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Week 2 Learning Team “B” Case 1-3, 1-4 and 2-2
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ACC497
July 2, 2012
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Case 1-3 Politicalization of Accounting Standards
Some accountants have said that politicalization in the development and
acceptance of generally accepted accounting principles (i.e., standard setting) is
taking place. Some use the term politicalization in a narrow sense to mean the
influence by governmental agencies, particularly the SEC, on the development of
generally accepted accounting principles. Others use it more broadly to mean the
compromising that takes place in bodies responsible for developing these
principles because of the influence and pressure of interested groups (SEC,
American Accounting Association, businesses through their various
organizations, Institute of Management Accountants, financial analysts, bankers,
lawyers, etc.).
Required:
a. The Committee on Accounting Procedure of the AICPA was established in the
mid- to late 1930s and functioned until 1959, at which time the Accounting
Principles Board came into existence. In 1973, the Financial Accounting
Standards Board was formed, and the APB went out of existence. Do the reasons
these groups were formed, their methods of operation while in existence, and the
reasons for the demise of the first two indicate an increasing politicalization (as
the term is used in the broad sense) of accounting standard setting? Explain your
answer by indicating how the CAP, APB, and FASB operated or operate. Cite
specific developments that tend to support your answer.
The former accounting boards, CAP and APB, did in fact reach their demise due
to increasing politicalization. The broad definition of politicalization assumes that
standard-setting bodies are influenced by those invested groups. The CAP had issues
from businesses regarding the fact that service here meant they had to hold AICPA
membership; many entities saw this as limiting the voices from businesses the CAP
sought to represent. In light of this, the APB was formed; developed with board
members from not only the accounting profession, but also from industry, government,
and academia in order to have a better representation of those specific groups.
However, the demise of the APB came when the independence of the board members
was questioned; each member was responsible to their respective employers and were
thought to be looking out for their own respective interests.
The FASB is different in that all members are independent of other businesses.
Proposed by the Wheat Committee chaired by Francis Wheat, the FASB is the “official
body charged with issuing accounting standards” (Schroeder, Clark, & Cathey, 2011).
From these changes in accounting boards that develop and expand upon
accounting theory, it is evident that the entities on the receiving end of the principles
and guidelines that are being developed have the ability to change the organizations
that appoint them.
b. What arguments can be raised to support the politicalization of accounting
standard setting?
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One major benefit to the politicalization of accounting standard setting is that the
backing of federal government regulations aids in the dissemination and credibility of
changes to accounting standards or newly issued accounting standards.
One other benefit is the ability to include the federal courts when a ruling is
needed regarding clarification of a standard.
c. What arguments can be raised against the politicalization of accounting
standard setting? (CMA adapted).
As has been shown in various examples in the past such as, congressional and
FASB debates regarding the use of fair value measurements and the reporting of
employee stock options as an expense, political agendas have the potential to skew the
perception of what may be more appropriate for the profession. In these examples,
companies and other interested parties were able to use money and positions of power
to lobby congress to ensure that regulations that would have been best for the
accounting profession but not necessarily in the best interest of the company were not
allowed to be passed or implemented by the FASB.
Another potential issue resulting from the politicalization of accounting is the
conflict of interest that can result from a regulating authority, such as the federal
government, which can be influenced by big money and big power, able to dictate when
and how experts in the accounting profession will do their job.
Case 1-4 Generally Accepted Accounting Principles
At the completion of the Darby Department Store audit, the president asks about
the meaning of the phrase “in conformity with generally accepted accounting
principles,” which appears in your audit report on the management’s financial
statements. He observes that the meaning of the phrase must include more than
what he thinks of as “principles.”
Required:
a. Explain the meaning of the term accounting principles as used in the audit
report. (Do not in this part discuss the significance of “generally accepted.”).
Accounting principles are a set of rules and guidelines an auditor must follow
when preparing their audit report or financial statements. An example of an accounting
principle is, "Conservatism." The conservatism principle allows the auditor to decide on
an acceptable alternative when there are two possible ways an item can be reported.
Another accounting principle is the "Going Concern Principle." This principle allows the
auditor to disclose on the auditor report if they have a concern the company's financial
future is uncertain. The accounting principles are a set of rules to help keep the
auditor's opinion unbiased and objective.
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b. The president wants to know how you determine whether or not an accounting
principle is generally accepted. Discuss the sources of evidence for determining
whether an accounting principle has substantial authoritative support.
