Challenges in Accounting Standard Setting by Government
Accounting standard setting by government is a complex process, riddled with issues that can compromise the effectiveness and objectivity of the standards developed. These challenges stem from the political influences that often dictate the decision-making process, the bureaucratic rigidity of governmental procedures, and the inherent behavioral and economic objectives that shape the development of standards. This article explores the various issues in accounting standard setting by government, highlighting the key challenges that need to be addressed.
Political Influence on Accounting Standards
The first challenge is the potential for political influence to dominate the accounting standard-setting process. Technical accounting issues are not always decided based on objective, professional criteria, but rather the views of the political party in power at any given time. This raises concerns about the objectivity and impartiality of the standards. Furthermore, it has been argued that accounting matters, despite their perceived political importance, may not receive the necessary legislative attention due to the constant demand for legislative time. As a result, government officials and those with political influence often heavily sway the process, leading to standards that may not serve the broader public interest.
The rigidity and lengthiness of the legislative process can further complicate matters. Although certain issues deemed of sufficient importance may receive legislative attention, the prospect of lengthy debates and lengthy processes often discourages attempts to modify existing accounting standards. This can result in a system that lacks the necessary flexibility to adapt to changing economic and business conditions.
Behavioral vs. Accuracy in Standard Setting
The second challenge lies in the conflict between behavioral and accuracy objectives in standard setting. Governments often develop accounting standards and regulations with a focus on encouraging or forcing specific behaviors, rather than striving for accuracy. The two primary behavioral objectives are the rule of conduct approach and the economic incentives approach.
The rule of conduct approach aims to restrain unfair economic behavior, seeking to limit the discretion of practitioners to minimize variations in reported earnings. This approach emphasizes uniformity in methods and verifiability of results over accuracy. Standards driven by this approach are likely to provide guidelines that ensure consistent reporting practices across similar circumstances.
The economic incentives approach, on the other hand, focuses on setting standards that motivate decision-makers to act in ways that align with the government's social and economic goals. This approach assumes it is impossible to accurately measure earnings and that an accounting theory built on a measurement objective is impractical. It emphasizes the reported earnings as a motivator for economic decision-making, regardless of the accuracy of the measure. Under this approach, accounting standards are developed to serve policy goals rather than to achieve accurate measurement.
The challenge is that these behavioral objectives can overshadow the need for accurate measurement and reporting. Government-developed standards may prioritize the manipulation of financial data for political or ideological reasons over maintaining a reliable and transparent accounting system. This can lead to a distortion of financial reporting, making it difficult for stakeholders to make informed decisions based on the financial information available.
The Need for Objective and Accurate Standards
Given the complex challenges presented by governmental standard setting, the need for objective and accurate accounting standards becomes paramount. These standards should serve the interests of various stakeholders, including investors, regulators, and the broader public. They should be developed as tools for making informed economic decisions, not as instruments of political or behavioral control.
To achieve this, accounting standards should be designed with the primary objective of measuring return on investment accurately for specific organizations. The focus should be on creating a measurement process that is neutral regarding behavioral consequences, serving as a tool for all economic decision-makers, including buyers, sellers, lenders, borrowers, managers, shareholders, regulators, and the general public. Both the private and public sectors should benefit from the development of such standards, which emphasize objectivity and verifiability over behavioral influence.
Despite these challenges, there is a growing recognition that well-designed, objective accounting standards are crucial for a fair and functional financial markets. Governments, in collaboration with professional accounting bodies and other stakeholders, must work towards overcoming these challenges to ensure that accounting standards serve the broader public interest.