Eddy R.

Rasyid
Andalas University
The Future of Financial Reporting:
From the Early Nineteenth Century to
the Recent Global Crisis

Prof. Eddy R.Rasyid
Drs. Akt [UGM], MCom-Hons [Uwoll], PhD [Uwoll]
Universitas Andalas


Eddy R.Rasyid
Andalas University
Resume
Birth: Bukittinggi
1979-1984: Drs.Akt [UGM]
1990-1996: MCom(Hons) & PhD[Uni of Wollongong, Australia
1996-1997: Director, Centre for Accounting Development (PPA) FE
Unand
1997-2002: Head Dept. of Accounting
2000-2004: Executive Director QUE Program, Accounting Dept.
2002-2006: Director of MM FE Unand
2006-2010: Head of IAI KAPd Educational Development
2008-2010: Head of IAI KAPd Organisational Development
Audit Committee PT Semen Padang
Member of Higher Education Board (DPT) Dikti

Eddy R.Rasyid
Andalas University
Outline
During the 19
th
Century accounting
Early Twentieth Century: Accounting by
Norms
1929 Crash: Norms Challenged
1998 and then the Recent Global Crises:
Swing Back?
Finally: Issues in the Future




Eddy R.Rasyid
Andalas University


Introduction
Eddy R.Rasyid
Andalas University
Introduction
The recent accounting and auditing
failures have received much attention.
Institutional or individual failures? Or both?
Attempting to look briefly at the changes
happened from the early nineteenth
century to the recent era and what
responds made.

Eddy R.Rasyid
Andalas University


The Era of 19
th
Century
Eddy R.Rasyid
Andalas University
Accounting Practices Emerged
Reports of accounts including profit and loss
records have been in practices since 1600.
However, the evolution of accounting from book-
keeping was there in the era of 19
th
century.
In this era, profit was conceptualised as the
growth assets, while the concepts of costs and
income were yet not there.
The emergence of joint ventures in UK where
investors put their money lead to the significance
of periodical reports.
Eddy R.Rasyid
Andalas University
Separation of Income with Capital
The separation of capital with income started as the emergence of
corporation.
According to Scott (2006)*, it is in this era a long transition period
started: from accounting as a controlling system with which
businessman could control their business, to accounting as a
system providing information for investors who have not involved in
the management of the corporation.
A common interest between investors and the company lead to a
need of trustworthy information.
This circumstances encouraged the emergence of auditing practices
and a need to regulate accounting.




WR Scott, Financial Accounting Theory, fourth edition, Pearson, 2006, h. 2.
Eddy R.Rasyid
Andalas University
UK Companies Act 1844
The UK Companies Act 1844 requires that
balance sheet for investors to be audited.
Consequently, accounting practices had to
consider the Act. For example, devidend has to
be taken from profit and accounts have to be
audited by independent persons.
However, at that time any person could perform
auditing.
Companies Act 1844 together with other
regulation together with Industrial Revolution
have lead to a need of accounting professional
standards.
Eddy R.Rasyid
Andalas University
Industrial Revolution: USA
At the end of 19
th
Century, Industrial Revolution reached USA.
It is followed by the move of accounting development.
The introduction of corporate income tax in 1909 in US encouraged
such an awareness on the importance of income measurement.
Managers then started to reduce amortisation from income.
However, prior to the 1929 stock market crash followed by a great
depression, accounting had just minimally regulated (unregulated)
Following the 1934 Securities Exchange Act , there was a formation
of the Securities and Exchange Commission (SEC) with the prime
focus is to protect the interests of investors by issuing regulation that
is based on disclosures.
SEC is accountable to ensure that all investors will have relevant
information on companies issuing and trading their stocks.
Eddy R.Rasyid
Andalas University
Early Twentieth Century:
Accounting by Norms




Early Twentieth Century:
Accounting by Norms
Eddy R.Rasyid
Andalas University
In The Earlier
As mentioned before, in the early 20
th
century accounting has not
yet much regulated.
Instead, accounting practices were predominantly lead by norms.
Accounting practices are very normative.
In April 1909, American Association of Public Accountants
established a Special Committee on Accounting Terminology.
However, the Committee is just:

to collate and arrange accounting words and phrases and show
in connection with each the varying usages to which they are
put. This committee will not attempt to determine the correct
or even the preferable usage where more than one is in
existence (Zeff 1971, p. 112).

