GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 3
ACCOUNTING
REGULATION
 INTRODUCTION

1. What Accounting Standards?

2. Accounting standards vs Conceptual framework
3. Accounting standards vs GAAP
4. Contents of Accounting standards
5. The reason for Acct standard formulation
6. Accounting Regulation theories
7. Financial Reporting framework in Indonesia

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What is Accounting Standard?

• Accounting standards =
– original pronouncements (accounting rules and
guidelines)
– set up by authoritative bodies (like FASB, IASB, and
IAI) for financial reporting
– specify how transactions and other events should
be recognized, measured, presented and disclosed
in financial statements
– in a certain environment
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 CF vs Acct Standard
• CF = “… a coherent system of
interrelated objectives and
fundamentals that is expected to
lead to consistent standards…”

• CF = concepts underlying
accounting standards formulation
• All accounting standards should
not contradict with CF
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 Acct Standards vs GAAP
• GAAP (generally accepted accounting principles)
is a collection of commonly-followed accounting
rules and standards accepted as sound practices
for financial reporting in a certain environment
• The phrase “GAAP" consists of three important
sets of rules:
1. the basic accounting principles and guidelines,
2. the detailed rules and standards issued by FASB and
its predecessor (Accounting Principles Board-APB)
3. the generally accepted industry practices.
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 Acct Standards vs GAAP

• Accounting standards = main sources of

financial reporting (most authoritative rules)
• There is no universal GAAP
• The purpose of GAAP is to ensure that
financial reporting is transparent and
consistent from one organization to another

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 The nature of accounting
standards
• Accounting standards = the primary source of GAAP
to keep accounting practices consistent and
understandable across all companies and industries.
• Accounting standards usually consist of three parts:
1. a description of the problem to be tackled
2. a reasoned discussion on ways of solving the problem,
then,
3. in line with the decision or theory, the prescribed
solution
 Contents of Acct Standards

• Definition Characteristics of Acct

• Measurement Standards:
• Issued by regulatory body
• Recognition
• Have specific titles (SFAS,
• Presentation ASC, IAS, IFRS, PSAK)
• Disclosure • Have order numbers (IFRS
• Effective Date of 18; PSAK 14
implementation

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 Why we need accounting
standards
• Managers: guidelines of financial reporting
• Users: guidelines to evaluate firm’s financial
position, performance and conduct
• Public accountants: guidelines and rules of action
• The government: databases on essential variables
(taxation, regulation of enterprises, planning and
regulation of the economy, and enhancement of
economic efficiency and other social goals)
• Those interested: generate interest in the
accounting disciplines
ACCOUNTING STANDARD
SETTING

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 ACCOUNTING REGULATION
THEORY
• Should we regulate accounting practice?
• Two perspectives:
– Argument against regulating accounting (free
market approach)
VS
– Arguments for regulated markets (Regulation
Approach)

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 Arguments against regulating
accounting
• Use the agency theory:
– Firms have an incentive to report
voluntarily to the capital market because
they compete for scarce resources:
– Failure to report might be interpreted as
bad news
• Called as Free-Market Approach
 The free-market approach
• Assumes that accounting information is an
economic good that:
– is subject to the forces of demand and
supply
– results in an optimal amount of information
disclosed at an optimal price
• Advocates of a regulatory approach maintain
that there are market failures in the private
market for information
Arguments for a regulated market

• Use a public interest argument

• Based on market failures include:
– a firm’s reluctance to disclose information
about itself
– the occurrence of fraud
– the underproduction of accounting
information as a public good
– Lack of objectivity
 Theories of regulation

• Three theories of regulation:

1. Public interest theory
2. Regulatory capture theory
3. Private interest theory

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1. Public interest theory
• regulation is supplied in response to a public
demand for the correction of inefficient or
inequitable market prices
• regulation is required in the ‘public interest’
whenever there is market failure (inefficiency)
due to:
– lack of competition
– barriers to entry
– information asymmetry
– public-good products 17
1. Public interest theory

• Governments intervene:
– to get votes
– because public interest groups demand
intervention
– because they are neutral arbiters

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2. Regulatory capture theory

