)\iret teadilg thit chaptcr, )ou sllould h.rr: aD ap pri .i.ljon .)f th.

: ilk\lirt
E thcthcories of regulaiion ihat are
'elevanl
to accounting and auditing

E ho$,lheories o{ regulation applyto accourting and auditing pra.tice

E the regu lato r), frameworl. for finnncial repo(ing

E the stiucture for setting accounting and auditing standards.

'nstitutio.al
 At the end of each quaner, half'y€ar and financial yeir frrms arc busy preparing th€ir
accounts and (at leasl at year-end) having them audited by an ind€pen.lent audiLor.
firms lodge their ac.ounLs with governnent agercies and listed firms provjde reports
and other informatio lor iheir sroch exchange. Ii l]s issue press releases for investors
and adviseft. To Uhat enent can Lheory help us to understand why th€se activities
occurl Car theory explah $'h]'privat( se.tor bodies and govemN€nts and thcir
agencies trke an adive role in the hnancial repofting p'ocessl lhis chapter addreilies

First, we consider a number oflheori€s L\at ar€ reLevaDi to the pracli.e of accolLnting
and audiling. We drsclrss the th€ory ofefii.ient Darkets and agenq theory Lo understaDd
ihe setirg in whidr tulancial repofting o..urs. we consjd€r duee specific rheories of
regulation, rvlich have been proposed lo c{plain regulaiion in capital markets. The
iheories are pubiic interesl, regulatory raptu. and ptivate inLeresl dreory. In the nexL
secdon, ive consider fow tlre three Lheories apply in practice Considcr the case rvhele
a govemment changes linanclal r€po.(ing requiremerls or introduces rno.e overciEht of
auditors following a n1ajor coryorat€ .ollafse (€.9. as oc.LLred in tir€ Llnit€d States wilh
the Sarbanes Oxley Act in 2002). Can publi. inreresr theory explain this inten'ention
in the narket pla{:e, o. is private inter€$ iheory mor. applicable? If a major industry
group is able to €nsure production of en accornting shndtrrd $'hich aliSns l\ith ns
prcferences for a..ountirrg measurement .nd dis.losure, has th€ grolrp captured the
standird sener3 w€ consider the ei€nl lo $hich €a.h ofthe &ree Lh€orles is helpful in
understandingthese :rnd sirrilarev€nts.
In this chapier we identi4' mary diferent pafti€s lhaL are involved ir the prepantion
and r€BulaiioD offinancial rep.rning. ]n the third seclion we present a descriptioD ofrhe
rc8lrlatory franework and disclss Lhe elenentsvhich a.e likely to .qnprise a'proforma'
(ore{ampl€) flanl€wo.k TheelemenLs considered ar€: statutoryrequirenrens, corporate
governance; auditors and oversightr and ind€pendeni enfbrcement bodics we explore
hon, these el€menis infuence thc olLtput ofth€ fuarcial Fponing process, that is, the
furancial siat€merts
lirally, r'e des.ribc the intexrtrLk)n.rl srandard setl;ng process. Ac.ontrli g standsrds
can be viea'eil as a kq p:r.L of thc regLtlntol' frame\vor k as they influen(t thi: behaviour
ol prepareLs and auditors and LhLrs rhe informarion provided {or users of nnan.iaL
repons. Since accoxnti!rg standa.ds irrvoh,ellealdr rranslirs, rrranypaLlies are concenred
aboLrt thef conteDr and have be.orne invoived in thejr formLrlatjor ln re.eni yeaN,
slandard seuing has nro\.e.1 to th. jrloniLional arena, $ifi the sl.rndarlls de\.eLoped
bv the LoDdon based htenatjonn A..ounLing Sri|d:rrds Board [I\sB) L'sed h Dore
d1atl 100 counrries The goal of harrnorisarnrn oI n.:rnci.rl reporting has led the lAsB
to work closely wiih th€ united Siai6's Finrncial A..omting Standards Board (F sB)
on a number ofjonn projecrs. we also des.ribc thc dfvl]lopm€nr ofirLrdidng slandards,
l\'lich has become nrcreasingly irtei narional.

ffi-.rnr rHEoRtEs oF REGULATToN RELEVANT

TO ACCOUNTINC AND AUDITING
Capita m,rrl(et thcorists suggesl thaL managers hr\,e lllany in.enLi\,es ro volLLntaril_y
provi.le accounling infonralion Lo parries erLen l ro the firm, rnd to hav,: rhat
informarion verified b)' independ€nl a diLors. So why do we .rbserle rcgolatlon ol
fiuancial reponing through company law and ac.oundng stindardsi wh) do nosr
counties h:rve l€gaL reqLriremems to produce auditcrl 6nancial slatcmenisl Ther€
are s$$al thories $,hich are relev:1nt to undersirrdins the resulation of linancial

PART I A..ounlinr Lhco.'

 \

reponiry (i.e. tlle preparlng, auditing and srpPly of accoLrn ng informaiion about an
entit-vl. i hey include:
. theory ofellicienl markeis
. theories olregolation public intel€st, regulatory caprure and Pi\iate intelest

Theory of efficient markets

Iree Inarkd (conomists rvould nrglLe that markcts function best wilhour govemmeni
inteNenrion, and ihat maximilm efficier.v is a.hieved by allowing titrces ofsupply and
demand to dictate markct behaviour. ln the world's xrcreasingl) hternatioDal capital
merkers, forces ofdemand and supplv hijve r large influence on the Ilows of informarion
and.apiral. Ho\\'€ver, govemmelts also acrively imeNene in these markets, regulating
not onl-v how Darkets a.e .onducted bul also rhe provision oi iDforDlation rvhich has
been des.dbed as the'lileblood'of.apiLrl mark€ts. Al btsr, govenlrnent ini€^cnLirn
ailns to assist Nad(et d€velopmenr erd Promore €conoinic giowth. E.luitable and
transparent narkets, where ihere is a balince of t'ealth enhalcing oppo.tuniries and
investor pniection, are considered vinl to attnct paniciPants. Neveiheless oPtinal
markd regulalion is an an lath€. than a science.
A.counting { an be seen as an infomratlon industry; ihar is, the business ofaccottrting
is ro prcdu.e informadon. Advo.ales of &e frce-N.lrk€t app.oach argu€ thal, as with
any other produci, demand and suppl-v forces should operate. l'her€ is a deinand for
ac.ounring information by users and a supply ofsuch infornation from companies in
rhe ionn of financial stl.menrs. An equilibrium Pdce ih€refbre can theoretically be
lourcl for a.counrir€i lnfomration.
SLrppose a new type offinantial infornation is demanded by ls€rs and a supplie. is
\^/ilLiDg to prollde ii for a price The prj.e will linalLy adiusr ro one where the suPplieL
srill linds ir advaDtageous to furnish th€ information nnd users believe the cost ls equaL
ro or less than rhc beneflLs ol the info iation. ]f noi, then the iDfbrmaLion lvill Dor be
provi.lecl. lr orher \a'ords, free m;trkeL forces can d€t€mrhe thrr tl'pe of accourning
data to provide and rhe.iecessary standards that und€rlie Lhem.
It is highl-v unlikelt that iuthoitati!€, regulan)rv bodies will r€linqr.rish thei. Pres€nt
po\\'er ll1 accoLrDlirg. Be.ause of fial, lritics ofthe free nark€t approa.h sry Lhe dleoLl'
is unrealistic Fu.thermor€, th€-v argue Lhrr lhe theo{, is unwor kable lt.ruse the markel
n1€chanisms will not be able io achic!t a socjally nieal €quiLibNnr lrri.e lor accounring
infbrnation for rh€ following rensons
,{ccourting iDfornration .annoi be Lonsidered i the same $'a}' as other prodlrcts,
b€cause it is a 'public' good once the informadon is r€leased by a conu:uv, it is
available to evervone Alihough th{: irformalion may be sold to cerrain peopl€ only,
!,th€rq \.vho did roi pa)i for it cannol be easity excllrded from using fie irfo.marbn
This phenomenon is referrtcl ro as the'frce'ride/ pr.rbLem, outlined overlea{. In the
:r..ollndng s€tting, examples ol fiee riderc include linancial analysts and Potential
investors Becar.rse not all users c:rn b€ charged lbr th€ cosi of producing ihe iccounling
information, slrppli{:rs have nlinimai incenti!,e to prodLl.e ii. ll ly regulntor}'
'!ill
int€n'€ntion can persuade .ompanies t.r produce lhe inlormatioD ne.essary' 11) m€eL
real dernand and ro ensLtle an €flicienl (itpiral rnnrl€r.
A (onrpitny h:1s a moropoty on th. supply ofinlormarion aboLrt itselfind, therefor€,
th€ tdrdeir.r wiLl be for ibe conrt.ny ro urderproduc€ and seLl ai a bish price. l'ronr
sociery's poirt ofvielr', nandatory repolling will r€s ll in more inforDatior at a loser

clj,\PTER3 ApF \ rg tlreory to r..or. i.g r.gul.t on 55

 [\,en if a fiee market existed lbr accolrnting information, a regulatory boa.d would
still be nceded because use$ are unable to agree on lrhat th{:y want and accountants
!!ill not agree on lh€ pro.edures to derive tbe desjred information. Flrnher, ihevalue of
hfo.rnation plovided by .ompanies to Lrsers is greatly e rarced il it calr be .omPared
$ Lrrfo'l-.r.iu' t,, no.r' . t,r'r..

Agency theory
'lhe denand lorfnancial infonflaLion.an ire.ateSorised as b€ingeiihei lorsL,rwnrdshiP
or for de.ision- aking purposts A1ltin$n and feltham siat€ that ag€niy lheory
considers mainly tbr stewardship dernand lor inlormation.r The theory concentrales
on the relalionships in which th€ welfar e of one penon (e.g the owner) is enlnrsrc.l to
another, the agent (e.g. a man.rge4. Atkinson and Feltham explain that the dernand firi
stelvardship information rel,rtes to the d€sir€ to:
. Dorivale dre agent
. distribure risk eftcieDil)'.
Th€ dernand to. inlbrmation fo' decision making puposes r€lares to th( rol{' ol
inforlnntion ir staristical decision theory Informal;on is valluble if ir improves the
alk;catiur ofresources ard risks in the economy Il does this by r€ducing unc€ftrinq
Llnceftairty in ag€ncy theory can be classified as ex ante or ex posr. lx anle {befbre
rh€ i:\.enr) unceriainty exisis at ihe time a derision is to be nrade, such as unteLtinty
ibout conrrollable events that rvill affect produ.tion (x un.rrhinty about rhe skill of
the rnanager. Flx post (after the event) uncerlainly exists aftcr the decision has been
made and the rcsults realis€d. This unce[airty is ih€ sanle as ex ante uncerLi] it\ e{c€Pr
fiai it can b€ redu.ed by c\ post repons on what actuall-\r happened Agenqv rhcory
focuses on the irnpair ofaltemative er post repons tlat atject €x post uncenalnr)'
Atkinson an.l F-elrham sce rhe role of standard s€ttin8 as one of idertjlj/irg \itLLari' 'n5
where w€lfarr iDprovcncnts be obhnred fiom a Bjven poli(-r' on tuaDcial
reporiing Welfare improvenents 'villr€lat€ to Par€to comparisons. Poli.y A Nould be
p.efeired to foliq B if L1nde. th€ forner €very p€rson ls at least .rs lvell o11 as rnder
Lhe larLci nnd ir least one percon is better off lolicv A l{ould also be prefened to
foli.v tJ il it rcsulrcd in a m.ne efficient allocation of resolures ind risk. Thus, under
Lhis view, it app.nrs th:rt perciled econoll1ic consequerces of accounrinS standards
plnY an intponanl role
Agen.y theory giv.s us i Lelnl]worh in which lo srLrd) .onLrir.ts ber$,een prin.Dals
nnd agenLs a d to prdi(t thr c.onomi. .onsequdr.es of n:rndirrds. For exrmfl€, ir is
oltcr lo:tjcal thrt managiJs'.onpensaLi.nr be ticd tu .cpofted profits o. rhev nray harr
less nrcenLive to :r.hiev.: prcits hr this sirunrion, o e type of .mtra(hral r€lationshif is
between users ofa..ounLing ddd and the.ompan)' Conlrads for financial tlata can be
altemarjves to prblic reponing. ifac.ou Lirtg we(: ileregulated', the narkei merhanisrr
rouLd generate slLfficlenr i fonrlarion a di(::rch a s<rcially ideal equiLibr ium poirtwhere
thecosrofprovjdlngtheii{)rmatjonequalstheberelits.Supporrersofrhis\reurLgue
rar naDdatory discbsrrres arc thereforc rDnecessary and undesrable be.ause lllarli€t
ior.cs .an be depended on to generai€ xny desired informatidr. FurLhei, , ,rrrp rrrrcs
liave in.entives ro disclose iLrfbrDation vollrnlariLv, :rs evklenrtrl hy rh€,tignificant
ler.el of i,oluntary dis.losures by listed .olnpaDles. Th. possibility of over legislating
r€pofting r€q!ireini: ts also.eTates to the free-id€r'e[c.L B:]si(illy, wheiethr1narginal
rosr of idonatiorl is per..ived to be l€ss than ihe posslble (marginal) benelits, userc
wjll demand increased lev€ls ofdisclosure. However, inr€resrrd parii€s $'ho bear liul€
or nonc ol rh. .osts of disclosure have Sreater in.erliv.s to denand jncreas€d levels of
.lisrlosure, l€nc€ thc term'ftec ridel.

56
 Moreover, advocales argue, requrred reponing rends ro .reate overproduction of
informalion. Sin.e the cosi of producrng xlformaLion is not borne by users, they witl
dcrmand nrore and nrore inlorfiration. An arlhorirative body, such as the IASB, may b.:
misl€d bv rhis exagg€rated demard a|d, .onsequently, prescribe more disclosure of
information than necess3ry. This nay create a 'slandards overlo:r.l', abour which many
.onrpanies dnd accounta ts hav! cor.plainrd

Theories of regulation
Public interest theory
Th€ central economic reason tbr the origins of goverrmenr inien'€ntion in tll.
operalions oi various markets in the 'public interest is thar of narket faillre.r within
this theoretical framework, reguhtion is inlended by legisltriurrs to i)roL..r consl1mer
interesis by s€rLrrirS improved economicper{omrarce... conlpared wjth anunr€gulated

A fore rinl mrrl€r iaiiurc o.clrrs Hhen there ]s a failure oI one ol fi{] .ondirions
neressary for tbe best operation of a .omfer;tive market lixan4rles ofpotential failures

. lack ofcompetition (rronopoly, olisopoly)

. inpefect infonnarion gaps (infornation asymm€rry) bel\reen bLlye$ ard sellers or

cenain market signaLs (e.8. sell€r r€puiation)
. re 'public good' nature o{ some products (e.g. linan.i:r1 infoinaiion), lvhere
$e provision of Lhe product ro ir single indivnlu'rl mak€s it e.tually and costlesslv
avaiiable to other ifldividuals Ma.ket failure occurs here becaue sinc€ oth€r
individuals Lan recejve ihe produa free ofcharge
market cannot turction.a
- the Doxnal pricing syst€n xr lh€
l'ublic interest theory is based on th€ assumption thal economic narke$ are subj€ct
to a series of rrarket imperfactions o. tmnsactior failures, r4rjch, if kft uncorrecLecl,
ivill rr:sult in both incficieDt and in€(lritable outcones. Ir is also based .rn Lhrec lurdr€r

. the irtercst of consuDrers is translared imo legisl:rriv€ :r.tion through the opentior
ofth€ irt€rnal nark€tpla.e. Withir this mirl{d, votes are seell as a form ol currencv
The policies, or ar least dre images, pr€sented b,v rhe compering candidates for lh.
olirce rre the .omm.rdities bi:ing bought 5
. dr€re are igcnts (€ntrepi.n€urial politirians and public inler€st groujrs) \4ro will seelt
reg lntion on behallolthe'publj. interesr'. 'These asenls may satisl/ th(:jr s.lf i]lterest
irstrurnenta ly th r ouglr pursu it of plrb Lic iDieresi objectives bur r h e rh eory r.qui.es
I

drat at l€rasr som e pr€fer€rces for rhe plr blic intercst be gen u ine a nd t('rm ina I
"'
. the go\.ernmert has ro iDdependent role to pla!' in drf development of regulations.
Rather, government offi.ials ar,: simply rerltral albit€Is who irreNene .ostl€ssly iD
markets ar fie request ofbublic intcrest'agents.

Regulat()!y capturc theory

A se.ond th.ory prop.rs€.1 to understand regulation ol finan.iii repofling is capluie
th.ory 'lhis theory n]aintair$ that alrhorgh lhe'pueose in facf (x origin olreg1llatioD
is to protect the publjc irr€rest as dis.ussed abov€, this purposi' is nol achi.ved because,
in the proc€ss of regl ation, the regulrtee .omes to control o. d{)minate the rqulator.
That is, the.afture view singles d( regrLated entiiies as'prevailing in th€ srrugEilc r.
inlluence legislation .. . llil predicts a rqular s,:quence, in whidr ih€ original purposes
of a regulatory program arc laler thwartcd through rhe efforts ol the intel1:st group'.7

aUAPJLR:l Aft rifq tlre!r! to n..o!ni nc re!L ati.n 57

 Caplure dxrory assrnes, 6rsrly, rlral all m€nrbers of society a.e e.onomi.ally
rationali rher€fore, each pe.son will purme his or her sell interesl ro the point where
dte privatc ma€inal bqr€[L from lobbying reglrlators jusr equals the privare marginal
cost. R€gulation has the potertial to redistribuLe s Ther(io.(',
'!callh teofle lobby lor
r€gulations ihar increas€ rheir wealLh, or fiey lobby Lo ensure that regulations are
inelf.crne ir decreasing &eir wealdl.t Second, the captlrrevier{ assunes, as i{'ith public
interesl theory, tlrat the govennent has no in(lepe.d€nt role lo pla-v in the reguhrorv
process, and that int€resi gll)Lps ba1ll. t{r .ontiol ol tht] governmenfs coelcive PoNers
1o achieve rheir desired we:rhh distribulion.
Capirr€ is said to octtr in anr one of fou. siruations, namcl)', il the regLllaled

. contr.t the reguhtion and the re8ulatory a8€n.y

. succeed h coordinating the regulirlory body's activities with thcir activities, so ihai
deir privat€ inleresr is satisfied
. neurraiise or i:nsure rlon peLfbrmance (or nediocre perfomance) b]'the iegul:tting
body
. ir a s btle process ol interaction wirh the regulators, su..eed in !o opting thc
regldators into a lnUtLrall-v shared perspective, thus givirg Lh€m the r€ilulalion they

Reglrlarory agenc_v caprrr€ involv.s .apture ol the jdninistration, impLemenution

and, to a large de8ree, eval ation oftbe effects ofthe polic} pro.€ss with;n any.egulJtcd
.rrea. It has bcen {ound to b€ especially pronollrrced $,her€ dre lbllon'xrg pL€condirions
applv.
. Th€re is a smaLl nunlber ofclienr entities.
. Individuals within the regulaiory agell.-v ha\.e regular contact n'ith a cotrnon srt
ol indn'idtals the regulared entides and ha\,€ either a regulared industry
'vithin
backgrolrnd or a potential for lirture emplo_r,rent opportunities in the regulated
lndusrry.
'lh€ .egulated industry conlrols tlre infomration needed fbr r€gulaiion
L r .,o pr"\rr,o Ltorr,..i , 'dprI.r.
The regulaLory ,rgen.\ h:rs minimel resour.€s in .omp:rrison k) rh. ir(lusiry it :s
regulating.
The mniu reas()n lor the.nl)luie view.entres o lh( fd.t tlrat reh'uLatory de.jsiofs
usually hale najor efletts on the int€r€sts of regulaied xrdLlstrles. for cramjrle, rh€
perlnisslon Lo ofe.aLe r busi .:ss o. ro ptuvid€ a pirri!Lliar produd or serrice may be
grenr€d or deDied by regulirory a8en.ies, and the level.llrd sru.rure oflxi.cs.hi.ged
fbr an indusrry's outpuL mry bc deterrrined by sratut ln turn, regu at€cl indusiries
per.ei\,e that their ov€rall hnancial position caD be siSnilicrnrly affe.rcd by icgulaLory
d..isioDs. lh€retore, fiey 8en€rate irL€nse actilit), aimed at iDfluerciDg the regulatoD'
agencv.tr
conirast, non jndustry groups su.h ,s the gere.al public and conslllllers fird
In
dremseh'es in i differenr sitLrarion I'ith'each person's individ nl srakr in a regulalory
decisio'r LbehSl very sllltrll, te*r:rfs itnlre...ptible lvloreo\€r, even when dley
do become ccucerned about a reglLlntory issu,r, gene.al interests lack pre existing
orgnnisations throu€lh whi.h rhcir concerns can easib'be channelled'rl
lhe reguialon capture iheory \\'ould slrggest drar profirssional accollntin8 bodies or
the corporaLe se.ro. rdll s'ek as much conrrol as possible over rhe se[ing ol iccounting
slandards governing the reporLing by Lheir members.l}lis inloh.es either formal control
overstandiri(l seliing, reprtsrnlation oD the relerant stardard settingbodi{'s, orsigniF.ant
influerce/con ol over rhe de.isions nri.k'by the rele\.art siandard settingbodies.

