In this article we will discuss about the reasons for slow progress ASB in standard setting in India with suggestions to improve it.
Reasons for Slow Progress:
The Indian ASB’s efforts in respect of accounting standards, although commendable, are not very satisfactory taking into account the work done in this area in USA, UK and other countries. Many factors are responsible for the slow progress of ASB in standards setting.
Some such factors are as follows:
1. Indifference Attitude:
The Institute of Chartered Accountants of India is expected to carry on two basic activities:
(a) Conducting chartered accountancy examination and preparing CAs to perform accounting and auditing function and
(b) Formulating accounting and auditing standards.
The ICAI has, in the past, devoted its major time in former activity and has not given required attention to the latter accounting activity. The ICAI has been evaluating its performance largely in terms of how ably it has succeeded in producing a large number of chartered accountants. As a result of it, the ASB could not act earlier as an efficient accounting body and could not speed up the process of standards setting.
2. Lack of Openness in Standard Setting:
The standards setting programme of India has not had a tradition of encouraging critics who are free to indulge in even handed criticism of its performance. A profession or a standards setter whose effectiveness depends on public confidence has a special obligation to retain that confidence through a conscious and deliberate effort to open itself to the public and acknowledge mistakes.
In standards setting, concerned parties have to know what is happening. It is for better to be involved in an open system than in one where there is uncertainty as to what is being done and what arguments are most persuasive.
3. Accountants’ and Auditors’ Preference for Status Quo:
It has been noticed that the accounting profession and the persons involved in it do not like changes for the sake of preserving the status quo, although some proposals may appear to change for the sake of change. This is true not only of the accounting profession but other professions as well.
However, there are some truths, which the accounting profession should accept such as:
(a) Change is the order of time. Even if we were inclined to hold the past, it would be unrealistic to try it.
(b) Profession has to change and adopt with developments in the larger economic and social worlds of which it (profession) is a part,
(c) Inevitably there will be changes we do not like, but the accounting profession should be prepared to practice under conditions that are less favourable. The function performed by accounting profession is useful to society and serve the public interest.
4. Government Intrusion in Financial Reporting Area:
In India, there is found more government intrusion not only in business matters but in laws relating to company accounts and reporting. Government intervention has been justified as the accounting profession has failed to provide accounting leadership.
Accounting profession needs people who can give political and technical leadership. Accounting leadership does not mean only reacting and resisting but exercising leadership and recognising leadership responsibilities.
5. Accounting Research:
In India, in the past, not much accounting research has been conducted and recently, whatever accounting researches have been done, have not been seriously considered by the standard setter in India. Some may question the role of research in standard setting.
Many academicians comment that the route from research findings to accounting policy making is quite confusing and often impossible. On the other hand, many practitioners claim that the research findings are inapplicable to important practical problems.
These critics tend to be intolerant of any research that be used in dealing with the next day’s problem. Goldberg observes on the limitations of empirical research in accounting:
“…(it) should serve to emphasise the limitations of much of the so-called empirical research in accounting that has been carried out in recent decades and has occupied so many columns of accounting literature with its reports. Many of these researchers give the impression of having mastered an investigating technique, usually borrowed from some other discipline, and then having sought a topic in or related to the field of accounting in order to apply it. In their findings, negative and tentative outcomes abound. It is as if an army of research technicians have been limping around in circles waving their intellectual armory in a frenzied display of futile offensives against an imaginary foe”.
“Accounting researchers may aspire to act as natural scientists act—and it has become a fashion for many in recent years to claim to do this—but while they apply what seems to them the methods of science, they themselves seem not to realise that what they are exploring is the activity of human beings whose statistical uniformity is one of artificial (= non-natural) categorisation. Much research has, indeed, now been done in behavioural aspects of accounting, frequently based on techniques used in the behavioural sciences. The question of the significance of the behaviour of the selected subjects has not often been raised specifically”.
“There are important distinctions between the science of nature and the social sciences of human activity. For one thing, natural scientists often assume an inherent uniformity in the subject-matter of their observations, and can either ignore or explain away departures from uniform application of a hypothesis. When departures from uniformity are seen to be serious enough to command attention, a fresh hypothesis is needed. Under such a regime as this, knowledge of our natural environment has expanded enormously and at a continually accelerated rate in the last three or four centuries”.
“There seems to be unavoidable differences when human activity is under observation. As human beings themselves, observers cannot avoid being aware that the objects of their attention are capable of self-awareness and can and often do act as having some freedom of will as well as ingrained instincts. While some human activity results from and depends on instinctive responses, much depends on the exercise of reasoning—rational and rationality may vary between people. To arrive at a satisfying explanation of human activity, we surely need to recognise this variability in the perception and, in some cases, the concept of rationality in human activity”.
However, accounting research can contribute effectively to standards setting. There are many researchers and studies which have recognised the importance of accounting researches in standards setting.
According to Beaver and Demski:
“….Research plays at least two roles:
(1) To provide evidence on various aspects of Vi (the value of various financial reporting alternatives)… and
(2) To provide evidence on the consequences of various mappings from VI to V (the preferred alternative)… Of course, none of this research will—in and of itself—resolve the fundamentally ethical question of how preferences should be weighed across individuals in determining financial reporting policies. We are, however, hopeful it will provide some information on what the consequences of alternative choices may be.”
According to Mautz:
“Accounting research has a two-fold function. First, it must discover as best it can and taking into account all available information, the theoretically preferred solution to the issue at hand. This requires development of an overall structure of theory so that the specific issue can be placed in perspective; it also requires identification and evaluation of the various ways in which the specific issue might be resolved. Second, and this is an indispensable part of applied research, steps must be taken to determine just how far in the direction of that preferred solution a standard can go and still be acceptable to a majority of those concerned What arc the various interests? What impact will alternative solutions have upon them? Of the various solutions that can be reconciled with the overall theory, which provide the greatest total benefit at least cost?”
