The Australian Accounting Standards Review Board (RLE Accounting)

The Establishment of its Participative Review Process

Asheq Rahman

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317962762
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

This study provides a neutral and comprehensive explanation about the activities which precede the formulation of accounting regulatory policies. The knowledge gained from it can be applied to understand the formulation of regulatory policies in other areas and to predict or explain the behaviour of interest groups in the preparation of accounting standards and regulations.

Chapter 1

INTRODUCTION

The Problem and the Hypothesis:

There has been renewed interest in accounting research regarding the creation and demise of accounting regulatory bodies. The creation of the Accounting Standards Review Board in 1984 in Australia prompted a major study into its creation and the establishment of its functions by R. Walker¹ (1987).² In the U.S.A. Davis and Menon (1987) investigated the creation and demise of the Cost Accounting Standards Board using Bernstein's theory of “life-cycle of regulatory commissions”.

The subject of this study is the creation of the A.S.R.B. and the establishment of its functions. The interest in this subject has been instigated mainly due to the dearth of research on it and by the methodology adopted by R. Walker (1987). R. Walker used the notion of “regulatory capture” in his description of the Board and in investigating the process of its creation. He showed that the accounting profession, being the regulated party, influenced that process in order to ensure that the Board would be under its control.

The inadequacies and anomalies in R. Walker's study are discussed under various headings in Chapters 2, 3, 4 and 11. In essence, it is asserted that R. Walker's approach was biased towards showing that the accounting profession was the only influential participant in the Board's creation and the determination of its functions. This is evident Board's creation and the determination of its functions. This is evident from his choice of the “capture” notion without any reference to other theories of regulation. Without a review of those other theories it is not possible to judge the efficacy of the “capture” approach.

Again, R. Walker's description of the Board being captured by the accounting profession is limited to a study of certain aspects of the Board's operations. A systematic review of the Board's organization and functions (before its merger with the Ac.S.B. of the A.A.R.F.), within the regulatory framework of the Co-operative Scheme for Companies and Securities, in Chapters 2 and 3 indicates that the Board was dependent on and susceptible to influence from several interest groups. The influence of the profession on the preparation and review of standards is noted as R. Walker did, but it is found here that other parties had also secured important roles through which they could constantly scrutinize and influence the Board's activities. To identify a few, the Board, being dependent on its creator the Ministerial Council for its basic authority, had to operate with the notion that all its approved accounting standards were subject to political approval. This implied that the political consequences of its standards had to be minimal.

Within the time-frame of this study, the Board was also found to be dependent on the N.C.S.C. for the enforcement of the approved standards. The presence or absence of any standard which was an impediment to the efficient administration of company law was liable to receive the attention of the N.C.S.C. and its delegates, the State C. A.C.s. Furthermore, R. Walker (1987) failed to mention the conspicuous presence of a number of company executives on the Board. Companies or more specifically their directors were, in fact, the primary object of accounting regulations, such as the approved accounting standards. Auditors or the accounting profession as a whole, as R. Walker assumed, were affected because they were actively involved in the preparation and authentication of company financial statements. As a result the companies, along with the accounting profession, were also one of the regulated parties because their activities and interests could be affected by the approved accounting standards. The considerable representation of company executives on the Board was devised, presumably, to help secure the interests of that group of regulated parties.

Accounting regulatory recommendations have ranged from free financial information market proposals to suggestions for central government bureaucratic control, with regulated markets as an intermediary option.³ In Australia the regulated market option is favoured by the policy makers and has been in use for a long time.⁴ According to Peirson and Ramsay (1983) three different means of regulation have been in use in Australia. These are Government legislation, professional accounting standards and the official listing requirements of the Australian Associated Stock Exchanges (A.A.S.E.). The choice of the Accounting Standards Review Board (A.S.R.B.) and its approved accounting standards showed a preference for a mixed form of regulation. Under that form, accounting standards were reviewed through a “due process” mechanism by the interest groups and on approval received legislative support.

Such a board seems to be the outcome of various proposals for and against its establishment. For example, F.J.O. Ryan, the N.S.W. Companies Registrar and later the Commissioner of Corporate Affairs, demanded a statutory commission with the power to prepare standards (Ryan, 1967, p. 106). Frank Walker, the N.S.W. Attorney-General in 1977, called for an accounting standards tribunal for reviewing accounting standards (F. Walker, 1981b, p. 23). The Accounting Standards Review Committee of N.S.W. Report (1978, p. 145) recommended the establishment of an accounting standards review board capable of setting priorities and authoritative enough to direct the professional accounting standard-setting process. As a part of its responsibilities as a company law enforcer, the N.C.S.C. demanded the right to set disclosure requirements for company accounts (Durie and Kelly, 1982, p. 38 and Australian Financial System, Final Report of the Committee of Inquiry, 1981 , p. 372). Coming to terms with the surge in the call for Government intervention in standard-setting, the accounting profession accepted intervention to the extent of review by an independent or profession sponsored board (“Australian Accounting Profession”, Submissions of March and August 1982 to the N.C.S.C.).⁵ All those proposals had one common feature – legislative backing for accounting standards. Others, such as Winsen (1980) and the Australian Industries Development Association (1982), argued to the contrary and suggested the continuation of the process of self-regulation or no government intervention.