58 PART I A...!rr fg [c, \

Private interest theory
A rhird theory has emerged in response ro dissatisfa.rion wirh explannri(nrs provi.led
by both tb e publi( inrerest ard the capture th€ories. l he assumptions of t h ese rheories,
thtrt regulalion comes into existence as a result ol goveannlent respoDse to public
denands to recti4' inefficieDl or ineqLriiable plactices by individuals and orsanisations,
was slrongl), challenged in 1971 by Llrorg€ Sligierrr'lhe basic thene oI Srigler's
.hallenge is thrt governmenLs have one basic resource ,hich 'is not shd.ed even with
rhe mighiiest of ils cliizens: the por{er to coerce'.ra This'polver to coerce'is a p.rlcntial
resoui{:er or threat to €very business lrm in that wilh i$ pos,{J to p.ohibjt or .onpel
and,ior to provide or withdraw tr(es aDd slrbsidi€s, th€ gov€mmeDt car ard does
selectiv€ly help or hurt r any bLrsincsses
Sijgler argues rhat regulaiory acti\.itt reU€cts the relati\.e politi.al power of inreresr
groups. l h €ir interaction is i{irh politicians who ar€ not ncutralarhiters (ns in Lht public
inter€sL and crpture theories) but, Riher, are like busjness execlrtives or consumers,
and are ihus rationall_\' self irterested The politicians seek ro rnaxinris€ thei. chanres of
fuLure electoral su.cess. covernment officials 1\'ill 'selL aspects oftheir ri8ht to coerce
othen in the fbrm of sLrppl,ving r€gulatory progranrs and legislalion, which will act to
enhanc€ rher ability to win vores and ra;s€ money to firance election campaigrs.
The essential commodity transa.ted in this political marker is a lransfer of rvealth,
Nith consthu€nts on the demand side and their politi.al repr€sentaiives on rhe supply
side. 'Viewed in rhis way, fie narket here, as elsewh€re, r'ill distdbuLe more oi tlle
good to ihose whose effective dernand is the highest. Fo. Stigler the question ofwhi.h
group will have the lighest effecrive denand rranslarell very quichly irrto a qresrion oI

frivate inter€st theorists b€li€ve that ther€ is a narhet for regulaiion r{i$ sinilar
suppiy and dernard forces op€rating ]s in dre capiral narkd Within this politi.al
market there are nrany bidders Holvever only oue group will be successflrl, and that
is th€ group rhat makes the lighest bid. lnthisf ie\!, prodllcer groups air rost often
the highest bidders and are thus able ro use rlle powe. ol the governlrrent to their own
advantage for two re:rsons fi.sr, the llnns in any gi\.en indusi4, are fe$'er h number
thaD tre persons outsid€ th€ indusiD tll.1t na_\' bear the cos$ ol Lhe regulntion sorrght,
such as resricions on enrry. Therelorr, the firms sceking polirical pr.orecdon find it
easi(:. 1o beconre ar organised interesi group capable of $,ielding Ioliri.al inflt{lnc.:.
Since rhe per capita gains Lo them are lilicly to b. high, they have ?n incerti\.e io
.ombire Lheir effi)ris to achi€ve Dntualir b€neliciaL ends.
ln .ontrast, mudr larger bui more diffuse groups, such as consumer and publi.
inrerest Sroups, are limiied in $eir abiliiy & make an effective bid, due 10 rwo naior

. rhe costs of organisation (e.9. the .osts involved wirh mobilising rheir votcs and
comriburjrg resources to the support o{the appropriate political party)
. infomation Losts (e.8. cosls rlssociated wilh obtaining information about g{Jv€rnnrent
acrions).
'lhe basic asseftioD of privare inleresr rheorv is that th€r€ is a Ja( ol diminishhg
retlLms in LIle relarionship beti'een group size and rhe .osts of Lrslng the poliri.al
proci:ss Civ€f ihis assefiion, theorists believe that reglrlatioD do€s .or arise ns a rcsldt
of a governmenL's response to public d€maDds. Instead, regdation is soughr by rhc
'p()duc$' private iDt€r€si Sroup and is design€d and operared mrinl)'for its benefii.
But even ifa group has a stn.g inccntiv{:1o organise, there NUsl still be a mech:lnisnr
by whirh the group acquir€s and LLses rts inflrence Stigl.:r's se.ond assunr ion is that
gov€rnment of6cials, lik€ blrsiness exe.rtjves or consLrlne1.s, ar€ rarionally selLinrercsred.

Cil|APTtR:l App ! ne h..,r Lu....Lr.1i.e cp rl.rtio. 59

 I

fh€y seek to maxinise rheirvoles {if drev are el€cted oftcials) or their lvea lth (ifthey ar€
appoinredolfrcials),orbodl'lrodu.€r'privaleinr€restgroupscansupplytlleseresourc€s
by providing.:lmpaign contribulions and political adverlising to ele.ted oflicials and
lucrative opponunities for post'gov€mment employllrent.
Thus, regulation can simply b€ s€en as a device for LraDsfadng profits to well
oryanised groups in Lhe lonn ol subsidies, price tuing, control of €nrD' of political
competitors, ind suppr€ssion ofth€ p.oducrion of substitutes if the grorps will retorn
ihe favour with votes aDd contibr.rrions to politi.ians. 'l'he theory lthercforel predi.ts
that regularorc will lrse tlleir power to iransf€r incoDe fron those $'iih less political
po$rer to rhose with more'r6
\\'e will now app]y these theories to fracrice.

Iti;l- HOW THEORIES OF REGULATION APPLY TO

ACCOUNTING AND AUDITINC PRACTICE
In rh€ p.evious sectior, rve explored a number of rheories of regulaiiorl, rvhich hav€
been prcposed to e\plain rhe regulation ofa..ounting and auditing. we now consider
Lh. applicalion of the public interest, capture and pnvate iirerest rheories i prir.tice.
we ask to rvhat L\1enl th€se theor ies explain and predicr the regulation ol nccounting
and auditing as obsewed in capital mark€rs.

Application of public interest theory

Und€r public iDter€n th€ory gov€mments interven€ in the regulalion of linancial
reporting ir respoDse ro marker failure and 'in the publjc interest'. lt€ basic argumeni
is that market mecharisms have faiLed and govemmeni action is n€c€ssary for rhe
greater good. The iDtroduclion of the Sarbanes-Oxl€t Acr in the United Stares in 2002
followhg th€ collapse of rhe Enron Co4roration and ihe xudit 6rm Arthur AndeN€n
can be vie\ved rhrough rh€ lens of the public inrercst'. New Gnancjal r€pofting aDd
.orporate governance requirenents $'€re introduced and new standard! an.l oversight
srmctu;es for audilo$ were create,:1.'7 Canacla, Kuhn and Suitor argue that th€
Sarbanes-Oxle_\r Acr { reared, in the plrbli{: interest, one of the greattsr pror€cuolls ur
llnancial markets and related coporate behaviour ir hisiory.r8 Case stud],3.1 ar ih€
end of this chapter provides an oppoftunilv ro ronsider rhe cosrs and ben€fits of the
Sarbanes- Oxle-\r Acr.
An earlier exanple is the Ausualjnn gov€rnmenr establishing the A..oun ting Standards
Review lloar.l (ASRB) in r984. The government s jntervenLion in the accountjng standaid
setting process is seen as justilied b_v lallLlres in the mark€t for accounting infonDatiol,
evidencr:d by the sigrificart rumber of corporate collapses even afier auditors had
certified accounts as true and fair'. Silnilarly, calls for nricter a.counting standards o.
for changes in staDdard selring proc$ses l:ollowing major corponie collapses in ttre lat€
1990s and early 2oo0s (lnron and \'Vorldcom in fie United States, HIH and One.Tel in
ALLSrralia) .ue seen as justi6ed uD.lerthe public interesl theo4,.
Corporale collapses are deemed to indicale that there w€re serious violarioDs.rl
.ompdidve conditions. The violatrons stemned lr.m ;nfoinrarion asynmetries berween
thr suptliers (corpoLaLe managenent and accoulling trofessionals) and exlernal
6nancial sratement users (investon) rvho do not kn.rs'what accouDtins informatiof
they neerl and/or are unal)le to determine Lhe valui: of the accouniinS irformariol
they rereive. lurihernore, financjal jnformatiorl can be s€en as a 'public good'which
1
!
hes led to a divergenc€ be6{€en ihe maryinal costs ancl benefiN ro (a) rhe use.s olllnrncial t
,ii
PART I A..n ,n i..
'h.,r! ;1d
nlfonnation and [b) infbmrarion producers (corPorate nanagement). Before g.]v€mment
iniervenrion (e.s Lhe establishnenl ofrhe ASRB), slandards w€r€ nor legislatively backed
and publi. iDteresl theorists arg e that it was not surPrising ro find rhai $e anount of
rhe informalion froduced b-v corponte enriti€s lell sho( of'th€ qualily recessary for
!e
infornred investmeirt decisions and optimalrcsourc€ allocatior in Lhe economl
Thlrs. th€ public interrbl theory framet\ork sugg€sls Lhe governnertt inreNentjon in
ihe a..oLlniing star\dard s€tting Process is lo .ecriry faiLures in lhe markel lbr ac.ounling
infonalion. ln turn, publi. ifterest lvas seLl'€d by a rcLurn ofconidence ll1 the capital
m:rrk€N by iDv€slors.
By concentrating o of govemrrrent irterv€ntion in tlle rni'keqtace to
Lhe necessity
p ro tect consum ers, pLrbLic i ofnanvrescarch
eresl theory genel alll' i gnores thefindings
studies which ir\dicate that rhe mallagtrs of business entiiies hale slronS incentives
to ',:orrecr' markel failure perceplions aboui their business acliviii€s l'his .orrection is
achiev€d through th€ rel€ast oi extensive voluDtary disciosures ol inforLraiion which
protects rhe users ol financial infornation.ro For example, narkei for'es will exen
tressure on firnls to re.luce uncerlainty about llre qlralit] of dr€ firm's
prcducr' rhe
tuiurr vjability ol rh€ firm, and the ability olcurrent manallenent to ensure approPriate
rctlrms to investors lt is claimed thal failure to redlrce this uncedainty lends lo the firnr
being liewed as a 'l€nron'.r'Tbis, in lLLm, .an resdr in additional costs to th€ filln in
the forrr ol for €xample, hi8he) int€resl cha€€s, in.r€ased securiry rcquiremer\ts for
loans ancl an increasect threat of takeovel from comp€titors. lhus, 'e find examples
where we ran appLy public interest theory, but it is noi clear that the rheory is the only
explanation for the obseN€d beha\'lours

Application of capture theory

waLke. argu€s that although lhe Australian goverrlneni orignrally inrroduced ihe
ASRB to cnsur€ th€ protection ol the 'pLrblic interesL" he b€li€ves .apture th€ory is
more applicable in explaining ihe ev.rnts lle aryu€s that rhe boarcl n'as successtullv
.aptured by th€ accoLurting prolession, ilu .cgulated lndustry'r'?The ultnnate sjgnals of
caplure, accordinil to lvalker, centred on evdrLs sLLch as the fa.t lhat the'du€ process'
p.ovisions w€r€ abandoned in favour ol'fast track' apProval of sLandards submitted
by the AustraliaD AccoitnLlng Resear.h Folrndarion (AAR|)']r furthe.nlore, a rumber
.,f disputes belwe€n the ASRB and the AARF w€re setd€d in &e lart€is falour rnd the
AARI (fir.led by the professionl ne€ed $irl, rhe r\SRB (tundirl by dre sovernment)
lhe ASRB forDally hnd power to @nsider standards subrriited to il f.on an-v soutce
This was nn arr€npt 1o l)roaden politi.el nc.eptability ofaPproved stanrlaids; howeveL,
only ore out of 13 approre.l standar.ls came f|om a source outside fie prof€ssioi'
ThLLs, as with ordinaq'standir.ds, ir coulil bc argLed thar rhe 'due process mcchinism
within the ASIIB failed to achie\t its PLr$ose.
Basicnlly, walk€r's argunent is that th€ sccounting prolession needed to legirirnise
accounting srandards (that is, €nslrre conplirn.e $'ith the stirndards) which could
be a.hi€ved onlv bv srarda s rhal had rhe lorce of latr1 by ensuring rhai ac..'unting
stanclards rvere ba.kcct l)) l€gislarion. llo'vcver, the accounring proftssion had an
econoDic interest in retaining the standard lettnrg pro.ess, which it clitl nol wanl t')
relinquish to tht governln€Di. ln tum, Lhercfor€, the only tay rhe prolcssion could both
legiri rise accounling standards and nrairrnin irs €conomi( inleresls was to iaplrtri:'
th€ ASltLi, the body thai had th€ power to mak€ accolrnring siandards nandaroD for
.orporate enlities. Under ihe capture viel\,, Fgularory inleNenlion i the accouniiDg
standard sedng process was designed, as wilh the Publjc i'rteresl theoll fiamervork, to
protecr th€ publi. interest. Holvevcr' walkeis snrdv polllal's lhe arcoonring prolession

cHAPTFR I Apt rirg lhe!r,v r. n..auri r! rrB!!i i.n 61

 .l

as an €lire giouf Lhat, in e*icl, was not a.couniable to the public nri€rest, which sorShl
and achie\.ed control ol the standard setling process lor irs own 8ain, and tlhich was
consrr,rlned only by the feai ofsrate intenention':r
'l he intentationrl harnorisation of;..ounting has raised nes' (Iresiions in relaiioD
to the applilability of capture theorv while lhere was \tideQread support in ALNlralia
for the harrnorlsalion of accornting stendards, lhe adoprjon .rf inre.nrLional strndards
strongly reflec the inreresrs rnd p|efere[ces ollarge companies, the Australiin se.urities
lxch a ngc (,\SX) and sections of dre acco Lrnting profession ':5 CL| RP I dire.ted standar d
seu€rs to ha!.e a (omrnercirl lbcus and io be fesponsive to blrsiress !re.'ds, rfflecring a
response by governrnent to lobbying aSairsi Austialirll AccounrLng Standa.ds Board
(AASII) slindards by the corpo.ate sec{or. The ASX was a sliong srpporrer of early
adoption of internarional staDdards, pr€sumnblv becaus€ it salv belrefils for the ASX
aDd listed coNpanies f'lowing fioln th€ use of inLenlational standards In one sense,
thr ;rrreresls of all these parlits have beer overtken bv inl.rnational events. llaving
ex€rcised their influ€nce and achieved rheir pLeference for adoption ol international
sLandards, they ar€ now in the posiiion of h.lvnrg given uP influerce over the lro.rss of
rhe developmem of those slandards. It is unlik€ly rhal these parLies (larye coDpalries,
rh€ accounting profession and the ASX) .an influence lirtur€ Alrslralian accomrin8
srandards in the same way as they have in rhc pasl. None of then is in the position to
comrol or'caprure'the standard setting process posl 2005.
wirhAusrralia's and lillrope's decisionsio a.lopl int€rn ational st, ndards, and the lASB's
nlission to hav€ its standards adopted in all co.rntries drroughout dre \\,orld, the tbcus
ofregulatory capture has shift€d ro the IASB. Zeffnotes rhar $e lASll is under a'steady
flow ofinsistent vie s' fiorrl lrad€ associations, maio. conlpanies and banks in tiropean
colurries.,6 lle explains rhar rhere are many groups vilally.on.erned with the iAstl
outprLt" so we can conclude rhal captur€ btr any one group would b€ unlikely. However,
the iden thatlhe IASB has been 'captured' bv the fASB has beentlagged. lhe issri€ ofIASB
srirndr.ds ',rhich are clos€ to tlS C€neirll) r\.cepted Al:counting Principles (CA{P) does
rai$r the quettiorl otlhe influence ot LIS CAAf on IASB standards. Zeffrepofts thai the
dissent in lurope oler IfRs 8, rvhich closell' follolvs a FAsB standrrd, has raised afresh rhc
quesijorr ofa,hether .onverseDc€ bes{een the lAsll and FASB isgood lor luroPe.ri

Application of private interest theory

Itivate inlcr€st thcory provides .rnoth€r approach to rrnclerstandirg behavi.]lt. oll.rrties
with an ince.tive 1lr influrn'e the regulatiorl of financial r€pofting. Rahlllan/s soughl
1o appl,v the priute j.ter est iheory ofStigler, Posner.rnd Peltzmtrn to the establish]llert
of rhe ASRB. Rahmar's conclusiol $'as LhaL Lher€ Nqe severnl limiLaLions ir \\hlker's
stlLdv. He assen€d ihat a systeDatlc .eview of thc lbard's o€anisation and lun(tions
indlcrted &ar the Board Nas deperdeDt oD and susceptibie io influence fron several
inLdesr groups. Thrs, $'hile Rahnan confirned the iDfluerce of th€ accolurtirg
profession on the pi eparariol] and revi€lv olstand:rr.ls, he also tuLUrd thal olher parties
secued iDpoftart roles rhat enabled theN to constantly scrutinis€ and influerlce the
Board's r.tiviLies. These pafues inclLrded rhe N4iDisteria] Council 1\'hich provided the
llo.d \{jth its basic autho.ily 'Ihc ljorrd had to oper.rt€ with tlle notion drit all ils
approled accounting standards rvele subi€.: o political approle1 lhis inDl;e(l that the
polirical consequerces ofjls srandards ha.i to be DriDimal.
Ralnrrn lound that thc 8o.rd also depended on th€ Nitional Cornprnies rnd
Securir;es Co.rmissioi (NalSC) for the entorc€menl of standards. The p.csence or
abs€nc€ of any srandard $'hich impeded rh€ eltcienr idminisrratior of company larv
s'es thLrs liablr to r..eive tbe atterrioD of the NCSC (ro1{ the Australiar S€clrriries

62 PART 1 A..oL,ir i8 h.dr

il"

:rnd Investments Conmission or ASIC). i:Lrnhelllrore, Rahmar aigu€d that Walker

ftili:d io n€nlion rhe presence of a number of.onpany €xecuriv€s on the ASRB Board
This is panic lirrly inpoftant, given thnr it \1'as nainlv the corporate managen and
directors ihat r.ere r€quir€d Lo comply with rnandatory a.cornting staDdards on the
introdr.rclion olihe AsRB. Thus, it was this sector which r.as, in reality, the legdated
indusrry' ALrditors or the accounting profession as a whole $'ere ultimately iiffecred
onLy because they nere activ€ly i volved jn the preparation and authenlicatjon of
conlpany hDanciaL stateinents. The corsideribi€ represeitation ol .ompany ex€cuiives
on tlre board lras devise.l, presunablt io help secure rhe i terests ofrhat Sroup of
regulared panies.r'r
From thjs p€rspecive, Lh€ a.counling professiort did noi'captLrre' the statrdard setting
process i Ausralia. Rathe., ]t .orld be arsred thal rhe producer 8roup, lvhich is well
organised and capible oflvieldiug significam political influence .onlPared with either
rhe accoundnS professior or dre much laiger buL [rore djl]irse user' group, becxm€
extensi\.ely nrvolved in, and ultimatel), coiriroUed, tbe debaLe on th€ regulation of th.
staDdard seltirg pro.ess in th€ 1980s Arguabl!, rt did so in order Lo achieve a padi lar
lo.m ol reglrlalory inteNcntion !\{rich se.uret them fron over d€regulari() '.r0 other
€viden{e ol Lhe iobb-\,ing polve' of th€ {orporate prepa.ers group (rhe nanagers/
directors ofrhe C 100 public companies) can be seeD in th€ pr€ssure this grouP brought
to bear on the ac(ounting professicn to effecd,ely wiihdtau Stat€mem of Accorntirg
Conc€prs (SAC) 4 llltniLian o d Re.og ition 0[ Lhe [)ement! oJ Finntrclal Stdt€nd11^ during
rlr e earLy I 9 9 0s. rr F'u fi h er examples of iDflLr en.e b-v pani€s frorll the corporate secrcr nre
s€en in dre governnent's Ct,l-;lll' I proposals to r€struclure strndard seuinS Processes
ard the sUbsequent 2005 adoplion of internadonal accountlng stanclarcls
A limitarion ofthese theo es ol reg'ulalion is that drey are not mlrlually €xclusive,
drat is, events explahed by one theory nla-r' be erplained equallv well bv another
rh€ory. h is not clear rhat a sjngl€ explanarion can b€ defended. I'or examfle, in relarion
ro thc Sarbanes OxLey A.t it can b. argued thrr the LIS Sovemment s'as obliged to
take a.tion lirllowing the collapse of lnron, to sho$' ihaL it \\'as responding to serious
ler€ls ol concern about the adequaq' ol corporaLe gov€rnance, financial rcpo.Ling
slrpeNision and auditing. Thus, rh€ prjvate interest theor- may apply equally r'€ll k)
explainxrg obs€Ned events Privale irierest th€ory has malv sripporters as il recogrises
ih. fundemenral self intercst ofpani€s invoh,ed in regularion. lt also fits well Nith 1he
vi€wthat srandnrd setdng is a political p.ocess ut.onsld€r d1€ influence ofpolilics on
standar(l s€tting in the nexL sectiorl

Slandard setling as a political process

Sranda.d setting is liewed as .r political process because ofits potential to sig fi.antly
affect the weilb€ing ofa wid€ \'arieLy ofinterestgroups. Ther€lbre th€se groups a(€nlpt to
influen.e the introducrion ofregulatioll. This nrod€l ofpolitical beh.rviour is a summary
ofthe'public choice dr€ory of regulatlon il b)'Wats and Zimlnennan 1o
rvas used
arglre thai fie poljtical pro.e\s is simply i D€ans of purslring individul or group
selfinreresr.rr Diff€rent $oups arr affecreil differenL]y bv a.couniing regulations.
ror €xamplc, n standard banning recogrition of doubful debts expense mighr be
wekolned by 6rms thd bor.orv healily ard ar€ rlose to th€ir borrowing agreenert
lev€rage .onstrainrs Or the other hind, la'gc binks wiLh high pubLic profil€s mat b€
averse lC) 1he slllndard becaus€ jt causes thrir p.o6ts to inc.eis€, underslales lheir risk,
aDd incLeas€s thci. apparent exploilarion of their custom€rs. ln rhe pr€s€nc€ of div€rse
and olLen conflictirg interests, a decision m:rl{ng bodv a regr:latory group mllsl
stike a balanc€ behle€n th€m bv naking politilal .hojces ii For those decisions to be

aIIAPTLR I Ai)Iinrtl,edv r. i..ourr nil regr rton

 .l

accepied by rhe people affecttrl, the regularory agency needs a Nanditte to nake sociaL
choices; that is, iL needs politiral Iegirimacy. Gerborh r€inlorces thjs view:
... a politicisarion of ac.ounting tule-nrakin8 Jisl nol onlv inevirable, but iust ln.
socleq' corllnitted to demo.ratic legitlmisation ofardroriq, onlv !olti.allv .csPorsib le
insdrLriions hav. dre ri8ht to comnand othen ro obey rLLles ra

