Financial Accounting Theory PDF

FINANCIAL ACCOUNTING THEORY Craig Deegan Part 1- The THEORIES TOPIC 3: The Regulation of Financial Accounting Slides written by Craig Deegan Copyright © 2014 McGraw-Hill Education (Australia) Pt...

FINANCIAL ACCOUNTING THEORY Craig Deegan Part 1- The THEORIES TOPIC 3: The Regulation of Financial Accounting Slides written by Craig Deegan Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-1 Learning objectives 3.1 Understand the meaning of ‘regulation’ together with some of the various theoretical arguments for regulating the practice of financial accounting. 3.2 Understand some of the theories that explain why regulation is initially introduced. 3.3 Understand various theoretical perspectives that describe the parties who are likely to gain the greatest advantage from the implementation of accounting regulation. 3.4 Understand some of the various theoretical arguments that have been proposed in favour of reducing the extent of regulation of financial accounting. continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-2 Learning objectives (cont.) 3.5 Understand that accounting standard-setting is a very political process which seeks the views of a broad cross-section of financial statement users. 3.6 Understand the relevance to the accounting standard-setting process of potential economic and social impacts arising from accounting regulations. Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-3  Better placed to understand why some accounting prescriptions become part of legislation while others do not Why As students of accounting we should have some insights into what political factors examine might have influenced the development of the various rules we learn theories of regulation? Accounting standard-setting is a very political process while some proposed requirements may be technically sound and logical, they may not be mandated due to political ‘power’ or influence of some affected parties Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-4  What is regulation? The Oxford Dictionary defines regulation in terms of a ‘prescribed rule’ or ‘authoritative direction’ The Macquarie Dictionary defines regulation as ‘a rule of order, as for conduct, prescribed by authority; a governing direction or law’ On the basis of these definitions we can say that regulation is designed to control or govern conduct Hence when we are discussing regulations relating to financial accounting we are discussing rules that have been developed by an independent authoritative body that has been given the power to govern how we are to prepare financial statements, and the actions of the authoritative body will have the effect of restricting the accounting options that would otherwise be available to an organisation Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-5  The are alternative views on the need to regulate accounting disclosure ‘Free- One view – the free-market market’ view – is that we do not need all the regulation we perspective currently have accounting information should be treated like other goods, with demand and supply forces allowed to operate to generate an optimal supply Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-6  Private economic- based incentives Arguments ‘Market for supporting managers’ ‘free- market’ ‘Market for corporate perspective takeovers’ ‘Market for lemons’ Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-7 Private economic-based incentives Assumed that managers will operate the business for their own benefit and this will always be expected by shareholders and debtholders so if managers’ self-interested behaviour is not controlled then they will be paid a lower salary Therefore, it is in the interests of management to enter contracts with shareholders and debtholders to constrain their actions Contracts often based on accounting information accounting-based management bonus schemes accounting-based debt covenants continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-8 Private economic-based incentives (cont.) Organisations not producing information will be penalised by higher costs of capital Organisations best placed to determine what information should be produced dependent on parties involved and assets in place Imposing regulation restricting the available set of accounting methods decreases efficiency of contracting Also assumed that auditing will take place in the absence of regulation—reduces risk to external stakeholders allows organisations to attract funds at lower cost Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-9 Problems in presence of many different parties The ‘contracting argument’ might be good in principle but tends to have problems in the presence of many owners or debtholders may be too many parties for contracting to be feasible prohibitive cost of negotiation if different investors want different information costly to negotiate single contract with all investors as they need to agree on information provided is it realistic that every party will assume every other party is driven by self-interest? Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-10  Another argument used to counter regulation is that in the absence of regulation managers will still do the ‘right thing’ because of the ‘market for managers’ ‘Market for Managers’ previous performance impacts on remuneration they can managers’ command in future argument In the absence of regulation it is assumed managers will be encouraged to adopt strategies to maximise value of firm (provides favourable view of own performance) includes providing optimal amount of accounting information Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-11  Assumptions underlying ‘market for managers’ argument Managerial labour market operates efficiently Information about past performance is known by prospective employers and will be impounded in future salaries Capital market is efficient Effective managerial strategies are reflected in positive share price movements however, problems arise if the manager is approaching retirement also, we might question whether the managerial labour market is always efficient Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-12  Another mechanism to motivate managers to do the ‘right thing’ even in the absence of regulation is the ‘market for corporate takeovers’ Underperforming organisations will be taken over by another entity with the ‘Market for existing management team subsequently replaced corporate takeovers’ Therefore managers are motivated to maximise firm value argument Information produced to minimise cost of capital thereby increasing firm value assumes managers know marginal cost and Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd marginal benefits of information PPTs to accompany Deegan, Financial Accounting Theory 4e 3-13 ‘Market for lemons’ argument Another mechanism is the ‘market for lemons’ No information is viewed in the same light as bad information market may make the assessment that silence implies the organisation has bad news to disclose Therefore managers are motivated to disclose both good and bad news Evidence that both good and bad news is disclosed voluntarily (Skinner 1994) continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-14 ‘Market for lemons’ argument (cont.) Assumes the market knows that managers have news to disclose may not always be a realistic assumption – for example, consider high profile cases like Enron If knowledge of non-disclosure becomes available later, market expected to react at that stage Taken together, the various factors just discussed (market for managers, market for corporate takeovers, market for lemons, expectations about self-interest and the resulting use of contracts, and so forth) are considered to provide justification for restricting accounting regulation Is this realistic? Do we really believe these mechanisms are likely to work ‘efficiently’? From whose perspective do we assess ‘efficiently’? Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-15  Accounting information is a public or ‘free’ good It should not be treated the same as other ‘goods’ Pro- In the presence of free riders, true regulation demand is understated perspective pricing system does not function properly Leads to underproduction of information Regulation necessary to reduce impacts of market failure Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-16  Some people argue that free goods are often overproduced as a result of regulation Should The public, knowing they do not supply of have to pay, will overstate their ‘free’ goods need for the good or service be e.g. investment analysts regulated? Could lead to ‘accounting standards overload’ Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-17 Role of Adam Smith’s ‘invisible hand’ ‘Invisible hand’ notion used as argument in favour of free market without regulatory involvement, as if by an invisible hand, productive resources will find their way to most productive uses Some (for example, Milton Friedman) went on to argue that leaving activities to the control of market mechanisms will actually protect market participants the central feature of the market organisation of economic activity is that it prevents one person from interfering with another in respect of most of its activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. Does this sound logical? What are the assumptions? Do we believe that freely operating markets will protect us? continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-18 Role of Adam Smith’s ‘invisible hand’ (cont.) The free-market argument ignores market failures and uneven distribution of power Smith was concerned where monopolistic powers were created by government intervention But Smith advocated regulatory intervention in some instances where in the public interest to protect the more vulnerable Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-19  It is in the interests of many businesses that regulatory interference be reduced Why was Smith’s work misrepresented? The work of acclaimed economists, such as Adam Smith, used as ‘propaganda’ to support their position Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-20  There are theories available to explain what motivates politicians/regulators to introduce regulation. Theories to explain the introduction of These theories include: regulation public interest theory capture theory economic interest group theory (private interest theory) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-21  Regulation is put in place to benefit society as a whole rather than vested interests Regulatory bodies/politicians are considered to represent the interests of the society in which they operate, rather than the private interests of the regulators/politicians Public The enactment of regulation is a balancing act between the perceived social benefits and the perceived social costs of interest the regulation theory Assumes that government is a neutral arbiter Do we agree with the above assumptions? Do the assumptions match with our knowledge of politicians? Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-22  While regulation might be introduced with the goal of benefiting the public, this goal may not subsequently be achieved The regulated party or industry will seek to take charge of (capture) the regulator Capture theory Once the regulator is ‘captured’ the industry representatives will seek to ensure that the rules subsequently released are advantageous to the parties subject to regulation Although regulating initially in the public interest, difficult for regulator to remain independent Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-23 Capture of accounting standard-setting Walker (1987) analysed capture of Australian standard-setting through the ASRB, arguing that the accounting profession lobbied before the Board established to ensure no independent research capability, no academic as chair, and to receive admin officer not a research director priorities only set after consultation with AARF ASRB fast-tracked AARF submissions but not others majority of Board membership were members of the accounting profession Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-24 Criticisms of capture theory No reason to suggest that regulated industry the only interest group able to influence the regulator No reason why regulated industries only able to capture existing agencies rather than procure the creation of an agency No reason why regulated industry could not prevent creation of the regulatory agency Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-25  The economic interest group theory of regulation assumes that groups will form Economic to protect particular economic interests Groups are often in conflict with each interest other and will lobby government to put group theory in place legislation which will benefit them at the expense of others No notion of public interest inherent in the theory Regulators/politicians (and all other individuals) are assumed to be motivated by self-interest Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-26  The regulator is not a neutral arbiter but is seen as an interest group itself Economic The regulator is motivated to ensure interest re-election or maintenance of its position of power group theory Regulation serves the private (cont.) interests of politically effective groups Those groups with insufficient power will not be able to effectively lobby for regulation to protect their own interests Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-27 Examples of application to accounting standard-setting The release of new or revised accounting standards have real economic and social consequences for example, consider how the adoption of AASB 138 Intangibles might have created real economic impacts within Australia or consider the new accounting standard for leasing that is being developed Industry groups may lobby to accept or reject a particular accounting standard e.g. European Banks in relation to IASB 39 Large politically sensitive firms found to lobby in favour of general price level accounting in US (led to reduced profits) Accounting firms lobbying to protect their own interests Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-28 Accounting regulation as an output of a political process The view that financial accounting should be objective, neutral and apolitical can be challenged Will inevitably be political as it affects wealth distribution within society Standard-setters encourage affected parties to make submissions on drafts of proposed standards continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-29 Accounting regulation as an output of a political process (cont.) If standard-setters give consideration to views in submissions, accounting standards and therefore financial reports are the result of various social and environmental considerations tied to the values, norms and expectations of the society in which standards are developed questionable whether financial accounting can claim to be neutral and objective continued Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-30 Accounting regulation as an output of a political process (cont.) Compliance with accounting standards is usually seen to indicate financial statements are ‘true and fair’ can or should financial statements that have been prepared on the basis of accounting standards (with such standards having been developed after taking into account various economic and social consequences) be deemed to be ‘true and fair’? Users may not be aware that financial reports are the outcome of various political pressures Should regulators consider preparers’ views given that standards are designed to limit what preparers do? Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Deegan, Financial Accounting Theory 4e 3-31 TOPIC 3: REGULATORY APPROACH OF AN ACCOUNTING THEORY PART 2 Malaysia’s financial reporting regime  Malaysia’s financial reporting regime 1. Financial Reporting Act ▪ post-listing obligations 1997 ▪ accounting standards and valuation/revaluation of assets 2. Financial Reporting 6. KLSE Listing Requirements (Amendment) Act 2004 submission of reports additional disclosures 3. Companies Act 1965 7. Bank Negara Malaysia 4. Income Tax Act 1967 5. Guidelines of the Securities Commission 1995 ▪ corporate disclosure FINANCIAL REPORTING ACT 1997 FRF is established under the Financial Reporting Act 1997 FRF; A trustee body has responsibility for the oversight of MASB’s performance, financial, fund arrangements FRF as an initial source of views for the MASB on proposed standards and pronouncements Section 27 of FRA 1997–stated that all companies incorporated under CA 1965 will need to comply with MASB approved accounting standards Under FRA 1997, MASB Approved accounting standards have force of law statutory duty of directors and management of reporting companies and other business, industrial or commercial enterprises to ensure financial statements of their respective companies or enterprises comply with MASB approved accounting standards  Functions of FRF ❑To provide its view to the MASB on any matter which the MASB seeks to undertake or implement with respect to the development and issue of accounting standards and conceptual framework. ❑To review the performance of the MASB ❑To be responsible for the financing arrangements and operations of the MASB ❑To approve the MASB budget ❑To engage or to employ persons and determine the conditions of such appointment as are necessary to assist the FRF and MASB perform their functions under the FRA 1997. ❑To administer the fund established to finance the ongoing operations of FRF and MASB including management of funds not expanded on operations during the period. ❑To maintain proper accounts and prepare an annual statement of accounts of the FRF. ❑To appoint an auditor for the purpose of auditing the annual statement of accounts. ❑To forward the annual statement of accounts and audit report to the Minister of Finance, and report on activities of the FRF and MASB at the end of each financial year. ❑To perform such other functions as the Minister of Finance may prescribe. ❑(Source: Susela Devi et al, 2006, Accounting Theory & Practice: Malaysian Perspective,Prentice Hall)  Companies Commission of Malaysia Set up to amalgamate activities of former Registered of companies (ROC) and Registrar of Business (ROB) Function; to ensure that provisions of the Acts and laws are administered, enforced, carried out and complied with S 169(4) of Companies’ Act 1965 requires every company incorporated under Act to have its P/L and B/S duly audited before being presented at AGM Companies should comply with approved accounting standards in preparation of accounts Coordinated efforts undertaken with accounting profession and MASB to identify issues that impact financial and reporting environment  Securities Commission Set up under the SC Act 1993 Function; to promote strong and healthy securities market and to maintain confidence of investors in line with provisions of the SC Act and Securities Industries Act 1983 ❑prior to 1993, no single authority in Malaysia entrusted with responsibility of regulating and systematically developing capital market ❑Is a self funding statutory body with investigative and enforcement powers ❑reports to Ministry of Finance and accounts tabled in Parliament annually  Securities Commission (cont’) ❑Also enforces Capital Markets and Services Act 2007 ❑Member of International Organisation of Securities Commission (IOSCO) ❑A public company has obligation to fully disclose to public information necessary to make informed investment decisions ❑if listed, it must immediately release information which are expected to have material effect on market activity in, and prices of, its listed securities ❑appropriate action taken where improper use being made of price-sensitive information ❑http://www.sc.com.my/ ; Function of SC  Rule - making Authorization Supervision Ensure fair, efficient and Reduce systemic Enforcement transparent risk markets The summary of: Securities Commission's Objectives Protect investors  REGULATORY OUTCOMES Supported by two pillars: Proportionality and Transparency Proportionality Transparency 1. To achieve a balanced, efficient and 1. Supports accountability to public and effective regulatory environment stakeholders, and help to design 2. The degree to which SC regulate proportionate regulation markets, products, services, market 2. Disclose relevant information and not participants and activities should disclose those may harm public interest commensurate with risks posed, 3. Ave an open-door policy in receiving standards of conduct practiced and feedback outcomes they are seeking to achieve  Auditing Oversight Board The Audit Oversight Board (AOB) is established under Part IIIA of the Securities Commission Act 1993. Part IIIA was incorporated into the Securities Commission Act 1993 by virtue of the Securities Commission Amendment Act 2010 (the Act). The Act came into force on 1 April 2010 The AOB's mission is to assist the Securities Commission (SC) in overseeing the auditors of public interest entities and to protect the interests of investors by promoting confidence in the quality and reliability of audited financial statements of public interest entities.  