Accounting Reform in Australia: Contrasting Cases of Agenda Building

During the 1990s there was significant public interest in and criticism of the institutional arrangements for accounting standard setting in Australia (see, e.g., Walker and Robinson, 1994; Belkaoui and Jones, 2002, pp. 102–7; Peirson, 1998; Brown and Tarca, 2001). Consequently, there have been attempts to reform the standard setting process—on two fronts. The first came from the accounting profession under the auspices of the Australian Accounting Research Foundation (AARF) which commissioned A Report on the Institutional Arrangements for Accounting Standard Setting in Australia—the Peirson Report (Peirson, 1990a). While applauded by the Australian accounting profession and the AARF, the Peirson Report failed to win the endorsement of the Australian Government (McGregor, 1995). A second more substantial and reformist accounting standard setting agenda was initiated by the Commonwealth Department of Treasury of Australia (hereafter, the Treasury), as part of its Corporate Law Economic Reform Program (CLERP). This reform agenda was formally announced by the Treasurer, the Honourable Peter Costello, in March 1997 (CLERP, Proposals for Reform, Paper No. 1, Commonwealth of Australia, 1997, hereafter CLERP 1). The details of the CLERP have been published by the Treasury as Corporate Law Economic Reform Program: Draft Legislative Provisions (1998) containing A Bill for an Act to amend the Corporations Law, and for related purposes, and Corporate Law Economic Reform Program: Commentary on Draft Provisions (1998). The CLERP became legislation in November 1999 (taking effect as of 1 January 2000) as the Corporate Law Economic Reform Program Act, 1999 (Part 12, ss 224–38, specifically relates to the new institutional arrangements for accounting standard setting). More recently, CLERP 9 ‘Corporate Disclosure—Strengthening the Financial Reporting Framework’ (September 2002) was released, which provided a number of sweeping recommendations for reform of the auditing profession, as well as detailing recent developments in Australia's harmonization program.

While both the Peirson Report and the CLERP¹ generally endorsed a U.S.A.-FASB style approach to accounting standard setting, there are significant differences between them. The Peirson Report recommended that the Government relinquish substantial control of the standard setting process. However, the CLERP envisages an expanded role for the Government in accounting standard setting: For example, the Treasurer appoints the chairman and determines the membership of the Financial Reporting Council (FRC), and appoints the chairman of the Australian Accounting Standards Board (AASB). Prior to the CLERP Act (1999), accounting standard setting in Australia came under the auspices of the Commonwealth Attorney-General's Department. Under the new legislation, accounting standard setting is under the control of the Federal Treasurer (Companies Law Economic Reform Program Act, 1999, Part 12, ss 235–6). This constitutes a fundamental shift in standard setting policy away from jurisprudence, administration and law to the realm of national and international economic policy and trade.

A prominent feature of the Treasury's policy agenda, and the one that has been the principal focus of accounting discourse in the CLERP, is the international harmonization of Australian accounting standards (see Collett et al., 1998; Peirson, 1998; Zeff, 1998; Brown and Clinch, 1998; Brown and Tarca, 2001). Unlike the Peirson Report, CLERP 1 and CLERP 9 advocate the rapid adoption of IASC (now IASB) standards, a deadline subsequently set by the FRC for 1 January 2005 (see IASB Press Release, 3 July 2002; CLERP 9, p. 106). Furthermore, CLERP 1 proposed that adoption of IASB standards can best be achieved by bringing accounting standard setting under the auspices of the Treasury (CLERP 1, 1997; and Part 12, s. 233 of the Corporate Law Economic Program Act, 1999).

However, the most striking feature of the discourse on CLERP is not the fixation on the international harmonization of Australian accounting standards per se, but the prevalent silence on the profoundly reformist agenda of CLERP 1—the introduction of market value (or mark-to-market) accounting. By market value accounting, CLERP 1 means the following:

The Government links market value accounting with broader macroeconomic objectives. CLERP 1 states that (pp. 13–14):

Contrary to the conventional wisdom, CLERP 1 argues that ‘greater use of market value accounting would enable the [capital] market to operate more efficiently through a reliance on enhanced transparency from institutions and corporations in relation to their operations’ (p. 60). CLERP 1 acknowledges that ‘While market value principles have been included in a number of Australian accounting standards (for example, in accounting for the general insurance industry), the method is not favoured by the business community’ (p. 60; see also Walker and Jones, 2003). Notwithstanding this opposition, CLERP 1 advocates market value accounting because it ‘would provide a more informative means of financial reporting for investors, market participants and regulators’ (p. 60). According to CLERP 1, the advantages of market value accounting are that it provides greater transparency, better reflects risk management practices and obviates the need for ledger accounting (p. 60).

This reformist proposal might, at first, appear to be in conflict with that of the international harmonization of accounting standards. It is not. For CLERP 1 states that ‘the proposed AASC [now AASB], having regard to international developments, should seek to promote the use of market value accounting when developing and revising accounting standards that require the valuation of assets and liabilities’ (p. 60). It is apparent, therefore, that the reform agenda of CLERP 1 far transcends the mere institutional arrangements by which Australian accounting standards might be set and harmonized with international accounting standards: It goes to the heart of accounting itself. It contemplates a more contemporary, reliable and informative style of accounting; one that would better inform investors, market participants and regulators about the current financial performance and position of firms; one that would lead to better informed—and hence more efficient—capital markets.

