Question

Some accountants have politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).Instructions

(a) The Committee on Accounting Procedure of the AICPA was established in the mid-to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer.

(b) What arguments can be raised to support the “politicization” of accounting rule-making?

(c) What arguments can be raised against the “politicization” of accounting rule-making?

Short answer

1. The committee on Accounting Procedure (CAP) was set up as a result of the criticism faced by the accounting profession. It resolved certain accounting issues and topics instead of developing generally accepted accounting principles.
   The purpose of the Accounting Principles Board (APB) was established primarily to rectify the inadequacy of the CAP.
   Financial Accounting Standards Board (FASB) is accountable for setting up of GAAP in entity showing the varied interest groups afflicted by the use of GAAP.
2. Arguments for politicization of the accounting rule -making process are dependency of accounting entirely on public confidence for its success as well as by the way of actual compromise, the economic community has confidence in the righteousness and purpose of rule-making of accounting.
3. Arguments against the politicization of the accounting rule-making process are the complicated events that occur in the firms would need that skilled accountant enhance the right accounting norms and the use of agreement to enhance accounting rules would lessen the accountant’s professional position.

Step-by-step solution

Meaning of Generally Accepted Accounting Principles

Generally accepted accounting principles (GAAP) is defined as the set of generally-followed accounting norms and standards for financial reporting.

Explanation for statement ‘a’

The Committee on Accounting Procedure commonly known as CAP, was brought into existence from 1939 to 1959, was the outcome of AICPA committees which was there in the period 1933 to 1938. The committee was set up due to criticism sustained by the accounting profession at the time of financial difficulties of 1929and the upcoming years. The CAP diverted its complete attention towards rectifying particular accounting issues and subject instead of the enhancement of generally accepted accounting principles.

The aim of the Accounting Principles Board(APB) was developed primarily to rectify the lack of the CAP. ABP was therefore accountable for enhancing written expression of generally accepted accounting principles by the way of examination of the research performed by other members of the AICPA in making Accounting Research studies.

The official entity of the Financial Accounting Standards Board (FASB) shows an aim to invest the responsibility of setting up GAAP in an entity presenting the varied interest categories afflicted by the use of GAAP. FASB is independent of AICPA any organization of CPAs and accounting educators and group of private firms will have a chance to make their opinions known to the FASB by the way of membership on the Board.

Explanation for statement ‘b’

Arguments in support of the accounting rule-making process include:

1. Rule-setting is basically unified in nature. As accountants were not able to set up on the criteria of technical accounting components, rules which would highlight the needed consistency and acceptability.

The public accounting profession, through framework such as Accounting Principles Board, implemented principles which business firms and individuals had to adhere to. For throughout the years, these firms had limited control over the principles, even though the financial well-being was affected to a higher degree by those rules.

Explanation for statement ‘c’

Arguments against the politicization of the accounting rule-making process include:

1. Accounting is basically technical in nature is observed by accountants. As a result, they feel that primary research by objective, substantive, non-dependent and unbiased researchers finally will result in the best remedies to critical problems.

This method would result in “lobbying” by diverse parties to impact the setup of accounting rules.