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Politicalization of Accounting Standards

Updated on April 30, 2015

ome 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 Securities and Exchange Commission, 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.).

Accounting Principles Board & Committee on Accounting Procedure

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?

Yes, the reasons for the demise of the Committee on Accounting Procedure (CAP) of the AICPA and the Accounting Principles Board can be related to a growing influence by governing bodies, “politicalization”, such as the SEC. After investors lost life savings due to the stock market crash of 1929, the Securities Act of 1933 and Securities Act of 1934 were established. Since the SEC’s initiation, the organization has continued to set accounting standards, while providing oversight to auditing and accounting firms. With the increasing need for more regulation for accounting practices, CAP was replaced by the Accounting Principles Board (APB) in 1959. CAP developed fifty-one pronouncements, which shortly afterwards became known as generally accepted accounting principles (GAAP). During the first fourteen years of the APB came thirty-one new standards. In 1972 the FASB became the primary organization for setting accounting standards, after the need for developing a higher set of standards could not be accomplished by the APB. The FASB is currently recognized as the authoritative body for creating rules for reporting and disclosing financial information by the SEC.

What arguments can be raised to support the politicalization of accounting standard setting?

Arguments in support of the politicalization of accounting standard setting can be made by the investors, lenders, vendors, employees, and all other stakeholders who have fallen victim to corporate fraud. After the collapse of corporate giants such as Enron, WorldCom, and Arthur Anderson, to name a few, the Department of Justice (DOJ), the SEC, and the U.S. Commodity Futures Trading Commission (CFTC) were forced to create greater restrictions and improved policies, including the full disclosure principle, to protect stakeholders. While fines, penalties, and even jail time were handed down to the directors of many of these companies, for many employees who lost their hard earned pensions, investors who lost life savings, and vendors who went under, justice may never be fully served.

What arguments can be raised against the politicalization of accounting standard setting?

Arguments against the politicalization of accounting standard setting can be made by honest hard working businessmen, women, and entrepreneurs who’ve always prepared their financial information using fair judgment who are now forced to comply with a lengthy list of regulatory rules and guidelines. With so many small business owners struggling to stay afloat in what has been described as the worst economic conditions since the Great Depression, many cannot afford to hire accounting professionals to ensure they are in compliance with newly revised standards and policies. Because of the illegal acts of businesses in the past, stricter standard setting has burdened all publicly traded companies.


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