While the notion of market value accounting is not new, this recommendation is—to our knowledge—a historical first from a government, regulatory or standard setting body. The leading intellectual exponents of market selling price accounting are Chambers (1966; Chambers et al., 1978; Chambers and Dean, 1995, and in several other works—see Chambers and Dean, 1986, 2000) and Sterling (1970, and in several other works—see Lee and Wolnizer, 1997). The leading practitioner exponent of market value accounting is the former Chief Accountant to the U.S. Securities and Exchange Commission, Walter Schuetze (see Schuetze, 2004). Wolnizer (1987) argued that such an accounting would transform auditing into the rigorous safeguard intended by law by requiring auditors to authenticate financial statements by recourse to corroborable commercial evidence independently of the reporting enterprise.

Reporting on interviews with Sir David Tweedie, chairman of the IASB, and other accounting luminaries, The Economist (24 April 2003) stated that ‘the way to make [financial statements] more relevant (and to stop executives from fiddling them) is, standard setters believe, to force companies to value more of their assets and liabilities at market prices, to mark them to market’. Sir David Tweedie is reported to have argued that ‘market value is superior to historic cost’. The Economist concludes that ‘the slow march to market value is probably unstoppable in the long run, because so many accountants now believe that it is the most intellectually valid way to value assets’.

Against this background, our study has three main objectives:

AGENDA BUILDING: PHASES AND MODELS

Under a Western democratic system of government, changes in the polity are decided upon in the public arena. Emphasis is often placed on the more visible decision-making processes and what influences them (see, e.g., Schattschneider, 1960; Dahl, 1968). Preceding this public or visible phase of the policy making process is a less visible, but perhaps more crucial, determinant of policy outcomes; namely, the processes by which matters at issue in the polity are screened, articulated, expanded, and eventually propelled into the public decision-making arena. This process has been called agenda building (Cobb and Elder, 1972; Cobb et al., 1976),² or earlier, as agenda controlling by Bachrach and Baratz (1962) to describe the invisible and perhaps more intangible face of power by which controversial issues in society are either diffused or quashed before they gain access to the public arena (see also Rahman, 1998).

Agenda building is concerned with how and why some public policy issues attract the attention of policy makers and others do not. It has to do with the determinants of the agenda for political controversy within a polity, how the agenda is developed, how it wins the attention of decision makers, and how participants are involved in the political process. In this study, we are concerned primarily with the international harmonization of accounting standards and the potential for the introduction of market value accounting as a public policy question. We are particularly interested in the reasons why it has come suddenly to be integral to the regulatory reform agenda in Australia. The setting, enforcement and quality of accounting standards in Australia have not been free from public criticism and political controversy over the years (see, e.g., ASA Report of General Council, 1966; Walker, 1987). For example, as was evidenced in the recent Royal Commission Report on the failure of HIH (Report, 2003) the quality of conventional accounting standards has been shown repeatedly in corporate failures, takeovers and litigated cases to be technically flawed and unserviceable in the context of financial choice and action. Further, their impact on corporate governance and accountability has not escaped close public scrutiny, particularly in the context of the so-called corporate excesses of the 1980s (Walker, 1993; Wolnizer, 1995; Clarke et al., 2003), and in the more recent spate of failures, including WorldCom, Enron, and closer to home in Australia, HIH and One.Tel. Notwithstanding these events, nothing appears to have captured the corporate regulatory agenda more in Australia today than the issue of international standards harmonization and the quality of accounting standards (see Final Report, Royal Commission Report, HIH, 2003).

PUBLIC AND FORMAL AGENDAS

Cobb and Elder (1972) and Cobb et al. (1976) distinguish between public and formal agendas. A public (or systemic) agenda consists of the full spectrum of issues that are widely perceived to be socially important and of legitimate governmental concern in a community. Public agendas are formed through the perpetual struggle and clash of social forces as articulated by various interest groups. At any time, the public agenda will reflect the existing balance of social interests in the community, or the mobilization of bias (see Bachrach and Baratz, 1970, p. 58) within a society. Formal agendas, however, represent those issues that have been elevated to formal recognition and are subject to specific consideration by decision makers (Cobb and Elder, 1972; Mitnick, 1980). Agendas of this kind are described variously as being formal, institutional or governmental.

Public agendas are more ‘intangible’ and broader in scope than formal agendas (Cobb et al., 1976, pp. 126–7). Moreover, the priorities between public and formal agendas can be quite different. While it is possible for an issue to attain access to a formal agenda without having reached public agenda status, this is unlikely to occur for any issue of major social consequence. One way to achieve access to a formal, governmental agenda is by its proponents attempting to expand its scope, intensity and visibility in the public domain. To attain formal agenda status, a public policy question is likely to be of considerable social importance because high public visibility will draw the attention of political decision makers.

MODELS OF AGENDA BUILDING

Cobb et al. (1976) describe three models of agenda building that can be applied to the ‘career of an issue’. They identify four phases in that career—its initiation into the domain of the public and/or formal agendas; its specification to the targeted audience; its expansion from one agenda to another; and its entrance on to one or more agendas. The initiation of an issue usually arises from some social conflict, controversy or regulatory gap. The issue may then be specified in terms of a specific grievance or policy proposal by an initiator group and then guided towards agenda entrance. If an issue is not directly placed upon the formal agenda, then its expansion in the public arena may serve to heighten public awareness and facilitate the mobilization of public support in order to persuade decision makers to elevate the issue to the formal agenda. Similarly, decision makers who participate directly in the formal agenda formation process (e.g., the members of a regulatory agency or government department) can mobilize support either for or against an issue or reform proposal. Finally, agenda entrance will occur when decision makers decide that an issue is politically or socially important enough to be placed on the formal agenda (Cobb and Elder, 1972).

