4 Major Difficulties in Setting up Accounting Standard

The following points highlight the four major difficulties faced in setting up accounting standard. The difficulties are: 1. Difficulties in Definition 2. Political Bargaining in Standard Setting 3. Conflict in Accounting Theories 4. Pluralism.

Difficulty # 1. Difficulties in Definition:

To agree on the scope of accounting and of principles or standards, is admittedly most difficult. Some, for example, equate accounting with public accounting, that is mainly with auditing and the problems of the auditor. Another opinion is that it (accounting) is frequently assumed to have a basis in a private enterprise economy.


Some use “principles” as a synonym for “rules or procedure”. The result is that the number of principles become large and most uneven in coverage and in quality. Another group seems to equate “principles” with “convention,” that is, with consensus or agreement.

If this is the case, then a principle can be changed if all agree it should be or alternatively, the only propositions that can qualify as principles are those that command consensus or agreement. Such disagreement leads to difficulty in-standard setting and further does not make the standards totally acceptable to society.

Difficulty # 2. Political Bargaining in Standard Setting:

Earlier, but not so many years ago, accounting could be thought of as an essentially non-political subject. But, today, as the standard setting process reveals, accounting can no longer be thought of as non-political. The numbers that accountants report, have a significant impact on economic behaviour.

Accounting rules therefore affect human behaviour. The stories conveyed by annual reports confirm or disappoint investor expectations and have the power to move millions (whether of money or persons). For all the bloodless image that accounting may have, people really care about the way the financial score is kept. Hence, the process by which they are made is said to be political.

Horngreen writes that:

“The setting of accounting standards is as much a product of political action as of flawless logic or empirical findings. Why? Because the setting of standards is a social decision. Standards place restrictions on behaviour; therefore, they must be accepted by the affected parties. Acceptance may be forced or voluntary or some of both. In a democratic society, getting acceptance is an exceedingly complicated process that requires skilful marketing in a political arena.”


Tweedie and Whittington observe “Accounting standard setting is certainly a political process, responding to pressures from the economic environment and compromising between the conflicting interests of different parties. It is important that standard-setters be aware of this and that they be aware of the specific pressure and interests involved. It would be unrealistic to expect to determine standards without such difficulties, and the best way to deal with them is to admit their existence rather than pretending to ignore them.”

Difficulty # 3. Conflict in Accounting Theories:

There has been remarkable growth in accounting theories especially relating to income measurement, asset valuation, and capital maintenance. Though much of the developments has taken place abroad, (USA, UK, Canada, Australia, etc.), accounting in other countries has also been influenced. While the theorists battled on, the various sectional interests found that the theories could be used to support their own causes and arguments.

At present, there is not a single theory in accounting which commands universal acceptance and recognition. There is no best answer to the different terms like profit, wealth, distributable income, value, capital maintenance, and so forth.

We cannot say what is the best way to measure profit. If the profession truly wishes to be helpful it needs to discover from users, or to suggest to them, what would support their decision-making, and then do develop the measures which best reflect those ideas.


The search for an agreed conceptional framework could be regarded as essential to orderly standard setting and a responsible way for the standard-setter to act. Also, it could be helpful in distracting critics while getting on with the real issues in accounting problems.

Absence of a conceptual framework, i.e., a set of interlocking ideas on accountability and measurement is not conducive to standard setting and improved financial accounting and reporting.

Difficulty # 4. Pluralism:

The existence of multiple accounting agencies has made the task of standard setting more difficult. In India, company financial reporting is influenced by although in different degrees, by Accounting Standards Board of ICAI, Ministry of Corporate Affairs, Institute of Cost and Works Accountants of India, Securities and Exchange Board of India (SEBI). No one agency has jurisdiction over the entire area of accounting standards.

Similarly in other countries also, there is plurality of accounting bodies. For example, in USA there are organisations like Securities and Exchange Commission, Financial Accounting Standards Board, American Institute of Certified Public Accountants. In U.K., there are Accounting Standards Board of ICAEW and Companies Acts to deal with accounting matters and financial reporting.


If pluralism were reduced or eliminated, the path toward the goal would be smoother. However, the absence of pluralism is not a necessary condition for agreement on standards developed by a single accounting body. No one would claim that the mere absence of an obstacle constitutes a sufficient condition for success.

A standard setter has to face many difficulties in standard setting process. In a rational way, a standard setting body should first define the objectives of financial accounting and reporting, identify user groups to be served, and the information which were useful to them before starting the process of standard setting.

A standard setting process, i.e., the process of selecting the appropriate accounting method includes the following important stages:

(1) Identification and assessment of theory:

The various theories underlying alternative accounting methods should be examined for individual merit and internal consistency. In the light of the conceptual framework, the relevance of the alternative methods to the various users of accounts would be assessed.

(2) Research into the costs and benefit of alternative methods – The role of research would be:

(a) To examine the realism of the assumptions underlying the various methods.

(b) To assess, and preferably quantify, the benefits accruing to users resulting from the introduction of each alternative method; and

(c) To identify the costs and practical difficulties of implementation by field studies.

(3) Choice between alternative methods:

The final stage of the process involves the exercise of judgment in the selection of an appropriate accounting policy. The standard-setting body is confronted by a social choice problem similar to that faced by a Government in deciding how to allocate public expenditure and by which means taxes should be raised to pay for it.

A choice may have to be made to favour certain groups of users at the expense of others, as ultimately the amount of information which can be published is limited. The decision involves the assessment of the benefits accruing to different users of accounts, and the costs associated with these benefits, bearing in mind that some of the users of accounts bear none of the costs.

Ideally, the choice would be made from a ‘neutral’ viewpoint, but ‘neutrality’ can be determined in practice only if there exists a social welfare function for comparing various costs and benefits to different parties in a manner which is universally accepted as being ‘neutral.’

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