Auditing Oversight Board Mission: ‘Fostering high quality independent auditing on financial statements of public-interest entities and schedule funds in Malaysia”  Auditing Oversight Board The AOB will do this by (watching the ‘watchdog’): ◦ Registration ◦ Recognition ◦ Inspection ◦ Enforcement ◦ Revocation and Suspension of Registration  Auditing Oversight Board REGISTRATION The AOB is responsible for the registration of auditors of public interest entities or schedule funds under Part IIIA of the Securities Commission Malaysia Act 1993 (SCMA). The public interest entities and schedule funds are defined in Schedule 1 of the SCMA. The registration of auditors of public interest entities or schedule funds would ensure that only fit and proper auditors are involved in auditing the financial statements of public interest entities or schedule funds. This is in line with one the AOB strategic themes under the strategic framework which is to promote high quality audit practices.  Auditing Oversight Board Recognition Part IIIA of the Securities Commission Malaysia Act 1993 establishes a framework to enable the Audit Oversight Board (AOB) to grant recognition to foreign auditors who audit the financial statements of foreign corporations listed on Bursa Malaysia.  Auditing Oversight Board Inspection Section 31E (1)(d) of the Securities Commission Act, 1993 (“SCA”) provides that one of the key responsibilities of the AOB is to conduct inspections and monitoring programs on auditors to assess the degree of compliance with auditing and ethical standards. In discharging the above responsibilities, the AOB may inspect an audit firm of PIEs under a regular inspection program or a special inspection program. Under either program, an AOB inspection may be carried out at the firm level or engagement level or both. A firm review focuses on the review of an audit firm’s quality control systems and practices and the degree of compliance with the requirements of the International Standards of Quality Control 1 (“ISQC 1”). An engagement review aims to assess the degree of compliance with auditing and ethical standards of an audit engagement conducted by an auditor  Auditing Oversight Board Enforcement The principle of proportionality, efficiency and achieving the desired outcome continue to be essential to the strategic enforcement approach adopted by AOB. In determining the type of sanction that is imposed on any contravention or breach, AOB takes into account the nature and seriousness of the offences, previous regulatory record and other aggravating and mitigating factors. Among the matters considered by AOB is the impact of the contravention on the integrity of the profession, the capital market as a whole and the impact of the breach on the confidence and reliability of audited financial statements of the PIE in question. The focus of AOB enforcement is whether the auditors comply with the recognised auditing and ethical standards. Such action from the AOB may not necessary imply the audited financial statement does not give a true and fair view.  Auditing Oversight Board Enforcement ❑The sanctions are: Directing the person in breach to comply with the provisions of Part IIIA of the SCA or any condition, written notice or guidelines; ❑Reprimand; ❑Requiring professional education to be undertaken; ❑Assigning a reviewer to oversee an audit that is undertaken by the auditor concerned;  Auditing Oversight Board Enforcement ❑Financial penalty of not exceeding RM500,000; ❑Prohibit the person concerned from accepting any public interest entity or schedule fund as its clients or preparing reports in relation to financial information of any public interest entity or schedule fund, as may be required under the securities laws or guidelines issued by the Commission, for a period not exceeding twelve months; and ❑Prohibit the person concerned from auditing financial statements or preparing reports in relation to financial information of a public interest entity or schedule fund, as may be required under the securities laws or guidelines issued by the Commission, for a period not exceeding twelve months or permanently.  Malaysian Accounting Standards Board (MASB)  FR Act 1997 establishes Financial Reporting Foundation (FRF) and MASB; main functions of FRF are to provide financing arrangements for MASB’s operations and to review its performance  MASB as an independent authority to develop and issue accounting and financial reporting standards in Malaysia  MASB with FRF make up framework for financial reporting in Malaysia  Role of MASB? Organisational structure of MASB Financial Reporting Act 1997 Financial Reporting Foundation MASB Issues Working Groups Committee Secretariat  Malaysian Accounting Standards Board The aims of the MASB ❑To implement an efficient, effective structure and ‘due process’ for the development of MASB standards, a conceptual framework and other forms of authoritative guidance. ❑To purse the development of MASB standards, a conceptual framework and other authoritative guidance on a basis that recognises that users of financial statements are the primary customers, so that those users are better able to make economic decisions.  