In elucidating the various stages in the process of agenda building, Cobb et al. (1976) have identified three agenda building models, each of which describes differently the stages in the career of a public policy issue: the ‘outside initiative model’, the ‘mobilization model’ and the ‘inside access model’.³ The outside initiative model describes a situation in which an individual, group or organization outside the government structure initiates or articulates a grievance or issue for reform which they then seek to expand (i.e., publicize) to the public domain. This may take place through media coverage, the public lobbying of politicians, or other forms of publicity with the strategy of pressuring decision makers to place the issue on the formal agenda. Under this model of agenda building, issues are generated at the ‘grass roots’ level of society and driven into the decision making arena through popular support wielded by special interest groups (Cobb et al., 1976, pp. 28–31). The extent to which the interest groups are organized and visible in the community may vary greatly. Entrance is achieved when an issue is finally included on the formal agenda. However, the elevation of an issue from the public agenda to the formal agenda does not in itself guarantee success of the issue. Indeed, Cobb et al. (1976) have observed that policy issues are often modified significantly or even rejected outright by the decision makers.

The mobilization model (see Cobb et al., 1976, pp. 132–5) describes the process of agenda building where institutions or political/institutional leaders seek to move issues from the formal agenda to the public agenda in order to muster the support needed to attain their objectives. Under this model, issues are placed on the formal agenda by the decision makers directly, or by people or institutions with direct access to them. This process is often triggered by a public scandal or systems failure (such as a spate of corporate collapses), followed by the commissioning of a committee of inquiry or some other panel of experts (such as the HIH Royal Commission). The decision makers may then formally adopt some or all of the committee recommendations in the decision process. This path of agenda building relies on expert opinion and offers some sense of legitimacy to the agenda issues. Initiation of a matter or policy occurs when the decision makers make an announcement about it—the announcement communicates that the issue is on the formal agenda. While there may have been extensive debates about the issue among decision makers prior to the announcement, the public may have little or no knowledge of the issue, given the lack of preliminary expansion to the public domain (Cobb et al., 1976, p. 135). Following the announcement or initiation of the issue, decision makers then elucidate it and explain what they seek from the public. Through this process of specification, they seek to make the issue clear and ‘palatable’ to the public. Mobilization of the issue within the public domain is necessary, however, in circumstances arising when the implementation of a policy requires widespread voluntary acceptance; where decision makers lack institutional or financial support to implement the policy; and when coercion by decision makers is inappropriate, impractical or perhaps too expensive. Decision makers seek to expand an issue from the formal to the public agenda in the same manner that proponents seek attainment of the formal agenda under the outside initiative model (see Cobb et al., 1976, pp. 133–4). That is, there is an attempt to expand the issue to new groups in the population in order to gain the required support to achieve the desired outcomes. Agenda entrance under the mobilization model is achieved when the policy issue is transferred from the formal agenda to the public agenda. While decision makers usually possess greater power and resources to influence issue expansion than, say, outside parties, mobilization efforts can still fail through faulty planning (strategy), poor communication between decision makers, organizational structure problems, or failure to convince lower level agencies of the need or importance of implementing the program.

In contrast to the outside initiative and mobilization models, the inside access model describes a pattern of agenda building and policy formulation that seeks to exclude public participation in building of the agenda. Under this scenario, the initiators seek to place an issue on the formal agenda and have it dealt with or implemented, usually with the minimum number of changes. If issue expansion does occur, it is usually limited to a few selectively influential groups who are considered important to the passage and implementation of the policy. The issue initiators try to limit issue expansion to the public because they do not want the issue on the public agenda. Rather, they seek a more ‘private’ decision within the government, and generally stand to be defeated when the issue is sufficiently expanded to include public groups that might be opposed to it (Cobb et al., 1976, p. 135).

As the name suggests, the initiators are an inside group, such as a government department or regulatory agency. The matter at issue is articulated in the form of a proposal that is usually communicated formally to other government leaders/decision makers. Despite enjoying close ties with the decision makers, the initiator is not guaranteed success because of the complexity and demands of the political process. Consequently, the initiator may seek limited expansion of the issue in question in order to increase its relative priority and standing. Under this model, entrance means gaining formal agenda status as opposed to public agenda status. Notwithstanding that it may be preceded by a large-scale organizational effort behind the scenes, the achievement of formal agenda status is usually neither public nor spectacular.

Being descriptive of complex, social phenomena, Cobb et al. (1976, pp. 136–7) acknowledge that their models of agenda building are more conceptual than empirical, and that most real-world occurrences of agenda building will be more complex—combining models as well as agendas. This does not diminish the usefulness of these models of agenda building in the context of our article. Our examination of the accounting standard setting reform processes in Australia suggests that the approach to reforming institutional standard setting arrangements by the professional accounting bodies and the AARF resembles the mobilization model, while the bold approach to reforming accounting by the Treasury corresponds with the inside access scenario. The latter is particularly apparent in relation to the Treasury's advocacy for the international harmonization of Australian accounting standards and the introduction of market value accounting.