In to dissatisfiction wilh standtrd s€iting by Plof€ssional a..oltnting

respons€
bodies, ftov{Tnments in rnanv.ountries have sei up in.l€p€ndenr standard sutters in
ar atempt to pndu.e hlgh qlrality starldards whi.h neet deciliorl makin:l needs oi
iinancial stat€m€nl us.rs. The standaRl scLLidg'dlre process' shouL.t allow srakehol.l€rs
ro .oDrribute to standar.l setLing, but also pft:venL any one partv, sLLCh as Lhe actounling
profession, from dominating th€ process. Conceptual franeworks, pLeviouslv
developed in rhe UDited Slar€s, tlnired Kirgdo , Canada and Australia, soughl l{)
provide staDdir.l setting bocljes wirh a franework lviLhin which lo dev€loP ac..'utltiDg
siaDdards. Ind€pendenr national siandard seuers lave h.d nlrcd suc.ess ir p(xtu.ing
concepttally sonnd accounLins siandards lhat achje\td Lllt de.isior usetuLness
obiecrivc Nerv siardards that have €xt€nded &c traditional bou daries of linan.ial
repofting in.lude those ircorpo..r.ing fairvalrtu ineasuremeni Dethftls. IIolvever, ihere
are norable examples wher€ p.og.ess toward a.'on..rpLuallv pr€lirred positiu) has bee)l
slow or where political lobbying h.]s'derail€d' an accountinS standard An .xampL€ of
rhe former is leasiDg. A G4+l srldy in t996 .ecommerded capitaljsing propcrt-v rights
inherent in all leases.35 Standard setters have expr€ssed a preliren.€ for recognrsing
leas.s on dre balance sheet. but luve rhus far been unabl€ to secure a standard lthich
satisfacrorily a.hieves this objective. Th€ IASB/FASB htrve a clrrrent P.oitct on
leas€ ac(ounting, \\,hich involves comprehensive reconsideration of all'oini aspects of le,rs€
arcounring a d is exp€cted ro lead to fundan€Dtal changes in accountiDg for leas€s.
lhe ainl of the project is to d€ve1op a new conmoD approach to lease accolrntiDg that
'woLrld ensur e rhat all assets and Iiabilities arisirg und€r lease conrrrcts .rre recognised in
rhe bahnce sheer. A discussior paper on LI1€ topic was jssued in 2009 r6 Isslres r€]evanr
to undersranding sLandards for leasc accountirg are explored in Lheory in actior 3 L

Companies should come clean on the value of leascs on their books

lnvertors shou,:l be very warl ol the results rep.rfied b) (orrp.rfics llrt rel'/ re.vi! o.

lyn.coriitinSrules(:anm.r.niratthem.jorityoim.rnycomtarics asr€lsnfdIrbi iti.s

Si
don't 5h{rwLrp on their baLar':c slreels. As a resuh, ever terillc (nrPrnies I ke \ /oolworths
repon grossly iiilirled rcrurrs(D irvennrent.id providir finr r.ial rl5i fen5!res lhntbe.r fo

n:rt).ttc.rl corpor.rte.rises sr.h .s Lfron's (1)llapse, tre LIS Securjties afd

Fo lo$,ing
Fxch.ng. Cornission invest itnted ollbaancesheet:nangcmcnts. lts nricl 200; repori
m.de sob. lng rcadifg. lt cstinaie.l thnl US- isted conrp.lies ha(l ()mmitted thcmselles to
l€ase p.ym.ntr r.rtalLints $USl 25trllion($l..1triLlon)th.idlcnot.pfc.r of l)alaf.erheets
AborL90plrl{:{utoiALnraiarcascsareofb.lani:esheetafdnrost.onpanftsfrvcrnre.
Thls smo<e ird lnirrcrs lrick sp. i.unrll lie ir the r€tai ingand.lrlnrer{t{rB Da!d
Twee.lle, chairman of the lnt{r ritiona Account ng Standards Bo.r'd, re(:.r } nrd a US
congressional hc.rin8 of hirj .nrbition b "al]lLr.r ly fly ir an air.r.tt thnl's on . r ri I r-. s
baL.rnce sheet betorc I di{r".
He srould fl! Qi.tas to lrs.trrlit, some (thol]gh not allr of rs .lr(rati lcas a e or
bnlnn.e sheel L.rst y!:irr, &rJ,n'si l4€-.1 vallcd Lhe olt balance-slre€t i:.5e liabilii cs of two
.rg(,tlsreiaiel,,CVSandWagreen,at$USll.ll)i liof an,:lSUs1j.2 bi ionrestnivey.

Pql ll q..n!r nq .r
 .l

l{ thcsc were on the ba afce sheet, the comp.nies' respectivc tina liabililies woud be
260 pcr ccnr nnd 166 per cenl of thelr reportcd l.!cls.
lr realitv, conpanie, coJnrn ttlng thenrselvc5 t.r l.a,cs eilcciively [,l.ly as,c.ts (ri8ht Lo usr]
thirgs)fundedbl.kbt.OblgationrLomrkeregul.r ease payrnents arejusl I (e obligations trl
nrake regular interesi repaymefls. Cood analysts, bankels.fd equity investor5 adju5t report€d
linancial statements to reflect thls 6ct.
Accountants (listing!ish betwe€n "capltal" ind "ot)|rnting" leas€s CapilaL cnscs m!st go
on balance sheet but opcratin8 eaEe! c]onl. Whl e the Australian Era rdard says that lease
classif carion should be based on r lease', "subsLance", lts Suidan. e . ritcria {u i:apitil leases
{s!ch as tlre ease term cover ng txr "nrai.rr part" oi.n assefs economi( lif') ieave nruch
wrlgSle rdJir
The US standard pro!ides hnrd crlleria, s!(:h Js tre present valLre of mlnimunr l€ase
payments exr€'edi18 90 pct.eft ofasset\,a uc. llut 5!ch crjteria h.1ve creaLed.r huge iinanclir
eng neer ng lndustry and p()videc a ''how lo" SLrlde lor ,itru.lu' ng lease de. s to keep th€nl

RetaiLcis.an cormjt themselves to mLki dccadc eases lnvoivlnS huSe casi: pay.nents,
yet keep tbem otl balance sheet. Frnd manag{J il Capital Palners esliinates the capitaliscd
valt]es oi Wooltrodhs' and Colel oiI-bal.nce shc.t lc:rses to b€ $11 8 bil ion r.d 510.8
bil ion respect vel,v. Adjusrifg for tlris oti balanc€ sheelinS nrakcs a huge differenre to th€ir
recently reporled 200fr 07 trrsults
woolies reporred th.r ner dcbl teLl $l.l billion, to $2.4 billion, if 2006 0/. But adjlslecl
Ior ofi-bal.n.e sheet lea5es (whjch rose $ L3 bi llon ln value), it .ea ly rernained !nchanged
at $14.1 billlon. Cole{ adjusted net debt is realy $ll.B biilion, verrus the Xlgorl mllllof
repo -.c1.Thatis,83per(:eniand92percentoilhes€companies'rcrl netdcbt, respecllvely,
s ofi balance sheet. Likewise, reported nvested capltal (debt plus -"qulq,t iumbeu grossly
Lncierstat€ real L,v. Woo ies' 7l.9 per ccrlt adjrsted debucapital mtio is more lhan rloLrble the
10.7 per cent repofted, r,hi e Co e{ is almort quadrup e 175.1 per ceft versr5 I9.4 per .cnt)
WhiLc oil balance sheeting doesn t disto( .eturns on equitv, its impact on debi ratios ialse r-
downpLavs .isk \\h ch may cause sharehol.lers to nraLie poor risUrelrrn trade-otG.
ln fairncsE, off ba ance sheeting also redu.es reportcd earninSs before interest and lax IEBlT),
be.auee it causes th€ ent re lease charSi: to bc exPcnscd. Lf lcase assets nnd I ab liLies were
on )nlance sheet, the expense wor d b. sp it behveen clepreciatior and lnterest; the former
aiiccts EBll, the la(er doesn't Neveih€less, oii balance ,hcet;ng nllates 'eporled relunrs on
lrvested capital (ROl), as it reduces the invested capita lcnominatff by much more than the
ElllT nuncrator. Uring JFCP's ease value and depreciatlof/int$i5i sirlltr, Woo jes' leas€
irdjurlcd ROlis 15.2 rercent $hleveryheirhh),itlslittenroredra.hallihc2T.lper.enl
rep!'tecl.Q){rs'llperceriadjustedRO is essthanhalith,.2Tlp.r.rntrcp.nlcd.
Ofi balirnce shectinScan a so nrak€ RO trends mlsleadirg. Forera ple, CoLes ofte. cLains
that lts ROI hrs nrore tran dolb ed ,if.e 2o0l 02. I his irom 12.7 per cent to 27.:l per
.eni because repofed lBl'l ha\ doubled whlle r€porled invested capilal has Srown on \
21 per.ent, kepi in chc.:k m;inl)' through sore y leed€d workifg c.lpltal redrcllons uui :rs
trorklng capltal is small rclativc to oil bal.lnce sheet lease value, $,h ch gre\\r 24 per (rn, rhe
.djusted ROI has only risen from 9.7 pcr cent to I I rer cent.
Civen the market's vlers or \lo(rlics {8rcnt) and Cokrs (poon, yo! may wonder whv
lvoo jer' reported Rol looks slight y worse thar Co es ThcmaindrilcrisWooies'$5l)iLliof
olint.rngiblc.rssetsisuchasgoodNi fron acqulsit onslversusCo es $l.7 bi lion.llinlangibes
arc cx.ludc| t.r provide a belter mensure of real op€ratlng perfornr.fce, Woolil:s' Rol beiore
casc adjunmcnls bccom{r5 9-5 pir {c ri morelhandoLrbleCoes"+1.Iper.c.t.AftcrLcasc
adiustnrenLs, it ls 2l per cent, much high(r tlran Cokrs' 14.5 pcrc(1rt
The Wool es/Coles comparison show, thai ofi l)a.nlc shertinB (iirf mrke iflcr cunpan!
.omprrisons oi reported r€t!nrs v€ry misleadinS.
As coJnpnnies differ in the mix oJ assets Lrnder.linct ownership, cap h le.ses.rnd operaL ng
,-rscs, thc or y w.ry tc' m.rke I ke io'llke comparlsons ls to put al eises on balance s reet.
Off ba af.ie sheciinS..rr alqr) distorl compat sons a.ross busines, un;ts. Reporti{l ROls ol
Tnrget (65 per cenl) and Food & liqr()r 12.1 per (.rt) do partly rele.:t gcruinc performanrc

CHAPTFR-l Aptlfi.Srr--or!1. r..ountn! regr nti." 6q

 I

diilerences. But th€y aLso reflect th€r {n.t th.1r otl bir irn.e sheeLing boosrs RoL Ie atlve t Lc5, f.rr
unitswithhishcrcaninBspersquirenretrc(rsmeleragedrjvc\hasecharges,hclc.oifbalin(
sheer k'ase vi uen. Despitc its c!rrent urderp$iffmance, Food & L q!or's $41I ni I oi EBIT
is 2,1 per cerrt abovc Target'5. On Lralance sheetinB would narrow lls irpparefl ROI 8ap
J:olotrlnB thc 5Ec'5 cnLl, th€ rte alional A.counting Standards Boar(L l)lnf, to €liew
iease accouitlng trv th Au:jtralian particlpatlon). Unlortunately, a ncw srandard won't cmetge
Lntil at ead 2009 and lt s,.)r't nc.csrarily requin: lul on ba ance sh..ling As ':uncnt
st.fdar.ls have iortere(l .r huge ndlstl a.d alLow€d comprnie, lo f ranclr ly eng ieer rrEy
r 'rr..'r, l . g ' rn \r
Ratherthan s'aittor rew sLandirds to Io(r on balan..:c dreei ng, comrr.jca thal rea ! carc
abo!l sr.rreholdcls shoul(l take th€ initialive to do lt nos'
Pir Ke, i tei.lres n,.hgr trr Melbou'ne Bus rr$ scho.linil n r lemblr!tJr Cip n Prri.E Trii t) tscn Prirr 'r
Sour.er lr. Audrd/d,, 2 O.toL., 204,-

Q estiors
1. Describe curenl a.ounting practlces for le:r\e:t as out ined in thj, a( cle
2. u/hy doc! the althor cal lr:asing strndards 'sil1y ac.ountlnS ru cs'?
3. Stanclard setL€rs rropose revising lcnsing standards lo rcquire c.lpitalisatiorr of a e.rses.
Exp aif thc financial i P.1cL lor Co es and Woo worths in 20i17 08 of hirvirlS otl baiance

4. What ?re the adlaninBcs oi capil.lisitg eases? Cilen thal mo\t comPanles lsualv
reporting operating eases, wil they opPose ncw leaslng ru es?

'rhere are DaDy examples wl€re polirical lobbying has interfered I'ith the slandard
setting process and wilh the srandar.ts evenlully issued by boards Zefftracks the rising
importance of finarcial accounling standards in differenl secio$ of thcr United Srates
economy and describes rhe spe.ial interest lobb-ving which has occurred to obtain
srandards compatibl€ $'ith pafiies' desired olrtconres.3i Notal>lc eumples irrclude Lhe
r.entment of foreign .lrrrenc-v translation gairs and losses; unrealisecl holding gains
.rnd losses on .urri'nL marketabl€ equity securities; 'suctessirl ciTons' and fllll cosr'
poli.y .hoice for th€ oil a d gas industry as well as l€asjn8, sto.k ulti 'n\' |cr,s orrs
consolidnled a.couming and nlan.ial irsrnments. lhe lls siLualion i< nnt trri'ttt.
Zeffdescribeslobl)yingofnatjonal shndard setters h Carada, S\dcn andtheLJ ted
Icngdon on a large of simil issLres Hedlso oLes si$ifcaDt lobbving olLhe ]ASB,
iI reladon to rhe €liminatior ol l.rst in, l'irst out (l,lFO), shrre based payDent ard
financial insruments r3 w€ describe belo$'the.as€ in )€iation t.r ir:rn.i.rl instrun€nts
an.l then .onclude this se.tion rviih a desc.iPLbrl of the polirical pro.€ss.s surround]]lg
the adoplion ol IAS 38 17?ldrgill. Ase6 in Australia.

Financial instruments
lex' ac.oluting standards have br:an as conrrovelsial as those for financial inslruln€nts.
clonsequertly, ihe adoption of IAS 39 Fnrn.tri lrurrrlc,r.s Recag itlon dnd
Medsunnrtt in dre rurotea,r tlnion (EU) has been a higblv foliricis€d proc€ss
Fonrlng slaDdar(ls ro accoLut lbr inancial instrLrments has .haLlenged slrndard seLt€rs
for ser.eral years. Early developn€nts occurred h Lhe llnited states, r'here fiere has
been considerable d€nand lor th€ us€ of ftir value nreisuremtnt (i.e. nark Io narket
oruscofar eslimirtion rnodel l(i ie.ord fair vallre ar balan.e dalo to ntoft::r..u te\'
rellect ihe risks and r€wards of holding ln]ncial instrun€nts.r' Stin(lard s€ficrs hav€
vie$'ed fairvalue n€asuremenL as usetul for pr,:)\.idhg relevanL infornlation tor decision
making b', users of Gnan.ial intbmation. Th€ Im€rnaiioial O€af ization ol s..uliiies
I

PART I A.Lor rtirB r!re!1 ,j

 .l

Commissions (lOSCO) .onsidered guidan.e for accotnting for financial insrruments

€ssenrial and requested the Intemxtjonal AccouniirS Siandads Commission IIASC) to
incLud€ a linarcial instrum€nts standard among the .ore standards being p.epar€d nr
expectation ol endorsement by IOSCO for use by companies in cross bordet lisiings.
'the IASB created IAS 39 bascd on rhe FASB slandards relatirg to financial instntnreDts
(FAS I14, 115, 133 and 140) as an irterim standard, noting ihat funhe. developnenL
of l,{S 39 wor.rld be r€qrLired.ao
follolving the annourcement in 2002 thtrt iniemational accounting standar.ls (lASl
would be adopr€d in lurope, mu.h greater attention was focused on lhe coDterl ol
inlenational siardards. LLJ lisled companies, which had previousLy follo$'ed national
GAAP, worLld now be required io follo ,IAS at least for consoli.lited a.coltnis. ln the
area of6nanciaj instruments, the accouDting change\\'as potentially dra atjc Cenerally,
companies used hislorical cosl accounting fot finan.ial instrumeDls' showing then al
co$ or amonised cost, and incilrding gains iD the income statement only rvhen they
Nere realised. ln relaLion to linan.ial ass€ts and liabilities, comp.nics had considerable
discr€tion aboltl rvhef gains and loss€s w€Ie recoded in nrcome. IAS 39 would reqtrire
.onrfanies to ir.lud,r onrealis€d gains and tosses on.ertain linancinl irstrunenis in
incone when they occuned (llor l'hen the-v *'er€ r€alised), thus r€sticting colr]panies'
choices abolrt th€ timing of r€cognilion of3ains and losses on some instruments
The .ea.tion to IAS 39 ainonS some D{roP€an companics \\'as ertremely negative
The jdea of intludnrg Lrnreilised giins and Loss€s ill incone was not Popular in some
coulltries, slLch as Fmnc€ and G€mrany, where accouniing Practi.e was essentially
conseffative, use ol the historical cosr pinciple rhc norm and up$'ard revalr.ration ol
ass€ts or liabiliri€s not widely pracrised."' Comparies obiccred lo Possible subieciivig
irxroduced into accoLntirg measurement and expe.ted volatility in reported eamings,
as well as fie costs in$r.ed in n€etjng the rcqujrem€Dts. lrrrthcr, baDk representatives
arglred thar th{:y lvol d be lbrced ro folloN accounting ru]es (such as Lhose proposerl
fbr hedge accounting) $,hich diil not reflecr ihe underlyiDg reaLiry of iheir busjness'
aking ac.ounting infbrmation less, rather than rre, useful for de.ision makirg.al
The lAsi] gavi: cnreful consideratn'r to the issu€s .aised by slak€holders I December
2003 it am€nded rhe 2002 e\posur€ dlaft after rn entensi\€ due P.ocess which includ€d
num€rous board meetings, discussion ofdle e.rposure draft 1\'i$ constituent !ir(JLrPs irl
nine roundtable me€tings, recei\.ing aLld evalualing mole than 270 .omnlent letters
and discussirg rhe Lopjc $'iih advisory commitl€€s and nati{Dal staDdard setti:rs Ion
arou d dr€ $'orld.1r At the same rime, iinancial ttirenlent prepar€rs, nohbly th€ l.rg.
rr€nch and Clerma banks, rvere lobbylng hard ihrolrsh all possible means to avoid
the rdoptior oflAS 39 l-olnhying eftbfts directed,rt Lhe IASB w€r€ made by companies
individuals and their repr€sertative bodies such as pro{essional associaiions industry
representative groups, nadonal srandard sdrers ind EuroP€an .€presentative bodies
ircluding FEf, and ETRAG.!a lhe ultinl.rre lobbyng a.tivity was obseffed: a letter frorr
rhe French presid€nt, lacqu{:s Chirac, to th€ litropean Connission (EC) president
$'hich objected ro measu|ement of derivaLives al lair value and claimed that the IASB
stdndard wouLd have'nefarious conseqLrelces fbr linan{-iirl stalrilit}".!l
Th. IASB respo d..l ;rs best it colrld t.r dr€s. con.erDs, bLrL was conrmilled lo
a stardard b:rsed or the prircifle ol recognition an(L reasrr€rnent of financial
inltmmenls i1t fan lalue Thus, l.\s 39 was inch td in dre sundard! subnritled ro
the Accounting ReglLlatory CoDrDi(ee (ARC) for endo.sement lrior to adopiion b-v
the I]C. Th€ ARC erdors€d nll the IASB starda.ds, blrt ex.lLtded certajn Provisjons
.onlained ir IAS 39.'6 Th€se relat€d to the use of lair value mensurement and ro
hedsins. CoNpanies were not r€quitud Lo .onpl) wilh these s..rions of IAS 39 wh€r

LTIAPTFR:l At ) )i.u the.r! ro i.L.rntinS ft'a!13r.. 67

 \

prepaing accourlts in accordance $,itlr IAS/I|RS from 2005. Thus, the lobbying a.ln irirs
ofecoDomically poweftl and politically *,l]11 .onne.ted gloups succ€ed€d ir diciaiing
the conteni of an a.counting standa One ol the issues of th€ 'canre out has be€r
rcsolv.d. while lhe orh.r Fnrains 1?
TheARC'S decision was crid.ised by panies who sarr the crearion of'Lr.uropcair IAS'as
a back{ard step. arvay from the goal ofharmoDised finan.ial reponing The UK starda.d
setie$ did not agree wirh theARC d€dsion, and en.our,rgcd llK ('npanies lo.ompl)rrLidr
rhe ftrll hedging re{tuirenenis of Ir\S 39 46 The political cortroverv in rr:larion 10 IAS 39
has nor decreasecl rvith thc passagr of rinle The linancial crisis, which begal in 2007 08
resuli€d in the IASB amending IAS 39 (and IfRS 7 ltrnrtd IrsrirrxdrL\: Dtsdoinres) ro
rllow conparies the choice ofreclassiqring soIlr.r l'rnan.ial jnstrunenls ioln categories
where fair value neaslLrement appli€s to caiegori€s l^rher€ irems are measlued bas€d or
arnon;sed cost. The board defeDded the changes, Nhich weie rade wiL\oul due proc€ss
consuLiatioD, in the ligbt ofrequests from [U ]eadeis and 6nance ministrrs nnd that the
facl thai the ac.o!nting choice {,as availablc under LIS C,{A.P.I') Lloth theory in aclion 1.2
and case srlrdy 3.2 address issues relating to regulation and accounting slandards. lhry
;rllow further o\ploration oftbe role offairvalie ac.ounting in the global financiaL cisis