“Our role (as academicians) is to provide information for policy decisions., concerning:
(а) What issues ought to be raised in considering a given financial reporting topic, and
(b) What the potential consequences are, given the existing research.
….For example, while our colleagues in economics may not have a comparative advantage in recommending the socially optimal form of minimum wage legislation, they may have a comparative advantage in communicating research regarding the potential consequences or effects of minimum wage legislation on unemployment.”
Few Suggestions with Regard to Standard Setting:
There are many problems in standards setting tasks. It is difficult to prepare a complete list of all possible measures to strengthen the process of setting accounting standards and remove the weaknesses in the existing framework. However, some measures are suggested here.
These suggestions are only tentative and are generally based on an accounting theory perspective and analysis of environmental variables. These deserve further analytical and empirical investigation. A continuous enquiry is also needed to suggest other and alternative reforms.
1. The Institute of Chartered Accountants of India should recognise more the importance of standards setting and give it much more recognition and place among its diverse activities.
2. The ASB should undertake and/or commission a research study of the existing literature prior to undertaking a study of an accounting issue. This comprehensive research study should prepare and collect all arguments in favour of all related issues and sides. Since standards setting is a continuous programme, the ASB should make a time table for research studies for a longer time period with a lead time sufficient not to delay the ASB’s deliberations.
3. The standards setting requires consensus to satisfy all concerned parties through subsequent standards and statements. There are many difficulties in achieving consensus such as lack of intellectual and analytical analysis, permitting many solutions (some of which may not be desirable) to a given problem, causing deal in standards setting which results in a long-jam of accounting issues to be solved.
This necessitates that the criteria of ‘consensus’ in standards setting should be used with proper understanding and within defined limits. In a democracy, one must operate broadly within a consensus, but that does not mean that on every issue one must count the votes. Unanimity is not required for standards setting or policy making.
Actions do have to be within the boundaries of a broad consensus, but that does not mean they cannot be near the boundaries:
4. The enforcement of accounting standards is a difficult problem and requires proper investigation. It is argued that standards should have legal backing. In absence of legal mandate, business firms may not feel encouraged to follow standards.
5. The ASB should, in future, act as ‘accounting reader’ in standards setting area. In our country, this task cannot be given to private sector standard setting body. Also, the government cannot handle this job with speed, flexibility and purposefulness. It seems that there will be no drastic changes in the current set up and the present method will continue.
A body like Accounting Standards Board (ASB) can use the technical expertise of the whole accounting and auditing profession and therefore its technical solutions to accounting problems are likely to be better than those arrived at by civil servant experts. The ASB can easily and promptly maintain flexibility in accounting and reporting, whereas there could be too much delay on the part of government as financial reporting is not considered a hot political issue.
6. Accounting Standards Board should be reorganized and strengthened. As a better alternative, ASB should be made a separate organisation and authority and should not work under the supervision and control of ICAI. This will ensure adequate attention toward standards setting and ‘a free from bias’ functioning which is necessary in standards setting.
7. A review committee should be set up to make an appraisal of standards after they have been formulated, to ensure that these standards are generally beneficial to the wider society and have been issued only after following a due process procedure. Review should not be done by the ASB itself.
A separate body would allow the ASB to properly concentrate more on the technical and detailed aspects of preparing standards. The Review Committee would accept standards or refer them back to ASB. The Review Committee would thus act as a check and balance on ASB. If the ASB and the Review Committee, after negotiation, could not agree, a joint sitting should be held and the matter should be resolved in the joint meeting.
8. A suggestion has recently emerged in accounting literature to establish an ‘Appeal Court’ for those who believe that standards issued are against the accepted ‘true and fair’ philosophy. It is said that standards which involve social and political choices cannot be justified solely using either theory or empirical evidence.
Such an appeal system would be directly in an area which so far, at least has been left to the profession. More importantly, it would help to ensure that the whole compass of accounting standards is either consistent or that concepts used for one standard could be reasonably distinguished and any difference from other seemingly similar standards explained.
“Such a mechanism would provide some authoritative monitoring of accounting standards and would document to some degree any learning experience concerning standards. This experience is not presently recorded in any formal way. This process would allow ‘case’ law to be built up without it becoming a burden on accounting policy makers. Such case law could, if necessary, always be overruled. Of greater importance, would be the ‘Court’s’ insistence on consistent reasoning between standards. This would allow a type of conceptual framework to be built up. Concepts found useful for one standard could on a priori be expected to be used in similar settings with other standards. This should mitigate the tendency of accounting policy makers to approach each accounting problem in isolation from their deliberations over other standards. It would, for example, be of interest to consider the implications for other standards of applying to them the same concepts as used for the foreign exchange and the current cost accounting standard. Some possible conditions which allow the choice of an accounting standard for a given accounting problem to be made without considering the interaction with other standards on the welfare of the business community are known. They are, however, fairly restrictive.”
Goldberg commenting on accounting regulation says that the way to more, socially sound regulation lies as:
a. Clear indication of the need for and purpose of each regulation (in, whatever form).
b. Clear expression of the prescribed or proscribed activity.
c. Protection of the victim of any misfeasance or malfeasance together with compensation of victims by the perpetrators or beneficiaries of any departure from the regulation.
d. Ensuring that penalties and/or punishment shall be imposed on the individual human beings responsible (whether as instigators or perpetrators).