Politicization of Standard Setting Term Paper

Politicization of Standard Setting
History of formation of CAP, the APB, and the FASB and rationale for formation
The Securities Exchange Act of 1934 set general accounting standards for all American accountants in practice. Then, the AICPA formed the Committee of Accounting Procedure (CAP) in 1938 so the profession could regulate itself. In 1959, CAP decided accountants needed a general theory of ethical practice, and a constitution to outline the purpose of the profession. This was a shift from a situational approach to ethics when practicing that had previously dominated the profession. The Accounting Principles Board was the result (Flegm, 2005).
In 1972 the FASB created the Discussion Memorandum on the Conceptual Framework for Accounting. “Although the income statement and the matching concept had been the primary focus of financial reporting [until then] FASB changed that focus to the balance sheet….because measuring capital maintenance is difficult, if not impossible, the pragmatic accountant focuses on profit maximization” (Flegm, 2005). Pragmatic demands, politicization and simply the need for a more a realistic view of how organizations view their own balance sheet all conspired to produce this change. The new board’s policies “changed the basic emphasis of financial reporting from a report to absentee owners attesting to managements’ (agents) successful stewardship and accountability, to a report to potential investors reflecting the company’s potential (assuming that this could be expressed in dollars)” (Flegm, 2005).
What arguments can be raised to support the “politicization” of accounting standard setting?
The change to emphasize reflections of future value and reporting earnings to present and future investors enables companies beginning innovative enterprises to gain a foothold in the market, and is more useful to ordinary stockholders and investors because it is easier to understand, and reflects the investor’s own future-focused orientation when deciding to hold or sell stock in a company. Investors want to know how a stock will perform in the future, not just its historical value and capital maintenance expenses.
What arguments can be raised against the “politicization” of accounting standard setting?
One accountant believes that the FASB “has outlived its usefulness and that the SEC, adequately funded, should exercise its 1934 mandate and take full control of accounting standards. Furthermore, the SEC should also reaffirm the use of historic cost as the measurement base, and the basic need for the attestation by an independent public accountant as to the stewardship of management,” in short that accountants should serve the public good (the public good including the shareholder’s ‘good) and the public good does not gain a really good assessment of future performance, because too many subjective variables are present in the portrait of corporate health created by current accounting policies (Flegm, 2005). The “FASB does not recognize that the greatest risk any company faces is strategic risk” (Flegm, 2005).
Works Cited
Flegm, Eugene H. (2005, Dec). “Accounting at a Crossroad.” CPA Journal. Retrieved 9 Sept 2007 at http://www.nysscpa.org/cpajournal/2005/1205/infocus/p16.htm