Accountants draw the Iinc at regulatin€i

The Slobal accoLrrting standards sdt(J has defende.l its role ln the flnanc a crisis and bL.nred
pnrdenlial regLlators for lax ruliis thal efabl€d ban rs Lo r sky bels, dole ol]t excesslv€
bonLrses ard pay too much in dividcndr. 'nak€
Menrhrs ofthc lntcrnntiona A..o!rrting Standards Board, visillng Sydney yeslerday, a so
deir:ncled ialr va ur: ai:countjng, \!hich banks have crlticise.l ior exacerbat ng the cris s bl
lorcing rhem to rccord nrarsjve wriie downs ln asset valres.
"We are not sel up to be iocused on fnanci. stabi ty," board nrembei Stephe. CooPer
said. "There.ue ot rer tprudential reSLr .Lorsl who are .lre!dy s€t !p to do thirt, but dre) don'r

''ll seems cr.zy to nie rhat peop. ,rc askifS u5 to do somethifS w. .ic pntenll), rot

will pr,"sent its vieu,s to ire i:l 2o mcetiiS ol {,orld lea.lers i. London .exi nxr rtl
The IASB
afd .ade , to put thc .rnus ior ovcrsighr oi b.nk, on pr!dentiir reg! .rto s.
$,iLl urSe
"Ihc r{r8!lator shouLd br: fq us{a] or not alkrv ng ba.ks to p.}, .lividen.l5 an.l d.r sh,r.
brvba. ks il thal is golng to put th. b:n ( in dafB{rr, rrth.j lb.rn tryifS to ch.nge the proiit that
is r.porlcd,' Nir kxrpcr sai(1.
lh€ ASB qaid thc prol)le nswtlr ir vnluc a((r)Lrrin3 tlrc method oi va !l.g .ssets at
nrarl(et vaLuc rat re than histori.al (nt ar.rsc bc( Josc it !vr5 fot adoptcd wide y efougl
afd shou d be appl ed ro all iinanc al fstrumenis
The major nveshreftbanks.lpplylhemelhodLoonly60p{y(iyntoil(lpe.ccntoifiran.iil
nslrunrents on thei' balalrce rheets,.rnd the maj(n r(:tai barks,t)t)ly iito.5 litle as l0 pe

"People ate.lski.g us to takc a h.lr( ut 1(r l.ir vahc or othrr ncasu!{rndrts tr hen t mes aie
good a r. irrcr.nsc th{r la r valuc s,he. tlnres are b.d," Mr Co.JP.r said.
"But to d{\:idc l)y hoM, nru(:h ),or haircut an.l bv how much you ifi:reas€, you rale to b!
c ose to the l)af <s rid th.r nrarket,. The banking rcgulan)r hns that r:krsen€st "
IASB mDl)(r Wnrcn Ma.C;re8or said t1c bn)(ng ndusty shord keep ar.ldditn irl
cnpitn bLil.rto p (x{\1 a8n inst .nta(rop hes, as nnrre,sdd.
He al,o sai(l Austra ian (nrlt)anie, should reporl q!arter y, :rs if $c US, raLher thar twi.e
a y.r3r, to cnsu( thc t mc y .liscloslr€ of asset prlce, "il th. reed tor I nrel! nlor atiof s

PART I 4..!untlng tre! ,r

 The IASB wllL lotrby lhe C'20 io cnr!re lhe US cofLintres tovvards adopling lnternational
accountlng standards. lf the LIS iails to adopt the stir.dJrds, ihere lvlll be an lncrcased risk ol
reg! .itory . rbitrisc: corrpnnies lookinil l.rr 8.ps to dclermlfc the besl iLflsdictiof for rhenl

Saun:-.: Tht Autt.iian tinan €/ Rev,4r, 5 rvlar.h 20119. w$!v an.onl

Qurstions
1. The irti(:I. i{rfe s to a vlew ( lr.ulat n8 at thc timc, that fair value n.rrrunrifg ront il)!te.l
to the'gLoba iin,rncial crisis' (ironr October 2008, the near co l.lps. o{ n.rnv l)anks
.nused capital tk^\'s tcJ dry !p and sh.lre Prices to lalj drimati.al y) How ()u d {.i va ue
ai:.ou rt ng er.ccrhalc the IinaiclaL .riris?
2. Why does the IASB nrember refuse lo accepl espons bi iry ior the ilnancia .rlsi,?
3. lh. IASB cofsi.lcrs ndoptnrn of lAsll nandnrds in ih€ L]SA to be essentl.l [xpli]i I u lry ir
holds thi, view. To whnt .xle rt does lrc ASB's positiof tilcct sell interenl

lntangible assets
The adoption oflAS 38 rntur8irl, Assets in Alrstrali:r nlso illustrates lh( role of politics ;f
Lhe slindards setting process.'lhi: AAsB had nor isslred a sPecific srardard on accouDting
for intansibles, having withdra\ n its exposure drali in 1992 due ro la.k ofconsensus on
theslrbjecr.50 Niany methods fbr valuing iDtaDgibles asseLs had del'eloped and AlrstraLian
conpaDies used a varieq, oflnethods.5r IAS38 (issued by Lhe IASB iD 1998andrevised
in lvlarch 200,1) reqrdred methods of accourting thal uere s;gnificartly differenl ftom
tbose adopted bv some AlLsualjan compaDies. for example, inrernallY generdted
intangibles caDDot be recognised and intangible assets without an actiYe rnarket cannot
be revalued. Australian compani€s with srlbslantial xllangible assels in eilher of these
cat€gories lobbi€d th€ ]ASL:], the AASB anct the iedelal governmenl for relief lrom
rhe IAS 38 r€quir€n€nts birsed on tLle iDpad ihit Lhq' would ha\'€ on companies'
financi.rl statenents.s: l'he AASB r€quested that Australian conpanies be Pcrni(ed to
.an forward eisting intangible asset valu{:s from I larLrary 2005 I lowev€r, the IASB
ddined lheir r€quest l'he AASB $'as urable to ntrgoti3te with the IASII to a.hieve an
ort.ome that \\'as cons ered impoftart b-v sonre Auslralian comp:Lnies 'lhe result
shows rhe rclative porver ofthe A,{SB and IASB and highlights the limited ability ol the
AASII n) influence ihe lAsll. Ii nlso illusrlat€s the IASII'S ne€d to be se€n to be a srrong
iDd,rp€ndenL stindard s€tter. lhc,\ustralian gov€mDrenl chose not to irteN€ir. in
rhe process ol edopting lAs 38, dest)iLe companv reqLl€sis for it ro do so. Transfenitrg
a tlrndamentrl xspe.t ofsiandar.i srtring offshore (to the lAsll in l.ondon) allo\\'s the
golernment to.eter to global marker forces demanding iniernationirl .olnParrlrilir-v an.l
gives it a juslific:rLldr io sta-v out ofthe sLandard settxrg process. It also highlights the loss
ofinfl euce ollhe corporate sector over tlr€sLrndard seuirgprocess.

HF- TUT REGULATORY FRAMEWORK

FOR FINANCIAL REPOR,TIT.IC
h 1b€ precedi.g dis.ussion, r'e have refd red ro tn:rny palies 'ith af active ro]€ lvithin
the financial reportir\g €nvironlrlent. They iDClu.le rh. treparers ol the 6nanciai reports
(conpanv directors ;rnd their exe.Lrrives and nranrgersJ rnd a comp.u)"s errcrn.rl
nuditors as \{'e]l as the Rrl{'makcrs, such as pivate scctor groups, stock ex(h.ngcs.nd
qo\r nrenrs nnd rheir asencies. ]'he:r.tivities of lh€re parlies will be uen(€d by n
rhe environment in which hnancial reporring takes place; that is, its legal, econonic

CHAPTER I Atpl\, fg I reor! t.r r...LLnlifg r+r itlof

 polirical and socjal s€rdng. The sp€cjfic envjronmental fearures ofthe financial reporiins
en\;'or'-.r r ,lF L, \.ldr ,r L..,led rh. rg,.,ruD |r.r,wort ui h[,n.;
reponing. While regulirory tuaneworks vary b€rwecn colntrles, rhey ofren have
.ommon €lements. We outline Lh$c elemenls below to pftivid€ an ovefr'iew of ihe
.e8ularory fran)ework for linanciaL reponxrg (thar is, a proforma reguLatory i,al1le1\,ork)
and to demoDstraie how the el€rn€nrs ofihe rcgul;llory framework influence the oulDur
ol rrF hlrr.rl r"torl rs pro p$ rr. hr r",:rl r.,r "r rl,.
r€Srlatory frame$'o1L rlhich \\'e dis.Lrss are:
. siat tory requiremenis
. coDorate go\rrnanc€
. auditors ard oversighr
. independent enforcenenr bodies.

Statutory requirements
'Ihe key parricipanLs in rhe prodLrctjon of ti ancial r€fo.ts are .orpor?re
direclors (and
thei. executives and nana8ersJ ancl jndependenl .rdno$. Elses4jere jn this book, $,e
have e{plained thar ther.e ,rre man! molivations lor malagers ro \.olunrarity prolidr
financial informarion and ro have Aai in{ormrrim indep€ndeDrty verii€d througll
ihe audir process r.ro.rv we rurn ro fie.ole of srarulolr requjreDenrs:rs ar incendve
to p.odlrce finan(iat sratemenrs xtld have rhem audit€d. In rrany courtrj.s.ompJny
law nardal€s rlrar djL€crors provide audired accounrs 5r Thus a pnmary influence on
diredors and audirors is the need io fulfil starrtoqr repofting requiremerrls, as contarned
in collrpany lnw Onih€ onehand, compan_vtawwiI Iik€iy man.tare birsjc r€qLliremenrs
relarin8 to which r€pons are to be p.epared and ih€jr frequency of prepararion. llui ir
may also iDchde panicular r€qlrirements retating to rhe infornlaiion to be includ€d; 1or 1

e,rample, in Ausrralia comfaries nusr disctose infbrmarion about theU en!iromennl

perlbDrance. ln some jLr.isdiciions, notably Lhe Lrniled Siares, repoliDs requirem€nLs
are de.i.r'ed predominanrty froln securjties Dart<et Iarv raLher ttan .ompany taw.5l
l
l
AddirioDal frnan.:iat reporrinS requir€menrs are derive.l tr.,m specific r.counijns
standards and in mary jurisdicljors these srar.lards ha!,e the tor.€ of l:ir. rol
cxample, listed.oInpanies ir ih€ LLL.opean Lhion ihal prepare.onsotidaLcct inanciet
l
sratements ar€ requjred t)y tarv r., us( IASB s(ndards adopred l)y ihe EU. ill Ausrralin, l
cotnpany law requires all reportnrg enlilies ro toltow tegalty en.torsftj IASB b.sed
accolurLing srandards Tax"rion tit, js anorher srarurorl, influeD.e on fin:rnljal
a.counrjng in many cour rrtrs u riht. Lhu{ h,11u$ rr B a fLr; . h oL c€rrnan ac.ountinS
rradirion tD $ese.ornrries, for singl€ enrlry repo.ling, ihe tinanciat accounrhg mlei
ar€ the sam€ rs 1ax njtcs 5r CojlpaDy la\\,, in turn, forms p.rrr of a wttter legat svstel1r,
which ls liket), ro irclude $.ays of noniroring com iarce lvjrh shruiory reqoircm€nrs.
to. exaDrfte, dre FEE repors rhnr nuDy luropean colrnrrjes have a bocly responsible
for checking todgemerr ofaccounrs ln addirjon, lhe judicial s].siern p,ovides sancrjons
ard pernlries $ar pronrote cornpliance wirh conrpan_v tr\^,.si

Corporate governance
Arother imporlanL €lelrlent wirhi. a collnrry,s regulatory f.amewo.l( is rbc svsrem .,
.o+nrai€ govrrDan.e. D:rvis rrkes, bioa.t'iei{. ofc".porare eouerll,r, .r rn,i srar€s rh.t
ir refer.s ro'Lhe srrucnr+:, proc€s\,, ind rnsrrt|tior s r,ithl| Jn,l
-lrourd organizations
that allo.rk pos.er and resour.c conrol among padcipants,.rT Some .orporal€
governance pracdces arr deived frorr laws i{hich .equire direrrors to c.ury
out speciti.
a.tions in rehtion ro rhe mrnagenent for their colnpanies. for cxanlpte, reqlrilemenLs

7n PARI 1 AL..!ntifg tr-..r

 \

to hold neetings $'ith shareholders and to (lisclose matters olinierest srch rs dir€crors'
renunerarion and retaied paft_v tnnsa.lions a.e basj! coporate govenance rnatiers
whi.h may be covered by .onpany la$r.!l
However, a regulatory franrework ma), contain rddjtionat corpo..lte Bove.nance
guid.n.e and rules, aising hom bolh privat.: sc.tor voluntat rccomnendations
and srock exchange ljsin8 rules Corporate gortrnanrc guidence nray tak€ lhc fbrn
of best p.actice re.ommendarions, rfiich encourage dir€rtors to adopt
'olIntarygov€rnance mechirnisms, to best suit the situation .rf their nrdivi(lual
appropriat€
comPanv. Both slrpranationaland n'llional bodies have produced coeorai€ golernance
reconnnendarions. Th€ lDtenatioral Fedcritior ol]\..oLlnunls (llAC) guidelnes are
an cxrinple olthe IorDer and corporate goye.n.rn.c .odcs isslted nr d1e Llnir€d Kingdon
aI]d Australia arc tl\amples ofrhe latter'r Covernnn.r irq irem€nls lelnting to finan.ial
repoltingcan be €nforced by th€ sLocl(exchanges orthegovemment bod-v responsibl. for
enioirem€m oflinanrial *rporling rquirenenls. lor exanple, in ih€ United l(ingdoln
and Austr:r1lr, the resp€ctive stock exchaDges re.ommend complianc€ $'ith the corporare
governarce codes nnd reqrire compaDies not in comtliance to Frovide explanations
ofrhe i:asons fbr non conrpliance, rhe so-called 'ifrot, $,hy noi mle. [tl direclives on
corporate governance can be enforc€dihrough n€mber slates' lega I sl,slems

Auditors and oversight

ln many countries auditors p€form a vitally inpodant fundion in providing assuranc€
about rhe quality ofinformaiion provided by conpanies in their 6nancial slrr€ments.6!
It is common for th€ auditing professior to be regulared ir some Nay. Ihe most basi.
foIlr ofregulation ofthe professioD is limirirg oftllembership ro pelsons wiih panicular
qlralifications and experien.e .rnd requirnrS regisuation to pnctise. Other forms o{
regulation involve requiring rnernbership of a professioml body and colllmitment to
an erhical code ofcolrdud lrolessional bodies rnay also sanction m€tnbers in breach

Ma.)'of thesc lorms of regularion are sell nnpos€d because a profession na-v agree
to lbllor, a bocly of mles io rnainLain irs privileged position and to protect its righi to
pracris€ as a professio . For €xa rple, pri\,ate sector sellregulauon ofrh€ accolrnring
protissioD is an earl-v form of aLrditor ovcrsighL. In Lht p:rsr, proLssnJn.ll bodies ha\.e
taken their role ofov€rsi:tht ofilre p.dessior seriouslv, devoii.g consideiabie resources
to deveLoping standards for profissional conduct ar a n:tional and nrt€inaiiorrl level.
Niany rational bodies r€presenting arditors bale volrntail-v a.lopied jnt€. rtional
slandards of auclirhs (lSA) as an indiration of their conll1litn]eri to provi.ling a high
quaLuy seNice and denonstrariDg behaviour appropiaie to Dremb€rs ol a professbn.
S€lfregulation ofrhe auditirg profission has b€en i{idelv obsened, but there are
sorne rorible exanpl€s $'here regulalior ',vas fron earlv tines rhe responsibility
of sul. aurhorities. lor €x.rnplc, in lran.€ ard lrah, regulation of audito^ was dre
responsibilitv of Lheir respe.tivc litdependert ertor.ctrrent bodies (th€ secuiti€s
ma.kel regular().s, Aulorita des \larchas Firan.icrs orJj,\lF in lran.e and Commissione
Nazionale per le Societa € la tsorsa or Ornsob in ltaly). lD the case of the AM! and its
pr€dec€ssor organisation Colnnission des Opdrations ile Bours€ (CoB), th€ regulator
worlis closelv h'ith the Cotnprgnie Nrtionale des Colr1lnissaires aux Cornpres or CNCC,
dre bodv r€presentxlS th€ audilirlg profession in dre process o{..r.rying ott oversight
.ri audiLon' a.tiviLies
'lhe locaiioD of.eqronsibjliq for auditor oversigh( Ni& a statutory body, rather fiar
allo\ring self:reguiitioD, provides (at least jn theory) krr more hdependent reglllaridr.
Th. .h.rice ol a sLalutory reglLhLor rather than seLfirgul.tion may rcfle( economir: or

C|APl {3 ?\pp \ n!tre.^,tor..!Lfl rg elulrt!r 71

 \

poiiLicat diff€r.nces in )ptroaches to nanagement ofcapital rnarl(els. For€xample, urtjl

2005 the United Kingdom had a longstandirg tmdition of self-regulation of audirors,
consisteni with a culturaL position of mrrinisinS iDterventior in the operation of rhe
.apital mark€r. Statutory rcgulaiion of arditors is consislent with a more centralise.l,
intc^,enlionist approach to regulalioD of busiress observed in Fran.€ and ilaly.62 h
recent years, many counries have inlroduced starutory bodies responsible k-rr.ruditix
ov€rsight, as discLrssed in dre finrl s€.rion ofrhis chaprer

I ndependent enforcement bodies

A sLudy b)' the fEE inrlLrdes ar ind€pendenl enforcenent body as palt of the overalL
ststem for enlor.ement offinincial reporling reqlriremenG.6r The role olsuch a bodv
in the regul:rtjo of financial repodng is to promote .omplian.e \dith th€ reBlrlations
goveming ihe produ.rion of frnanciaL sratenents, which lr.e .onLained in lat', al]d
accoLnring stxndar.ls. An in.lep.ndort enforc€ment bodv is an exte.siotr ol lo.lgement
supenision, a basic pan ofthe regulatorv IarnervorL. while lnanv.ountries hav€ a bodJ
r€sponsible for Lodgement srpeNision, nnLing up an independeDt enforceD€nt body is
a rnor. .e.enr cvenL, linked to the adoption oI IFRS in 2005. Be.al]se oi the impoftanct
ol cornprchensive and consistent applicaiion o{ IFRS h achieving dre goals of IIRS
adoplion, each llll member staie was r€quired ro s€t rtf an independent enfor.eDent
bdr- ihe CommiLLee of Europearl Secuilies ltegulalors (CllSIi) rcpon€d Lhar by 2006,
20 ofthe 27 nl member slates had set up an €nforcement n;echanisrt Lhat met, rt least
in pirrt, rhe rcqrirements laid dowr by CUSR slandards for enforcemenL 6'
A securities nirl<cL regularor is the most colnn1only obsen ed fbrm foran in(lependenl
eo€orcemenr bo.ly. lxanUles in.lrde the AMF in franre, the Corsob in Italy, tht
Aurcriten i:inanciirle Mnrken (or AFM, Iin.rncial Market Aurhoriry) ill the Nethe ands,
the Se.u.iti€s lxchange Co nnission ln th€ Llniled States and ASIC in Australia.
lndep€ndent enfbrccDrenr bodies lrav have eltensiv€ dlrlies ard powers ll1 relatioD to
thc regulation oiset urities rna.l(€ls, $,hich eji€Dd far b€yord llle monirorinB offinancial
rcponing Nevenhelcss, su.h ])odies .rl1 be very active in enforcing finarcial rcpoftin.q
req[irelllenls .o n L.ri ned in h\! ard .lccottllling siandards r" The sEC is a n.rable example
of :rn rdive rnarl(et reglllaror, r/hich is xrvoh.€d lll setiin8 accounting requir€meDts
(eirherdirlr( rlv o. rhro gh.r delega ted (]o ll1rr irtee, IASB), providing nnerpretarion advice
r|dtakirgl.grli.tion:rgrinsr.mslornoncolrlpliin.e.66The.,ryinaction3.3explores
dte .ol. .,1borh drc lislj alld Lhe SIC rl1 rclation to the isslle ol ba.lidaLjng of slocli
options in the tlDil(al St.tcs \'\'c .onsi.lc. the cxtcrri ro whi.h FASII rnd/o. Lhc SIC can
be corsidcml resporrsiblc wlret] ihe.e is nor .orrqrliancc witL ar accrrurring srand.rd.

Enforci.g requirements oi accounting standard,

Exccutive in U.S. convicted for backdating share options

bt tr. t)..]) rnd i,lat1Ri.htPl
r sc.rel:l r gu ltr'!rJli(:t in the ilr5t opt ons rac rdar ig.nse 1(l go to
Nl]u, Yorl. il.S. prose!r to
Lrin nrurinBrcor!lctofthal s expectcd ro onbr)lden theD to pr rsue siml .rr .aser.
lLr(rsint.l.S llinri.tCoLrrlinSafFrancisr.jof luc\da\, ron\,1( t{'d i t.rnrerchl€ exe.utiv(roi
B (x.rkrC.)mmufi( iln)rrs Slst€ ns, CJegory Reyes, :14, on l0 ()!fts oi (!nlpirar! ai.l lraud.
llxr vq{lld end.rd i iive w€el t, ial if whi. r Reyes was arcuse(lolintertionil } changing the
gra rt drri s for hundreds r)l slock opl on awards wiLhoul clir.lorinS the nro\re to invesLors.
Scnl(1r.lnS is scheduLed tr) Nov. 2l. Lrnde Ll.S. sertc rcjnS gr ir:l€lifes, Reles l::oulcl ln.e
Lpto20yeas nprisonTbrthen stscriols.hnrgr!a5w.laspayrnl lorsoi..iarrirllres.

PARI I A.tuurrinil ilr.. !