AUSTRALIAN ACCOUNTING STANDARD SETTING REFORM AGENDAS

Institutional Arrangements

Prior to the CLERP Act (1999), the administrative and functional relationships between the accounting profession, the standard setting boards, the Government and other parties involved in standard setting in Australia are illustrated in Figure 1 below (see AARF Policy Statement 1, 1993, Appendix 1, paras 7–13). The Appendix of our article displays the revised standard setting structures required by Part 12, ss 224–38 of the Corporate Law Economic Reform Program Act (1999).

The Australian Accounting Research Foundation (AARF) was established on 23 November 1966 by the two major professional accounting bodies—the Institute of Chartered Accountants in Australia (ICAA) and the Australian Society of Certified Practising Accountants (now CPA Australia)—each of which currently contributes equally to the majority of the Foundation's annual operating budget (see CLERP 1, p. 42). The principal function of the AARF was, and remains (albeit in a diminished capacity), to provide technical advice and support to the standard setting authorities—the Australian Accounting Standards Board (AASB), Auditing Standards Board (AuSB) and, historically, to the now disbanded Public Sector Accounting Standards Board (PSASB). Importantly, the AARF does not have the authority to issue or amend accounting standards. That prerogative resides solely with the AASB.

The AASC (now AASB) was established by the Australian Securities Commission Act in 1989. This Act established the Australian Securities Commission (ASC; now the Australian Securities and Investment Commission), including its duties, responsibilities and powers. Figure 1 shows that the AASB, under the pre-January 2000 structure, comes under the aegis of the Commonwealth Attorney-General Department, not the professional accounting bodies, because its functions and responsibilities are specified by statute. Further, the accounting standards applicable to the Corporations Law⁴ are those issued by the AASB, and compliance with those standards is compulsory for all reporting entities under that law (AARF Policy Statement 1, 1993, paras 6–10). The enforcement of the Corporations Law is the responsibility of the ASIC that came within the jurisdiction of the Commonwealth Attorney-General's Department. Under the CLERP proposals, and the 1999 legislation, the chairman of the AASB is appointed by the Treasurer while the other members are appointed by the recently established Financial Reporting Council—the members of which are appointed by the Treasurer (CLERP 1, pp. 35–7, see Appendix A). The Financial Reporting Council takes on an oversight role similar to that of the U.S. Financial Accounting Foundation (FAF) and the U.K. Financial Reporting Council (Peirson, 1998; Hockey, 1999, p. 2). The newly constituted AASB, under the CLERP legislation, has the status of a body corporate and constitutes a Commonwealth authority for the purposes of the Commonwealth Authorities and Companies Act 1997 (CLERP 1, pp. 35–9).

The PSASB was established under the auspices of the AARF during the early 1980s (AARF Policy Statement 1, 1993, paras 11–14) to promulgate ‘professional accounting standards’, designated as the AAS standard series, applying to all entities not covered by those issued by the AASB (AARF Policy Statement 1, 1993, paras 11–14)—principally to public sector entities and not-for-profit entities in the private sector (AARF Policy Statement 1, 1993, para. 13). However, subsequent to the implementation of the CLERP, the PSASB was disbanded with the AASB then formulating accounting standards for universal application in Australia. Other boards and committees of the AARF included the AuSB, and the Legislative Review Board (LRB) and Urgent Issues Group (UIG) (CLERP 1, pp. 34–5). The primary responsibility of the AuSB is the promulgation of Statements of Auditing Practice (AUPs) and a conceptual framework for auditing practice in Australia. The LRB monitors the consistency between legislation pertaining to companies and the accounting standards issued by the AASB. The UIG was formed by the AARF and its boards in early 1995 to provide guidance releases on accounting matters considered to be of urgent importance to parties affected by approved accounting standards (AARF, UIG Charter, 1997, paras 5–11).⁵

THE ACCOUNTING PROFESSION'S REFORM AGENDA— A MOBILIZATION APPROACH

The strategy used by the Australian accounting profession to advance its institutional standard setting reforms exemplifies the mobilization approach to agenda building as described by Cobb et al. (1976). In particular, the professional accounting bodies placed the matter of institutional reform on the formal agenda and sought to obtain sufficient widespread support for their reform proposals to attain public agenda status (Peirson, 1990b, pp. 14–15). By reference to the notion of ‘a career of an issue’, we illustrate the ‘fit’ between the accounting profession's approach to the reform agenda and the mobilization model.

As the initiators, the professional accounting bodies—through the auspices of the AARF—commissioned the Peirson Report (1990a). That Report placed institutional reform of the accounting standard setting process on the formal agenda (Rahman, 1991, pp. 28–31), for the AARF and its boards had close links to the Government. Further, the senior officers of the professional accounting bodies, the AARF and the AASB, had ready access to the Government and senior bureaucrats through existing legislative and administrative arrangements and structures (Miller, 1996, pp. 3–15 for an overview). Augmenting this privileged status (see Cobb et al., 1976) is the authority in respect of accounting standard setting vested in the accounting profession, the AARF and the boards by virtue of the Corporations Law (now the Corporations Act, 2001). The Peirson Report made clear that the AARF and its boards had long considered current institutional arrangements for accounting standard setting to be inefficient, and that the members of the AASB lacked independence. The major thrust of the Peirson Report was to recommend that Australia adopt the U.S.A.-FASB model of accounting regulation and, in particular, that the AASB be established as an autonomous body independent of the accounting profession, commerce and government. The Report was silent on the substantive matter of the quality of financial statements—and hence the need to reform accounting standards. Consequently, it was silent about how its proposed institutional reforms would deliver better accounting standards and hence a more serviceable style of accounting for informed market choice and action. In contrast, both of these issues are the dominant focus of CLERP 1, and later CLERP 9.

