Academic journal article The Government Accountants Journal

Conflict in Accounting Standard

Academic journal article The Government Accountants Journal

Conflict in Accounting Standard

Article excerpt

Over the past few years there has been substantial federal government deregulation of business. However, in one aspect of business, that of financial accounting and reporting, new requirements and disclosures grow unabated. Accounting and reporting rules, which are issued by private sector accounting regulators, are extensive, intensive, and significant, and each new rule adds to what has already been referred to as a "standards overload." Business leaders have appealed and threaten further appeals to Congress for relief from certain of the accounting rules. The Securities and Exchange Commission (SEC) has undertaken a study of United States accountizing practices, particularly their cost and complexity, which can, according to SEC Chairman Richard Breeden, "adversely affect the ability of U.S. businesses to compete in the international marketplace."(1) The SEC is also concerned whether stringent U.S. accounting standards inhibit foreign companies from accessing U.S. capital markets. These issues are representative of conflicts which have been and continue to be present in the regulation of business accounting and reporting.

The above circumstances lead to several interesting and important questions, including: How did it come to pass that the private sector rather than the public sector issues accounting regulations? Is there unhealthy and/or irreconcilable conflict in accounting regulation between the regulators and the regulated and between private sector and public sector regulators? What does the future hold for this strange anomaly of public regulation in the private sector? These questions are all significant, but before these questions and related issues can be satisfactorily addressed, we should consider why private corporation accounting and reporting is regulated in the first place.


A dynamic, free enterprise economy depends on private. invested capital to provide resources for replacement, expansion, and modernization of plant assets. Investors provide capital to businesses expecting to receive in return future cast, flows to compensate then, for giving up other current use of their funds. These future cash flows should be commensurate with the degree of risk taken. In order for investors to make well informed decisions on expectations of risk and return, and for capital markets to allocate resources efficiently, investors must have sufficient relevant, reliable, and accurate information.

There are many sources of information for making investment decisions, but the preeminent source, directly or indirectly, is the corporate annual report. While the typical annual report is heavily accented toward improving a company's image, nevertheless it is loaded with information in the form of financial statements and explanatory notes, management comments, supplemental disclosures, and an outside accountant's report on the fairness of the representations contained in the report. Other information, is also used in making investment decisions. such as interim financial statements and press releases. But, since this other information may subsequently be presented in the annual report and be subjected to independent verification by outside accountants, it is influenced by the annual report. Even if an investor does not see a corporation's annual report, the market price which must be paid for a security will be based, at least in part on others' evaluation of such information.

External financial reporting in the form, of annual reports, however, has a recent history and a checkered past. Early 20th century financial statements were not very informative, usually consisting of a very condensed balance sheet and only sometimes a brief income statement. Many companies changed accounting policies, such as depreciation and capitalization, from year to year, in order to meet their profit goals. Residual equity accounts. then called surplus, often included appraisal surplus from writing up assets to appraised values, paid-in surplus, donated surplus, as well as earned surplus and any other surplus which might exist. …

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