F
The vcrdjct sent shock waves th'outsh Sil con Valley and law offices around thc country that
are repr€sortin8 dozens oicompanles nfd.xe.utives entang cd lr fie sidesprcad scrida.
ln ihe wake of irtefsc mcdia atlent on, reSLr atort cra.:kcd dowf ()r more dran I00 .onr
pani., oler the unlikelv coinclcler{c oi st.rck options being grrnied .gain and agaln to
executives and employecs on daLes when the sharc pricc was iow a LacLic thrt guaranlecd
thc marim!m profit When the options were lal€r t!rned lnlo .rash.
Backdarin8 i, iLlega jlthecomp.nfdo{rsnotproperly.r.cotntforthe.lis.ountedgranlsas

The U.S Sc.urities and Exchange Comr)rission eventua y investiSated rboul 1.10 corir
panles n cofnection with thc pr.rclice, and prcsc( Ltors iiled.h.rrges against al €asl iiv{l

Yet lawvers have lons argued that thcse cnses sere more lvinnable as .i!il rither than
cr mina corLrts wherc t1. burden of prod i5 mu( h gr.nter.
Most oI tlie backdallng cases, ini:luding lhe one agaif5t Rclcs, lr nged on proving th.11he
defendants knowin8Ly manip! ated an option elanl date to d€irau.l invest.rrs.
But thal claim can bc obscured by the conp exity oi a( coulrti'rg lssues. Whi e lawycr5 on
both sides ncknowledge thrl thesc .aees .1r€ d ff cult to win, tnr ll(n:ade decision in,:ll.rtes
that a SLrl ty verclict is possible.
"lt emboldensthenr jn brin8ing othel cases, bLrt dof'tthinkitmeanstheywi lbrlngbtrshel,
of these cnses," Seaf O'Shea, a crinrina defense lawyer in Nq{Yor<, sajd ol prose(:llors.
"Ihey will bring the strongest of thosc where lhey can show evil ifient in trying to conceal
informaton from shareho dels."
Mark Zalderer, a t.ial awyer in New York, said: "Defcnse l:Lwyers are going to be keenl)
aware Lhat where there is iividence oi Jnis eading docurnents, it wil lrc dilliclrlt to rely on the
delcnse that nobody knew it was ilbgnl.
"Beit.rtorcportsom€lhlngtruthfulythari,p$hapsttLrest;onnbethantorisknrisrepresentirg

ln the Brocade casc, prose.utors presented ev dence lhat Reyes intentionally mls€c]
,hareholders with a "s),siemic pririri(:.r ol cre'ry picking stock pric€s" ro l)riicl in gain5 i.)

Durifg thc trial, a iorm€ humrn resourccs cmPkry.c tcrtii ccl thnt Reyes Lold he' that the
pra.ri.c was "not illee.rl if yo! dof't get .aug rt."
P.osecutors al$ said that Reyes denled ba(klrtiirS stock oprons whrrr hr:was questioned
by nvest gaiors .rbout ih(' pattur ol lavorable granl dates.
ThelawyerforReyes,Rich.rdNlarnarc,port'.r)ed)s.lienlasahacl-vl,orkingtechnolog!
co npany !!ho dld not lrafil.i ln th. a.1:!rLftlng ar.n rd oi stock optior granls.
'r\ccltive
Brrcadr:, thr: dcir: nse :r rgued, oii€red lhe los pr red grafrs a( a wry ol aftra( tlrrg empkrtees
as the doGcorr boom crcrirrl an intcnse ball e to hire talent.
J.r,., r,n|r.nroni/ //.rrr.l /rirrD. tk N€\r \ir: I nre! aomp.i!, \ler re{nJ, 3 \ugL!t ll0;

QuestioDs
A.:.ounting st.rndards requir€ Lhat, in ce(irin cirfLrnrst.nces, conrp.ries r(..d an crpense tor
5toirk oltlons grant.d to cmployees.
1. Do for consi.ier thrt lhe(ompany 8ft)cadc Comrnunicaions compied wlth thc
reqLirement to reco d an expense for stock options?
2- Who h.rncflts {()m t L 'bn.lidirting' of stock optiofs? Who ls ha med?
3. lf opllofs can be backclited, his th!' slnf(h(l ,dtinB board ( n tlr.: Urrited Strles, thf r-ASBI
b€en eilectjve in the role oi promulgating.r.couftinS regulations?
4. \ /hat i5 rlrc dc ol thc StC in relation to the regulalion oi accourting prn.tice?

ln som€ .ountr ies, the stock cx.hange hkes lhe role oflllarkel .egul:ltor. For.xarDplc,
stock ex.hangcs are (or have be€n) involyed in nrqrirornrg financial reporhg xl
Slvitzerland, Swe,:len ancl Nofr.el, AnoLher iorr1ofjndeprnde.L cnlorccmellt bod,v is a

Cll,^PltR:l AfPlv n! tr-.or\ t. r(.ountirg eg! al or 73

 I

review panel, su.h as the Ljnited Kirgdonls financial lteporting Revie$ I'anel (FIiRP)
'lhe fRRn was formed ir 1991 \^'ith pos'e. to investigate matters relating to Enancial
repo.ling brought io its attertion. The IRIIP was ser LLp as a pivate s€ctor trust and
compises menbers of the blNiness cotmrunity. Thus, ir is a structLue that invoh'es
the p vale secLor in regul:rtion, whicll is viewed by many as an efte.rive ahernative
approach to regulation."T Arorher approach rvas takcn by CernaDy folloitjng adoption
oi IFRS. lhey set up a ilvo-tier enforcement s-vsr€m, conprising a r€vi€w panel
(Delrtrhe Priifstelle fiir Rechnungslegung, i.e. the rinan.ial R':Ixllting Enfbrcemeni
Pan€l or FRIP), \\,hn:h reforts to a governmenr department (ilundesanshlL frlr
Fina rzd ienstleisrungsaufs i( ht or BaFin, ie the Fede.al lnsLirut€ for the Olersight oI
Financial S€ni.es).
Anolh€r paft of th€ regularory framervork rvhich aris$ b€.ause ol widesprcad
adoptior ofI|RS is a syst€rl to coordinal€ enforcenr€ft. A supranatjonal organis.rtion,
the Imernatioral org:rnization ofSecurjties Col11l1lissions (IOSCOJ esiablished a system
for pa.ricifaling IOSCO r.rnbers and oLher lndependmr enlor.emcJrL organisations
to share intbmarion and ronsulr in order to improve cooi(liniLion and.onvergen.e.
llach narional regulator rciajns the ability to deal $'ith an issue in its own righl bui rhe
systetr aims 1o faciliiai€ consistency and provjde a rclerence point for future regulatory
decisions 65 Ai a regionil level, CIESR has sei up a coordinalion nechanisn] (Eurapean
enforcers' coordination sessiors or EICSI to maiDtain a databas€ of enlbrcement
decisions. Th€ EECS focllses or1 decisions taken or to be tak€n b_v local enlbrcers and
give! input and ta€dback on specilic cax,s in ord€r io achiev€ consistercv anong
European enforrers.6e

I@- THE INSTITUTIONAL STRUCTURE FOR SETTING

ACCOUNTING AND AUDITINC STANDARDS
ln our disclrssioD of the regularot, ftamerlorl( lor linancial ieponing, s'€ sa$. that
fiDancjal repoling requirenenG ,rre cotl}monlv derivd Gom stanll€ Lar. afd ac.o niing
stan(lirds. In tbis s€ction, \ve cofficler th€ d€velopn)ent of rn inteualioDal siandard
setlirg body and th€ process ofserling irremarional a{icounting aDd audiring sraDdards.

Background
Thc de\'('l.rpnreut ol interDarional accounring sral.lards b€gal forrnitlv r.ith ih€
iorrnarion ot the lnternarion.ll Ac.ounring SLandirds ai)mnrirt€e {l,.\SC) xr London nr
l97l'Ihc.omrrilteeconpris€drepresenhLilesolt.olessioralaccounrir8bodiesfioIn
nine.ounriies (Australia, Canada, France, Iipa , l\i€xi.o, rhe Nerherlands, the llnned
Kngdom and lrelard, th€ Llniled SraLes and W€sl aierman_v) ?0 Its aim lras ro develop
accoLLnring srdndads for the prjlare se.ror suitable for Lrse iD .ountries rhroughour Lh€
world l)riorro 2005, Inremarionrl Acconnring StaDdaids {tASl w€ie innuential inrh€
lollowrng wavs. The_v \.ere adopted for rse in coun jes \rirhouL a naiional standard
sdting structure' for erarnllc in l)apLra New Cunre. a|d l .lltrresia. tn orir€r cases,
they rvere used in rhe dev.lopneni of national standards, such as in Shgapore and
HoDB Kong. IAS \rr( also Lrsed volunriril\ ftom rlre early 1990s in fie consoli.lared
a.counts ol.o rpanies frorn Lolurtries slrch .rs Swirz€rland and cermrn,vir In rhese
coLLntrics, natioDal accolrniing reflect€d tr sLakeholder orieniition arising Lom rh(]ir
code las, jegal f.aneNork and tax based :r.couniing svsiens Conpa|ies uscd IAS r.)
prolid{: additional infol]nalion lo..itiral n]ark€t panicipants in r nro.c r.anstrarenr
r"l ,;: r'-lr i.' r',.'t
 \

The mernb€is of Lhe IASC hailed fron courtries with a rang€ ofa..ounting pncrices
and differenr approach€s io sellilrg accounting sta dntuls. !:]rlv IASC standards oflen
alLolved a choice of accounting poljcy to include the prefer€nces of variolLs member
narions. Durirlg the late l,l80s th€ IASC b€gaf lvor k on lhe Imfrovements Project, to
improve the quality ol IAs and remove man]' ofrional treatments. The IoSCo, a bodv
representing securities re3rlaLors throughouL fte r{orld, soughr a set of stardards whi.h
its rnembe could use in cross border listings. lhe revised standards were endorse.i
by IOSCO in 2000, albeit with the proviso that Lreinbe..ounLries could add furLhe.
requirenenls.r? The lauer p.ovision refl€cted Llr€ Position ol rhe nark€l r€grtlalor in
the I Inited sr.r.s. rhe SIC. lt did noL intend to reNove the LIS CAAP reconciliation
reqriremenlr (th€ so call€d Form 20lrJ for cornP.rnies usjng ]ISC staDdar.ls and lisring
on the more reglrlated tlniled Stales €xchanges {such as the NYS[, NISDAQ and
AMSX) -
Alrhough use ol IAS throughout the (orld lvas increasing, f.rnher iccePmn.e
rvas limiled by the l3ct tbe IASC $,as not an indepeldenl sbndrrd seiting board.
Consequently, it was restnrcluft:d in 2001 to .ft'ate the Inlenational Arcounting
Srandards Board (IASB), an independent boald brsed on ihe srructure of rhe Flnancirl
Ac.ounting standards Board (fAsll) in Lhe Lhit€d Stat€s. 'l'he bonrd comPrised founeen
tull tim€ menbers, choseD for their expe(ise alrd etPerience in professional ac.ouming
and standa.d s€ttirlg- lt rvas s ppon€d b!' d€dicat€d rechnical siaff locar€d ir london
The IASC Forndatiolr b€.rme the oversighl body of the lAsB and an inkrprehtions
committ€e was fomled.;r'lhe formation of the IASLI sa$' th€ disb:lndlng of the C'l+l
(a body coDp.ising independem sialrdard se(ers frolll,\usdalia, Canada, N€w Zeal,tnd,
the trnired Kngdom, the lJnilc:d states and the lAsC), u.hich was bccoming inflLrenrial
in developnlg interirational slandar.ls The l,\SB has responsibility fbr updaring e\isrnrg
1AS (which sdll carry the IAS label) .tnd producing lnterDational Fina cial R€ponDg
stand ds (lrltsl
The inporlance ofthe activilies ofthe lAstl intreased dramati.all)' wirh the decjsion
in 2002 bv rh€ turop€an ComDrjssior (LC) to adopt L\SB srandards in 2005. Tht lC
announced that all lisLed.onlpanies in European Llnion (ltl) mcmber .oumries woul.l
prepare consolidated accounis bas€d or i-^.sB si.lndards. This lirndalneDtal .[angc t{rs
an inpoftant st€p p.oL rring the produ.tior of Drore iranspar.:nt a d colnPalabl€
finiincial inlormatioD br listed lirropean comprnies. Ir was proDrpted b-v lbe go;tl ol
developins a silsle, unihed capilll narket jn llrope. thed€cjsionpronrtredrflurLl,of
..livily at Lhe Ir\SB and in llLI lnembe. coLrotries. First, fie L\SB was reqlrir€d ro prcduce
a 'stabte plirlor m' olslllndards bv r NlaKh 200.1, ro be r€vje1!ed b_r th.r l'lc's AacoLmjng
Itegriatory Connittee (AnC) lhe ({,m littee would r€comnend to th€ EC \lh€ther
the standards should be endorsed lbr us€ in ELI countries. lhus, the IASB had a h€al.
worLload ard tiShr tiiretable as ir $ughr to firulise standards, il]cluding dcmandhg
and controve.sial prolects such as accounting for linancjal instnrments Se(ord,
each lU member .olrntI. had to prepare for adoplion ol internalional siardards by
considerhg hoi{ ll-RS .et)orting would imegrate with rational repofting Fo! €xanple,
would parcnr .ompany and private company accorirrts also use inrernatiouai st.rnrlarcls
or continre to use rational CAAI'I Th. setting uf ol lndependenl natioral cnlor.emenl
bodies, to prourorc .omplian.e rvith international standards, r'as also reqLrn€d r5 Thnd,
Lhc accouniing profissior (including exi€rnal auditors .nd public accounlants) had
io prepare tbr lrns adolrtion. This invoh,ed technicai trairing 1.) acquairt enselves
with srandards, r4lich in soln€ cases wcr. nra.kedly diff€renl tu ef,isting nalioDal
c,\AP. Conpanies also faced many challeng€s P€rsonnel had Lo become Le.hnicrll)'
proficient in ihe sla dards:rnd.ompanies h.rd to revis{: ac.oltntjng syslens to r€cord

cllAPTLRl Ar rl! rg tre. r t! i(o!.ri.g r.3Lrl.lion 75

 .l

information rcquircd by the new regine. ln addition, they had ro communi.ar€ with
stakeholders such as irvesrors and fuaDciers about how IFRs adoption would impact
on tleil financial shLements.

The IASB and FASB convergence program

lheworkprosran of fi€ IASB nas tufther.onplicated by tln: announc€ment of dr€ IAsB/
IASB convergerc€ progrnm, .alled the Nor$'alk AgreeneDt, in 2002.;r''lhe FASII was
formed in 1973 and is highly reSarded throughoui ihe $'orld rs a le;rding standard seuer.
The fAsB has power delegal€d by llre SLC to develop sLrnda.ds forfinan.ial r.poning tor
listed companies. lt has produrcd several accourrting concept statementsTT and a serics of
linancial reponing siandards focusing oD providing high quality financial irfomatioD
which rs us€ftr1 for decision maklng.The us€ of inrenarioral standards in d]e United States
has b€en discussed at length 7s\M)ile sonle groups, such irs tlre slockex.hnnges, lnounted
aryuments ju favou ofacceptanc€ of IAS bas€d linancial srarem€nrs, the SEC untiL 2007
maintaired that rei:on.iliation Lo US CMP necessarv ro ensur€ a'iev€l pLayin€l
neld' lhe SEC issued a .oncepl release in 2000'vas *,hich ourlined its vi('\,s ab.Jul desirable
aitribures of l,\e fiDancial reporting fraDes'ork.?t 'fhey include high-qualiry standards
developed by an independent slaidard sertinS board, and compliance prolr1oLed by l
indepe dent e for.€nlellr bodies. \^ridr the adoption ollAS in 2005 b) rn.ln) ,.rirt,riric\
pressff€ to allou' dre useollAS $rithoot reconciliadon (e.g.lrom lU companies..oss listed
in the Llnit€d SLites) nrcr€as€d. ln 2007. Lhe SIC agreed to pemrit ioreign .cgisrrants to lile
IFRS accounis with ihe SEC the lo.m 20 F reconciliarion.so l h€ SEC th€n began
'lithout
the prccess ofcoDsideingwhetherdonesticr€gisinnts be pemritted 10 use I|RS inslead ol
US GAAP.S'While t]lere are sone supporte$ for use of IFRS in Lhe United Stnles, d€ l.ange
aDd Howieson argu€ lhaL poliLical realities mean fie tls is lnllikell' to gi\ s up ,uvsrriBnty
over the setling of accoun firg slandards.sr
hr rhe nreantiln€, th€ IASII/IASB convergeDce proSran has 8en€rared considerablc
work for both Boards. lt coDplicaied t]le process of producing the 'suble flatform'
of staDdaid fbr 2005 as rhe IASB was working to rhis aim while at th€ sanrr time
.onsiderinS ihe exieDt to which standards could be revised to .on!€rg€ wirlr LJS G.A.{f.
lhe convergence program reqlLires fie F SB and IASB to identjl_v differences b€iween
their resp€.Live sL:rndards, to rcvierv available soluiions and to adopl the Lreuer
treatmenr. ln practj.e, Lonvelg€rce is a coDpLicated process. Some ol th.r diffcren(es
arise be.iuse of Lrrderting diferences be8{een the rw{) scts of slandardr LIS CIAAP
have beeD described as rlde bas.d shndards s'hile IAS ailn to b€ p nciples based.sr
'Ihe grearer involv€menr of rhe lhired SLrr.s.reans rhat jDrernarional slandrd seiiing j
, ,in|Lrrr'ld . ,. flir rr r\ , ,.\ don . .rFc ) h. I i\l{ .r ,l \\r{
The coDvergencc pro(ess can only b€ a t$'o-!rav dialogue L)etwe(:lr rhe I-ASII and IASB
because ofits inh€r€nt difiicuLiies, which would lncrease ifrnore paries \verc involv€d.
Ilol!'ever, rhe IASB has a policv 01$'orkirS $'irh national standard serterc on proje.ts
{here th€y are able ro contribLrr€ to ihe st:rndard setrinS process.s'LThe.ilrelx liaison
standad selters .lre national stanrlarct s€tting bodies lrom Australia, France, cenany, a

Iapan, Nely ZealaDd, th€ United KillSdonl and rhc Llnil€d Stares. Th€y pini.ipalc in
rhc lASll's Nork through rese.rrch proj€crs, project teams and ioinr proicds The tASJ:l js
l
dep€Ddent on lhr .onlribuliolr ol narioral srandard scLr€.s, yer ir is uncl€ar rhe extent
ro which these bodies \\.ill influ$.e the linal decisi.rns ofrhe IASB. Sirce 2005 bodies
ftom rhe lll (such as narioral slardard s€riing boirrds and tfRAG) have b€.onr{: more
vo.al ir the process c,I d€veloping accounftrg slandards Th€ IASB may siar ilself as
tbe gloLril standard s.lrer, bur lor rhe FLI ir is their'1o..rl neighbourhood srarrlard
setter'.!5 Ci'en that stardards have economi..onseanen.es. rhei. is vicororis d.b^re

PART r A..!u rtiri rh..rl 4

}!
 -t

1i

in l-lurope the coDtent of IASB stardards and rhe direction ofstanda.d setrin& as
aboLrt
discussed previ.,uslyin this chapter in relarion ro j:l ancial insrrullrents. Case study 3.3
provides an ofporlunity Lo (onsider n nunr}l:r of impoftanr developnlerrs rclaring to
Lhe adoplion of internationaL standards, ('hich bring out key issues arising lrom use ot
common standards.

