Presented below are three models for setting GAAP. 1. The purely political appro

Question

Presented below are three models for setting GAAP.
1. The purely political approach, where national legislative action decrees GAAP.
2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
3. The public/private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions
(a) Which of these three models best describes standad-setting in the United States? Comment on your answer.
(b) Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
(c) cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

Explanation / Answer

This is a very interesting question, either a good professor or excellent textbook author. Question A: which of these models describes the United States? Being a Big 4 auditor this question is of particular interest to me. I think you could make a very good argument for 1 or 2. I would like to side with 2 through. 1. I think you could make a case for the purely political approach, but I feel there is a great deal of private sector involvement enforcement which is why I like 2 better. 2. Private/professional approach best describes the current situation since we have the standards being set by the FASB (quasi government organization under the SEC) and mostly auditors enforcing the standards. Granted the PCAOB does take part in some of the enforcement but they just can't look at every audit. The vast majority of enforcement is with the audit work in the accounting firms. 3. Public/private mixed, this maybe what we had pre-FASB (I think 1970s), when the AICPA was a purely private organization and issuing the authoritative guidance. We don't have that anymore and will likely never have a set up like that again. It simply gives the firms and private sector way too much control. Part B: why do so many groups take an interest in standard setting? These groups are interested in standard setting because it determines how they'll get paid, whether their company will survive. You could run through each of these examples and why each group has a stake in financial standards Financial Analyst- it determines the quality and usefulness of the information they get out of companies to do a better job. Labor Union- it can give them a better picture of the financial condition of the company and whether they're in a position to ask for a better labor contract. Part C: another group other than the FASB that is trying to set accounting standards. I would probably ask my professor for some clarity here, I'm not sure if we're talking about the "elephant in the room" IFRS being set by the IASB. This could also be some regulatory accounting standards which are set for like insurance companies who have to report another set of financials on a regulatory basis in addition to GAAP(to better show their solvency, it's a borderline cash basis of accounting). It could also be the IRS which generally has all taxpayers including corporations report a close to cash basis method of accounting for tax purposes. The thing is, another basis of accounting can't really just come into the United States and set up shop. We can't get together in our garage and start a better basis of accounting than is out there. This is because the SEC holds all the cards. For big corporations that are traded publicly they have to go through the SEC which means they have to report on US GAAP.

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