In order for an accounting principle to be generally accepted, it must have
substantial authoritative support. The American Institute of Certified Public Accountants
(AICPA) created in 1936 along with the Financial Accounting Standards Board (FASB)
"each of these bodies has issued pronouncements on accounting issues, which have
become the primary source of generally accepted accounting principles"(Schroeder,
Clark, & Cathey, 2011). Another accounting standard setting body is the Governmental
Standards Board (GASB). The FASB and the GASB's primary functions are developing
the generally accepted accounting principles businesses and not-for-profit entities must
follow.
c. The president believes that diversity in accounting practice will always exist
among independent entities despite continual improvements in comparability.
Discuss the arguments that support his belief.
Diversity in accounting practices within independent entities will continue to exist
because of frequent changes with Generally Accepted Accounting Principles and lack of
recent knowledge of said changes. The FASB, SEC, and AICPA have been critical to
the issuance of business accounting standards. This act of standards overload was a
difficult transition for small businesses, but they do not have the resources to research
the pronouncements. The introduction of emerging issues Task Force has progressed
for a better understanding accounting issues not clearly stated in the pronouncements
provided by the FASB. The EITF also advises the FASB staff on whether a FASB issue
should be acted on and expects new type of securities, products, services, and various
accounting tasks for said type of transactions. Many accountants have argued for
disclosure standard differentials as a potential solution for the standards overload
problem.
Case 2-2 The Theoretical Foundation of Accounting Principles
During the past several years, the FASB has attempted to strengthen the
theoretical foundation for the development of accounting principles. Two of the
most important results of this attempt are the Conceptual Framework Project and
the Emerging Issues Task Force. During this same period, the FASB has been
criticized for imposing too many standards on the financial reporting process, the
so-called standards overload problem.
Required:
a. Discuss the goals and objectives of
i. the Conceptual Framework Project
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The International Accounting Standards Board and Financial accounting
Standards Board (the Boards), created a joint project known as the Conceptual
Framework project, in which it developed an improved and common conceptual
framework (IFRS, 2012). This framework would provide a sound foundation for
developing future accounting standards and is essential to fulfilling the Boards’ goal of
developing standards that are principles-based, internally consistent, internationally
converged, and that lead to financial reporting that provides the information needed for
investment, credit, and similar decisions (IFRS, 2012).
ii. the Emerging Issues Task Force
Due to a criticism of the FASB for failing to provide timely guidance on emerging
implementation and practice problems, in 1984 the FASB responded by establishing a
task force, the Emerging Issues Task Force (EITF), to assist in identifying issues and
problems that might require action; and expanding the scope of the FASB Technical
Bulletins in an effort to offer quicker guidance on a wider variety of issues (Schroeder,
Clark, & Cathey, 2011). The FASB established the EITF in an attempt to address two
issues - a variety of issues that aren't fully addressed in accounting pronouncements
and the ever-increasing body of professional pronouncements creating a standards
overload problem (Schroeder, Clark, & Cathey, 2011). The goal of the EITF is to provide
timely guidance on new issues while limiting the number of issues whose resolutions
require formal pronouncements by the FASB (Schroeder, Clark, & Cathey, 2011).
b. Discuss the standards overload problem.
Over the past several years, there has been and increased international demand
for both developed and emerging economics for a common set of accounting standards
for smaller and medium-sized businesses (SMEs) that is much simpler than full IFRSs.
The IASB published an IFRS designed for use by SMEs and the direction of the
standard is to provide a simplified, self-contained set of accounting principles that are
based on full IFRS eliminating choices of accounting treatment, topics that are not
generally relevant to SMEs and simplifying methods of recognition and measurement.
This standard reduces the volume of accounting guidance and is not suitable for
publicly traded entities and financial institutions. Another difference between U.S. GAAP
and the IFRS as no standard exists in the United States allowing individual companies
to decide whether to require or permit the use of IFRS for SMEs in place of full IFRS or
national requirements.
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References
Boynton, W., & Johnson, R. (2006). Modern Auditing: Assurance Services, and the
Integrity of Financial Reporting (8th ed.). Hoboken, NJ: John Wiley & Sons.
IFRS (2012). Retrieved from http://ifrs.org
Schroeder, R., Clark, M., & Cathey, J. (2011). Financial Accounting Theory and
Analysis Text and Cases (10th ed.). Hoboken, NJ: John Wiley & Sons.