Accounting standards for the public sector

As noted above, the lASll sels standa.ds lor the p.ivate sector Diffirem siand:rrds .ould
apply to the public sectol, 8ir.en that plrblic s€ctor entities mat have difercnt goals and
objecrh'es and different stakehold€rs compared wifi privat{: s€cor entities. lndnidllal
countries must d€cide Lhe extenl to lvhi.h IASB sra.dards $'ill be fbllorv€d by publi.
settor entities. In Ausiralia alld N€w Zealand, the approach ro date has been ro pursuc
one set o{ accountin8 stardards, slLirable fo! both publi( aj\d p.ivat€ secior enlities.
Such standards are clescribecl as'sector ne'-rtral standards'.36
In Llrstralia ihe,A,{SB has a nunb€r ol funclions, as described belo\\, b,\' the then
.hairmrn, Potessor David Boymal:
. produce accounting standards to b€ follolved by reponing enrities
. produce accorurting standards fbr ihe plrblic ard not for pronL se.tors
. aciively pallicipare in d€\'elopmenl ofiniernarional standards
. provide nterpreiation of accounting srandards to ensu.e cornparabiljry of linancial
reponing by A$rralian repordng entities
. provide rc.h.i(al suppod to Austmlian r€pres€ntariv€s on inrernarional .omnliLrees
su.h as the ll'SASts and SACsr
. produce standards for private secror and nor for profit entities are a key board
funcrjon. h addition, the Board notes that ii suppons the worh of rh€ Inlernation:rl
Public Se.to. Accountjng Siandards tsoad (IPSASB), a comnrirl€e ofrhe lnternational
Federation of Accountanrs 0FAC). ln 20119, IPSASB was nl.olved iD del.eloping a
' '-. ot, 14. r lr, .,.ror. .., ir .

lnternational auditing standards

lifally iD this chaprer, we consi.lc. rhe .(]glrlarion of alrdirxrg pra.ri.. ind rlxl
d€veloplncrt oI lnrcrnatiorral auditing standards Hisroric.lly, audirjng (as s€lf
regLrlarcd. Sev$al protessi.rnal accolrrting so.ieries lvere lbuDcled in the nLneteenrh
.rrluryto promot€ the prolession and 1o frovi.le training for nlen]bers.3s Th': lonnaLion
olthese societies occurred duriIrg r tinx.lvhen Conpanies AcLs were beillg passc(l in rh(.
tltlired Kirgdom requiring audit! and thus generaling a signi6cant source o{ revenue
fbr accoL1ntxn$.3'r As W.tts and Zimnerman havc dorumenred. rhere is.viden.e of
aLrdils in ttr. ea.ly hislory ofcoporations and Lh€ (levelopment of professional ardirins
rellccted the development of capital ra.k€ls.'r0 lhe aurhors .on.lud€ that aLidi$ w€rc
denanded ro nleet the neerls of financial si:riement ose.s aD.l contrading parties and
that l€gisl;rtjon reqrriring auLlits merely.odifie.l lhe best €xisring pracli.e.
As (lis.!ssed chaprer 2, earl), du{titjng rheon' dev€l opm en 1 do.unrented Lhe process
ol audithg and'nrhe duri(s expected of alrditors M{)re general theorerical d€r.elopr1€nr
followcd h des.ribed and prescribed b.rsr audirrDg pH.tice These pracric€s becnmc
'vhi(
ensh.ined ir alrditing standrr.ls issrrcd bv the prolession ln the Ilnit€d Sr: es, rhe
Arrerican Irslitute .Jf A.countarts 1{'as r€sponsiblc fo. rhe irsr alidiring srandards x1
1919.e' In Aosrralia, au.litiDS stand2rds ne.c issued by the professiolral .rccolurLing
bodi(s through the,A''\Rf. Th. t)rciession was r€sponsible lor maintaining.thical
srarldards, in.lrding (lis.iplhing melnbells \4ro did not follow accoLulring and

aHAPTFR:l Llirlvir! theor!to i..o!nrifg r.!r i.of

 I

audiling staudards lloNever, this forln of rcgulation was weakened if rhere lvas no
legal reqrirement for ac.ountanls to be members of professionrl bodics Th e Am€rican
lnstitute of CIrAs (AICPA) began a si'slem of l)eer reviews in tlxr 1960s, although it $'as
voluntary u)rtil 1989.,1
As Dote.t previouslv, fie accounting scandals di tnron and other l:ompanies in the early
2000s can be regarded as narket fail r€s and appearro have been us€d as iLlsrifi.aiion for
governmenr itne^,ention in auditing slandard setLnB in the Unit€d Star€s and Ausiralia.
Sirce the passaSe ofthe Sarbanes Oxley Act (2002), i eviews ofaudir lirms in rhe US luve
been corducred by a governmert body, the Public Conpanv Accounting and Oversighr
Board (PCAOB). The I,CAOll is also responsible for setiing audiling sLandads fo.
lhe audit ofprblic companies. ID Austlalia, aLditing siandards have hrd legal backing
thouSh the Co,tord rionJ,{.1 2 00I sirce 1Iuly2006 follo\a'nrg passage of CI-Iin P 9
Even though audiiing staDdards are no\1, slt by governnent bodies, the erly
fbcus has been nrore on rewriLing shndards ro enable them to be incorporated into
l€gislarion rhan on changing their conrent 1nt€malional Standards on Alrditing (lSA)
are develop€d by the lnt€rnatioral Audiring and Asslrance Srardards Board (IA SB). In
Australia, the Auditing and Asslrrance Siandards Board (ALIASB) relvrore the prevjous
sel ofprofessional standads aDd is direcied to us€ ISA as n base fron Nhich to develop
ne$ Ausrmlian standards, with an\' Decessarv an€ndment er
The L{ASB operates und er rh€ auspices ofthe IIAC. The IFAC'5 lnelnbers are accourliirlg
organisations and nlost menbers of the L!\SB have been practising aLrdirors. This
sitration has l€d some.orrmeDiatoB to suggestftat dre L\ASll is 'captu red' by the audjring
profession in the saner.aydrat professional accounting bodi€s had 'captured'the narional
a!.litin I sian.lar d s€iting process befor€ the Sarbn es Oxlq'Act fi the LIS and CLERI g in
Australia. Ev€D tiough govemm€nls apfear to have taken.onrrol ofaudiring sianda.ds,
rheir relianc€ ont]le IAASB pot€ntially u d€rnrines govenln€nt auihorily.tl
lhe IAASB appears to be aware olthe threat to its credibility and power b), j1s reLianc€
.n professional accoLLltants for lunding and expetis€. The I|AC €sLablish.d rhe ltlblic
Inleresr Oversighi Board IPIOB) in 2005 wilh ihe obiecrn'e ot incre:]shg conndenr€
in the standa.cis issued by the LMSB :rnd ortrcr ll'AC bodies.ls lls .rim is to ensur€ rhat
mndards i.e sel in a transparenr manner Lhil r€flecrs th€ plrbllc inrerest, wiih ifput
by ihe public and regulirors, and ro fa.ilira( ardir re3l ation. r\s discussed turrher
in chapter 14, th€ flrrlue success ol rhe IAASII relies on su..essful en{o.cernenr ofthe
alrdiftrg stnrdards and reiainirg rlle rnrst ofdre various srakeholders
Coverirmenis appear ro beli.ve ihat accrNftirg and ruditing srandards lllatrer,;rnd
thev have so m e slrpport fLom n scarch for their view. Tllere is dence ihal the s tlcngrh
ot accomtjDg and auditilg srandards and ihe effe.riven':st ':vi of iheir €nforcemenr arr
iacrors in rhc successful developrnenr ot financial mark.rs around the w.rrld. Francir,
KhuraDa and I'ereira Badrered evid€rce on the quality of auditins, ihe srr€ngth of
atrditins enforc.rmeDl, and rhe quality of accoluring srandards and found rh:rr high
qualiq accounting and auditing are more likelv ro exist in corporare goy€rnanLe iD
rountries idr s ronS jnvestor prot€ction. e6 Ho\!e!er, althouSh hjgher qual ity accoU nting
r

and audidng;rre also posiril.ely associated u,irh financial marLeL developn€nt jn !hese
countr;cs, th€ eviden.c does nor support rhc coDtenrion Lhrr rlx.y ar€ sufficienL ro
e courag€ t re del'elopment oI in:rn.inl markers $'irhour sfong investor prdecdon
{jne €xample ol how the actions of irudirors can nrpa.r on indivjdu.ri .ompanjes
and oll th€ broader lnarkei is;rddft.is.d in rh€ol], in a.rio| l4 lhe arLiclr pr€s€nred
considers rh€ mari(er lDpacL oldudji.rrs giving an'€mpirasis otnatter'opi]liorl, $,hiclr
l1lay be necessa[' for sonre co rpanj€s tollownrg rhe 2007 08 tularcial . sis

PARI I A.{.1 r,lrr thr. '

 I

Many small caps to flash orange

bl Danon Kitnel and Pattl.k Dutki)

Hundreds oi snrall ALrnralian Securlt e! Exchange-listed cornpanies $,il have their hall ycarly
ac.ounts fiaBgcd l)), .rdilor, ov.r thc rext IodniEht bc.nu5c of con.€rns they may fil to stay
ir bLrsiness ovcr the ncxll2 months.
The ongoing lrnpact of the credit crisls nrears di.ectors of rrany sma I cornpanies wiLl be
trnab € 1{r gLrarante€ lhat their company wi I cont nLr," as a Coing concern, especial y h,here
they trce rolling over their debl.
'I rc wn.ning by.ljrectors and accountanis iol ows n.rackdown bf ihe Austra ;nn S€curities
afd lrvcdmons Commission on ins.r vefL tr?ding and comes as the ha i yerr reporting season
diaws to an ord ovcr ihe next ttr,o lvee<s when many cash st apped conrpanics tcnd ro

ln December, ASla said directors should io.u, on r,hcthcr comparrs uill remair so venl
gilentheirabiliq'toreiinanceclebt,ralsefLrndsand.onplywith enrlng covenants
"Managing b.rn{ ng covenants in an environment where asset vn les arc dropplng calr
bea very.lific!tlr ng, saldJeifLrcy, chairm.n oithe Finafci.l Repo'Ling Counci lhe
olerslght bodv for accoLrnting ard auditing st.ndards n Aunralia.
"Fo a srn.r I mining.omp:rny, fo' nstance, a drop n commod t! price, leads ycJU to
loo( nt the .ar ling v.rlu€ of mlnes. This reduces as5et lalues, \^i hlch then alfects bank ng

When signlng oii on accounts, auditors are .lso req! red to provid€ af assuftrnce thaL
companies w ll rema n solvent oler th€ next l2 nroilhs. Where th€ € is rncertaint)." abolrt
wh€ther a cofr pany ca n conl nue as a go ngconcern,irditorsarereq! edtoflagthea.co!nL,
w th "an emphasls oimatter".
The techni.a accounting w.lming is one st€p below a "qLalillcatior", which is the
serious w.1flrifg aboul potenLia lrregL arit es ln company ac.ounts.
'nost
KPMC'snationa nranaglng Partner, risk and regulatlon, MichaelColsrrrn, srid h{r rxlrLtc{l
to see more accor fG t agg€d M,lth an "emphasis of matt€ '' in the clr ent cn!ircnrncnt bc.aLsu
of uncert.int) about their debl proii e. But the high nlmber of f aggecl accounts ha\ creatcd
nl nr.mong accounlants an,:l regulrtors anri.l concerfs that inven.)rs nrav mis ntcrpret the
finclinBs.
"lr thls {:n!ironir.rt, a simp e event has i .haif reJct on," Mr Lr c,! said. "ln prtLing the
ruth or the t.tr c, ii ca. hirle i siowtr.l er-ieci Ther€ feeds to be r rn.rture judgenrent
ap) i... Does lt rcan $at Whcels are ;borr to ia I oJii No. B!t rather r rr I n qu.r ilicalio r.
w ri( h is a red ilishlig li8hr, ai eirph.sis oi mirtter ls real y an ornrge g o!v."
lhcm.t(jwisdisc!sse.l.t.rnreetingoflheFlnanclaRepotngC.!f.i in Mcll)ounxr Insr
Mt < art..dcd by rir l u.), Corporate t fMnisLerN.tSherlyandtrenov(:h.irnifoithr
Aunra ian A(r.! rtlng Slandrrrls lloarcl, Eruce Porter.
" t is cmphaslslng io the readers thls p.rlicula rolft, it s say rg e.r ard halc n look ar
tris, go and halc a ft.a.| so you ir lv unclerstand the .ccounts becalse of this un.:c t.rinty,"
Mr Porler snjd. "lt i$n),in8 ih{Jc i5 a La( r oi cvidenc€ 1o sa), I00 per .ent tthni th s .o'npirry
it, ll sr v vel," rc sa rl.
r,j,,,, iir lrli irii,Fr,,,,,)lli,r,, )r Fr,,. L,,1,r ,'

Questions
1. t{hat do{:s th. rc.d ineofthealicemeanby sna cJp' ard 'i adr or.nge'l
2. Lxp ain the JrgLnrent th.t nrer€ly by rl,rc ng ar 'orryhasis ol nr.iler' section lr nr .Ldit
rqxJrr vou cor d nrft a chain 'eact on.
3. Thc arti.rle discrsses bank covennnts explrjn th. impact 1:ji,rsset !alues on b.nk
.ove..nts irfd th€ potenti.l reperc ss o rs Ior a conrpan\'.

'''''.''' 79
 The theories oi reSulation which are relevanr io accounting and auditins
rl, iirn or I',.. i\.oe..1.,r.. d ., ..r.,r s..tnrr,,un.,d , ,,ri ,t.,1 .,. \
re\,ie$,ed Lheories proposed ro explajn the pracric. of fiDan.ial rcpofling and auciiting.
The.nies fronl €.onomjcs including lhe theory ot etdcienr nla*e$ anci agencv rheon
r' r, 1, ".ll tu Jp''l , re,l,. r\. ,t r. r, , 1,... ,; ..ur. Lrortr
'l". rheor e.l.lt.".ro rndc "r , d". o l .j , " |'. ,", o,.,..,,.. i,,,.,.1-r",
for lrs producLior Specific rheorjes oi regutation ats.r pro\,;d€ insighis abour how and
rl qeob."r.rr,. r,;, 1 ||,,, .t F . o rppofl b
Publicint€r€sttheoryproposes ihargovemnenrs ortheir agenrs;Drroduce r€gutarion ro
compensate forrnarket fiilure. R€gullttioD is mrended ro p.orect rh€ ini€resr ofiDdividuats
aJ,o.rprr, .\.rot, 'ir ,.Sr .ro.o.rFl\. ..t rl,r, ut ,h:. r.,.1..!,nro
fir;rncial reporrinS, rhe assunprion is thar reguhijor wi nnpro\.€ i]ltbrnlaitoo florvs
thus irrpro\,ingcapiral rrarkei efli.i€ncy. In rtlis rheory rhe
Bove.nln€nr is an jndeDenderr
D,.. .r.dger" ,. po Jr r"q.le r ,Lr: potiri. ,..Jr .,,br. i,,r. .,
groups to inleNcne in drr mark€r. White ir.oLrk be a.lilred rh.r these
tarties ar€ acijrg
iD parL i{ith seliinr€rest, rh€ regutaloFr jnlenfnrior js claime.j ro have some
oveLali
genLrire publi. interesr.
R€gulatiorl js not cosrless Ir i.roLves we,tih ll:rnstirs anrt iheicfor€ has e.onomic
for rhe patues beiDg regut.t€d. Ciprur€ rheoD, f.oposed thar pa.ries
lLrbje.t to reguLarion scek ro (.ontrot Lhe gov€rnnrrnl or ils ag€nls who :r.e rcsponsibt€
for jssuing thc r€guhriof. The rheon.rssum€s rh.r jn.tivi(lual; af.r eLonomic
Latiollatists
and they will plrrcLre thejr own self:tnLcrest. Thus, they ad ro in.rease .rd Drorect rh.ir
.r.l lr rr. ,F. .,. u, o .,,, rps, t.,r ,iboJ tor .\Jmp..rh.....,r... ,r.t by
djctalirg the body's ,ctivirics and agenda or by neuLralising n (i.e. L:nsu g rhar its
pe ormance is jneffcdjve)
,^ thjrd lheory tal((s a somel\,hal ditf€r€rr persp€clive. privare imercsr
iheoN proposrs
rl r n ,o,lld.r
I 'lr" ry., D g .rn., ,r ,. .,,, ,o ,".,t, ,,. r,
hrs rhe'power 1.) coer(e'and wi[ erer.ise ihis po&,er in the nav ri,hich besr sriirs
g,r,,,,,rub,,,'i .,,,r t,,tir ..,.d., ,,,r eJ||t .,t ;, or ..,-r.i.. Lle
lxnver ro rra\imise rheir firlure elecl.rral su.cess The govern telrt cloes nor regutare in
th€ pul)lic interst bur rathe. iD response ro rh. prj\,are inreresi grcr,p
wirl iie m,,sr
voting power. i. c,rfiral markets rhc croup with rhe mosr inceDtile and reyrrrrs ro
lobLr)' ior rheir prelerred regulalion is often fionl rhe lisrert conpauy or.orpor?te

rr \P | 4...!nrr r! th..r,
 \

How theories of regulation apply to accounting and auditing practice

ln this section, w€ L{plored ihe extent to whlch publi. jnter€sr, capru.e and p.ivate
interest fieodes can be appli€d in practice. We obsered ihat governments in many
courties have inle^'eDed in t]l€ process of setting arcounting and audiling standnrds.
Alihough slirndards were inirialLy under the corltroi ofthe private scctor, a succession of
events led to governrJr ent .onirol in nunircounrri(]s. For ejiample, inAustralia accounting
staDdards \4,ere dev€loped by the accou ring prof€ssion.:lhe govell]nrent inrerven€d in
the accounting strndard seltng process fron the r980s by sertnrg up bo(];es u.irh ihe
responsibility lbr promulgadng a.counrirS siandards. \\ie discusscd dte er(ent to which
such bodi€s were 'captured' b{ the panies fb|rfhom $ey we.e creating r€gularions. We
also consid€red $e role ofprivrte int€rest groups i obtirining regulaiion favoulable to
their own inter€sts.
The 6nal pan ofthis section expanded on the them€ ofrh€ political nailLre ofstandard
setling and r€guladon. Noled US academic Stephen Zeft has desdibed slanda.cl s.tling
as aD ines.apably poLiri.al process. This vie$' applies nor jusr ro rhe Llnired Siares, bur
equalLv in other countries as wcll. \{e obsen'ed rhat th€ adoptior ol IASB standards in
the lrr.opean Union has tak€n the polit;cisation ofaccolrDting standard setling ro a nevr
level Zeffexplains that there ar€ a range ofparties in\'olved, with djfferent objectivrs and
cultural preferences, which has rcs lted ina lengthy endorsenent process subsequentto
the lASil's standard setting process (aheady a highly political process). Wr reviewed the
adoption o{ iAS 39 in Europe to illustmte solne ofth€ issues nrvolved.

ffi-
r*rf n'.,"gur,tor\ rrdmpr,!orl' for findn(idl repnrtine
finJnciJl refofting do€\ nor .ccur in a \.acrum. lhere are rDany facrors which lnnrenc€
tbe process ol prodrcing nnancial infomation. ln this section we described a nuinber
of kev elcmen$ which nra_v be obs€Fed in a nunber of counrrieJ financial r€porlins
framework. Our ailn was ro provid€ a 'profomra' of rhe r€gularory framea.o* and ro
sholr hour rhe elements alTect ihe prodlrciion of financial repons Fiist, we disclrss€d
staruLo4 .eqlriremcnts, $at is, ft€ lar,s r{hich require preparation and alrditins
of financial repor$. Such larss may b€ .ontained ln company, sccurities marker and
raxation lalv. C.rnmon requirements I'hlch affecr preparation of inancial repons ar.e
the dutv 1.) prepi.e accounrs (tu a,-cordanc€ \a,ith a..ounring stardards aDd other legal
r€quire r.nts), to h. .e them audited by:n c, em:rl audjror aDd to lodge &em wirh a
govrrnInent body Nei( $,e referred to corporate gove.nanre. Some corporare governan.e
fracrices fo lloN requir€ments o fl a$', lrhile o thers refl ect b est pracdc€' reco rmendarilDs

dcvclop€d by the private secLor. Ilxrndes of rh€ fonner hclude rhe ttJ djrlLri\ir ol
coqlorale gov€rnan,:e and e{ampl€s of Lhe larler are ihe governnn.e .odcs u,hich havr:
becrr adopted in rhe Llnired Kingdoin a .l Australia.
CompLiance 1\'ith firancial repofting requirel]l€Drs is promored by e),:temal audiiors
and in dep end €Dt enforcemen r bodics. We o bserred ihar in mary countri€s auditors have
traditionallybeen the most imtortant padi€s for pronroting compliance11.'irh -rccoUIring
standards. ,{s a rcsulL of ::rloption of IASB siard.rrds in 2005 nany colnties hav€ set
up ind€pende L eniorcenlenr bodi€s. While sonrc people consid€r such bodies a wasre
of rcsour.es (th€y hav€ b€en described as 'che.king rh. checkeN'], n1'ny commemarors
poinr io Lhe necessity of consisreni enforcerleDt across .ountries (o cnsul€ comlrar?1bie
appli.ation of IIRS. lt is argued that $'ithout coodinated ei orcement the benefrls of
adoplion of iDrernarional sr.rndads will not be achieved. Wc dcs.ribed rhe rypes otbody

t \fljch hel'e been s(t up and tlle entorement.oordirrtion Deahrnisns whicl

be€n put in plac€. An ev:rlunlion
if rhe li rrrr.
ofthe role and €ffecriveness ofth€s€ bodies u'jlL occur
have

I
CHA 'liR.r Afr!irB hcoi! io a..ount ng regu .r of 81

I
T
 !

lllll* tn" in,riruriondl \tru. lurF ior \etting ai, oLrnting rnd iudilinB rlrndJrd\
ln rhe hnai sc.Lion ot rhis chapter r€ prcvided an overvieu' of rhe developn€nt of
inr€rnaiional bodies that p(x.ide ac.ouDrirg and auditing standards. we djscussed rh€
background to rh€ cun€nt processes for developing international ac.ounting standards,
begirning wirh the fbrmation ofthe IASC in 1973 and then th€ jASB in 2001 Key
iss es disclissed were:IoSCo's suppon for a set ofcore standards, the ELI'S decisior ro
adopt IASIl slandanls lion 200-5; and dre greatcr invoh.enerr of ihe United Strles in
irtenarional srandard setting, resuhing frcm the IASB/IASB conv€rgen.e p.ojecr, $4ri.h
commenced in 200?.
\'\re also dis.ussed the selting ofaLLdiiingstandards.The professional accoLrnting bodies
have a long hirrory of involvement widr srandard senirg, which parallels rhe hisrory
of legal reqr.rirements for audirs R€gulation of audiring occurred despiie evidence that
audits are denanded in tbe abscnce of regulatlon. Professional accounlnrg bodies
wrote fie firct auditiDg standards bLrr governmenLs have used market faillrr€s to jusrify
rrgLrhring audiring standards in the tJniied Srates and Austmlia. Hol\'€ver, the Austnlian
;ru.liting stand:rrds are based on lhe intenational standards hich are Nriti€n b-v a
body controlled largely l)y pra.rising truditors. An ov€rsight body has been established
io ensure the standards reflect ihe publi. interesL:rnd ha\'€ due regard to the views of
reguLaiors. Fnpnical research ruppons Lhe role of accoLnting :rnd audiling standards
and rheir eftactive enforcement in rh€ de\,elopmcnt of iinancial markers around the
world.