Shyam Sunder, Minding our manners: Accounting as social norms,
The British Accounting Review, 37 (December 2005) 367-387.

Eddy R.Rasyid
Andalas University
Nature of Norms
Norms of a group are shared (common knowledge)
expectations of its members about the behavior of others
Etiquette, dress, table manners, grammar, language, customary
law, private associations
Objective of norms is observable behavior, not
unobservable beliefs
Must be a consensus, not just majority support
A new entry of norms becomes respectable by attracting
a following, not by enforced authority
Eddy R.Rasyid
Andalas University
The Memorandum
A memorandum on auditing procedures was prepared by
the American Institute of Accountants, in 1918.
The memorandum approved by the Federal Trade
Commission (FTC), and originally published in the
Federal Reserve Bulletin, labeled A Tentative Proposal
Submitted by the Federal Reserve Board for the
Consideration of Banks, Bankers, and Banking
Associations; Merchants, Manufacturers, and
Associations of Manufacturers; Auditors, Accountants,
and Associations of Accountants.
The intent was to coordinate the evolution of norms, and
not to impose and enforce a standard.

Eddy R.Rasyid
Andalas University

Evolution of Norms

In 1918, the American Institute of Accountants appointed a Special
Committee on Interest in Relation to Cost to address a lively
controversy on imputed interest as part of the cost of production
The Committees recommendation against inclusion of imputed
interest in cost of production, approved at the annual meeting of the
Institute, does not become accepted as an accounting norm
The Institute appoints a special committee on the standardization of
accounting procedure to consider all questions of procedure
brought before it, and to make recommendations from time to time
on vexed questions in the hope that ultimately there may be
established something approaching uniformity of procedure
throughout the country
The charge suggests facilitation to form norms, not legislation of
standards. During its eleven-year tenure (1918-1929), the
Committee produced six reports, and none was submitted for an
official stamp of approval of the Institutes membership



Eddy R.Rasyid
Andalas University
Mechanism to Identify the Norms
The absence of authoritative standards of accounting did not mean
that the world of accounting had less order.
Active mechanisms the accountants used to identify the norms of
their profession
Journal of Accountancy and the CPA Journal served as forums for
active, even feisty debates on accounting and auditing.
During 1920-29, the Librarian of the Institute issued 33 special
bulletins on topics referred to them, without the authority of the
Institute.
In 1931, the Institute published a 126-page book Accounting
Terminology, a compilation of accounting terms and their definitions as
a matter of advice, not authority.
Throughout the 1920s and into 1930s, a committee of the Institute
worked in close cooperation with a committee of Robert Morris
Associates, an organization of bank loan officers, to respond to inquiries
submitted to them.

Eddy R.Rasyid
Andalas University




1929 Crash:
Norms Challenged
Eddy R.Rasyid
Andalas University

Loss of Credibility

The stock market crash of 1929
Severe economic depression that followed, precipitated
another crash
Loss of credibility of norms of accounting, and the formal
or informal mechanisms by which these norms evolved
and were sustained
Too many had lost wealth, livelihoods, even lives
Financial reporting wrong doing were very deep, people
lost trust in the social contract

Shyam Sunder, Social Norms Versus Standards of Accounting, in M. Dobija and Susan Martin, eds., General
Accounting Theory: Towards Balanced Development, pp. 157-177. Cracow, Poland: Cracow University of
Economics, 2005.


