ACG514 Ethics, Governance And Developments In Accounting Thought Assignment

Question 1 Accounting History 20 marks

1. In relation to accounting history, provide examples of managerial, institutional and professional influences on accounting principles.
2. The development of accounting principles is said to have become more politicised throughout the 20th century. Why this is the case?
3. Critically evaluate whether accounting history has any relevance to modern accounting practice.

Question 2 Conceptual Frameworks 20 marks

1. What is the purpose of a conceptual framework of accounting? How are conceptual frameworks different to accounting standards?
2. Critically evaluate conceptual frameworks in terms of their benefits, problems and criticisms. Who has the most to gain from the creation of conceptual frameworks?

Question 3 Measurement 20 marks

1. Outline the benefits and weaknesses of accounting measurement
2. Compare and contrast historical cost accounting and fair value accounting in terms of their strengths and weaknesses.
3. Are the moves towards greater use of fair values beneficial for accounting? Justify your response.

Question 4 International Accounting 20 marks

1. In the context of financial accounting, what is harmonization and standardization?
2. Global standardization of accounting requires the United States to adopt IFRS. In this context please answer the following questions:
   2. Do you think it is likely that the United States will embrace IFRS in the near future for domestic firms? Argue your view based on advantages of adopting IFRS in the U.S. (6 marks)
   3. What do you think are some of the factors that might discourage the country from adopting IFRS for domestic firms? (10 marks)

Question 5 Critical Perspectives 20 marks

1. It has been said that accounting maintains the power of the already powerful within society and that the process of international harmonization can hide unequal social relations. Outline the basis of this statement.
2. Evaluate the following quote from the Business Council of Australia (2005) from a critical perspective:

   Given the difficulty defining corporate social responsibility (CSR), as well as the fact that CSR activities are already broadly being pursued in Australia by large corporations, mandating the CSR through legislative intervention runs the risk of stifling the innovative and creative approaches to CSR that are being adopted by Australian companies. (10 marks)

Q1

Managerial pressures arose because management of organisations determined accounting policies in the early 20th Century. Information was targeted at share investors due to separation of ownership and management.
Specifically, the format and content of financial reports was determined by management, which meant that:

• Most accounting techniques lacked theoretical support
• Focus was on determination of taxable income
• There was a desire to smooth earnings
• Complex problems were avoided
• Different firms adopted different methods for the same problems
• Institutional pressures include influences from bodies such as Securities Exchange Commission in the USA, or ASIC in Australia. The SEC for example was founded after the Wall Street Crash. In Australia, the antecedents of ASIC (eg (National Companies and Securities Commission) came much later (1970s). These bodies placed pressure on the accounting profession to reduce the variation between firms in relation to accounting practices.

Professional influences refer to by the accounting profession to self-regulate. Examples of professional influences include the development of accounting principles by professional bodies which began in Australia in the 1930s and continued until the 1980s when the Australian Government became more directly involved in standard setting through the Accounting Standards Review Board (the antecedent of the AASB).

1. The increased politicization can be attributed to:
   • Corporate collapses or crime implicating accounting have led to political pressures for regulators to fix accounting through increased regulation.
   • As accounting has power to influence decisions, impacted parties wish to influence regulations and the standard setting process
   • This has led to increased politicization of accounting with powerful interest groups attempting to wield their influence
2. • Studying history can give us context to existing accounting problems, which can aid in the development of policy aimed at fixing the problems. In other words, an important aspect of solving problems can be exploring the reasons/history of the problem.
   • From a research point of view, it is important to understand the history of accounting so as to not base studies on false claims about the past.

Q2

1. A conceptual framework is a group of ideas or principles used to plan or decide something. It is a normative theory which prescribes the basic principles that are to be followed in preparing financial statements. CFs are said to be a coherent system of concepts, which are guidelines to the accounting standards used for financial reporting.

   Accounting conceptual frameworks are therefore a coherent system of concepts and a set of guidelines to the accounting standards used for financial reporting.