Questions
1 . Ceneral arc€ptanc€ of arcou ntillg stanclard s i! im pofant to the accouDl I B
r

prcfession. By r.hom does th€ profession reqLru€ gen€Rl acceptance ofthe

starrdarcis, anci ivhv is it irrportanto thc prof€ssionl
2. lhe stardard seuingprocess is highly political. Describe aD acroumil]g re8lrlarion
thanvorild be poiitically contror.ersial, and rhe qpes ofpolirical pressur€s thal
could bc brorght to bear in ihe standard setting prc.ess.
:]. lhe ti.xt describes a thrcry of regrlatory captrre.
(a) what js ies!1atoD capiurei
(b) lloa. can standard setting bodjes such as rh€,\-.SB:1!oid regulitol'
capirrel
(c) Ita standard seninB bodv is'.aptLrred'Lry the p.olession, ir{: there aDy l
steps that ti1€ govennent car take io l1)3le thc bft]y indcpenderti lf
so, shorld ihe government nke tllose sr€psl lusdl,' your aDswer.
j
G]) Do you b€lieve that the current inlern.tionil a..ouniing staDdard
setting arang€merts, based arcLnd the IISB, are at risk of regulatory I
capturel \'Vhy or $']1y norl
4- lrr under 500 $ords, provide an argunlent for the reSulatory approach to slanda.d j
settinS. Th€D, in onder 5oo *'ords, provide ar arg lnent for the free market
approach to srandard seiting. lrinalh., analyse th€ argumeD$ and conclude iD
iavour i)l one approach rarher than the oih€r (which approach you favorrr rs up to l
yo , but you musr decjde lvhich approach js beu€r, at leasL Llnd.r a sei of .$suu€d
.ircunlstances)
l
s. Itthe IASB coDcludes rhat the econoni. conseqren.es of a st.udard ir is aboLrr ro i
apprcvervill disadvantag€ a porreftrl lobblr groLrp, a,hat should the IASB do aboLrt
the situaLionl
l
,;
a2 P,{R1 ]
J
,fl|
6. Hou do you thi
k accounting standards should be serl ls that the apProach
currently taken bv the IASB?
7. 'W€ should disband natioluL standard setleru They are ofno us€ follot'ing the
adoplior of intenational acconntingsundards' Explain whetheryou agree or
disagree with this statement.
8. \!hatare free-rjder$i IIow system erlsure thnrlhosewho benefilmost fro
can ir r

an acrount;ng nandard requiring .ertain disclosrrres aiso bear the greatest costs
ofitl
9. Th€ setiing ofa.colrnting standerds requires sorlre assessment ofe.onomic aDd
other b€neiits and .osis. trVhar are the ethicrl issues irvolvcd? Is ir possible Lo avoid
ethical issues in d€veloping accountin8 standardsl
1o. Yor hav€ been appointed as chiefaccounta t ofa finn that will be adverselv
affecred by the Incdlod of ac.oLurling that is proposcd in nn er.posure draft for
an a..ounting standard on leas;ng Wriie a repon of500 r{'ords or less explainins
to rour Board of l)ireclols how you could j{)bby lhe A,A.SB and th€ L SB ro adopt
irn accounting pracrice other than the one Proposed in the exPosure draft. Also
comment on the costs and benefils oflobbying for dr€l:ompany
11. In 200r and 2002 there $'ere sevenl high profile corporale .ollapses in the Ilnited
Siates associaied wilh irisleadirg nrarcial sratemenLq and ac.ounting practices
folLoNing rhese collaps€s, new laws wer. hrroduted to intPr.rve tlle qualitv of
6nancial rcpofting.
(a) ln your opinion, rvil I furLher rcgularion prev€nt deliberarely misleading
repoftingf ExPlain.
(b) Are additioDaL la{,s l;l<el), ro prevenr .orPomre collapses? whv or whv

(.) Ilow inpo11ant is the enforcemenl of 6nnncial reporting requirements

itl promoring hjgh qualiry reporlingl
1 2. lrch ol ihe th.€e th.o ries of regr larion discussed in this ch aPrer has its srren$hs

ard linrilalioDs in describing rccoLrnting standrrd serdrg, either pasr or Present.

$'har do you believe are rhos€ slr€ gtlN and \veakD€ssesi Provide .n €x.rmple
lvhe.r you belie\.e each oflbe theories has applied, or is likely io appl),.
1:1. lron I iaruary 2005 adopL€d IASB stardar.ls
this change? W\ or rvhl noL!
(a) Do you agr€e r{ith^ustralia
[b) \!ho stands ro gain lioDr Aurrrrlii's ,rdoption of IASB sl:rndardsl
lxpleh.
(c) \.Vho stands Lo lose tron Alrsrdli.t's rdoption of lAsll sLrndardsi
Erplain.
14. what is th€ role ol lhe Finar{ ial ileportnrg Councill Do yo thinlt thal all
members of &€ financial Reportins Council should be qualified accou rantsi
w,\-v or rvhy not?
15. lhe IASB and IASB began a convergence proiect in 2002
(a) what are the expe.t€d benefits oflhe co.vergence proiectl
(b) \{hat fa.tors nake coN-erg€nce dim.ulrl
(.1 Hon' js lhe flrture ofthe IASB ti€d to conv€€enr€l
r6. ShoLLld the SLC allow Lhe use ol lASll standards for LIS domestic list€d conpaniesl
tliscriss ieasons lor and agaiDst the tlse oflFRs bv tls cornpanies
17- \{hy has II.AC established .r Publi. lnterest Ove.sight Boardl
r8. Wln Nould rhe quality ofaccorDting and alrditing sta dards aflect the
d€vrlot m enl of finaDcial markers I \\41y is ihe strengih of enfor.emen t o I rhe
slnnd.rds and investor protccliorl irllportanr i
this relitionshiPi

CHAPTTR :l ,\ r r !ing treor! ro arror ir .g r.gr lrt of 83

 .!

Additional readings
K, Picl{er, R, Pacrer, P, & Radford,12009, Applyingin Lti txtiondL acnn )ting
1\lfredsod, K, l-eo,
rkrnddrds, John Wiley & Sons, Brisbane: Al1stralia.
Alfredson, K 2003, 'Parhway to 2005 IASB sranda.(ls','lhe Aushalian Accountiry Rerlew,
voi. 13, no. 1, tp.3 7.
Brown, P, & Tarca, .A 2{l{15, 'Ifs here, re;rdy or nor; a revie\r of rlre ,\ustaljan finan.ial
repoiing fram€work', A rt lian Ac.auni t lleuieu, voL. I5, no. l, pp. 68 78.
CollerL F, Codfrey, JM, & Hrasky, S 2001,'lnternational hallnonisatjon: Cautions fronr
rhe Australian experience.' Ac.aunting Hat izons, \,oi. 15, no. 2, plr. i7r 82.
Ceorgiou, C 2004, 'Corporate lobbying on accolmting srandardsi mefiods, tining and
percejved effectiveness', Ard.rJ, vol 40, no. 2, pp. 219 237.
l,aux, C, & Leuz, C 2009, 'The crisis o{fair vnlr€ accounring: Nlaking serse of rhe recenr
A.i:n ntnj Or8,lniutions and Socieq,, \ol 6 ;, pp 826 34
debare',
Miller,1995, Th€ credibility ofAustralian financial repofing: Ar€ the (o-reglrlation
N.l
arrnngements workiDgl'A sttdlitm Accaunting Relieu, vol 5, no. 2, pp. i 16.
Wat6, RI, & Zinmerman, lL 1986, Posi.ir,. dccolt tillg theory. Englewood Cliffs,
Nl: Prenti.e-FIal1.
Zcil S 2002, "'l'olitical" lobbying on proposed srandards: a challengc to rhi: IASB',
Aft)unting Horizons, vol.16, no. 1, pp.43 54.

Websites
Ausualian Accounting Standards Board IAASB) wrvw.a:rsb.com.au
Auslralian Securides and Invesrments Colllmission [ASIC) 1trw.asic.gov.aLr
CPA Australia ww$,.cprausrralin..om.au
D€loiue IASPIl1s !yww.iasplus.com
Ernsr & Young $'wlv.ey..om.au
Europ€ar Fjnancial R€porting -,\clion Group (rFR\Cl $s! etras com
F€danrion des Expetu Conphbles lrropaens (FEI) \ssv.fee.be
Finarcial AccoLurtiDg Siandards Board (IASB) !vw!v fasb.ors
Firanrial Reportxlg Council (rRC) ws,w.xsb org uk
t-inancial ReporLlng Council IFIrC) wi$ Li.sov.au
Coogle scholar wlvw.scho1ar.google.corr
hstitut€ of Chart€r€d A..ouniaDts in Australia {ICAA) l{1\'\\'.i.aa.org.;ru
lnlerllarional Ac.orlnLing Stindards Boa.d (IASB) www jasb.org
KPMG $'l{.l\'.kpnrg.(.oIn.au
P .ewat€rhol6ecoopers lv!tr plrc conl.ar!
Securiti€s ard Lxchangc Con)mission (SEC) a{]{ sec gov

Ealancing the costs and bencfits of regulatory

US's Snow urges balance in Sarbanes-Oxley rules

US lr€asury Sccretary John Sfox, on Wednesday wamcd agalnst usirg snrb.rnes
O\ ey Iinan.:ia repofting rules in $,avs lhat might dampen l]conomic growrh,.fd he
\ympathized wrth dre plight oi corporate execLrtives who are ufder reg!lltory ,(urinr.
'We need io nr. ntaln balance in our enforcemenr.'Snow said ln prepafti ftD;rr(.s
to tni Ncw York LlniveuiLy Center nrr Lah, and Busincss. 'We need to rriakc sLrc rhc

84 PAil I A...L.tifA theory

 \

p'
emphasis is on slrbstar{f and noi ior r. We ir.\rrl to make srre that inno.|nl mistakes
are n.rt criminal,' hc said. Contsr{rss p;rscd Sarbafes OxLe) ln 2oo2 in restonse to
a serics of high prclile corporato s.andnls thirl felLed Enron, Worldcom and the
ac!ountifg firm Afthu Andersen. Ihe law, named iorOhio Republi.af R€p. Michael
Oxley and Maryland Denrocrat c Sen. Paul Sarbares, ca s for ctrid iinanl.ial repo.ting
standards anC accoLntabi ity. Snow's.omments conrc amni widespread compLrints by
bus nesse! tlrat Scction 404 of lhc law, wfn r rcquin s m.rn.gels to explain pub ic y
how they look after corporate fifnnc.:s, i5 kxr costLy a.d lime-.onsuming. raqlrestnrn
and afswer sess;on w th ihe audlence, he said rrat he wassympathetlc wirh thc'wor d'
in which colporate erecLrtives and a\\ryers are liv ng where they are '!n.c snrgc' fronr
regulators. 'We've overdon€ rhis. W€ have got to find a way to ation:tl z€ this whoLe
corpor.tte Bovernan.e regulatory process,' Snow sald.
Thc trcasury secrelary warned trat whil€ Sarbanes-Oxle), s,as essentin in rostorint
public (onfidcllce in burlnesses nfLer Lh€ scandaLs, it rLrns the rirk oi being. drag on LiS
corporate eftcctiven.\s a..lwi lifgness to nvest if BllNing i:apir.l. 'This shole cl nrate
weiind oul5elvcs in, \'hli:h Sarbants Ox r:y is only a pn.t, may h.ve altered theappetile
tor rjsk t.rking and may have engcrrlcrr:tl a risk avcrse auirude,'Sno\\, said n response
to a qleslion {rom the irudience. I-1. adde.l thal dre ratio oi capil.il spending to.ash
f ows and corporate proiit ls lower than one tou d expect due perhaps t,r a ellrctance
among US compani€s lo take riskt. llowever, Snow maintained thaL passing Sarbanes
Oxley was nece:sary c ue lo the a.:is oi a lew corporate niscreants and thaL nrod fyi rg
thc law nr ihjs polnt woLld bc llL adviscd- 'Evelr though we all know lhere a e u,.1fs
that yoL .ould tvv.rak (Sarbancs Ox.y) this tray or ih!i, the conseqrences of trylng
ro amcrd it l.) dea wth ihose issuc, ihis cnily if the process would hale a poitical
backlash ihat wolrkl bc uniorunatc and counterproductlv€,' he said.
5nr!, l.rrir.\.11! ' rr')rlrrl

Questions
1. Cive rearons for tlre intruducti(n ol thc Sarbanes Oxley Act in the Uniled States in
2002.
2. \rvhy are some parr es now c,pposed to the ArJ? Why has thei vievl' changed lroJn
rvh€n the nw was i rst lrtrorltrced?
3. According 1,r lohn Snow, whal .r lerlr rhoul(l t(rnsi.oedindeLernrir rginanci.rl
report ng r! es?
4. Would yo! econmend n repeal c,i tlre A.1? Wh_v or rvhy nol?

Are bean counters to blame?

by.lrd|er RoJs -torl,rr
Some b ame the rap.r. ous krrdcrs. iJthcrs po nt to the dei.lbcat bor.iwe s BLrtSntrhcn
A. Schwarzmar sc.s rnorhcr s€t oi cu prlts beh nd all Lhe paif in the finnncial indrstt l

Th:rt's right, thc bcan counters.

A n{ ..i.untiig r! € - "an accornting rulcl" pnrt y expl.lins wh,! Lre Amer can
I rnn.ial svrtcm ooks so \1obb ), these .lays, h. sa\,s.
MrS(hwazm.n,thecojo!rderoiihepi!.rt{reit!rtygi.ntBlackstoneairorp,hasbeel
cspousinS this view ior w€eks ove lrnches an(lat c(rktail partles arou.d the g obe. t'\ a
c(,rtrovcrsial hyl)oth€sis, !t, rich ot rels rave put fo^v.rr.l betore, rfd it has sp k€.I p ent|
.rldebrte within the irdLrstry. But Mi. SclrwarzmaD is convinc€d thai the rul€ klotrrr as
FAS 157 is lorc|rg book iccpcrs io ovdsinte the p oblenrs at the nation's la€e:rt b.nks

,iFTlli I AtII\ ri".lh..rt to r..orfti,! !!r .irion 85

 .!

"From the C-E.al.'s Italk with." Mr. Schwarz ansairldurinBanintJVicwonMondiry

morning, "the .ulc i, ncccntu.linB and amplifyin8 pot€nti. losses t's .i siSniiicant
.ontribLrtin g factor."
Someof his bigwiB pals in iinan.e belr.\r rhatWal Steetis in much bettershapethan
the balrnce sheec suggesl Mr. Schwarznrdn said. The pr€sid€nt of Blackstone, Hamiltolr
E. Jam,"s, Boes even funher. FAS I5/, h€ sa d, is notjust m;slo.xiinB: "lt's dangerous."
HLrh? So the C tlgroups ard Mcrill Lynches of Lhe rorld are wrjting ofi biiljofs of
.lo lars bLrt they haven't actuall), lon llre mone_vl
Sori of. lf Mr. Schwarzmrr is to be bcLieled arxl th(yc's some evidence he nright
be right, at least partly ital SoesbackloFAS l57,whi{:rwent nto etiect Nov. 15,
j ust as the cred it h urici ne tore ih rough W.l L St.a1. Rcnrcmbc r, lhat was about the rinre
Citigroup oustecl Char cs O. Prince llL after thi: ban r sho.kcd invasiors by wrlting down
$5.9 billion and Mcrrill Lynch showed E. Stanlcy O'Ncrl thc dool nitcr it was forced to
write dolvn $8.4 bi lion. (The pain didn'l€fd iheftr, ior{rth.rolthose.o.rparlesorlhe
resL ot the tinancial industiy.l
FAS 157 repres€JrLs the so'cailed ialr vaue rue plt lnto efiect b) the Fifanci.l
Ac.ounting Standards Board, rhe bookkeeping rule makers. It requlres thit cerL.rin assets
he d bytinancialcompaiies, ncl!ding tr cky investments inked to mortgages and.nher
klnd, of debt, be marked 1(] market. ln other words, yor hav€ Lo value the assets at the
price you could get lor them fyousoldthemrightnoworlheopenmar(et.
The idea seems noble enough. The i! e iorces bnnks to nrark to nrar<et ratlrer ro
some lh€oretic.l price ca cl] aled by . conrputer a svstem otlen de i.led as "ma'k
to nake believe." {Oc.arionally, {or rcrtain types -of assets, the ru e a ows for using a
model and yes, thc potenl'alfcr mnnipulaiiof too )
But here's the problcm: Sonretimes, there is no nrarket not for toxic investnr€nG
like collateralized deh obLigatlofs, or C.D.O.'s, filled with subprime mortgages. No
onc wi I touch this stuff. And li there ls no markct, FAS 1i7 sa) s, a bnnk must mark th€
invcstmenl's value down, posslbly a 1 the way to zero
That parlly oxp ains {,hy blg banks ha.l to rrite down countless bi I ors jn C.D.O.
expoEurc- l he losnsirc, irt lcan in pa.t, th(reri.a . Nonetheless, thebanks, n response,
are b inging dos,n their krvcragc k:vc s anrl rLnnins to the desert to ra se ndditjon.rl
cap tal, often at shareho derr/ expense.
Mr Sch\€rzman afd othe6 say FAS 1il is torcirS uid.rservecl lvrile-ofis and
wleaking havo. on lhe finnnc al svslenr There s elen r ..lrnpnl8r afoot ln lvashingtoir
to change the r! e.
Sonr€ anal,vsts, even ns;ders, ,av Irnn(s like ( itiB(nrt) irrd lehnran BroLhers marre.l
dowi some of the r C.D.O. €xposure bl nrore than 50 pir.:ent whef the rrderl),irg
morlSaSes wrapped lnslde the C.D-O.'s lay ravc tnly r.r en I5 percent.
8ob Traliranti, hea,:l of accounting poicv .rnd depLrty comptroller at Cltigrout,
said ai a conference an nronth ihattfebank hnd "se.rriies \\,ith liulec,rno credir
ddcriorario., and we're being forced to m.rrl( thcr': do$,n to values thaL \r,e think are
unrealistically lou'."
,As a result, Citjgrc!p werrt h.t ln halrd Lo Abu Dhabi, s. ins a signiflcanr stake and
dilut ng exj5ting shareho d€rs n the p o.ess. AccordifS tur rhe Securiiies and ExchafB(l
Comrnissi{)f, FAS 157 requires an i.stit!tion 'b.:on5idrr ircrLra narker priccs, or
obse^,abLc inputs, even \\,hen the mJrkel i rs, iqui.lthan historical market v.tunres,
lrnless those prlces .rre the resr t ol a Ior.ftl ljquidatiolr or distress sale. '
A5 n resuh, Chrlstopher Haywnrd, f faf( .lirecior ard head of ho d nB company
supctuisiof lniliatives at Nler ill Lynch said: "Ihcrc is .r l)ii of this presruftr, . blt oi rh s
atmo5phere th.t says, 'Let's lust mark it Lk^vn, no irrc is going lo queni(!r ir ii we nrar(

OI.ourrc, Mr. schw.r7nr.f s theory on y holds up il th. under ying.re reatt! r5scrs
$o". "L ln..h. r..n, |.-r rt "...p, r" i. q.,.. o1r.r,,,,r rt-
some v! ture lnvenor or Mr. Schwarzman b!yifg up C.D.O.'s cr nrirssei

86 P \FT I i,, lur t n! tlreur/

 .l

:i

For Mr. Schwadzman's part, he says lhat the bafks haven't beer willing to Lrnlon.l
the nvestmenis at the d nressed prlces. Bi:sl.lcs, th. dllig€nce reqLrired ior rx\t buyers
is almost too complicate.l
lt is nor clear that Mr. Schwarzman's view is cotrcct- lhc lolks at the Llnivirsiry
of Chicago those the markct ;s al$/ays-righl guys talc umbrage aL lhc nrcre
suSScstir)f th.rt mark ng-lo m.rkct is n.,t nlways aPpropriale.
FAS I57 pft)tDfenls say lhat lf Mr. Schwnrzman and h s crotr'd 8!'itheir w.!, linanciaL
companles n,i8ht cnd up valuing ifvcstmcrt\ based on nrarket prices whef it suits
rhem, andjust look thc other way when ildocsn'r
"He's enLltled ro his vicw, but I don'1agree" said Danie Alpert, managinS l.llrector at
tlre jnvennr€nt bank Wcsh'o.rd Cnpital. "l don't bc icve thaL people are tak ng wrlte-
d.^vf,thatlorcesthemt.)diluterhelrsharcholdcrs."llanything,Mr.AlPertse,\s,"There
js stjl r
lot oi sl!dge out th$e-"
Mr. Schwrrzman s sLggestingthat Lhe mnrkel is somehow wrong, or wi dly ifeiiicient.
(Of course, Mr. Schwnrzman ls a privale equity guy, so the day ir day s\\, ngs in the
market lf his mifd a.e nlways I'ron8.)
Butsomesay CoLdman sachs provd$,lry FAS l5l works: Coldnraf has b.ei nra king
its books to nrarket for v€ars, afd as a rcsu t, its risk officers were ablc io ho.l bnck its
go go triders from making bad bets s'hef cvory. re e se was throwing down dn:lr chips
last year nlo thc subprime ganre.
Of co.rse, th. purpose of FAS I57 lvrs to nrnL<e the markel nrore lran5lu clt and
effi.i-"rr lvhi.h Mr. Schwarzmaf doc,n/t t.rke issue with.
"The concept of falr lalue accountlng is.orrect and useful, but thc.rpplication
during period, of.risis s problematic,' he said. "lt s another one of thosc unintende.l
conscquence,ofmakifgarulelhnf,s!pposedLobeSoodthatturnsoutth.rothcrwa)r."
Lct's hope he's r ghr
This nrtjce has beei reviscd to reile.t the iollowing r:orrection: Thc DealBook
coLumn on Tuesday, about af accounting rule Lhat a private equrty cxccutivc ,ays s
causing bank \\rlte'do$,ns to bc cxaggerat€d, misnated ihe t.nre of ihu o.Banization
that enablshes a.couniinS 5tandards. l1 is lhe Flnancia Acco!ntir8 Standards Board,
not th€ Federa Accoufrlfg Standarcls Bo.rd
l:.r,r.r '.,,i i',,,i ir|r.! | \ l0lli .f fr:.,,,.r,r':n I I r lnLrl

Questions
1. L-ist posslb e r-:irlore cor)t ibuting to the b.nkirg crisis (thoInol).m ol bad debls relaling
to co lareralis(xl debt obligntlons, e the so .a Led sub priin: risis, wlri.r )egaf :n
m d'2007 and bi(a.rc a rnore gene alglobalifancialcrisisinOrlobc.200s)
2. H.1s the nr.rkel b.nef te.lfronr lhe regu .lior reqLriringthe us€ oiiair vrlL. a(..runli'rg
for f n.i.lal instrume rtsi
3. Accorciing to pcoplc ctuoted in lhe article, dlcl the US capta markct efiici. i ! prlce
the.o Lat{yalir€d debt obl gations {CDOsll

The lbl owinB fivc cvc ris represent signifl.ant developments n re ation to tlrc adoption
and use of inrernationa a.counting standards.
1. ,une 2002 Th{: [uropean Cornm ss on announces p]ans to aclopt irtcrnational
-
accounlirg stirndards (lAS) for consolldat€d llrancial nntements o1 all list<:d
conrpanjes in Europc.i tJnion ([U) menbcr states lrom 1 ]anLrarr" 2005.
2. Octob€r 2004 The FLrropean C{'n rrissio l endorses IAS ior us€ in the IU, rvjtl the
-
exceptlon of ce{ain prollsiofs ot LAS l9 rclnting to hedge r.Lounting an.l iair valre
metr\!rement oi iinancia ifnrumefts \ryhen conrplyifS $rjth IASB standards from
2005, .or'fpanjes wlll noL be requlred t.J tu k^! lhc .x.l!dc.l provision oi IAS 3!1.

r r.rr raR I /\fp ! rg tlr.o I t! .L..oLr. i.g .qrhrnrn

 \

3. April2005 - The European Comnr ssion scoks rule chang{\ nr make it easierfor EU
compirnies cross listed if dre Llniled Statc\ to de,list irom US stock exchanges. The
Commlsslof js seekjng agreementf'om th€ Unned States sec!rities market regulntor.
the stc, to change the .lrrenL requl'e errt th.t co'npan es slrow they hav€ lewer
than 300 shareholders beiore th.y arc pc.nritied to ccase regisLration n the Unitcd
SLrtee.
4. Nov'hber 2007 Thc SEC announ.esthrtirom 2007,.ompanies cross listed on US
-
stock exc ranges whlch prepare acco!nls irased of IAS are p€rm ued to fi e firancial
reports with the SEC wlLholrt recon.i ing the rctrorts if accorda'r.c with L1S CA,{P.
5. Octobcr 2008 The IASB arrnounces amcndmqrts to AS l9 whjch pennit
companies to choose to rcclasriry jtcnrs ()t( oi calegorles requ rine Irir valLre
rneasurenrent into cntegories whiyc anrortiscd cost ls ured. The nme.dme rts were
announrc.l in responsc to thc 2007 2008 finan.ial c.isis and were madc witfout
iollowin8 the IASB's .he pro.icss
Qrestion
After consiclcrinB the rndtsial presente.l ii drG chapter, whrt lvolrlcl b.r possiblc
explanalion5 ior each oflh.se five events?

