Running Head: Accounting Standard Setting In The Private Sec

Running Head Accounting Standard Setting In The Private Sector4afina

Financial statements must provide a neutral scorecard of the effects of transactions, offering unbiased information that stakeholders such as investors, banks, regulators, and other users rely on for economic decision-making. The accuracy and relevance of financial reports are crucial for a well-functioning economy, as they underpin effective resource allocation. To be useful, financial statements should be straightforward to interpret, unbiased, timely, and backed by sound reasoning. They must focus on profit quality assessment, utilizing models that measure management's income manipulation under current standards and regulations, keeping in mind that income management can distort financial reporting, affecting its usefulness for decision-making (Healy & Wahlen, 1999; Dechow et al., 1995).

While income management can be modelled using aggregations of financial data, identifying and separating discretionary from non-discretionary earnings poses challenges that can influence the accuracy of such assessments. These models tend to be replicable but rely heavily on the effective identification of discretionary income components. They frequently overlook non-monetary factors, highlighting an inherent limitation in solely quantitative income quality models (Healy & Wahlen, 1999).

Cost of transactions exists regardless of whether accounting standards recognize them explicitly in financial statements. According to the principle of full disclosure, all significant transactions should be reported transparently to provide stakeholders with a complete picture of the company's financial position. Omitting liabilities, such as retiree medical benefits, may temporarily obscure expenses, but this can mislead investors and analysts, especially regarding long-term financial health. Such omissions hinder decision-making and violate the principles of fairness and transparency that underlie effective standard setting (FASB, 2010).

The FASB’s objective is to establish neutral, fair standards that fairly reflect economic reality, enabling comparability and transparency. The debate on standard setting emphasizes the importance of balancing the interests of various stakeholders, ensuring that financial reports are neither biased nor manipulated. Historically, industry groups, accounting firms, and users have supported an independent, private-sector standard-setting process, believing it is more sensitive to market needs and more efficient than government intervention (FASB, 2018).

In the United States, most accounting standards are developed within the private sector, with the FASB playing a central role since 1973. The SEC retains oversight to ensure standards align with public interest, but the primary responsibility for setting Generally Accepted Accounting Principles (GAAP) remains with the FASB (Beresford, 1989). Arguments favoring private sector standards include their responsiveness to market signals and their perceived neutrality, while others raise concerns about potential market failures, externalities, and delays caused by bureaucratic processes (OTA, 1992).

Nonetheless, few if any financial regulations are without some economic impact. When standards influence disclosure and behavior, they can lead to significant resource allocations and strategic decisions. For example, accounting rules governing asset valuation, expense recognition, or revenue recognition directly affect reported earnings, which in turn influence investor confidence, stock prices, and corporate strategies (Lev & Zarowin, 1999). Moreover, managerial incentives may lead to earnings management or manipulations, affecting the integrity of financial disclosures. Such behaviors underscore the economic consequences of standard setting, sometimes unintended and often complex (Healy, 1985).

Some argue that the financial reporting system cannot be entirely objective, as all information presentation involves judgment and subjective interpretations. Different stakeholders may view the same data through varying lenses, influenced by their interests and perspectives. This subjective nature complicates efforts to create purely neutral standards; therefore, the principles of transparency, consistency, and comparability remain vital (Laux & Leuz, 2009). The ongoing debate emphasizes the need for standards to adapt to changing economic realities while maintaining clarity and integrity.

In conclusion, effective accounting standards are vital for a reliable and efficient financial system. They help ensure that financial statements reflect economic reality, support informed decision-making, and maintain market confidence. While the private sector mechanisms have historically demonstrated resilience and responsiveness, continuous oversight, refinement, and adaptation are essential. Policymakers and standard setters must balance economic impacts with the need for transparency and fairness to sustain the legitimacy and utility of financial reporting (IASB, 2021; FASB, 2022).

References

• Beresford, L. (1989). The Role of the SEC in Accounting Standards Setting. Accounting Horizons, 3(2), 49-57.
• Financial Accounting Standards Board (FASB). (2010). Conceptual Framework for Financial Reporting. FASB.
• Financial Accounting Standards Board (FASB). (2018). About FASB. Retrieved from https://www.fasb.org
• Financial Accounting Standards Board (FASB). (2022). Current Standards. Retrieved from https://www.fasb.org
• Healy, P. M. (1985). The Effect of Bonus Schemes on Accounting Policies. Journal of Accounting and Economics, 7(1-3), 105-131.
• Healy, P. M., & Wahlen, J. M. (1999). A Review of Empirical Portraits of Earnings Management. Accounting Horizons, 13(4), 365-383.
• Laux, C., & Leuz, C. (2009). The Future of Financial Reporting: Developing Higher-Quality Standards. Accounting Horizons, 23(3), 341-356.
• Lev, B., & Zarowin, P. (1999). The Boundaries of Financial Reporting and How to Extend Them. Journal of Accounting Research, 37(2), 353-385.
• Office of Technology Assessment (OTA). (1992). Improving the Regulation of Technology-Dependent Markets. Congress of the United States.
• International Accounting Standards Board (IASB). (2021). International Financial Reporting Standards (IFRS). IASB.