• regulation is supplied in response to the

demands of special-interest groups in order to
maximise their members’ income
• The public interest is not protected because
those being regulated come to control or
dominate the regulator
• Assumes the regulator has no independent
role to play but is simply an arbiter between
battling interest groups
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2. Regulatory capture theory

• Professional accounting bodies or the

corporate sector seek to control the setting of
accounting standards
• Regulation = for a certain group

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3. Private interest theory

• Governments are not independent arbiters,

but are rationally self-interested
• They seek re-election
• They will ‘sell’ their power to coerce or
transfer wealth to those most likely to achieve
their re-election (if they are elected officials)
or increase their wealth (if they are appointed
officials) or both
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Standard setting as a political
process
• Standard setting is a political process because
it can affect many conflicting and self-
interested groups
• The regulator must make a political choice
• The regulator must have a mandate to make
social choices
• The recognition of doubtful debts can affect
entities differently
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WHO SHOULD REGULATE?

• Public sectors (Government)?

• Or
• Private Sector (Profession)?

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 Private-sector regulation of
accounting standards
Advantages
• responsive to various constituents
• possess the necessary technical knowledge
to develop and implement alternative
measurement and disclosure systems
• successful in generating a reasonable
amount of response from its constituency
base and in responding to this input
 Private-sector regulation of
accounting standards
Disadvantages
• lacks statutory authority and faces the challenge of
being overridden by government
• Lack of independence from dominating interests,
such as the accounting profession
• responding too slowly to major issues that are of
crucial importance to some of its constituents
 Public-sector regulation of
accounting standards
Arguments in favour
• acts as ‘creative irritant’ and as a catalyst for
change, since the private sector and market
forces do not provide the leadership necessary
to effect such change
• serves to protect investors against perceived
abuses
 Public-sector regulation of accounting
standards (cont’d)
Arguments in favour (cont’d)
• motivated by the desire to create a level of public
disclosure deemed necessary and adequate for
decision making
• Unlike accounting professional bodies, government is
secured greater legitimacy through its statutory
authority
• Private-sector objectives may sometimes contradict
the public interest
 Public-sector regulation of accounting
standards (cont’d)

Arguments against
• There is a high corporate cost for compliance with
government regulation of information
• Bureaucrats have a tendency to maximise the total
budget of their bureau
• There is the danger that standard setting may become
increasingly politicised
• Government regulation backed by police power may
hinder the conduct of research and experimentation of
accounting policy and is not essential to achieving
standardisation of measurement
 WHO SHOULD REGULATE?
• Willmott, Puxty, Cooper dan Lowe (1987)
Market Government
Liberalism Legalism

Corporatism

Associationism

Profession
Financial reporting framework in
Indonesia
• The standard-setting body in Indonesia = the
Financial Accounting Standards Board (Dewan
Standar Akuntansi Keuangan or DSAK) under
the Indonesian Institute of Accountants
(Ikatan Akuntan Indonesia or IAI).
• Under Indonesian law, both public and private
companies must comply with accounting
standards issued by the DSAK-IAI.

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Financial reporting framework in
Indonesia
• Indonesia's approach to IFRS adoption is to
maintain its national GAAP (Indonesian
Financial Accounting Standards, IFAS) and
converge it gradually with IFRSs
• Currently there is no plan (and consequently
no timetable) for a full adoption of IFRSs
• Since 2012, the local standards applied in
Indonesia are based on those IFRSs that were
effective at 1 January 2009
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Indonesia Acccounting Standards
• Standard Akuntansi Keuangan (IFRS Base):
– All companies listed in ISX
– All companies mobilize huge funding (banking
industry)
• Standar Akuntansi Syariah
• SAK – Entitas Tanpa Akuntabilitas Publik (ETAP)
17 Juli 2011: for SME
• SAK Pemerintahan (PP 24/2005 & PP 71/ 2010)

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Key terms and concepts

• Conceptual Framework – GAAP-Accounting

standards
• Content and Scope of Accounting standards
• Accounting Standard Setting process
• Regulations Theory
• Who should regulate accounting
• Indonesia Framework

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