The AARF and its boards carefully communicated the specifications of their institutional reform agenda to the major constituents of the accounting standard setting community in Australia (Rahman and Jones, 1998). The major communications instrument was, of course, the Peirson Report. But the style, format and methods adopted were important elements in the profession's specification and communication of its reform agenda. The Report included the results of an investigation and evaluation of the standard setting arrangements in the English-speaking world. These international comparisons confirmed the major anomalies and deficiencies of the Australian standard setting model, as perceived by the AARF, especially when compared with institutional arrangements in the U.S.A. Table 1 summarizes the key differences between the Australian and U.S. standard setting arrangements identified in the Peirson Report.

To better align the Australian model with the U.S.A.-FASB model, the Peirson Report recommended that the AARF be autonomous and broadly funded (1990a, p. 7). To enhance their independence and objectivity, board members should be full time and appropriately remunerated (p. 7). Sponsored by the accounting profession, the AARF and its boards, the recommendations of the Peirson Report were expanded to the public domain by widespread public endorsement by those bodies through extensive publicity (see, as an example, AARF Media Release, March 1991, pp. 1–2; Peirson, 1990b, pp. 14–15). There was a concerted effort by the AARF to mobilize wider constituent support for the proposals and, thereby, to bring pressure upon government to endorse and implement the recommendations of the Peirson Report.

Working under the commission of the AARF, Peirson published a feature article on key details and rationale for the reform proposals in the prominent and widely distributed practitioner journal, The Australian Accountant, in November 1990 (Peirson, 1990b, pp. 14–15). The article provoked a strong public response, most of which appeared to be in favour of the proposed reform agenda (see, e.g., Leo, 1990, p. 21; Prentice, 1990, p. 24; Stevenson, 1990, p. 28). Further, the style of presentation chosen for the Peirson Report implies that it was targeted at a wide audience and prepared for wide circulation. Throughout, the Report adopted a simple structure and made extensive use of a glossy format, bold highlights and plain English analysis. Another important instrument used by the Board of the Management of the AARF to expand the reform issue to the wider constituency in standard setting was their Invitation to Comment on Proposals for Reform of Institutional Arrangements for Accounting Standard Setting in Australia (1990, pp. 1–10). This ‘invitation’ was circulated with the Peirson Report and contained a guided questionnaire designed to assist and stimulate public submissions in respect of the findings and recommendations contained in the Report. The documents were distributed by the AARF in 1991 to an extensive mailing list, including all major accounting firms, stock exchange representatives, leading corporations (including the Group of 100), a number of academics and practitioners, and prominent professional and commercial organizations such as the Australian Institute of Company Directors and the Institute of Bankers.

While the public submissions pertaining to the Peirson Report's Invitation to Comment were not released officially by the AARF, it is widely known that constituent interests were generally highly supportive of its major recommendations (McGregor, 1995, p. 20; Belkaoui and Jones, 2002, p. 107). The mobilization strategy of the AARF to gain broad constituent support for the profession's reform agenda—to ensure its entrance onto the public agenda—was successful initially (Leo, 1990, p. 21; Prentice, 1990, p. 24; Starr, 1990, pp. 26–7; Stevenson, 1990, p. 28; Rahman, 1991, pp. 28–31). However, the mobilization strategy of the AARF could only be successful if the recommendations of the Peirson Report were endorsed by government regulators having jurisdiction over standard setting, notably the Commonwealth Attorney-General's Department (McGregor, 1995, p. 20). However, the Attorney-General's Department eventually rejected its principal recommendations in a written memorandum to the Executive Director of AARF in December 1991 (see Belkaoui and Jones, 2002, p. 107). In the light of CLERP, one possible explanation for the rejection has been provided by the former executive director of the AARF, Warren McGregor. He notes that the Government's view was that a prerequisite for legal backing for accounting standards was direct government involvement in the standard setting process (McGregor, 1995, p. 20). In short, the Government did not want to delegate law-making authority to a private sector body such as the AARF or the AASB (McGregor, 1995). It may be thought that the AARF's mobilization agenda failed because of the ineffectiveness of the profession's communications with other decision makers (e.g., the Attorney-General and the Treasurer)—the latter were not persuaded then of the merits of the AARF's reform proposals (see McGregor, 1995; Walker, 1990; cf. Cobb et al., 1976). However, the AARF's agenda may have failed for a more important reason—it was incompatible with the Government's agenda for accounting reform: internationalization of accounting standards and the introduction of market value accounting. The Government's reform agenda is substantial. That offered by the accounting profession was institutionally cosmetic, giving no promise of an improved accounting and better quality financial reporting.

