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  Problems with Standards

Introduction to Problems with Standards

There is broad agreement that financial reporting standards have enhanced the quality of financial statements. However, we should be aware to the potential problems related with their use.

Some of these problems are as follows:

Standards may inhibit change

Through setting out inflexible procedures to be followed, standards might stifle the development of new and better procedures. Progress in financial reporting might need that businesses have the freedom to experiment and innovate. Except they have this freedom, accounting practice might become ossified.

Even though this problem cannot be simply dismissed, history has displayed that financial reporting standards are changed while they confirm to be inadequate or ineffective. Over the years, several standards have been either modified or withdrawn. Additionally, developing a new standard includes wide consultation with interested parties and much debate on what constitutes best practice. So, the financial reporting standards can present the stimulus for new thinking.

Standards may impose false conformity

No two businesses are similar: each will have its own features and operating methods. Through insisting on general standards, there is a risk that the unique aspects of each business will be unnoticed. Even though this argument has some advantage, it can be taken too far. Variations among businesses can be overstated and their general features understated. Additionally, there is nothing to stop standards permitting a limited choice among accounting methods that may assist in reflecting individual characteristics.

At last, a business can, in exceptional conditions, depart from an accounting standard

In which it conflicts with the need to provide a fair presentation of financial health.

So businesses do not have to fulfil with unreasonable rules.

Standards involve consensus-seeking

Financial reporting standards influence specific groups who must be wanted to accept them. Except this occurs, standards cannot be applied effectively. So, the development of standards might be affected more through the requirement to attain consensus than through technical considerations of what is the best approach to accept. While this takes place, the quality of financial statements will suffer.

So far, there is no proof to suggest this has been a main problem. Standard-setters must be responsive to the groups influenced in order to command authority. Within a democracy this is how authority is legitimised. The way that they must attain, though, is to make rules that are both technically sound and largely acceptable.

Standards can be costly

Now there is an intricate web of financial reporting standards surrounding large businesses.

The costs of conforming to these rules are high and are borne through shareholders. Each additional standard that acquires costs for businesses means that less money is presented for distribution to shareholders. There is a supposition that the advantages to shareholders of these standards outweigh their costs, but what if this is not the issue? It is reasonable to expect standard-setters to perform an assessment of costs and advantages before adding to the load of rules.

Standards can be complex

There is a rising concern that international financial reporting standards are making financial statements too difficult to be helpful to shareholders. This has led to calls for better regulation. International standards are intended to be based on principles than on legalistic rules, and this should assist to avoid excessive complexity. Though, several question whether this principles-based approach is working effectively.

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