Malaysian Accounting Standards Board Composition of the Board -The members are appointed by the Minister of Finance as follows - A Chairman - The Accountant General - Six other members who posses knowledge and experience in matters of financial accounting and reporting and in one or more of the following fields – accountancy, law, business and finance. The FRA 1997 specifies that at least five of these members should be members of the MIA. - Three advisors representing the SC, CCM and the BNM.  Malaysian Accounting Standards Board Issues Committee -MASB established a committee in May, 2002 known as the Issues committee to replace its predecessor – Interpretation Committee -The change reflects the expanded scope of the committee, which in addition to dealing with interpretations of approved standards, also deals with other accounting related issues where there are no existing accounting standards. -It is responsible for reviewing accounting issues that have received or likely to received divergent views in interpretation and to provide recommendations to the Board for decision. -Currently it has 3 representative from the Big Four, 1 from medium practice, 1 from the corporate sector, 1 from academic, 1 analyst and 1 solicitor. Due Process in the issuance of MASB standards  Identify technical issues Identify technical issues & preliminary research Identify technical issues (Issues Committee) MASB initiates a Working Group Issues Discussion Paper (optional) Issues Exposure Draft Comments from (ED) or Draft Statement stakeholders of Principle (DSOP) Submission to Issues Revised ED or IASC DSOP Issues MASB Standard Implementation and or other pronouncements compliance International standards Malaysian MASB Activities organisations & organisation individuals  MASB Working group 1. Appointed by MASB to debate the issues 2. Chaired by a member of the MASB 3. Comprises of a project manager Representatives from ◦ Industry ◦ Auditors ◦ Regulatory bodies ◦ Academia  Exposure draft Draft exposure drafts are prepared by MASB WGs and refined through discussion The draft document is presented to the MASB for review and then to the FRF for comments (14 days) The draft pronouncement is then published as an exposure draft by MASB, which invites comment from all interested parties, usually over a certain period  MASB other roles 1. Approved accounting standards especially from the International Accounting Standards Board. 2. Other technical pronouncements such as Statements of Principles, Urgent Issues Abstracts and Technical Releases which are developed with due regard to both local and international treatments. The purpose of technical pronouncement is to provide guidance on the application of GAAP to the resolution of a particular accounting issue. 3. Development of Islamic Accounting Framework. 4. Participation in International Standard Setting Process. 5. Movement towards accounting standards convergence.  ISSUES: ACCOUNTING STANDARD OVERLOAD Standard overload = amount of information required to be supplied by reporting entity > amount reasonably required by users in making economic decision Situation been identified with accounting standard overload ◦ Too many standards ◦ Too detailed standards ◦ No rigid standards, making selectivity of application difficult ◦ General purpose standards failing to provide for differences in the needs of preparers, users and CPA’s ◦ General purpose standards failing to provide for differences between : ◦ Public vs non public entities ◦ Annual and interim F/S ◦ Large and small enterprises ◦ Credited and non audited F/S  ISSUES: ACCOUNTING STANDARD OVERLOAD There are some reasons contributed to the standard overload; i. Accountants began to issue a greater number of standards. The objective is to leave less judgment and to reduce amount of litigation involving accounting principle. The accountant do so as to response to numerous question raised about what to disclose and what not to disclose. ii. To protect the public interest and to assist the individual investor generated various and numerous governmental and professional regulations and disclosures iii. To satisfy the needs of many users required more detailed standards and disclosures  Effects of Accounting Standards overload 1. Accountants may lose sight of their real jobs because of the excessive data required when complying with existing standards 2. Audit failures may occur when compliance is the focus rather than basic audit procedures 3. Implications for legal liability, erosion of professional ethics, loss of public support and dissonance within the accounting profession.  Solving the standards overload problem  Not all standards apply to everyone. e.g IFRS 6 or Property Development 201 or FRS 204: Accounting for Aquaculture etc.  SMEs do not have public accountability. ( so a separate accounting standard for SMEs have been developed by IASB in 2009)  Cost-benefit considerations applies ‘ The optimal information for one user will not be optimal for another. Consequently, the Board which must try to cater to many different users while considering the burdens placed on those who have to provide information, constantly treads a fine line between requiring disclosure of too much information or requiring too little. …………………………….WHAT DO YOU THINK???