The variety of proposals made for an accounting standards review board and the involvement of several interest groups in the final outcome implies a pluralistic formation process. The basic impetus for a board, as we shall see later, was provided by failures in the securities market, but the outcome – the Board, seems to be the product of pressures from different parties trying to safe-guard or enhance their own interests. The regulators (the Ministerial Council), in the process of establishing a standard-setting body under the Co-operative Scheme for Companies and Securities, apparently were influenced by the interest groups.⁶ Therefore, the major problem addressed in this study is that:

Despite various forms of existing regulations and various recommended forms of regulation, why was the A.S.R.B. set up in a form that left it dependent on and subject to the influence of several interest groups?

The scope of influence of several interest groups and the Board's dependence on them for efficient functioning casts doubts on R. Walker's (1987) “capture” argument. It leads us to hypothesize that:

In order to ensure that they played an influential role in the functioning of the A.S.R.B. all identifiable interest groups actively participated in the Board's establishment.

Importance of the Research:

The A.S.R.B., due to its unique mechanism of securing the support of the major interest groups and legislative backing for accounting standards, was a noteworthy innovation in the field of accounting regulation in Australia. This research is directed towards understanding why and how a board with its unique attributes was installed.

Until now only R. Walker (1987) has attempted to provide an explanation of the nature of the Board and its process of establishment. Because of the economic consequences that emanate from the accounting standards (See Chapter 5), R. Walker's argument that the Board was captured by the accounting profession could have far reaching implications for those who depend on company financial statements with the understanding that they were prepared on the basis of standards which are the outcome of “due process”. Acceptance of the capture argument may also provoke changes for the Board leading to its demise. For example, if the Board is seen as a profession dominated body its standards may lose support of important allies such as the politicians in power, the law enforcing agencies, and the preparers of financial statements, as was the case of professional accounting standards (See Chapter 8). That could, in turn, reduce the support received by the Board from those allies. The loss of support could be to the extent that it could terminate the existence of the Board (The A.P.B. in the United States had a similar fate (Moonitz, 1974, pp. 74–75)).⁷ This necessitates further investigation of the Board's organizational and functional features. If our observations are different from R. Walker's we need to provide an alternate explanation for the creation of the Board. This study, therefore, is an investigation of the Board's organizational and functional features (before its merger with the Ac.S.B.) and provides a description of how they were determined.

Methodologically, R. Walker (1987) used a narrow approach in the sense that he looked only at the behaviour of the accounting profession in the Board's creation. The behaviour of other parties, especially that of the members of the Ministerial Council (the creators of the A.S.R.B.), had not been studied by him. His “capture” approach covered a time frame too short to illustrate adequately the Board's establishment. The time frame, he adopted, was sufficient to highlight the activities of the accounting profession and not those of other parties. He mainly examined the phase after the creation of the Board, and he highlighted the participation of the accounting profession. He almost completely ignored the involvement of other parties. The omission of a description of the “gestation” phase which preceded the creation of the Board and in which the idea of a review Board evolved, also contributed to the lack of examination of the involvement of other parties in the creation of the Board. This study will try to fill this void.

The A.S.R.B. since its creation was a public body financed by the Australian Treasury. The Board's contributions towards the improvement of securities market efficiency, reduction of frauds in the securities market or any other “measurable” objective to assist users of financial information, are not clear. Since the Board's budget and expenditure had increased rapidly from the initially proposed budget of $ 18,000 in 1981 (See N.C.S.C. Release 401 , 1981 p. 4) to $ 210,000 in 1985-86 (See A.S.R.B. Annual Report 1985–86 , pp. 18–19) and as it had no clear or readily discernible benefits for its beneficiaries – users of accounting information – it is important to understand why and how the A.S.R.B, was created.

In this respect, we also need to understand why the regulators, in their decision to create an A.S.R.B., overlooked the main purpose of having accounting standards as instruments of maintaining the quality of financial information in securities markets. As it is understood, initially the regulators saw the need for an A.S.R.B. in the context of the Co-operative Scheme for Companies and Securities for the improvement of the capital markets (See Australian Financial System, Final Report of the Committee of Inquiry, 1981 , Chapter 21). They seemed to have overlooked their objective in the process of reconciling their views with those of others, specially with those having a significant stake in the Board's creation.

In this research the A.S.R.B. is regarded as a part of an on-going regulatory process rather than a new regulatory set-up.R. Walker (1987) assumed the latter in explaining that the accounting profession, as a regulated party, managed to capture the newly formed A.S.R.B. through its influence. The “capture” notion is certainly applicable under such an assumption, and it only helps to explain and predict the situation from a narrow single party perspective. In this study an attempt is made to look at the creation of the A.S.R.B. as a “two-way” “process”, that is to study the behaviour of the suppliers and the demanders of the Board in an on-going regulatory process for company disclosure that probably co-existed with the company form of business organization since its inception. Such an approach can help us study and predict the behaviour of all interacting parties....

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Dedication
• Acknowledgements
• Table of Contents
• List of Tables
• List of Figures
• Abbreviations
• Abstract
• Chapter 1. Introduction
• Chapter 2. The A.S.R.B. - Its Organization and Functions
• Chapter 3. The A.S.R.B. - Its Independence
• Chapter 4. Evaluation of Competing Theories of Regulation with Applications in Accounting
• Chapter 5. The Theoretical Model
• Chapter 6. The History of Accounting Regulatory Policies in Australia Up To 1970
• Chapter 7. Professional Accounting Bodies and Accounting Standards
• Chapter 8. Towards Mandatory Accounting Standards in a Changing Regulatory Environment
• Chapter 9. The Creation of the A.S.R.B. - The Activities and Events
• Chapter 10. The Creation of the A.S.R.B. - An Analysis
• Chapter 11. Summary and Conclusions
• Appendixes
• References