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16/09/2016

LECTURE 3

THEORY FOR REGULATION AND


ACCOUNTING DEVELOPMENT IN INDONESIA

REGULATION OF FINANCIAL ACCOUNTING


Some accounting prescriptions become part of legislation
while others do not
Insights into what political factors might have influenced
the development of the various rules
Accounting standard-setting is a very political process

ARTHIK DAVIANTI, SE. MSI. AK. CA.

Discussing regulations relating to financial accounting


discussing rules that have been developed by an
independent authoritative body that has been given the
power to govern accounting practice

REGULATION OF FINANCIAL ACCOUNTING

ARGUMENTS IN FREE-MARKET VIEW

Different perspectives:

Private economic-based incentives

The free-market view is that we do not need all the


regulation, treat accounting like other goods

The pro-regulation perspective regulation is necessary


to reduce impacts of market failure

Market for managers

Market for corporate takeovers


Market for lemons

ARGUMENTS FOR PRO-REGULATION


PERSPECTIVE

ADAM SMITHS INVISIBLE HAND

Accounting information is a public or free good

In favour of free market

In the presence of free riders, true demand is


understated

The free-market argument ignores market failures and


uneven distribution of power

It should not be treated the same as other goods


Leads to underproduction of information

Some people argue that free goods are often


overproduced as a result of regulation information
overload

Uses market mechanism

Concerns with monopolistic powers were created by


government intervention
Advocates regulatory intervention in some instances

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THEORIES TO EXPLAIN THE INTRODUCTION


OF REGULATION IN ACCOUNTING

THEORY OF EFFICIENT MARKETS

Managers have incentives to voluntarily provide


accounting information, so why do we observe the
regulation of financial reporting?

The forces of supply and demand influence market


behaviour and help keep markets efficient

THEORY OF EFFICIENT MARKETS

AGENCY THEORY

However:

The demand for accounting information:


for stewardship purposes
for decision-making purposes

Explanations are provided by:


theory of efficient markets
agency theory
theories of regulation

The market for accounting data is not efficient


The free-rider problem distorts the market
Users cannot agree on what they want

Accountants cannot agree on procedures


Firms must produce comparable data

This applies to the market for accounting information and


should determine what accounting data should be supplied
and what accounting practices should be used to prepare it

A framework in which to study the relationship between


those who provide accounting information - e.g. a
manager - and those who use it e.g. a shareholder or
creditor

The government must therefore intervene

AGENCY THEORY

THEORIES OF REGULATION

Because of imbalances between data suppliers and data


users, uncertainty and risk exist

There are three theories of regulation:


public interest theory
regulatory capture theory
private interest theory

Resources and risk are likely to be misallocated between


the parties

To the extent the market mechanism is inefficient,


accounting regulation is required to reduce inefficient and
inequitable outcomes

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PUBLIC INTEREST THEORY


Government 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
Assumption: economic markets are subject to a series of
market imperfection or transaction failures.

PUBLIC INTEREST THEORY


Governments intervene:
Legislative action to get votes (competing candidates)
because public interest groups agents - demand
intervention in pursuit of public interest objective
Government has no independent role because they are
neutral arbiters intervene costlessly

REGULATORY CAPTURE THEORY

REGULATORY CAPTURE THEORY

The purpose to protect the public interest is not achieved

Assumption:

The public interest is not protected because those being


regulated come to control or dominate the regulator
The regulated protect or increase their wealth

Assumes the regulator has no independent role to play but


is simply an arbiter between battling interest groups

REGULATORY CAPTURE THEORY


Situations of occurrence the regulated entities:

Control the regulation and regulation agency

Succeed in coordinating the regulatory bodys activities


Neutralise or ensure non-performance
In a subtle process of interaction

Professional accounting bodies or the corporate sector


seek to control the setting of accounting standards

All member of society are economically rational


private marginal benefit from lobbying

Government has no independent role in the regulatory


process

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
This theorists believe a market for regulation with similar
supply and demand (with many bidders)
Only the highest bidder will be successful

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PRIVATE INTEREST THEORY


Producer groups of regulation able to use the power of
government for their own advantage:

1. Organised interest group seeking political protection.


Other groups (more diffuse) have limited ability to bid
effectively (due to organisation and information cost)
2. Government officials are rationally self-interested

This theory predicts regulators will use their power to transfer


income from those with less political power to those with more.

REGULATORY FRAMEWORK FOR


FINANCIAL REPORTING
A financial reporting environment is made up of:
legal setting
economic setting
political setting
social setting

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

ACCOUNTING IN INDONESIA

Influence form the USA:

The great depression 1929-1939 agreements between


American Institute of Certified Public Accountants (AICPA)
and New York Stock Exchange (NYSE) to form Board
Accounting Principles and later published Accounting
Research Bulletin (ARB) No 43 on Generally Accepted
Accounting Principles (GAAP)

Committee of Accounting Procedure (CAP) & Stock


Exchange Commission (SEC) 1936-1946 Accounting
Series Release (ASR) and American Accounting Association
(AAA)

ACCOUNTING IN INDONESIA
Influence form the USA (continues):

Accounting Principles Board (APB) and Accounting


Research Division (1959-2002) Wheat and Trueblood
Committees recommendation for structuring Financial
Accounting Standard Board (FASB)
2002-now Sabarnes-Oxley Act 2002 The Public
Company Accountability Oversight Board (PCAOB)

ACCOUNTING IN INDONESIA

International influence:

International Accounting Standards Committee (IASC)


published 41 International Accounting Standards (19732001)
International Accounting Standards Board (IASB)
International Financial Reporting Standards (IFRS)

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ACCOUNTING IN INDONESIA

Jawatan Akuntan Negara (Government Accountant


Dients) tahun 1915

Accounting study program offered by universities (19521964)

Ikatan Akuntan Indonesia (IAI) adopted financial


accounting standard starting 1994 Pernyataan Standar
Akuntansi Keuangan (PSAK)
Conceptual and legislative framework: Commercial Code
1847, UU No 1 tahun 1995 tentang Perseroan Terbatas
(diubah dengan UU No 40 tahun 2007, PP No 64 tahun
1999 tentang Laporan Keuangan Perusahaan, UU No 8
1995 tentang Pasar Modal, UU No 7 1992 tentang
Perbankan (diubah dengan UU No 19 1998)

ACCOUNTING IN INDONESIA
Standard setting in Indonesia followed American Model:
1. Issue identification

2. Preliminary consideration

3. Preparation of accounting discussion paper


4. Preparation of exposure draft
5. Publication of exposure draft

ACCOUNTING IN INDONESIA
Professional organisation Ikatan Akuntan Indonesia (IAI)
1. Kompartemen Akuntan Akademisi (IAI-KAA)

2. Kompartemen Akuntan Manajemen (IAI-KAM)


3. Kompartemen Akuntan Publik (IAI-KAP)

4. Kompartemen Akuntan Sektor Publik (IAI-KASP)


Standard setting Dewan Standar Akuntansi Keuangan
(DSAK)

ACCOUNTING IN INDONESIA
IAI declared fully adoption of IFRS on 23 December
2008
Convergence with IFRS started on 1 January 2012

Standar Akuntansi Keuangan per Efektif 1 January 2015


only a year behind IFRS

6. PSAK preparation

7. Approval and promulgation

END OF TODAYS LECTURE

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