Standard Setting Political Issues

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Standard Setting Political Issues
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Class Announcements

• Assignment 10 due March 31st available on-line
• Research Paper Part 4 and bonus due April 3rd
• Business Banquet - April 2nd 545-8pm, Catering
  - Gabrieau's Bistro Keynote Speaker - Annette
  Verschuren, Past President of Home Depot for
  Canada and Asia
• Final Exam 700pm April 19th, Main Gym, Oland
  Centre

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Class Objectives

1. Incentives for Production of Information
2. Regulation (e.g. setting standards) as a
   political process
3. Standard setting process in Canada
4. Theories of standard setting

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Standard Setting Regulation

• Standard setting is the regulation of firms
  external information production decisions by some
  central authority
• Information asymmetry used to justify regulation
• Accounting is a highly regulated area of economic
  activity
• Regulation includes minimum disclosure, GAAP,
  GAAS, audits

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Standard Setting Incentives for Information
Production

• Contractual
• Compensation contracts
• IPO
• Market-Based (non-contractual)
• Securities markets (firm value)
• Managerial labour markets (Reputation)
• Takeover market (corporate control)
• Other
• Disclosure Principle
• Signaling
• Private information Search

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Standard Setting Political

• A demand for information production as a result
  of information symmetry creates the demand for
  regulation.
• Because of the problem of unanimity, investors
  push for regulation causes standard setting to be
  a political process
• Natural to expect that the various constituencies
  would appeal to the political process when
  conflicting views can not be resolved by
  contractual or market forces.
• In standard setting, the interests of managers,
  small investors, large investors and other must
  be traded-off

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Standard Setting

• What is the standard setting process?
• In Canada http//www.frascanada.ca/accounting-stan
  dards-board/what-we-do/about-the-acsb/index.aspx
• Internationally http//www.ifrs.org/How-we-develop
  -standards/Pages/How-we-develop-standards.aspx

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Standard Setting in Canada

• CICA Handbook is the major source of accounting
  and auditing standards in Canada
• Accounting Standards Boards (AcSB) establishes
  standards for Handbook
• ASB Structure
• Voluntary board members administrative staff and
  full time chair
• Publishes standards on its own authority
• Advised Private Enterprise Advisory Committee,
  its members and staff
• 2/3rds of Board must be CICA members (broaden
  representation)

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Standard Setting in Canada (contd)

• ASB New standards
• Requires 2/3rd approval of Board members
  (supermajority voting)
• Exposure drafts enable reaction to standards by
  all interested parties
• ASB Timeliness
• Due process requires time
• Guidelines are interpretations of standards
• See www.cica.ca

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Standard Setting in the US

• FASBs purpose is to establish and improve
  standards
• Part of a three part organization
• Independent of AICPA
• Consists of 7 full time Board members
• 5/7ths majority to pass a standard
• Heavy emphasis on due process

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International Standard Setting

• In 2001 IASB adopted a structure similar to FASB
• Board of 14 members (12 full time)
• Established to harmonize global economy
• Compliance is not mandatory
• Process
• Agenda is set by staff, Board, constituents
• Solicits comment from constituent based on a
  decision paper both in writing and in public
  sessions
• Publication of an exposure draft is a mandatory
  step in due process
• After due process is completed, all outstanding
  issues are resolved and the IASB members have
  balloted in favor of publication, the IFRS is
  issued.

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International Standard Setting

• Benefits
• Cost reduction
• International comparability and consistency
• Increase market efficiency
• Delay
• IASC still in infancy and standards being
  developed
• Strength and stringency issues
• Getting US on board
• No enforcing mechanism
• Perspectives on role of standards
• Language translations

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Standard Setting Process Inclusions

• 1) Conceptual Framework
• 2) Sufficient independence and authority
• 3) Accountability to public interest
• 4) Thorough and published results
• 5) Due process
• 6) Decision rationale communicated
• 7) Broad vs detailed standards
• 8) Small vs. large companies

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Two Theories of Standard Setting

• 1) Public Interest Theory
• Public demand for correction of market failures
• Best interest of society
• Maximize social welfare
• First best approach to standard setting
• 2) Interest Group Theory
• Presence of a number of interest groups
• Various groups lobby to convince regulation
• Regulatory maximizes its own welfare
• Regulation viewed as a commodity

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Standard Setting and Theory

• We do not know how to calculate the best tradeoff
  between conflicting uses of information by
  investors and managers
• Current Standard Setting process is most
  consistent with Interest Group Theory
• Existence of conflicting constituencies
• Broad representation
• Exposure drafts
• Super-majority voting
• Due process
• Public hearings

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Criteria for Standard Setting

• 1. Decision usefulness investor reaction
• 2. Costs
• Standard setting process
• Managements adherence to standard
• Contract rigidities
• Proprietary information
• 3. Reduction of asymmetry improves operation of
  markets
• 4. Consensus encouraged and necessary for
  adoption

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Standard Setting Problems

• 1) Questions concerning independence
• 2) Need better opportunity for interested parties
  to be heard
• 3) Inadequate research, monitoring, enforcement,
  and education
• 4) Internationalization of standards
• 5) Cost of process

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Class Objectives - Revisited

1. Incentives for Production of Information
2. Regulation (e.g. setting standards) as a
   political process
3. Standard setting process in Canada
4. Theories of standard setting