   The IASB describes the Conceptual Framework as a practical tool that assists:

   
   Accounting standards (by contrast) provide specific requirements for a particular area, may actually go beyond the CF, are mandatory and sometimes conflict with the CF.
   1. the Board to develop IFRS Standards based on consistent concepts
   2. prepares to develop consistent accounting policies when no IFRS Standard applies or allows a choice of accounting policy
   3. others to understand and interpret the Standards.
   4. The Conceptual Framework is designed to provide guidance and apply to a wide range of decisions.
2. Benefits of CFs are said to be technical, political and professional. Examples of these are below:

   Technical benefits:

   Political benefits:

   Accounting information has significant real-world affects.
   Professional benefits:

   • Improve the practice of accounting and to provide a basis for answers to specific accounting questions and problems.

It is stated that the Conceptual Framework does this in two ways:

There are however many perceived problems with CFs:
They are ambiguous:

They are descriptive, not prescriptive:

The concept of faithful representation is inappropriate.

Financial statements are representational faithful and provide an objective picture of an entitys resources and obligations.

Accounting measures are created by accountants and do not exist independently of them There are many ways to construct accounts, and faithful representation implies that this isnt the case

Who benefits the most from CFs is up to your own opinion. Some may argue that the accounting profession gains the most, as CFs work to legitimise the professional status of accountants. Others may support the technical benefits.

• By providing a basis and guidance for those who set the specific accounting rules.
• By helping individuals involved in preparing or auditing or using financial statements.
• Prevent political interference in setting accounting standards.
  • Protect the professional status of accounting and accountants.
    • the principles are too vague
    • too much room for alternative interpretations.
      • Socially Constructed/Materialist view:
    • the Conceptual Framework simply describes current accounting practise
    • should be prescriptive (normative) and try to improve practice.
    • Realist view:

Q3

The benefits of measurement in relation to accounting include

• It assists in making financial statements decision useful.
• Allows users to assess the financial performance and financial position of the entity.
• Allows users to compare the entitys performance and position over time.
• Allows users to compare entities.

There are however limits to the usefulness of accounting as a system of measurement. These include:

• There is little or no agreement on what measures should be used, be they historical cost or fair value or a mix of the two.
• The inherent flexibility and the nature of a mixed measurement approach reduces comparability.
• Measurement can be quite subjective.
• With flexibility comes opportunistic accounting choices.
• The current approach to measurement results in the additive problem.

Historical cost is the dominant measurement approach. Traditional historical cost essentially requires items to be recorded at the amount at which it was purchased or received. Transactions are recorded on the basis a past event.

Historical cost is considered Less relevant, as it is not necessarily reflective of the value of benefits (present and future). It does however produce information which is more faithfully represented, as it is based on actual transactions. It is also considered more neutral as there is very little or no estimation involved. In summary then, the information produced using historical cost is generally understandable, but may less comparable.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is becoming more popular due to the release of AASB 13/IFRS 13 Fair Value Measurement.

The Information produced using fair value as the measurement base is argued to be more relevant as it is based on an up-to-date valuation. The quoted market price for an item is an objective method for determining the value of an item and is arguably more faithfully represented. Information produced using fair value is viewed as being more understandable and comparable (arguably).

Fair values do however require an amount of subjectivity and judgement involved in forming estimations of market value in the absence of an objective market price. The values recorded are hypothetical in nature, and therefore potentially less faithfully represented due to the subjective nature of the valuation process. For these reasons fair value are the most controversial measurement approach.

Whether the shift to the use of fair values is beneficial to accounting is up to ones owns perceptions. Traditionally the accounting profession has preferred historical costs because of the verifiability and neutrality of the transactions which are recorded. Having said this, the shift to fair values has occurred to due an increased focused on relevance for future decision making, even if this may come at the cost of increased subjectivity in relation to the application of fair values.

Q4

1. Harmonisation in relation to financial accounting refers to efforts to make the accounting standards being released by different countries as similar as possible and to remove all fundamental differences. Standardisation is typically construed as meaning that the accounting standards released by different countries will be identical.
2. Global standardisation of accounting requires the United States to adopt IFRS.
   1. Do you think it is likely that the United States will embrace IFRS in the near future for domestic firms? (6 marks)
   2. what do you think are some of the factors that might discourage the country from adopting IFRS for domestic firms? (10 marks)
3. One notable exception to the global adoption of IFRS is the United States. Given that the US represents the worlds major capital market, the non-involvement of the US represents a significant limitation in the global acceptance of IFRS. The US appeared very strong in its resolve not to adopt IFRS believing that its rules-based standards were superior to the more principles-based standards of the IASB. However this resolve to retain their own standards (and to reject IFRS) appeared to diminish around 2001/2002 with various accounting scandals involving organizations such as Enron. In terms of whether the US will adopt IFRS in the near future, a process has been undertaken jointly by the IASB and the FASB (called the Convergence Project) which is seeking to converge the two sets of standards thereby paving the way for the US ultimately switching to IFRS.