THE GOVERNMENT'S REFORM AGENDA—AN INSIDER ACCESS APPROACH

The Treasury's approach to establishing the reform agenda corresponds with the inside access model described by Cobb et al. (1976). The initiation of the reform program came directly from the Treasurer who, in July 1997, announced the CLERP. While CLERP has a broad scope—including capital raising, directors’ duties and corporate governance, and takeovers—it elucidates an agenda for the reform of accounting standards and the institutional arrangements by which they are to be determined.⁶

Consistent with the inside access model (Cobb et al., 1976, p. 135), the mere announcement of the CLERP proposals by the Treasurer placed the Government's accounting standard setting reform proposals on the formal agenda. The elucidation of those proposals in CLERP 1 constituted the Treasurer's specification of the reform agenda. Consistent with the inside access model, those specifications contained a set of concrete proposals which were targeted primarily at other governmental leaders and decision makers (cf. Cobb et al., 1976, p. 135). Cobb et al. note that specification of detailed and concrete proposals at the time of policy initiation is important to the inside access approach. This is because of the close time proximity between the initiation of the issue and its implementation. Public debate and other forms of due process are largely excluded in the formal agenda setting process. While there was some opportunity for public comment on CLERP 1, the process was neither deliberative nor extensive. The emphasis on concrete proposals for the reform of accounting and accounting standard setting is explicit in CLERP 1. In this context, three fundamental questions were asked in CLERP 1: Should Australian accounting standard setting arrangements and structures be reformed? Should Australia embrace international accounting standards for domestic financial reporting purposes? And should Australia lead the world in the introduction of market value accounting?

With respect to the proposed reform of institutional arrangements, the Treasurer described in detail the perceived deficiencies of the system of accounting and the institutional arrangements by which accounting standards were established—the majority of which go well beyond those identified by the Peirson Report. Like the Peirson Report, CLERP 1 endorsed, albeit tacitly, the basic features of the U.S.A.-FASB standard setting model for Australia (p. 30). Unlike the Peirson Report, CLERP 1 seeks to reform the outcomes of accounting standard setting—the quality of accounting itself. The Treasurer's points are paraphrased as follows (see CLERP 1, pp. 11–12, 59–60):

Consequently, the Treasurer proposed sweeping changes to the institutional arrangements for standard setting, which have now been formalized in the Corporate Law Economic Reform Program Act 1999 (Part 12, ss 224–38). Unlike the Peirson Report, the CLERP reforms are not silent about how those institutional reforms might lead to a more serviceable form of accounting that is expected to better inform capital markets, reduce the cost of capital for Australian businesses, and enhance investor confidence. These are vital issues. Empirically, they are beyond the scope of our article.

However, we are vitally interested in the Treasurer's agenda to adopt IASB standards, and through their adoption the expectation that Australian standard setters will promote the adoption of market value accounting internationally. That the reformist agenda of CLERP 1 is so profound may explain why the Government adopted an insider access approach to accounting standard setting: the agenda is simply too important, too far reaching, too unconventional to be left to ‘outsiders’ to design and promote. Continuing the theme of agenda building, and to the expansion and entrance phases of the inside access model in particular, we now turn attention to this issue.

HARMONIZATION OF AUSTRALIAN AND INTERNATIONAL ACCOUNTING STANDARDS

The most highly publicized and discussed feature of the CLERP is the recommendation that IASB standards be adopted by the newly constituted AASB (CLERP 1, pp. 3–4). CLERP 9 ‘Corporate Disclosure—Strengthening the Financial Reporting Framework’, recommends that the FRC and AASB adopt IASB standards no later than reporting periods beginning on or after 1 January 2005 (p. 106), which will coincide with the timing for the adoption of IASB standards by the EU (p. 104). To assist the FRC in achieving this objective, the Parliamentary Secretary to the Treasurer announced an additional $A2M in funding to the FRC and AASB, which doubles the Government's contribution to standard setting⁷ (CLERP 9, p. 102). It is clear from CLERP 9 that adoption of IASB standards would mean the complete replacement of existing AASB standards with those of the IASB (see Jones and Wolnizer, 2003).

Furthermore, to ensure consistent application of IASB standards, CLERP 9 (p. 105) recommends the necessity for Australia to adopt, from January 2005, interpretations of IASB standards issued by the IASB's International Financial Reporting Interpretations Committee (IFRIC). After all, the comparability of a common set of accounting standards could be eroded ‘if standards are subject to differing interpretations and markedly different enforcement regimes’ (p. 105).

The ideological commitment of the Treasurer to the adoption of IASB standards in Australia is a recurrent theme in CLERP 1 (see p. 24), and later CLERP 9 (pp. 102–6). And the drive for standards harmonization has been rationalized consistently in the context of the Treasury's traditional emphasis on national and international economic policy objectives (CLERP 1, pp. 11–13; CLERP 9, p. 106).

The major recommendations with respect to international harmonization are paraphrased from CLERP 1 as follows (pp. 1–2):

Under the inside access model, expansion of an agenda to the wider public is highly unusual. Consistent with this approach to agenda building, the Treasury apparently did not formally solicit submissions or opinions from any major constituent interest groups in Australia (see Peirson, 1998, pp. 1–4, for a detailed discussion). Indeed, the Treasury appears to have largely bypassed commercial interests and the professional ‘authority’ of the Australian accounting bodies. Nor has the issue of harmonization even been debated rigorously at the professional level in Australia (Peirson, 1998, pp. 1–4). As a result, there has been no evidence of a groundswell calling for the international harmonization of accounting standards at the grass roots of business and professional communities (i.e., the polity), at least in Australia. On the contrary, there has been strong opposition to the wholesale adoption of IASB standards by the business community, the organized accounting profession and academics (see, as examples, English, 1998; Peirson, 1998; Press Release of Australian Society of CPA's, 2 June 1998; Zeff, 1998; Emenyonu and Adhikari, 1998, pp. 24–32; Collett et al., 1998; Brown and Tarca, 2001; and Dean, 2004).

