Accounting Standard Setting: Political Lobbying Process

Cite this

Accounting standard-setting and the adherence to these standards is a crucial foundation of the modern business world. These standards are required for the purpose of good quality financial reporting which is useful in communicating economic information regarding companies to the stakeholders involved which include the shareholders, the potential investors, government, creditors, the general public, and many more. Since the financial reporting provides a look into the way the business has been handled, it allows the stakeholders to gauge the stewardship of the managers and undertake a variety of decisions based on the information at hand. Therefore, there is the reason for this information represented in the statements to be manipulated which is why it needs to be of a good and reliable quality which is what accounting standards seek to assure. According to Tutticci et al., (1994)

On-Time Delivery!
Get your customized and 100% plagiarism-free paper done in as little as 3 hours
Let’s start
322 specialists online

The setting of accounting standards involves the restriction of the behavior of financial statement preparers. Any restriction of accounting choice may have economic and social consequences, owing to involved wealth redistributions between interested parties. Such competing interests are reflected by the politicization of the accounting standard-setting process and suggest the existence of power, influence, and conflict. …..any description of the political process of accounting standard-setting should include a consideration of how, when, and by whom power was exercised.

The standards that are taking such widespread importance today came into formation after the sixties so as to promote the integrity of the accounting profession by allowing uniform data to be presented by standardizing the way the books were kept. This enabled the boost in confidence regarding the financial data among the stakeholders and made them easy to comprehend, comparable with other companies’ data, and reliable to the needs of the people involved.

Over time the importance of the standards in terms of allowing financial data to be presented in a particular way and its clout on investors has been realized by many parties. Thus the process of accounting standards set by various bodies around the world has come under pressure from political lobbying. By allowing certain representations to be made in certain ways, company profitability can be shown to go up or investors can be made to behave in a particular way. In December 2008, the outgoing chair of the Securities and Exchange Commission, Christopher Cox made an appeal that the “accounting standards should not be viewed as a fiscal policy tool to stimulate or moderate economic growth, but rather as a means of producing neutral and objective measurements of the financial performance of public companies.” (Reason, 2008) This highlights the debate that is brewing about how much influence political lobbying has on the accounting standard-setting process (Dagwell, 2008).

The term “lobbying” in this case needs to be defined so as to understand the process by which accounting standard setting is aimed to be influenced. MacArthur (1996) conducted studies in this regard and was able to define lobbying as merely the submission of a comment letter that lay down recommendations regarding possible changes in the standard that are required for improvement. These are provided by the various stakeholders to the standard-setting bodies in order to report new findings and encourage action regarding them. Georgiou & Roberts (2004) took this definition further however by incorporating not just comment letters but also the range of formal and informal meetings and communication that is done between the lobbyers and the standard-setting body including conversations with members of the board as well as the staff involved. They define the lobbying parties as being comprised of primarily three groups: those lobbying in favor of the proposal, those against the proposal, and those who do not choose to lobby at all. Sutton (1988) also adheres to these two parameters defined but does not include the third category of those who do not involve themselves in the lobbying process. Zeff (2002) takes political lobbying to mean self-interested considerations by those preparing the financial statements or other people involved which may be harmful to the confidence of investors and other users of the financial data.

The accounting standard-setting process in Australia has been to some extent a politicized process as well. The trend in the USA, Britain, and Australia since the 1930s has been aimed at developing generally agreed-upon accounting principles which are recognized as the best practice accounting practice. The major bodies that were involved in the development of the accountancy profession since long have been CPA Australia and the Institute of Chartered Accountants in Australia. There was a joint attempt to issue standards of accounting practice to be followed but adherence to these was low before the sixties (Dagwell, 2008). As a result, in the sixties, both the organizations teamed up to create the Australian Accounting Research Foundation which was aimed at carrying out research and developing accounting standards that the bodies could endorse jointly. This was in lieu of threat of government involvement in accounting standard-setting through legislation in the wake of some spectacular closures in the Australian industry which was attributed to some extent to accounting. This was followed however by intervention by the Commonwealth and States taking legislative power to sponsor development of and approve accounting standards which were followed by more control, thus bringing in federal interests in accounting standard-setting in order to protect the investor.

