Accounting Theories Essay Example

standard setting objectives and priorities that it traditionally has in Australia? To tackle these concerns, this paper will analyze the Australian standard setting environment before and after 2005. This will be followed by a comparative analysis to assess whether the theories that were effective at the national level still hold relevance when applied to international standard setting.
1. Analysis of the Australian Standard-setting environment before 2005: The accounting standard setting process operated independently and was funded by both the two professional accounting bodies and the Federal Government. The main aim of the standard setting regime was to consider the broader public interest and enhance the quality of financial reporting in Australia, from both the perspectives of preparers and end users (Lonergan, 2003).

Standard setting is a political process that greatly impacts the wellbeing of various interest groups. These groups strive to influence the implementation of regulation. The development of theories was meant to explain the introduction of regulation. Some theories propose that regulation was implemented in the interest of the public, while others suggest that it was implemented to benefit certain individuals at the expense of others, essentially in self-interest.

a) Application of Public interest theory to accounting standard setting
According to the public interest theory, the Australian Government's involvement in the accounting standard setting process through the establishment of the Accounting Standards Review Board (ASRB) in 1984 is considered justified. This stems from shortcomings observed in the accounting information market.

Failure is evident from the numerous corporate collapses during the 1990s and early 2000s, resulting in a demand for stricter accounting standards and changes in the standard-setting process. Consequently, the public interest theory framework explains why

the Australian government intervenes in the accounting standard-setting process, aiming to rectify market failures in accounting information. b) The application of regulatory capture theory to accounting standard setting suggests that regulation is intended to safeguard the public interest. However, this objective is not fulfilled as certain entities being regulated seek to exert control over the regulator.

The government is viewed as a passive mediator between interests, according to the Public Interest Theory. In this theory, the Australian professional accounting bodies aim to exert maximum control over the accounting standard setting governing their members. The capture theory suggests that regulatory intervention in the accounting standard setting process was intended to protect the public interest. However, Walker (1987) demonstrated that the accounting profession, as an elite group, prioritized its own interests rather than being accountable to the public interest.
When it comes to accounting standard setting, the Private Interest Theory predicts that regulators will use their power to transfer income from less politically powerful individuals to those with more influence. This theory states that regulation is sought by private interest groups in order to primarily benefit themselves. Rahman (1988) applied this theory to the establishment of the ASRB and concluded that the organization and functions of the ASRB indicated dependence on and susceptibility to influence from various interest groups, including accounting professions.

The ASRB had to work under the belief that all of its accounting standards needed to be approved politically. This indicates that the political impact of these standards had to be kept to a minimum. d) The application of the market-state-community model to the setting of accounting standards. The market-state-community model is a sociological model that focuses

on maintaining order in modern societies. According to this model, three institutions are responsible for establishing order - the market, government, and community, along with corporate associations. These corporate associations are recognized and granted monopolistic positions by the government (Abeysekera, pg.

According to Abeysekera (p. 66), corporative associations agree to support government policy decisions and articulate government demands. The history of Australian accounting standard setting can be understood using the market-state-community model. From the 1940s to the 1970s, these associations defended and promoted their power by consolidating their functionally defined interests (Abeysekera, pg.).

66). The CPAA and ICAA merged to create the AARF and established the AASB to ensure the profession's continuation (Abeysekera, pg. 67). By implementing a conceptual framework of accounting, stable compromises were offered to the government in the early 1990s. After 2005, the accounting standard setting process in Australia evolved to the point where it gained international recognition for its independent accounting standards board committed to producing high quality standards.

The International Accounting Standards Board (IASB) implemented global accounting standards in 2005, which brought significant changes to the landscape. This shift reflects the increasing significance of global capital markets as a source of company finance and the necessity for transparent and comparable financial information for investors (Alfredson, 2003). Australia has gained international recognition for its principles-based approach to standard setting and leadership in conceptual framework matters. Conceptual frameworks from countries such as the United States, the United Kingdom, and Australia offer a structure for standard setting bodies to construct accounting standards that consider economic, social, and political influences involved in regulation.

Australia, however, has three concerns regarding replacing its own conceptual framework with that of

the IASB's. Firstly, their own framework deals with important issues not addressed by the IASB's framework. Secondly, their future work program surpasses that of the IASB in terms of advancement and transparency across various areas. Lastly, adopting the IASB's framework would lead to a decrease in initiative, autonomy, and innovation when developing national frameworks. The Specific Accounting Concepts (SACs) in Australia—specifically SACs 1-4—offer more detailed explanations and prescriptions compared to their counterparts within the IASB's system. These SACs have been designed to meet Australia's specific financial reporting conditions and requirements.