Endnotes
IM Atkinson and C:A !:€lthani,
'ASen.) rheoN resea(h drd firan.ial
accouting nanddrd{, in s Ban,
drd lA [lilbuxi {eds), Ra.a,.l to
lrpport srdnddnl etrins in j r11.nn
d(auntin:l: a (:d aai.n te\p.ctivr,
Hamihon, Onr:rio: Clancon Cordoo
foundatior, M.r\1.srer Urne6iLy,
2. Deiailed disa$ions or rlris nh.kct
lailue.on.efi.". be tolnd nr
I B.to., 'Ih€ anatonry ollrarlei
failurer, Qlnr.rl /drndlof En ro,ri.r,
rol 72, 195s, pF 151 ;9; R losDer,
'l heories ol.cotromi. rcgulrrion,
Edt lortMl.,J Erana ji.' rnd
Au u 1!7,1,
tldndl.a'err Sci.,.?,
tp 335 i8; B Nlitni.L ll.rcirid,
.ro .rit, o/,q'knn, NsL York:
Colonbii LJdnc.siq Pres, 1980;
iod I Rdsay, 'fnnrc$orl( tbr
th. regulalion ofrh€ orrnr.r
r,arke1f1a.., /,r!,n,J ol cddrrrr
Poli4,, v.l 8, r)cc.nrbrr t!8i,
I A rrls, "nr. politi..l e.oDorr),
re8uladon', Ll.SStr /..r' /oordl.
it62, pp 12 jl
5 C Ro{.. 'E..nomi. iheori.s of rla.
nalL,re o1 ,.8ulatory a.Ln,iry', irr 15. S Peltznrif, "loNards i nror. grn..rl
F lomasic (ed.), 8ui,As nJ rreo.y ol rc8llation', .r0!rr, o/ rdr
'egrladlrlid,
Arilr?irr, S-vdne}: CCII usrralia d'll E.ororr'd, /\ugusi l9;6, p 212
1984, p 15:] I6. lQ lvihor Thr iolnij .l tirt iar,
6 Mnnick, op .ir, p 9l New Y.,rkr lJari. llooks, I t80 p. l7l
7 Posner, op ct, p 3.r.1 17.l Rnnto, llndeBlanding rh.
8. For €xampl., gov.nm.nts.a! sa.banes Oxl€r'Act a valuc addcd
provide subsidies ro.orporar. arr,.oa.lr tor th. Ddblic irtcre$,
emni€sr .rea'e nnn .nl,r.. barri{! (-'riri.d, /,,If..rirr,r dr,.r.ror"ri,.q,
to.nt,rrvithin lirdunLies; atrd allov vol 19, 1008, pp. 952 62
olPorare dic.tos ro r!o,d detiihd l8 , Canadr, Iliuhn and S Slton,
dis.lo{res on LJonuses and benenrs 'A.cid.rtaU in rhe F!blic j er.sr:
rc..ived. h
turn, thes. !eguL e.l drc p..led {Dim nraL yi.lded
b.n.hls hdvc th. potnrl.rl ro oir\ r th€ S..bif.s Orl.y A.L', Crilnd/
noni€s f.onr.ther parli€s nLch ds. iJartr,1i,. ir A..urlinj, vol I9,
restedirell', ia\|ar.ts, .duunr€6 1006, pf
987 100:l
$'itbnr thc .los.d'iidusiry, trld It Colpci.nrd (cim, ot .ir, F l!i.
shireholder and otlEr invc$ors t. l0 For drta,led dis.us\io.s .lrolLLnrdN
rhe m:nnitenrcrt ol the 'favoured dilclosurs Ffe, ro uh n!di.s as
C B€nsr(!r, The v,lue ol rh. SIC'S
9 Al lU.hards.! and Bj ,'1.(iono.r!, a..olnifig dis.los rc requir€ncnts,
'fhree styles olrule', Cl{ r,r,rjft ., 1...m.n1.! ,lrri.rr, lulv 1969,
pp 515 lri R Mods,'Corporal€
l0 iuiini.k, oF cir, p. 9s dis.low. n, a lrbnaDrlailv
ol I I l)Q!irl<, ,'li1JJrry tifu."r i, i./drl !n..8ul.rLed orvironmenf , 1/rn,rx,
\ol s, nTrldro,t, rg.n.n J, l,rif cctof , Nl: lLui. 19ti4, Fp. 52-86; at foslcr,
Prnrceton llnnrjs tr rri.ss, l98r hnn ti nl.La ! ht\t a n.\s i\
t

:] K Coofernnd C K.nu, "the p 13 Lond.r: Prertn. ttall, 1986;

.coroDi. Eri.rdle for dF niru,. 12 ibid C whiLltd, Thc dciived demand
add dter' !t.o+orate finrncial ll C Srigler,"lh. th.ory ole.otromi. foi con$lid ci llnancirlrt.fli.g',
dis.lonre regublion: A. licdl i.gulation' B.ll./orrrl d/ Eir!rtn: ldn tl al A,rarntntg nnn l..anarns,
ass€s$nenf, Iourd ,l /.to,,.ins ,!d dLl Ma,ds.nrdl S.r,r.e, Sprnrg 1971, D..emb.r 1987; tr Skinfer,'wh)/
P!!li. Prli.1, vol. 2, 1933,I t90. pp22l 6us volunft.ily dis.los. bdd ne$s,

PARr I A.cnuitinij tr€or!


F.
Ior ai ofA.&lrnns R6'drl, sPrils
1994, and l, Yi, C Richardson, and
Dltornton, Co!ponte disclosrre
.nvnonm€ntal liablliiy information:
Theory and evid.n.e, conre'1po,?r1
A.."utrrtrg lle5errl, Fdll 1997.
2l C A.kedof "nr. daner for lemod:
(lurliry uncerrain'r and the Darker
me.hanisn, auar',rl), .lrrrrdl ot
E."no ir5, August 19t0,
23 Th. Australian Accounting Research
l.oundddon hns tunded by rhe
proti$i onal 1..o!n1i ns bodi.s (ICA-A
and CPAA) 1o cary oufesea.cb an.l
prrtkipare in s.tlinS accountirs.nd
itrdilins slarda,dr lor fte Public
.nd privare se.tor duriuS rhe Period
1966-2000.
24 This turdiig by Wall.r is.onshreni
Nilh that of willnoft oP..n.,
p. 63, who n,vestiEred rhe seuing
ofa.co!.rnrs siandards i'r d,e
united Knrgdon, and the rclc ot tbe
a..ounting bodi.s in drdl !ro.ess.
25.I Brcwn aDd A lirca,'Polirics
proce$es and rhe luture olAustraljan
a..oundn8 slindards" -{bd.16,
vol.37, no 3,2001, PP :67-96.
26 S Zdl'lFnS der€lopnienls jn rhe
USA ard !Ll, and sone imPli.atlons
lor Aunnlia,,1 $iltr 4..o, drt
Rairr,, rol ,17 no.4, 2008
pp 27s-82.
27. s z.1l 'Som. obsla.l.s to slobal
6nad.ial eporring .omParabilitt
r
and @nve$.n.. i' , hish level or
quality, ,i'rnish .1.!r rrt{ rl.r'itli,
lol 39, 2007, FIr 290-102.
28. A Rahnrnn, Th. A..outting
Standards Revi.s Board
cstablishm.nr ol irs pa11i.if ariv.
rcvi.\v process', PhD tbesis,
llnir€Bily 01 S-\'drer, Nov.trber
1988
10.ltnhm.n, oP cil , I n'ii
3l lor *mFlq rcfer 10 M Dobbir,
'SAC.1: th. gr.ar debire. tur,Lnri
irderr, vol 2, no.4, Nlay 1rt3,
pp. l, 3,5; ard Il Soh,'C100 Pulls
ihe 8 oD SAa 4, N.tr ,{dolnrdfll
lol 6, no. 7, l5 April 1993, pp. 1, 9
32 R\{atts and I Zinm.nna[']he
deinard for and $,prl-y ola..ourlns
Lheories: lhe narliet lor dose!,
,Ado!flIins Rs,i.r', vol 5'1, no 2,
1979, pp. 271 105
31. R(aplan,'Book r€vierv on Beaver:
financial Eporrjn&.n accounting
ol revoludon, hrrnrj o/ d'd
l.,no?ntd, vol 3, do. ^..odrtr8
12, De.emb.r
1981, pp.241 52.
14 DL Gelbo$, 'Rcsearch, iDruitnrn
ard pohi.s ir ac.outnrB ir,ruiry:,
I..omlinj l.rie ,, \ol 68, no.
July r971, pp.475 82.
l5 C,1+1 Stud-v Litl.: A..ou.ling io.
leases: a n€lv aplroach, hlY 1996
!'q{ iasPlLs.codi
J6 lAsll2009, Dis.usslot I'aPer
DP/20o9/1, lf,ascs, Preliminarr
vi.ws, Imw iasb ory
37. S Zefi Th..lolution ol LIS
CAAP: Ihe loliri.al lor..s behind
profesionil stardardi, T/r. al)A
/ormdl, Febtuary, vol.75, no
2005, p 18
38 s Zeff, foliLkal lobbYnis on
acco oming stNrdards naiional
ard internatiotal €\P.rience, in
c Nobes and R l)a.ker, cdrrpdrd.n,t
trIa,n tiora] .do!,lit3, ninlh edition
Londonr P.aron Ddu.ation, 20u6,
39. J,lohnson dnd R Switinga,
'An.lomy of dr agenda de.ision,
Slaienent No 1 15, I..otrrnrJ
HrrEonJ, vol. 10, no 2, 1996,
,10 R Iones and Ev€rtrri, !\ccountiDg
and reponn\g Io! financial
insrnrm€nts: |rt.rnational
dNclopments, C/'jA lorndl. lol 75,
fo 2, :005, pF. 30 ,1.
41 C Nobes and lt l'arker, A..ounling
i!les and rndk.s ofindividual
.onrpanies nr Errope, (io,'pd,?rtrrl
nlo rdridrdi d.rlxrrtr& ni.th ediLion,
Londonr leaAor Educmion, 2006,
tlre
]2. D Flifi, 'A tassion lor.larnlr IIS 39
is ni the front ln,e ol th..onfli.t
pirring pnn.irlcs dgalNr irl€i,
F rafl.i,l Tt,.J, 6 l.bNary 200r,
P.2
.13 lonrs and \renuri, op. .it
44 F6dararioD des l]xl€fis Co.rptnbles
Euror€ens (!uropean Fi..n.idl
lepoft ing r\crior Crorp)
15 A t'arker, 'llsB Lo stard 6rD
lollowing rren.h athck , rudn.nl]
Ttn.r, I I lub 2003.
,16 1 Prrk.r. l(l rates vot. o. se ol
I,\S 39', fldl:tliTn tJ, 2
O.tob.r 200'1, F 3
r7. Zef op. .i1. rrinrit r A.,d,ntiJ
CllAPILli 3 ApPl,! ng lheorl to..couftifg
\
,18 I Llealy, finarcial insirum.nLs:
LAS l!r a moveable feast for
accountantsi",4..o!,.d,.y lrPJ,,d,
vol. 16, no 6, 1004, PP lri 3
,19 IASLI 2008, pre$ rele.s€, IASB
an.ndnenls pernir r.classili.ation
of nnan.lal irstrum.nc, ooober,
l,
50 K Alfredi , 'A.colnting ior
identiliableiiitansibles in
unfrnish.d srand.rd s€tti!8 ixk', Tl?
A!\tal , A&lrnlnrj Rdr'.rr, vol I l,
Do 2, 2001, PP. l2 2r.
5r. K Chalmtrs and I Codftey,
'CoNpanies nr dre dang€r zooe',
,A,Jrnli,n CP,{, vol 73, no 10, 2003,
52 T RaILi., (iCAs 5l 9 billiot leaser',
l, CfO, 1 S.plcmber 200.1, P 621
K w'.11e6, 'slandards fi8hrbrdi,
Erjilc$ RPd,r' l4c.Li)', l2l:ebNrry
:004, ! 36
53. L Orsini,lP Nl.Allisrer and R taril{h,
Worl./ d,.d!,lni3, N.\' Yorl{: \4althe('
54 Zell- op. .il, Brit^i A.{ro!D.trJ
55 C Nobes and R r.rk i, an',Frzd"
ntrrnationdl d@rnnn& .i8hth
edilion, London: I'ea.son !d!.arion,
2004, t. 33.
56 Fadi.alion d.s L\pel1s con\P(ables
Eu,oraens, ttfrton.,r,neldnlnJ ti
Efuopt Ap h11ianry ntuailatior of
ori.rrit/r. r/ner , AFril 2001,
Nw{ l€e be/Prbli.ations/nau.hnn
57 CiF l)nvis, N.u dire.tions nr
corlroiare govenian.c, ,^nnd/ l?.r lar
o/ So.iol,Xi, ro1 f1, pP l4:i 62,
AnSusr ?005. http://ssu..onr.
59 The Conibined Cod. on Co.Pont.
covernar.e, Llnned lanrSdon,
r\s lr. oL8.ul{r !)rin.ipl.s ofgood
.olloral€ gorern.n.e and bNt
!.a.ri.. ..conrm.ndalioos, r\$rralid,
ranv.nLsiidia oIg
61. whilc.ascs |a!e been tak.f rgiinst
n.Drb.r, rllreBularion is ah'ila
liniLed by rhe dis.iltinrlt bodj.t
rLillnrgress ro pursle (.ses agai$l
62. S \.1.1€ry (ed ),/\drrrn,X ,.l,r. ri,'
,, li,?fe, \,la.nillan, 19!9
61. ftde.ador des L9..ts conPtrbles
Eurotae 2001, oP ciL
64.The ConDirl.e ol luroPean
See.ilies R.SularoB (c[.sR) cEsltt
review ol th€ ldPle,r.niaii.n of
re!!Lirl.n 89

oflhe IFIiS in dre ELJ
enforc.nreDr
R€f07 352 Cfslt, faris, No\cmber
2007
65. P llrown and r\Tar.a,',4 conrnienart
on issrs relating ro rh. eDforccnenr
of Inl€malio.al Finan.ial lteFoniDg
StaDdard5 in ihe t-U , rrrrop.dn
,A.colnrirt nai.u rol. 1.1, no.
2005, tp 1812lr.
66. Nob.s aDd jrarl.er 2006, op. cit.
P 17S
67. S feanrle_! 1Hin$, K McBride
and R BLaDdL A lreoliarly
British irNlirurion: an anal_vs1s
ol th. coftibuio. nideby lhe
i_iDarcial Reponiirg Revi.w Pancl to
AccotrDtiue Compliance ln th€ LrK,
cenLre lor Busiress Pedonnance,
trBLi(!rc ol Char(er.d A..ountarts in
lnglatrd aDd wai.s, 2000.
68. Im.national O.SafizatioD ol
Seorhis Commissions (losco)
2005, innual ReF.fl, twlr ios.o.org.
69. fadantion des La?cns Conrprables
Eu.opiens, Potirion paper frnan.ial
r€p.ning .an!e.gen.e, eq{ildletrce
and mdtual r€.o8niti.n, lvlarch 2006,
70. Nob6 and Pa.ke.2006, op .ft
71. Nob.s and Parlier 2004, op. .n
72.l enadond Orgari2ation ot
Securides Commissiors (losco)
2000-'L.ISC sian.lirds, i!1al
7:1. Newrork Sto.l Exc|ange; NriionaL
Associarion of Sccuiries Deale$
.\uromai€d Quolalions; Am.ri.an
7a.IASB .\boui us', Nav.i.rsb ol8/ibout
i5. Erowtr atrd lar.d 2005, o! .ir
?6 linancial A.coudrg Shndards
Boird & Itrternatlonal,\..uur1irg
Shnd.rds B..rd 1002 Mpdr.rrffrrn,
90 PAI{i I A...rfli'rB rh.!rr
.l
of undeisnrndnrS: l'he N.Mnlk in 1u36, M.I,arxslralin (oDr a!
Aryonor! NoNalk, Conoecri.ur. Both the Insiinne olA.counranrs
in Edinbulgb ind nre lnsriluie of
78 Fo.an olrNiei{ oflh. i.grments, see A(ouni.nis in Clasgow weie fo.ned
llA rye ind s Sund.r,'whynot alloN ir a53. w{ i.a.lr.onr
lAsll od IASB siandardsro c.mFre 89 A Cornpanles A.t tenned fi€
in fie LIS!', A..ornr,n8 Hor eni, 'accourhn$ friend' is pa$.d in
1, vol 15,no.3,2001, pp.43 54 1862. Th. Act esrablish.s die rol€
79 S.crrjr es nfd lacln.Se Conrmission oi oli'cial liquidrlor, a lre6on
2000, lhc corcept r.l.ase or r$porsible lbr proc..dinSs in rhe
nrlerrLional a.courrirtS srandardt, llquiddLior ol prLlk companies, the
a( creates a lar8. soure olr.v.n!.
80 2.11200S, op. cl. for ac.ounra16. AnoIh.r Compinies
81 Ul S$..1,'lhe nnFa( in lhe Unnen r\d is passed iD 1867,
Srares olrhe globaL adoplion ol
lFl?S', A'|nrdlu, A..rrnti,X lieri.u', t0. RL WatN and i Zinlnrrmdn, 'Ag€n.!
Seprenber 2008, Fp lt9 208 ploblen,s, audiring. and rhe th.o!'
82 P De L.n8e ard B tloNi.so.,'Or oldr [rm: y)me 6id€n..', .ld!,,/
a sloN iroar to conveEencer the o/ l,r, dr,/ E.o"o,i.r, vol. 26, no. J
relar oDship betwr.n the LJSA ind O.LoLJ.r 1981, pp 613-:13
lf lenririonnl A..ouf ring Srandrrds', 91. AICPA 1002, A l'riPl /r6ro,t o/
rvo.lilng paper, llnn'e6ir' of South v\ret ldliafl: llt Enrrn a^n rlt
AiCPA, nE p,rle$n i htl Llt tJrbln
rtr r.jr, 20 Febr!rrt,
34 IASB H.Lv do .3rio.^l sr^ldard htip:r'th€.aq ore
sct.rs nr inr!r rhc lASll s a(iviri.sl, 92. ibid
^npr
91. Report ftom the ChrirDri. ofihe
85 ,\ tcrm used bt Z€lt see Zefl2008, Additing and Assuran.e St..dards
Board, Bulletirr olrhe FRC 200s/2,
86 Sec ln'de. dis.ussion se€ NIE I AFril, rlws.lrc.gov.au
Btudbnt and FF BaskeNille, 'The !4 lt Sinureu, n critique ofth€
"NZ' ni 'NZ IFRS'r Publi. Ben.fit lf ter naiional,{udning and,{ssuran.!
Enrirt AniendDenrs, Aar"l Snndaids Borrd', A r"l,d,
A..orrr'rt /ldri.!, lol. 18, !o, i, r\(Tox,drs ft.,@r, rol. 17, no. ?
200s, ff 185 90 Ju\ 2007, tp 2S, 2t i6
87.,{c.onnling Standards lnteresr C.Lrut, 9!. Publir hErest OreNighr lroi.d 2009,
AI]d{jZ Codfererce pEsenlalion,
lvi€lboUre, Iuly 2005 t6 J frincis, I KhuFna, ind R Perei.a,
S8. CirAAus{nlia was lorr.d as Lh. "lh. role ota.counting and auditing
Aunraliin Sociely 01 A..ornLarts in.orporar. go!!'Dan.€ and the
i. l952lrom n nr.rSer olsev.ral de!.iop.re.t oltfu r.idl rnark.Ls
rroiisiona!.c.o!frinSso.iedes. tlr. rorna rhe $'.tld. ,{Jd Pd.t.Iounkl
olde$ ofs.hi.h, nie lncorpotril.d oi 1..r![tr8 nrd !..ndrni.r, vol. ]0,
Inslitute olAc.ount.nh, was Lnned no l,2{)01, pt I l0