Eddy R.Rasyid
Andalas University
Moving [or Swing .?]
Since the enactment of the securities laws in the
early 1930s, the U.S. has seen a steady shift in
financial reporting
From business and professional norms towards
legislated written standards enforced by threats of
explicit punishment for violators
This shift altered virtually all aspects of
accounting (including accounting education)
The recent events can be seen as a
consequence of the policy decisions of the past
seven decades (Sunders 2006).

Eddy R.Rasyid
Andalas University
The Norms Does Not Work
Politicians responded the only way they could
and introduced federal securities laws and
regulations (to override the states)
In the following seven decades, accounting and
audit failures have been interpreted as evidence
that norms do not work;
Norms were gradually shifted to the back burner,
and accounting standards gradually rose to
dominate corporate financial reporting


Eddy R.Rasyid
Andalas University
Norms Not Well Defined
Social conventions and norms are rarely well defined,
vary in time and space, require an extended socialization
process to learn and understand.
They carry a penumbra of uncertainty about them.
Substantial but incomplete overlap among the beliefs of
the individual members of a group about its norms.
Norms evolve in small, almost imperceptible steps, by
processes that are not well understood.
This evolution is decentralized, difficult to predict the
future direction.

Eddy R.Rasyid
Andalas University
Pressure to Write Standards
While the evolutionary process is not solid, the
lack of definition and our poor understanding of
how norms evolve make them less transparent
During periods of crises, political or bureaucratic
decision makers feel pressured to write new
standards rather than continue to rely on
existing (recently discredited) norms and
business practices

Eddy R.Rasyid
Andalas University

Working with Regulation

In 1933-34, U.S. Congress give SEC the legal authority to regulate
financial reporting
The first three decades: mostly codified the existing practices
Gradually, these efforts shifted from identification of conventions or
social norms to promulgation of standards with increasing power of
enforcement
Increasingly assertive nomenclature of the three private sector
organizations to write accounting rules
The Committee on Accounting Procedures Accounting
Research Bulletins (1948-59)
The Accounting Principles Boards Opinions (1959-73)
The FASBs Financial Accounting Standards (1973 to present).


(IASBs International Financial Reporting Standards being the latest addition to this trend)

Eddy R.Rasyid
Andalas University
Standardisation Going On
Accountants shifted their allegiance from norms to
authoritative promulgation.
Profession now views standardisation as a measure of
progress (the thicker the book the better).
There has been little research and debate on merits and
consequences of standardization in accounting.
By 2000, the social norms have few advocates left, most
favor legislated standards (with legal enforcement)
model for financial reporting.



Eddy R.Rasyid
Andalas University
The Goodness of Formal Standards
Written standards: concrete, salient, published, easily
disseminated, easy to find, specified formally with some
precision, can be analyzed and discussed line and verse.
They come into existence at a specific time, through a known
and understood institutional process that may allow the
participation of the constituents.
When the environment changes, a systematic process is
available to formulate changes and submit them to a well-
specified process for possible promulgation.
Democratic appeal of a transparent institutional mechanism
for setting standards.
Formal written standards appeal to our sense of good
housekeeping
Specified processes for enforcement of violations

Eddy R.Rasyid
Andalas University

Limits of Written Standards

Following accidents and scandals, the rules
were not clear is a popular defense.
Recent evidence suggest that formal standards
do any better than social norms of financial
reporting remains elusive
The case for the efficacy of enforced standards
remains to be made

Eddy R.Rasyid
Andalas University

Consequences

More competition in the market for audit services has
progressively replaced judgment by mechanical
processes.
The competition has driven up the demand for both
accounting as well as auditing standards.
FASB/IASB are busy writing reams of standards
Standards have replaced the sense of personal
responsibility. (the result is Enron, WorldCom)
But the investment bankers and lawyers are busy
designing new transactions to get around the accounting
treatments of today

Eddy R.Rasyid
Andalas University
And Then..
Standards relieve mature accountant of the responsibility for
making intellectually sound decisions
Standards prevent thoughtful analysis by auditor because
they are used in legal proceedings (cannot oppose standards)
Auditors thought standards will help defend what they do, but
they do not
No other profession with claim to respect allows itself to be so
driven by standards as accountants have (under the false
impression that it is better for them)
That they think that standardization of accounting and auditing
will solve the problem, when it might actually be the major
source of the problem


