In the UK accounting standards are defined both by legislation and by the expectation of behaviour outlined by professional bodies. Accounting standards fall into two categories: legal guidelines and ethical requirements. Whether legally enforced, or dictated by morals and convention, every society forms standards. Accountancy is an important area of business activity, which meant the evolution of accounting standards was inevitable.
All activity requires rules: football matches, marriages, pet care and aviation are all examples of human pursuits that require rules, standards, guidelines and laws. Accounting is no different. In the UK, the creation and enforcement of rules and standards come from two different sources.
The government legislates to create accounting standards, but leaves much of the supervision and evolution of those standards to semi-independent agencies. In addition, the purchasing power of public administration gives it the power to influence the accounting industry by specifying standards for winning bids for government contracts.
The public enforcement of accounting standards is carried out in cooperation with professional bodies in the field. Enforcement of coherence with the standards springs from exclusion. Any accountant hoping for a job and then career advancement has to be a member of a professional body. Non-conformance with the standards of those bodies would result in expulsion and loss of employment opportunities.
Level playing field
The natural benefit to all of the existence of any standards is that it establishes a level playing field, which encourages equality and trust. Investors have a common yardstick to compare investment alternatives because they are assured that all companies follow the same standards in their financial reporting. Common accounting standards also save time for creditors because they do not have to issue a set of rules of their own invention to each company that applies for a loan. It can be assumed that all businesses already comply to legally enforced accounting standards.
The level playing field imposed on the general business community can give an unfair advantage to those who find loopholes to cheat. Standards lull the general population into believing that all are treated fairly and comply faithfully. However, this creates a blanket assumption of honesty that can be exploited by unscrupulous profiteers. The “off balance sheet” methods used by banks that caused the 2008 financial crisis are examples of this. Although these methods mostly complied with standards, they breached the ethical assumptions of fair value and honesty by which the accounting profession is pledged to abide.
Tightening standards to close loopholes exploited by the dishonest few creates restrictive standards that damage the commercial viability of the business community as a whole. Strict requirements of professional competence employed in the creation of accounts hands the profession a monopoly and allows them to raise their prices. Therefore, standards can be employed to blackmail companies with the threat of exclusion from the right to do business. Complex rules create high accounting costs that burden small companies and raise the price of entry in to the business world for start ups.