The economy is the major part of every country that is crucial for interpersonal and international relations. American capital markets are ones of the leading markets on an international scale, and their stability guarantees the further strengthening of American economic position. Under the conditions of the multi-party system and the possibility of the negative influence of politics on the country’s economy, it is important that American standard setting remains in the private sector. This paper aims to discuss the role of the concentration of accounting standard settings in the private sector in the issues related to the neutrality of financial statements and accounting standards and their openness to the interested persons.
One of the major characteristics of financial statements is the necessity to give a neutral scorecard of the effects of transactions. The primary goal of financial statements is the reporting of data about company’s operating results, financial positions, and their changes. Financial statements form a basis for the final decision about the possibility of the economic deal and play a crucial role for investors, regulars, creditors, and other interested persons. Hence, the data provided by financial statements should always be reliable, relevant, updated, and backed up. One should understand that proper and efficient operation of economy claims trustworthy financial information about the activities of its actors as forms the major basis for the further decisions about the resources allocation. The information contained in financial statements should be clearly stated and should not give any hints about its double meaning or uncertainty. Furthermore, the information from financial statements should be understandable and easily interpreted for all interested persons. One could achieve such clarity and logical statement of the information only on the basis of its openness and completeness of all financial operations, for instance, cost of transactions.
Costs of transactions exist regardless of the FASB prescribes their recognition in financial statements or not. In concordance with the concept of full disclosure, all financial transactions require being disclosed in financial statements. The primary goal of this disclosing is the clarity of the company’s activities to its beneficiaries. For instance, Liberman notices that our ignorance of obligations for retiree health benefits or the absence of the recognition of stock options’ cost would not have any influence on the transactions’ economies but would hide the part of the data from the investors (Gibson, 2011, p. 33). Furthermore, these transactions would affect the condition of the company in the long run. Thus, the beneficiaries of the company would not get the full information about its activities and could not make the correct decision that could lead to economic failures. As the result, the credibility of the company would decrease, and its further business would be negatively affected. The faithfulness and correctness of accounting operations is the best policy one could suggest.
Standard setting is in the private sector in the United States. As Liberman writes, “Throughout history, the SEC has relied on the Board [FASB] and its predecessors in the private sector to establish and improve financial accounting and reporting standards” (Gibson, 2011, p. 33). The concentration of the standard setting in the private sector allows more accurate prediction of the new standards’ effects, as they are set, studied, and revised with the contribution of individuals and companies. Furthermore, private sector decreases the political influence on the economy and makes it less susceptible to political instability and the conflict between the interests of the parties. Calhoun states that accounting is closely related to integrity and the involvement of politics would doubt this integrity or would abandon it (Calhoun, 1999, p. 41). One should also note that the parties have less influence on the private sector and FASB than on the government. When the standard setting is dependent on politics, it can get under the influence of groups with specific interests and can start to experience inner clashes related to the economic consequences of accounting standards.
There are almost no accounting standards without some economic impact. Accounting standards, for instance, include expenditures, liabilities, assets, revenue, etc. The track of expenditures leads to the control of the company’s funds and the possibilities of their increase or the necessity of their decrease. As the result, the business of the company could change, as it could add new services and expand or reduce the number of its employees. Assets and revenue can lead to the change of specific rules in economic policies of the company. The implementation of new accounting standards can lead to new economic costs and economic benefits. Furthermore, one should note that accounting changes are often connected with out-of-pocket costs, such as audit and the understanding, collecting and disseminating new information. Also, accounting standards influence the final economic decision of the investors and beneficiaries, and, thus, influence the further work of the company. One should understand that first of all, accounting standards defend corporate interests, and the concentration of standard setting in the private sector is crucial here; it excludes the possibility that the interests of the parties may come to the fore and may have a negative impact on the company’s business.
The independence of the private sector accounting is crucial for American capital markets. The concentration of standard setting in the hands of FASB allows the Board to perform their job openly and fairly on the basis of public debates (Calhoun, 1999, p. 42). The work of FASB and the location of standard setting in the private sector keep financial statements and accounting standards neutral and exclude the influence of the parties. It guarantees the stable work of American capital markets both inside the country and at the international scale.
References
Calhoun, N. (1999). Standard setting should remain in the private sector. The Review: A Journal of Undergraduate Student Research, 2, 41-44. Retrieved from http://fisherpub.sjfc.edu/cgi/viewcontent.cgi?article=1111&context=ur
Gibson, C. H. (2011). Financial Reporting & Analysis: Using Financial Accounting Information (13th Ed.). Mason, OH: South Western / Cengage. ISBN-13: 9781133188797.
