Analysis of Different Arguments for Standard Setting

In this article we will analyse different arguments for standard setting.

1. Government as Standard Setter:

The following arguments are generally given for standard setting by the government:


(1) A government would be free of conflicts of interest—more impartial and more responsive to all interests; it would not become a tool of business interests or of the accounting profession. Some argue that if the government were to assume this responsibility, business pressure groups would have less influence than they appear to have had over the conclusion of the private sector bodies.

Also, government may not have to devote as many resources to obtaining consensus for proposed accounting reforms as do private sector standards setting bodies.

It is said that non-compliance and explicit criticisms by business enterprises create difficulties in the enforcement of standards. Governments who command a reasonable majority may promulgate those accounting reforms which they desire without major and costly consensus seeking activity.

(2) A government can better enforce compliance with accounting standards in that it is backed by the enforcement power of law. The problem of the enforcement of accounting standards would be minimised. In promulgating accounting standards and regulations the legislator would provide whatever penalties they felt necessary for non-compliance. Accounting standards, as a practical matter, have a force of law and therefore, should be established by a government.

(3) A government would act more quickly on pressing problems and would be more responsive to the public interest. Also, the government is better equipped to control the redistributive effects of accounting standards than private sector standard setter and can more easily ameliorate their impact on any sector of society if this is desired.

Private sector standard setting bodies have but minimum control over such effects. The only other way in which private standard setters can take such effects into account is by altering the substance of proposed standards so as to vary their impact on those parts of society which it is wished to either aid or protect from adverse effects.


Such activities may have a cost in terms of distorting accounting standards away from what otherwise would be thought to improve the efficiency of resources allocation. The government may be better able to meet legitimate arguments concerning the economic consequences of accounting regulations without altering what might otherwise be regarded as an accounting ideal.

(4) Government could better bring to bear the variety of intellectual disciplines that should be, but have not been, brought to bear on accounting standards—economists, lawyers, investors, as well as accountants.

(5) Public accountants may desire that accounting standards be enforced by government, for several reasons. One is the fear that competition among accountants may lead some to chance compromising their integrity.

Another is the desire (common to most sellers of goods and services) to increase the demand for their products by legal requirements. A third is derived from the specialist’s belief that the laity would benefit from a higher quality product, but does not recognise the benefits therefrom because of ignorance; consequently a legal requirement should be imposed.


There are some problems associated with government being a standard setter. These difficulties are as follows:

(1) Technical accounting issues may be decided on the basis of the views of the political party in power at any time. It has also been argued that the perceived political importance of accounting matters would not be sufficient to obtain scarce legislative time.

Thus, the Legislature may be seen as generally rubber stamping the idea of interested civil servants and those who have influence on them and on politicians. That such regulation of accounting is better for society than private sector regulation may be doubted by many.

(2) The process of accounting regulation by the government is lengthy and does not possess flexibility even where an item is judged of sufficient importance to obtain legislative time. The difficulty of getting items through the Legislature may discourage efforts to change established accounting standards and may lead to rigidity.


(3) The standards and regulations set up by government may fall short of objectivity and accuracy. In fact, government is behaviour oriented. Its basic business is to encourage or to force people to behave in certain ways.

Accounting standards and regulations in a government environment would develop around two behavioural objectives, viz:

(i) Rule of conduct approach and

(ii) Economic incentives approach.

The objective of a rule of conduct approach would be to restrain unfair economic behaviour. The primary objective of standards setting from this view would be to limit the discretion of practitioners in order to minimise variations in reporting the earnings results of similar facts and circumstances.

Standards reflecting this view would likely to emphasise uniformity of method and verifiability of results rather than accuracy of measurement. The objective of economic incentives approach would be to set standards that would motivate decision makers to act in ways that furthered government’s social and economic goals. It flows from a view that accuracy of earnings measurement is impossible, and an accounting theory built on a measurement objective impractical.

It sees the bottom line reported earnings, as a strong motivator and assumes that decision-makers would react to the reported data even if that data varied significantly from what most practitioners might think was a more accurate measure. In this view, earnings would not be a measured result of observed economic activity; it would be a calculated cause of economic action.

Accounting standards, in fact, should develop around a primary objective of measuring return on investment for particular organisations as accurately as possible. It should be developed as a measurement process, measurement of economic activity neutral as to behavioural consequences.

