Standard Setting in Accounting: Standard-Setting by the FASB and Lobbying groups, Introduction to Approaches and Theories of Standard-Setting (Term Paper Sample)

Standard Setting in Accounting
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Table of Contents
TOC \o "1-3" \h \z \u Introduction to Standard-Setting in Accounting PAGEREF _Toc416964254 \h 3
Standard-Setting issues PAGEREF _Toc416964255 \h 3
The importance of standards PAGEREF _Toc416964256 \h 3
Standard-Setting by the FASB and Lobbying groups PAGEREF _Toc416964257 \h 4
Introduction to Approaches and Theories of Standard-Setting PAGEREF _Toc416964258 \h 5
Debate PAGEREF _Toc416964259 \h 5
Analysis of principles-based method and regulatory approach PAGEREF _Toc416964260 \h 7
The free market approach PAGEREF _Toc416964261 \h 7
Agency theory PAGEREF _Toc416964262 \h 8
Positive theory PAGEREF _Toc416964263 \h 9
Regulatory approach PAGEREF _Toc416964264 \h 9
Public interest theory PAGEREF _Toc416964265 \h 10
Capture theory PAGEREF _Toc416964266 \h 11
Conclusion PAGEREF _Toc416964267 \h 12
References PAGEREF _Toc416964268 \h 13
Introduction to Standard-Setting in Accounting
Standard setting is a vital methodology used in the evaluation of proficiency in preparation financial statements. It is a significant feature required and should be established by all organizations. This is because of the adverse changes in the nature and skills of work, policies, and environment. The accounting industry requires this procedure because it is a core factor in professional development. The system creates and develops values important in guiding the behavior of professionals such as accountants and auditors. It also enhances creativity, competitiveness, innovativeness, and productivity amongst the workers in a company.
Standard-Setting issues
These standards are established by the Financial Accounting Standards Board. Companies through their accountants are held accountable for preparation of credible financial statements. Accountants perform specialized services such as auditing, advising the management, consulting, and personal financial planning and thus are affected by economic conditions, technological surrounding, and complex business operating conditions. They professionals are required, therefore, to be guided by effective skills and educational standards to assist in transitioning in the job market (Cizek, & Bunch, 2007, P.49).
The importance of standards
The existing standards define the behavior of accountants and insist that their performance should not be limited to their daily tasks and routine procedures. They should tirelessly aim, therefore, to adopt into the evolving environment of accounting services by improving their technical skills. This is because of the rise in diversity, non-routine methods, circumstances and occurrences in an organization. They should, in addition, embrace creativity in differing concept; ensure effective communication with the various stakeholders such as supervisors, coworkers and customers.
There are various reasons that have called for the continuous setting of international financial standards, skills, and assessments that are applied in different organizations. The effectiveness of these standards will depend on various factors which should be adopted by a firm. This includes developing an integrated system significant in providing education reforms to the accounting profession towards industry- based skills. This would involve understanding the cultural changes and hierarchical relations in the organization. Standard setting should encourage frequent and constant communication between different stakeholders; educators, employers, workers, consumers, and the public.
Standard-Setting by the FASB and Lobbying groups
Standards are set by the Financial Accounting Standards Board to ensure that accountants exhibit high performance of their tasks. They require these experts to engage in continuous acquisition of significant knowledge and skills. They also encourage them to be concerned with other broad aspects such as effective communication, developing problem-solving skills, observing the code of ethics, and ensuring creation of positive public relationships (Cizek& Bunch, 2007, p.18). Lobbying groups such as the NSS have challenged the standard setting techniques applied by the FASB. They have for instance proposed for the development of an ASAF which has been made public by the IFRS (Barth 2007, p.30).
Introduction to Approaches and Theories of Standard-Setting
This essay critically scrutinizes the two approaches and theories to standard setting in accounting. The paper gives a brief explanation on the circumstances which affected the accounting regulations that occurred after the 2008 world crisis of the monetary market. In addition, it provides a connection between the accounting theories and the approaches to standard setting process and examples of their use in their market. Furthermore, it gives an in-depth overview of the free market approach or non-regulated method and the regulated or rule-based technique. Analysis for the two techniques is provided with the support of literature which has used in this paper. In addition, the various pro-regulation and sub-approaches followed in the standard setting are discussed. It also addresses the application of the theories in the current world together with their assumptions and the limitations that are experienced.
Debate
The event of the financial crisis in 2008 facilitated the scrutiny of the market regulations. This involved the analysis of parties that provided the accounting standards used in the market such as rating institutions, financial bodies, governments, and audit agencies. These were the events that were experienced in the public sector. The private sector was affected by the need for more regulations in order to provide protection to the public. The economists and scientists disagreed with these notions and they explained that it would have devastating effects on the economy.
This aspect provides the foundation for this article which views accounting as an important economic element. Corporations and other companies incur compliance and production costs to produce accounting information. Managers, on the other hand, benefit from using accounting rules and standards that reduce costs incurred in obtaining information. The shareholders require regulations that will enable them to examine, organize and control the actions of the managers and directors. Financial reporting and accounting, therefore, should entail significant factors such as neutral, objective, and apolitical. This is difficult, however, in real circumstance because of the existence of influence by external groups that have varying interests.
There have been many discussions over the years about the importance of developing regulations in accounting. Regulation according to den Hertog (1999, p.329) has no economic and legal meaning. He whatsoever provides a definition that it is "the employment of legal instruments for the implementation of social-economic policy objectives. A characteristic of legal instruments is that individuals or organizations can be compelled by government to comply with prescribed behavior under penalty of sanctions{…} furthermore government regulation is the instrument for overcoming the disadvantages of imperfect competition, unbalanced market operation, missing markets and undesirable market results”
The aim of this essay is to establish a link between the theories of economic regulation and non-regulation, and the approaches of standard setting. This implies that the accounting practices of organizations are directly affected by the regulatory actions in the economic environment. This shows; therefore, that the parties involved in the development of accounting standards could be the institutions that are controlled by the government or independent bodies and corporations.
Analysis of principles-based method and regulatory approach
Standard setting approaches are methodologies applied in the set and implementation of the standards in the market by various stakeholders such as the government and corporations. These procedures which involve the execution of accounting standards provide economic benefits which could bring a profit or loss to an organization. They have effects on political participants, the government, managers, and investors. Legislation is significant in financial markets because of the existence of asymmetric information in the management of people, firms, and external factors.
The execution of standards involves the use of two techniques: the principles-based method and the other is the regulatory approach. These two techniques play a critical role in the clarification of professional mediation rate in exclusion of their private and public implementation of the standards. Effective standard setting methods are important in the achievement of standard goals and objectives. These goals include preparation of appropriate, dependable, true, consistent, unbiased, and comparable financial information. These approaches should, therefore, should have characteristics, for example, should be rigorous, objective, transparent, and participatory in the development of accounting policies and regulations.
The free market approach
This is a non-regulated approach which disputes that the production of accounting information and regulation is determined by the market mechanisms and its needs. The accounting practices of entities are affected by the regulatory procedures that exist in an economic environment (Riahi-belkaoui, 2005, p.65).  The theory explains that the financial policies are treated as fiscal goods which interact directly with the market forces of demand and supply. The assumption created under this theory is that equilibrium related to consumer demands in an entity could be c...