Standard Setting Political Issues

1. Standard Setting Political Issues

2. Class Announcements • Assignment #10 due March 31st; available on-line • Research Paper Part #4 and bonus due April 3rd • Business Banquet - April 2nd – 5:45-8pm, Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia • Final Exam 7:00pm April 19th, Main Gym, Oland Centre

3. Class Objectives • Incentives for Production of Information • Regulation (e.g. setting standards) as a political process • Standard setting process in Canada • Theories of standard setting

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

5. Standard Setting: Incentives for Information Production • Contractual • Compensation contracts • IPO • Market-Based (non-contractual) • Securities markets (firm value) • Managerial labour markets (Reputation) • Takeover market (corporate control) • Other • Disclosure Principle • Signaling • Private information Search

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

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

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

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

10. Standard Setting in the US • FASB’s purpose is to establish and improve standards • Part of a three part organization • Independent of AICPA • Consists of 7 full time Board members • 5/7ths majority to pass a standard • Heavy emphasis on due process

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

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

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

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

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

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

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

18. Class Objectives - Revisited • Incentives for Production of Information • Regulation (e.g. setting standards) as a political process • Standard setting process in Canada • Theories of standard setting