Under the inside access scenario, issue entrance means successful inclusion on the formal agenda, though not necessarily on the public agenda (Cobb et al., 1976). The CLERP proposals were incorporated into the legal machinery, via the draft legislation, within months of the proposals being published by the Treasury (see Parliamentary Press Release, September 1997). This is evidence of the political influence of the Treasury and its success in placing its institutional accounting reform proposals onto the formal agenda (Collett et al., 1998).

INTERNATIONAL HARMONIZATION: A PROSPECTIVE SOLUTION

For the greater part of its twenty-five-year history, the standards of the IASB predecessor, the IASC, have been engaged in a fervent effort to find a serious audience for its standards (Evans and Taylor, 1982; Mueller et al., 1994). However, the IASC as a global accounting standard setter had, even in its formative years, been continually dogged by suggestions that their standards are more accommodating and flexible than those obtaining in (say) the U.S.A., the U.K., Canada and Australia (Nobes, 1985; Thorell and Whittington, 1994). Further, having regard to the considerable diversity of socioeconomic, legal, political and institutional structures in different countries, the feasibility of a universally acceptable and compatible set of accounting standards (and concepts) has been widely questioned (Nobes, 1985; McGregor, 1999; Evans and Taylor, 1982; Chandler, 1992; Jones and Wolnizer, 2003). Notwithstanding the industriousness of the IASC in accounting standard setting during these years, it had become clear by the late 1980s and beyond that the IASC had not attracted a significant international audience for its standards (see Chandler, 1992; McGregor, 1999).

The faltering quest of the IASC to find a market for its standards in these years eventually led to a significant rethinking of its mission of facilitating the worldwide harmonization of accounting standards (Chandler, 1992; Street and Shaughnessy, 1998). In the late 1980s and early 1990s the then IASC decided to narrow its harmonization agenda to the financial reporting of transnational corporations; and to forge stronger agenda policy links with the so-called ‘Group of 4’—Australia, Canada, the U.K. and the U.S.A. (see Street and Shaughnessy, 1998). In order to achieve its new agenda, the IASC targeted the newly established International Organization of Securities Commissions (IOSCO) as a vehicle to gain support and ultimately endorsement of its standards (Chandler, 1992; World Accounting Report, 1992).

In order to render IASC standards more palatable to the leading industrialized nations, the IOSCO often advised the IASC to reduce the choices offered and/or eliminate alternative accounting treatments allowable under its accounting standards (McGregor, 1999, p. 160). From the late 1980s, the IASC formally responded to these criticisms by, among other things, issuing an Exposure Draft (E32) on Comparability of Financial Statements on 1 January 1989 (Schweikart et al., 1996, p. 113). The IASC also published an invitation to comment on E32 entitled Towards the International Harmonization of Financial Statements. Subsequently, the IOSCO became involved in the IASC's Comparability/Improvements project, and was also a member of the IASC's important Financial Instruments Consultative group (see Shiratori, 1994). Despite the apparent close cooperation that developed in these years, the IASC found it exceedingly difficult to secure IOSCO endorsement for its standards (see Shiratori, 1994; Walker, 1995; Cairns, 1998 as examples).

A historic deal between the IASC and the IOSCO was made in 1995 in which both parties agreed to draw up a work plan for future activity (see Schweikart et al., 1996). This deal had an important role in changing the fortunes of the IASC. The agreement entailed the IASC developing, by 1999, a comprehensive set of core standards which would be acceptable to IOSCO. This would be followed by the IOSCO recommending to member nations the adoption of IASC standards for cross-border offerings and other foreign listings. While the IASC was hampered by a persistent failure to meet its own self-imposed deadlines (Hegarty, 1997; Beresford, 1997), in May 2000 the IOSCO both assessed and finally gave endorsement of thirty key IAS standards, although this support was not unconditional. In the same month the EU proposed that EU member states (Austria, Belgium, Finland, Italy and Luxembourg) should be required to prepare consolidated accounts in accordance with IAS standards, provided that they have been endorsed by the EU as being in conformity with relevant EU Directives (Flower, 2002).

No doubt the recent support for IASB standards by the EU and the IOSCO, coupled by a comprehensive internal restructuring of the IASB,⁸ has influenced U.S. standard setters to work more closely with the IASB on the harmonization issue (Brown and Tarca, 2001, p. 277). These sentiments were reflected in statements of the FASB, at its 18 September 2002 joint meeting with the IASB at the FASB's Norwalk headquraters—a meeting instigated ‘As part of a continuing effort to bring about convergence of global accounting standards, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB)’.⁹ A major focus of this meeting was to evaluate current joint projects on business combinations and financial performance reporting and develop a new project on revenue recognition. A major issue was ‘eliminating the key differences between existing U.S. generally accepted accounting principles and international accounting standards’.