This was followed in the 1970s by a process of international harmonization of the accounting standards in Australia as the need was felt at the time. This process of harmonization had some advantages for certain corners, especially the Federal government as the comparability and the quality of reporting fostered by international harmonization of accounting standard-setting allowed increased foreign investment in the country as stakeholders began to trust the comparing ability of the financial results of the companies at a greater level. According to Stoddart (1999), the Federal government at the time aimed to create some credibility for itself in the business community, and accounting standard-setting was chosen as one possible avenue to do it. He follows it up by holding that this move was not so much in the public interest as it was in the government’s which would not only be able to appease the business community and rail in more investment but would also be able to hand over control to a foreign standard-setting body as well as gaining popularity by taking on and addressing this new issue. Stoddart (1999) also highlights the role of the Australian Stock Exchange in lobbying the government for the adoption of the International Financial Reporting Standards and for the development of the Corporate Law Economic Reform Program (CLERP). This was important for the ASX as before a company can enlist its securities on the stock exchange, it is required to comply with the accounting regulations in Australia. ASX benefitted tremendously from the international harmonization as it saw an increase in the enlistment of foreign companies on the exchange as well as allowing the exchange to maintain many of the Australian companies as well. It was even reported to have been providing a major chunk of the funding for the transition and included threats to withdraw this if the process was not quickened in the nineties. Thus the range of political lobbying involved from the Australian Stock Exchange and other big companies on the Australian business landscape points to how the lobbying process in Australia is strong with regards to accounting standard-setting as the moves benefitted the big players, wielding little returns to the general public in terms of better information. Thus the process is to a great extent a product of political lobbying.

Yes, we can!
Our experts can deliver a custom Accounting Standard Setting: Political Lobbying Process paper for only $13.00 $11/page
Learn More
322 specialists online

A range of parties can be seen to be interested in influencing the standard-setting process and for diverse purposes. Georgieu and Robert (2004) have pointed out that argues that stakeholders act based on the financial data that managers provide to them which leads to particular actions of the market. If this is distorted, it leads to changes in the way the market behaves. In this regard, researchers have suggested that standards governing the preparation and reporting of accounting information should be according to the needs of the market. This suggestion is indifferent to those given by prolific groups which expect information to meet their own needs. This lobbying does not always result in the best results for the public. As Mitchell (2004) pointed out, the asbestos lobby forced the Australian government to bring about regulation that favored them which led to citizens coming to harm because of asbestos which was an outright failure on part of the government to protect its citizens. Organizations have a strong incentive to lobby for a particular accounting standard-setting because of the way the reward structure has been based. Many of the managers in big companies are compensated based on a performance-related pay structure whereby their remuneration is predicated on higher earnings being generated for the company. This creates the impetus for upper management to lobby with standard-setting bodies to allow them to manipulate accounting results in such a way so as to show growth and positive earnings on a consistent basis so as to get a greater amount of remuneration. Dhaliwal (1982) also explored the phenomenon through the perspective of the capital structure of the company involved. It is shown to be an important determinant of political lobbying by the researcher. It is also observed that loan agreements which include protective covenants push firms that have a highly leveraged portfolio to manipulate their accounts by going against the accounting standards and report a lower income and in this way they increase the volatility of their report earnings. The case of Enron is one of the indicators here as a mark to market accounting was important for the plans of the management at the top to report higher earnings for the company. Clive Peters is one of the names in Australia that was faced with an accounting scandal. It initiated proceedings against one of its own staff members in response which was due to incorrect and manipulated entries in the payroll system which led to a multimillion-dollar fraud being perpetrated.

CFOs in general are seen to be concerned about the effects of homogeneity that are brought by objective standard-setting and seek to influence it to a great degree. This was the case with the International Accounting Standards Board as it emerged that the CFO of Novartis has contacted Sir David Tweedie, the chairman of the IASB, with a threat to shift to the US GAAP from the IAS if certain standard relating to the amortization of goodwill was not altered (Lardon, 1997, cited in Zeff, 2002). This aspect was relevant to Australia since its standards are going in harmony with the international accounting standards produced by the IASB which is in competition with the FASB. These changes lobbied by Novartis will affect the financial statements of Australian companies as well and harm the social cause of the release of this accounting information. This is one aspect. Australian companies too can be said to look towards alternative standards to the IAS as suitable as for example companies have been seen to look with favor upon the US GAAP because of the preparers forming a well-organized lobby with regards to the standard-setting there. While this does not confer a direct advantage to the Australian companies who look to make that move, it does emerge as a source of comfort for the CFOs compared to the IAS. Another important source of influence is governments and the auditing and assurance services providers which have certain interests in accounting standard-setting. They can influence the process in various ways, one of which is funding for the body. This has been a source of criticism for the International Accounting Standards Board which has a funding regime composed of nearly a third of its funding being drawn from the big four accounting firms while the rest comes from two hundred exchanges and companies from around the world. There is a need to broaden this base so as to reduce the conflict of interest involved. A better solution could be compulsory contributions akin to what the Financial Accounting Standards Board of the US gets from all the listed companies in the country (Zeff, 2002).