The convergence project is continuing, with short?term projects completed, and the focus on long-term projects including:

• financial instruments
• revenue recognition
• conceptual framework.

Since 2007 the SEC has permitted foreign private issuers (but not US domestic companies) to lodge with the SEC, their financial statements prepared in accordance with IFRS without the need to provide a reconciliation to generally accepted accounting principles (GAAP) as used in the United States.

However, at this point in time it would appear that the US adoption of IFRS for use by US companies still appears a number of years away. The IASBs latest version of the conceptual framework has reversed some of the changes made as part of the convergence process, and ultimately the adoption of IFRS will be contingent ultimately on whether the SEC and FASB are satisfied with the results generated by the IASB/FASB Convergence Project.

In terms of some of the factors that might discourage the US from adopting IFRS one obvious factor is that the FASB and SEC must be satisfied that the convergence project has lead to accounting standards that are appropriate to the US context. In 2007 the FAF also raised concerns about the perceived independence of the IASB and they argued that before the US adopts IFRS (which we know emanate from the IASB) certain changes need to be made to the governance policies of the IASB. There were also concerns that in many jurisdictions there are amendments being made to IFRS at a local level before the standards are used in that particular country. This will also need to be addressed before convergence can properly take place.

Q5

1. From a critical perspective, international harmonization or standardization as it is effectively becoming is the imposition of a standardized set of accounting rules upon the businesses in a wide range of countries across the world. The driver of this comes from investors (holders of wealth) who invest in companies across the world and who want to have a standard set of accounts that they can use to evaluate their investments rather than having to be aware of a number of different accounting conventions (and cultures) when reading the reports of the various companies in which they have invested. Companies want to list their shares on a range of stock exchanges and this is made easier by each exchange being prepared to accept reports in a standardized form. In this way multinational firms are able to access funds from a wide range of sources and countries. Some suggest that companies from countries where equity financing has not been traditionally used will be at a disadvantage in these circumstances as they have less experience with the accounting standards and the role of the accountant in providing information to external decision makers. In this sense, international accounting provides a faade of comparability and equity, but they really work to the advantage of the already wealthy and powerful. In addition the international accounting standards might not adequately account for the types of transactions that may be culturally specific to the country and that there are then problems of a lack of representational faithfulness and neutrality which may further increase the unequal relations. International standards may also make it easier for foreign capital to exploit the cheaper labour available in developing countries.
2. From a critical perspective the position of the BCA is one that simply is attempting to keep the control of activities associated with corporate social responsibility in the hands of business, rather than allowing it to be subject to scrutiny through a political process. Critical theorists would challenge that existing approaches are innovative and creative, other than in perhaps supporting the interests of business. Allowing corporations to determine their own social responsibilities will simply lead to a situation where corporations will attend to certain responsibilities only to the extent that such activities lead to increases in shareholder value. Indeed, submissions from business entities to the 2005/2006 Australian Government Inquiry into Corporate Social Responsibility showed that corporations favoured embracing corporate social responsibility only to the extent that it leads to business benefits. Indeed, throughout their submission to government, the BCA continually referred to the imperative to maximise shareholder value. They stated in their submission to government that:

   The litmus test for any activity or responsibility is whether the performance of that activity or responsibility can reasonably be seen to be contributing to the growth of shareholder value.
   The above view effectively ties in directly with how critical theorists would expect business leaders to think (and to some extent it is surprising that the BCA said this as openly as it did). Views such as those embraced by the BCA place shareholders at the top of the pecking order of all stakeholdersagain, consistent with how critical theorists would expect business leaders to think. Business organisations often justify corporate social responsibility activities in terms of the positive benefits the activities will have for the owners of the businessthat is the shareholders. Business Council of Australia (2005, p.11) states, broader considerations, such as the community and environment are essential to contribute to and protect value in the long-term and accordingly the potential shareholder wealth that can be achieved over time. The idea that doing the right thing by the community and the environment will provide benefits to the owners is often referred to as enlightened self-interest.