While the restructured IASB has gained some recent high profile successes, it is premature to evaluate the IASB's current success in achieving its harmonization or convergence objectives. For instance, while the EU and IOSCO endorsements represent significant developments in the globalization of accounting standards, this endorsement was subject to important caveats, the two most important being:

Furthermore, IOSCO recommendations are voluntary on its members, and hence may not result in consistent adoption of IASB standards by member countries. Member nations are also free to require supplementary reconciliation or additional disclosures if deemed appropriate (Brown and Tarca, 2001, p. 275). While the EU has endorsed adoption of IASB standards, it will also be establishing its own authority for assessing relevance and applicability of IASB standards to the EU. According to Flower (2002, p. 273), this is needed because (a) of legal constraints—the EU cannot insist on European mulitinationals following rules set down by a non-EU body—and (b) is substantial—the EU will not be prepared to run the risk that the IASB will issue a standard contrary to its own basic interests. Hence, they have not given ‘blanket’ endorsement of IASB standards.

While the IOSCO has recommended adoption of thirty core IASB standards for adoption by national securities commissions, the SEC has not followed suit. Lack of support for the blanket adoption of IASB standards by the SEC may ultimately affect the success of the IASB's harmonization agenda, at least in the shorter term (Leisenring, 1996; Cairns, 1998; McGregor, 1999). For example, if the IOSCO endorses IASB standards for multiple listings and foreign offerings then these standards will of course be applicable to U.S. capital markets. At present, however, companies wishing to enter U.S. capital markets, which includes the majority of foreign listed Australian companies, must comply with U.S. GAAP and SEC listing requirements (Harris, 1996). In view of the possibility that IASB standards might replace FASB standards, the SEC, including many eminent commentators, has been sceptical about the prospect of IASB standards being accepted in U.S. capital markets (Hegarty, 1997; Sutton, 1997; Zeff, 1998; McGregor, 1999). In fact, notwithstanding determined efforts by the IASB to improve the quality of its accounting standards, public criticism of the quality of IASB standards by the SEC and FASB have been commonplace in recent years (see, e.g., Sutton, 1997, 1998; FASB, 1998; Beresford, 1997).

At this time, it appears unlikely that IASB standards will ever replace existing FASB standards for multiple listings and foreign offerings in the U.S. (FASB, 1998, p. 10; Walker, 1995; Sutton, 1997; Beresford, 1997; Sutton, 1998; McGregor, 1999).

While a closer alliance between the IASB and the FASB has developed in recent years, particularly following the EU decision, it appears the IASB still has a very long road ahead to achieve its mission of a globally acceptable set of accounting standards. This sentiment, tinged with hope, was echoed in May 2002 by the Chief Accountant of the SEC, Robert K. Herdman, in his testimony before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises:

And in a recent work, the chairman of the FASB has elucidated the tensions between a principles-based approach to accounting standards setting (favoured by the IASB) and the present rules-based approach of the FASB (Herz, 2003).

Having regard to the historical failure of the IASC and the present conflicts and challenges facing the IASB in achieving a significant international convergence of accounting standards, the proposal of CLERP 1 that market value accounting supplant conventional historical cost-based accounting is powerful. It would achieve a commonly understood international accounting language. It cuts through the conflict of principles-based vs rules-based approaches to accounting standard setting; it obviates the need for numerous, complex accounting standards; it can be readily implemented in all market-based economies.

The intractability of all current approaches to accounting standard setting—and the apparent overwhelming complexity of achieving a workable convergence in a set of internationally agreed accounting standards—is unlikely to be resolved unless there is a fundamental shift from cost-based accounting to mark-to-market accounting. The challenge confronting the IASB is not how to achieve harmonization/convergence; the vital challenge is how to fix a technically defective and demonstrably unreliable accounting as a guide to financial choice and action in a market economy. That problem has been graphically described by Walter Schuetze, a former Chief Accountant to the SEC, in his testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs (2002, pp. 2–3):

International accounting standards based on a mixture of historical cost dates and fair values, however extensively harmonized around the world, will not yield a reliable and transparent accounting. Perhaps without realizing it, the advocacy of market value accounting in CLERP 1 offers the best yet devised accounting that is not only commonly interpretable and intelligible in all market economies, but that will yield informative, up-to-date and transparent financial statements of position and results.

CONCLUSIONS

In the face of recurring unexpected corporate collapses, the decade of the 1990s was a period of intense public scrutiny of institutional arrangements for accounting standard setting in Australia. We have examined the approaches by the accounting profession and the Government to reforming those arrangements. The strategy adopted by the accounting profession under the auspices of the AARF was found to be consistent with the mobilization model of agenda building. It appears that the profession lacked sufficient authority and political influence to bring about an institutional reform agenda. Being confined to institutional changes, the agenda was not reformist and gave no promise of a more reliable and transparent accounting. It failed to gain the support of government.

The reform agenda of the Government, expressed in CLERP 1, was far more significant. While advocating changes to the institutional arrangements for standard setting and the harmonization of accounting standards, CLERP 1 proposed deep and fundamental changes to accounting—the abandonment of historical cost accounting and the introduction of market value (mark-to-market) accounting. The manner in which the Government chose to promote its comprehensive and far-reaching reform agenda was found to resemble closely the insider access model.

By adopting an inside access approach to agenda formulation and execution, the Government has been effective in bringing about a number of significant and rapid reforms to standard setting arrangements to Australia. Not only has the Treasury avoided any widespread debate on the harmonization issue, it formalized the CLERP proposals in the form of legislation in a very short span of time. Notwithstanding the Treasury's success in placing the international harmonization of Australian accounting standards on to the formal agenda, via the CLERP proposals and the legislation arising therefrom, the vital challenge to bring about a revolution in accounting remains to convince international accounting standard setters to abandon cost-based accounting, with its myriad concepts and rules, and to implement market value (mark-to-market) accounting.