Government is another important entity that seeks to influence the process of accounting standard-setting. This has been highlighted by the words of the outgoing chair of the Securities and Exchange Commission of the United States in 2008 who spoke of accounting standard-setting as not being a tool of economic stimulus. The government does however use it in that sense. The recent financial crisis provides a good example of this. The mark to market rules or fair value accounting as it is referred to result in the obligations and the risky assets of the banks having to be written down tremendously which resulted in the closure of many banks. It was a reflection of the undue risks that were taken by the banks and the drop in the market value of the securities that were kept on the balance sheet. The banks and the government’s pressure now on the standard setting bodies are pushing towards allowing banks to record these risky assets at other values which would not illustrate such a steep drop in value as before. This change in standards can although help to stem the tide of the financial crisis to some extent and save some banks. However, this comes at the sacrifice of the investor and other users of the financial statements who will not be shown the true picture of the organization. The political pressure as a result of Congress on the FASB thus can be seen to sacrifice the social cause of the standard-setting process and focus on the short term, which can further be brought into question by the nature of the campaign contributions these Congressmen attain from the same pressurizing organizations.

Looking at the dynamics of accounting standard-setting, one comes to the conclusion that it is more or less a political lobbying process at present. This is supported through various steps that have been taken throughout its history. Looking at the current crisis, the speed with which the standards are being altered by the FASB on the backing of political bodies brings into question its objectivity as the standard-setting is a slow process and can not be made to proceed at a rapid pace which actually brings its integrity into question. Without the confidence of the stakeholders, the financial data loses its intrinsic value. In the case of Australia, many indicators point to political lobbying. As the example of the Asbestos industry in Australia showed, the motive for standard alteration, in that case, was to avoid giving bad impressions about the company to the public which eventually resulted in harm to the public. Similarly, the Australian Stock Exchange was able to lobby the federal government through restricting funding and other measures towards international harmonization of accounting standards which increased its revenues at no particular benefit to the general public. The Federal government also played into the hands of these corporations because of its own interests in terms of building credibility with the business community and appeasing it. Although it is stated that the basic motive for implementation of new standards is public interest and the welfare of the investors thereby making accounting standard-setting bodies aim towards making financial documents more understandable and reliable, it is a reality that the process is influenced to a great extent by the political lobbying process, thereby sacrificing the social aspect of the process and bending to the will of the political forces involved. Therefore, accounting standard setting is a political lobbying process, and as such offers several opportunities and means for interested parties to influence its outcomes


Dagwell, R. (2008), Corporate accounting. Sydney UNSW Press.

Dhaliwal, D.S. (1982), ‘Some economic determinants of management lobbying for alternative methods of accounting: evidence from the accounting for interest costs issue’, Journal of Business Finance and Accounting, Vol.9, No.2, p.255.

Georgiou, G. and Roberts, C.B. (2004), ‘Corporate lobbying in the UK: an analysis of attitudes towards the ASB’s 1995 deferred taxation proposals’, The British Accounting Review, Vol.36, No.4, p.441.

Cut 15% OFF your first order
We’ll deliver a custom Accounting paper tailored to your requirements with a good discount
Use discount
322 specialists online

MacArthur, J.V. (1996), ‘An investigation into the influence of cultural factors in the international lobbying of the International Accounting Standards Committee: the case of E32, comparability of financial statements’, International Journal of Accounting, Vol.31, No.2, pp.213-237.

Mitchell, A. (2004), ‘Asbestos: key question hasn’t been answered’, The Australian Financial Review, 9 August.

Reason, T. (2008). Cox: Accounting Is Not a Fiscal Policy Tool [online]. CFO. Web.

Stoddart, E. (1999), “Politics in Action: Inter-organisational conflict in proposedchanges to setting Australian accounting standards,” Working Paper, School of Business, Swinburne University of Technology, Victoria, Australia.

Sutton, T.G. (1988), ‘The proposed introduction of current cost accounting in the UK”, Journal of Accounting and Economics, Vol.10, No. 2, pp. 127-149.

Tutticci, I., Dunstan, K., Holmes, S. (1994), “Respondent lobbying in the Australian accounting standard-setting process: ED49”, Accounting, Auditing & Accountability Journal, Vol.7, No. 2, pp 86-104.

Zeff, Stephen. (2002). “Political” lobbying on proposed standards: A challenge to the IASB. (Commentary).(International Accounting Standards Board ) [online]. Access My Library. Web.

Get a custom-written paper
For only $13.00 $11/page you can get a custom-written academic paper according to your instructions
Let us help you
322 specialists online

Cite this paper

Select style


BusinessEssay. (2022, February 9). Accounting Standard Setting: Political Lobbying Process. Retrieved from


BusinessEssay. (2022, February 9). Accounting Standard Setting: Political Lobbying Process.

Work Cited

"Accounting Standard Setting: Political Lobbying Process." BusinessEssay, 9 Feb. 2022,


BusinessEssay. (2022) 'Accounting Standard Setting: Political Lobbying Process'. 9 February.


BusinessEssay. 2022. "Accounting Standard Setting: Political Lobbying Process." February 9, 2022.

1. BusinessEssay. "Accounting Standard Setting: Political Lobbying Process." February 9, 2022.


BusinessEssay. "Accounting Standard Setting: Political Lobbying Process." February 9, 2022.