group pressure has threatened
to transfer their accounting regulations from one standard to another. For example, a
Swiss organisation called Novartis, has written a letter to the IASB head by threatening
that if the standards of goodwill amortisation are not changed, they would switch to
GAAP from IFRS (Teixeira 2014). This clearly denotes the fact that some organisations
might utilise lobbying for their own benefits and not for the global community.
In a similar manner, some organisations having more influence in their industries
use lobbying for eliminating the credibility of globally accepted accounting regulations.
For example, in 1992, the “International Accounting Standards Committee (IASC)” was

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pressurised to abolish the LIFO method. Even though “International Organisation of
Securities Commission (IOSCO)”, US and Canada accounting bodies completely
opposed the elimination, certain firms use political pressure for influencing the
elimination. Such pressure later compelled various accounting bodies to infer that the
government would utilise LIFO in income tax and tax rules. Even though IASC has been
one of the major supporters to harmonise global accounting standards expecting to
obtain the most articulate and committed exponents, lobbying with the help of political
pressure has achieved success in failing the Comparability or Improvements Program of
IASC (Wingard, Bosman and Amisi 2016).
The power of numbers exerted with the help of pressure groups made various
groups of standard setting in accounting relax their strong rules in accounting
regulations. For example, lobbies have been used by the “American Bankers
Association (ABA)” for driving the FASB in relaxing their market security standards. ABA
has utilised the letters that the Chairman of the Federal Reserve Board, Treasury
Secretary, Chairman of the Federal Deposit Insurance Corporation and two Senators of
US have sent to FASB (Young 2014). Even though SEC extended strong support to
FASB, FASB was managed to be pushed by ABA in relaxing its stand on marketable
securities along with admitting that it needs to be presented at fair value by considering
the same as earnings. There are numerous bankers protesting against the regulation
having the fear of the volatility of earnings, as regulations are directed into earnings. In
providing response, the “Statement of Financial Accounting Standards (FAS)” and
Exposure Draft proposed an accounting standard No.115, which formulated portfolio

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securities available for sale. In addition, it would have the ability of transferring the
change in annual fair value to the shareholders (Baudot, Demek and Huang 2018).
In the research work of Brouwer, Hoogendoorn and Naarding (2015), it has been
found that another lobbying that lead to massive industrial reaction was the Exposure
Draft of FASB in 1992. According to this draft, the organisations are needed to confer
share options on staffs for providing fair value estimates of the records available and
expenditure in the income statement. As a result, the trade unions and organisations
from different industries have sought the assistance of the members of “House of
Senate”. Consequently, these organisations have asked the members of the Senate to
undertake actions, which could hinder the progress of the proposal of FASB. Owing to
this pressure, a resolution has taken place undertaken by the Senate that compelled the
FASB in curbing its progress relation staff accounting initiative.
The Senate has utilised its critical economic status to argue out a false claim that
the desired growth entirely depend on the staff entrepreneur. The pressure that the
Senate has exerted as well as other lobby groups have been highly unrelenting and
intense, due to the Chairman of SEC has urged FASB in relaxing its stock proposal.
The reason has been to jeopardise the private sector and with such unbearable
pressure, FASB has been compelled to issue SFAS No.12. According to this standard,
the organisations are needed to utilise footnotes to disclose the stock dilution at the time
of undertaking report earnings (Reuter and Messner 2015).
In other situations, the pressure exerted by pressure groups, political parties and
lobbies resulted in several governments to withdraw crucial support from the standard

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setters in accounting. Along with this, such pressure has resulted in appeals from the
end of the lobbyists through making dialogue in public media. In the past few years, the
pressure has risen to an extent, which has intimidated severely the power of the
standard setting regulators.
Conclusion:
Lobbying has varying impact on formulating accounting standards, as evident
from the above discussion. The stakeholders expect that the lobbies would assist in
shaping the accounting principles and conventions. However, if these lobbies are
managed appropriately or excessive politics are allowed in the issue by the public and
other stakeholders, there would be loss of essence in gains. The senior organisations
might use the politicians in spoiling accounting principles for their personal benefits.

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References:
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standard-setting due process and the implications for legitimacy. The British Accounting
Review, 48(1), pp.59-73.
Baudot, L., 2018. On Commitment Toward Knowledge Templates in Global Standard
Setting: The Case of the FASB‐IASB Revenue Project. Contemporary Accounting
Research, 35(2), pp.657-695.
Baudot, L., Demek, K.C. and Huang, Z., 2018. The accounting profession's engagement
with accounting standards: Conceptualizing accounting complexity through Big 4
comment letters. Auditing: A Journal of Practice and Theory, 15(1), pp.29-33.
Brouwer, A., Hoogendoorn, M. and Naarding, E., 2015. Will the changes proposed to
the conceptual framework's definitions and recognition criteria provide a better basis for
IASB standard setting?. Accounting and Business Research, 45(5), pp.547-571.
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regulation. Journal of Accounting Research, 54(3), pp.863-893.

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Hoffmann, S. and Zuelch, H., 2014. Lobbying on accounting standard setting in the
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