It should be a tool for all economic decision makers—buyer and seller, lender and borrower, manager and shareholders, regulator and regulated, general interest and special interest, public sector and private sector. This kind of accounting standard and policy, it is doubted, could develop in government.

2. Private Sector Standard Setting Body:

Arguments have also been advanced for giving standard setting task to private sector body.

These arguments may be listed as follows:

(1) Government could neither attract enough high quality talent nor devote sufficient resources to standards setting.

(2) A government would be susceptible to undue political influences both from special interest groups and for re-enforcing current government policy objectives.

(3) Government is noted for their inflexibility and general lack of responsiveness on a timely basis to meet changing conditions. If the government were to assume prime responsibility, any incentive for the accounting profession to contribute to the standard setting process would be significantly reduced.

(4) Government standard setting would harm the vitality of the accounting profession, decreasing the supply of professional talent devoted to standards setting and turning accountants away from independent auditing and toward client advocacy.

(5) A private sector standard setting body would be more responsive to the needs of diverse interests; more appreciative of the complexities of modern business, hence more tolerant of judgmental decisions on the part of accounting practitioners; and more sensitive to the costs of providing and using information.

The standard setting by private sector bodies involve some problems.

Firstly, private sector standard setting body are susceptible to charges of inefficiency and are vulnerable to ‘capture’ by those who are supposed to be under their control.

Secondly, standard setting in the private sector may be influenced by vested individual interests and thus may not obviously aid the social welfare.

Thirdly, standards set by private sector body do not command a force of law but depend only on voluntary acceptance. In this way, there will be no compliance with accounting standards.

3. Standard Setting by Agency:

The standard setting task could be done by government or a private sector body. However, both the alternatives have problems. In accounting literature, it is now argued that government should delegate most, if not all, accounting decisions to some agency.

It appears a governmental agency may prove useful as compared to standard setting in public sector and private sector. Such an agency would have the clear and explicit support of the government and the Legislature. Therefore, all advantages which are claimed in favour of government as a standard setter, also accrue to such agencies.

The Agency may have technical expertise and may employ qualified professionals to handle the technical matters than that of private sector accounting standard setting bodies. Such agencies should be able to promulgate accounting regulations and standards in a more speedy and efficient way than the government.

The standard setting task by Agency would not imply large cost and would ensure compliance to standards. Such an agency may be more independent than a public sector or private sector body and can draw majority of its members from the concerned areas.

Also, it would be accountable to society than any private sector bodies. To make such an agency accountable to society, it may be provided that it should prepare an annual report describing its activities during the period under review.

Some fears have been expressed about a government-backed agency as standard setter. It is contended that agency’s functioning may be arbitrary. The government may broadly delineate the powers, principles and concepts within which the agency may be empowered to act.

However the staff of the agency may not be as careful as needed in standard setting task. The American SEC has not been able to create much confidence towards its activities and has been regarded a conservative force in accounting area and has in its judgements often acted in its own interests. Such agencies are very susceptible to political pressure, government pressure and even to lobbying from vested groups.

Bromwich argues:

“It is not so much actual intervention by superior bodies that may restrict the freedom of subordinate agencies. It is rather the knowledge that those discontented with, or jealous of an agency’s activities may seek to challenge them by putting pressure on more authoritative bodies. Defensive actions to protect such agencies against these challenges include utilizing procedures which arc neutral between individuals and efforts to discover a strong intellectual framework can be seen. Responses of this type take considerable time and resources and are likely to retard the agency’s progress with its real tasks.”

It is difficult to answer categorically that standard setting should be done by government or private sector body or government backed agency. In a country like India, where accountancy profession is not yet fully developed, it may not be advisable to assign the private sector the tasks of standard setting.

In USA, standard setting is done by FASB, a private sector organisation, but SEC also contributes to the formulation of accounting policies. Standard setting through a government body is fought with many dangers as the government may be doing measurement to serve its own purposes and uses.

Similarly, standard setting purely in private sector may be influenced greatly by business groups and other vested interests. To follow a middle path, a standard setting agency should be set up with an organisation, independent from governmental and private influences, and well structured, which could concentrate on objective accounting measurements and determination of business profit.

Its working and process of developing standards should neither be influenced by governmental interests nor private interests. This will ensure that standards developed would be correct, acceptable to the financial community and preserve the credibility of financial statements.

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