Furthermore, the Australian SACs have been more actively utilized to drive the development of particular accounting standards. A potential benefit of a conceptual framework is that it can reduce the activities of lobbyists and special interest groups who have self-serving motivations in attempting to influence the standard setting process, as suggested by Bazley and Hancock (1993). Solomons (1986) also suggests that conflicts between economic interests could be avoided if accounting's theoretical foundations were well established. The key issue arising from this discussion concerns the substantive qualitative differences that exist between the IASB and Australian conceptual frameworks.

Will the IASB framework be sufficient in quality and scope to fulfill the technical and strategic roles of the current Australian framework? The IASB framework was not designed for the Australian reporting environment, so it's unlikely that it will have the same impact as Australia's own framework on standard setting. Adopting IASB standards may diminish the need for a local framework and decrease the involvement of local standard setting authorities. This raises concerns about limiting local innovation and hindering efforts to address unique local standard setting needs. Additionally, past experiences have

shown that the accounting profession can be vulnerable during financial crises (Walker, 1993).

There is an increased risk of this happening if Australia loses authority and legitimacy due to a decrease in its autonomy in the standard setting process and the loss of its own conceptual framework. The adoption of IFRS is a significant change in how standard setting is conducted in Australia, resulting in numerous changes in the Australian standard setting environment. These changes include: the corporate sector in Australia encountering more challenges in shaping standards, increased focus on lobbying efforts towards the IASB instead of the AASB, and decreased influence of Australian companies in international standard setting compared to national standard setting.

The involvement of the Australian Federal Government in setting standards has decreased since the adoption of IFRS, which aligns Australian standards with international ones. This alignment reduces government intervention and appeals by companies seeking to prevent certain IFRS provisions from being applied in Australia. However, there is uncertainty regarding whether the International Accounting Standards Board (IASB) will create a universally accepted framework for accounting standards, which raises questions about applying national-level theories to international standard-setting.

Moreover, the International Federation of Accountants (IFAC) demonstrates a stronger commitment to public interest through its establishment of a Public Interest Oversight Board (PIOB) and representation on Public Interest Activity Committees (PIACs). The influence of multinational accounting firms in IFAC's standard-setting processes is also significant. It should be noted that IFAC, national professional accounting associations, and national regulatory oversight boards are interconnected entities (Loft, Humphrey and Turley, 2006).

The public interest theory disregards the findings of numerous research studies, which indicate that business managers have strong incentives to address perceptions

of market failure concerning their activities. They achieve this by providing extensive voluntary disclosures of information after 2005, which also serves to protect financial information users (Godfrey, Hodgson and Holmes, 2006). Additionally, as the IASB aims to enhance the quality and consistency of financial reporting, it becomes necessary for managers to disclose financial information to the public. The international harmonization of accounting has raised concerns about the applicability of capture theory because the adoption of international standards will heavily reflect the interests and preferences of large companies, the ASX, and the accounting profession. Consequently, international events have superseded the interests of all parties involved, leading to a decline in their influence over the standards development process.

Historically, the mentioned parties held considerable power over Australian accounting standards. However, their influence is projected to diminish in the future due to a change in the standard setting process since 2005. Australia has opted to adopt international standards, causing a shift towards prioritizing the International Accounting Standards Board (IASB) in terms of regulatory capture. It is anticipated that organizations from countries adhering to International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) will strive to exert their influence on the decisions and processes of the IASB. This influence will occur on a global level where certain nations, including Australia, possess limited sway. As a result, Australia's impact will dwindle and significant Australian players will lose significance.

In comparison to the US, the FASB is expected to gain dominance over the IASB due to its position as a global standards setter in the largest capital market. Consequently, there is a potential for the FASB to control the IASB. The

process of international accounting harmonization has altered the ability of different entities to influence standard setting. The diminishing influence of Australian companies can be seen in their impact on accounting for intangible assets.

The limited ability of the AASB to influence the IASB and the strong, independent image that the IASB needs to maintain are highlighted by the relative power between the two organizations. Furthermore, transferring important aspects of standard setting to the IASB overseas provides the government with a justification to not be involved in the process while also allowing them to refer to global market forces that require international comparability. This shift in power also emphasizes the diminishing influence of the corporate sector over the standard setting process.

The market-state-community model does not prioritize any specific institution as the most powerful or important. Streeck and Schmitter (1985) emphasize the need for individual examination of each case to understand the significance of different institutions and their relationships. Puxty et al (1987) pointed out that the model is only applicable within national contexts, which questions its relevance in an international setting. Therefore, it is necessary to assess whether government intervention in standard-setting has improved the efficiency and fairness of the market for financial information and capital markets.

There is a need to evaluate the changes in the financial reporting environment and address the challenges in assessing the effectiveness of government regulation. However, it is important to note that the theories may not apply universally, as the International Accounting Standards Board (IASB) has a prominent role in the international context.