Eddy R.Rasyid
Andalas University




1998 and then the Recent Global Crises:
Swing Back?
Eddy R.Rasyid
Andalas University
Global Crises: Shaking
After almost 50 years working with standards
Asian Crisis 1998
Enron
DotCom Crisis 2002
2008 Global Crisis: Started by Red September
Taking over of Fannie Mae and Freddie Mac by the Federal
Government
Merrill Lynch sold to Bank of America
Lehman Brothers files for bankruptcy
The crisis crossing over the continent and passing
Indonesia
US and other governments bail out

Eddy R.Rasyid
Andalas University
Estimated cost of the recent crisis
Country Period Estimated Cost as
Percent of
GDP
United States 1980s 2.5%
Japan 1990s 20.0%
Norway 1987-89 4.0%
..
..
Korea 1997- 60.0%
Indonesia 1997- 80.0%
..
USA 2007-2010 $700 billion=5.0%
$1600 billion=11.4%
$3200 billion= 22.8%

Source: Howell E. J ackson Harvard Law School, October 2008
Eddy R.Rasyid
Andalas University
What was Going On?
Increasingly complex and opaque financial
products
Unsound risk management practice
Inadequate structural reform
Eddy R.Rasyid
Andalas University
Then ..
Financial engineering to get around the
rules (Enrons SPVs)
Reasonable body of rule might be devised
to deal with a given set of transactions
No rules can be devised when
transactions are continually redesigned to
get around a slowly adapting body of rules

Eddy R.Rasyid
Andalas University
.. And Then
Clients actively played audit firms against one
another to lower their audit fees
The amount and quality of the work done by the
auditors was not observable to the clients
Competition for audit services would not sustain a
price to make auditing self-supporting
Auditors responded by a new business model to
survive in this cut rate environment


Eddy R.Rasyid
Andalas University
Revised Business Model
Aggressive pricing of audit services
Cut labor-intensive substantive testing, and replace it by
cheaper analytical reviews
Use audit service as foot in the clients door to sell
consulting services
Share consulting revenue with audit partners
Use consulting revenue to pay for any additional audit
liability coverage arising from reduced substantive
testing
Reduce the pay for fresh graduates

Eddy R.Rasyid
Andalas University
The Impacts: Post Crisis
Business and corporate environment has
significantly changed
Regulatory Change
Strengthening Financial Reporting Governance
Revisiting Risk and Control Reporting
Globalisation of war against frauds and
misconduct.


Eddy R.Rasyid
Andalas University
Finally ..
Enron and Worldcom, 2 of the 20 largest companies in the US,
declared bankruptcy as a result of frauds. Not just in the US!
CEOs and CFOs disclaiming responsibility for fraud.
Arthur Andersen no longer in business.
Part of the decline in US stock market since 2001 has been
blamed on overstated earnings and a lack of confidence in the
financial reporting process.
Accounting self-regulation process determined to be deficient.
Perception that accounting rules are there for gaming.

Eddy R.Rasyid
Andalas University
Then . Life Changing
Sarbanes-Oxley Act 2002 (hot issue until
recently)
Moving from historical cost principle to fair
value.
Financial statement emphasises on
Balance Sheet (instead of Income
Statement) SWINGING BACK?
Moving from rules based standards to
principles based on principles

Eddy R.Rasyid
Andalas University
Sarbanes-Oxley (SOX)
Sarbanes-Oxley was passed to help ensure the accuracy of financial reporting
by public traded corporations. Sarbanes-Oxley seeks to improve the
accuracy of financial reporting of public traded corporations. The Act:
Mandates corporate governance reforms. Requires corporations to establish
audit committees, precludes publicly audited clients from engaging an accounting
firm that audits financial statements for non-audit services, and requires
corporations to disclose all material off-balance sheet transactions.
Enhances the role and independence of audit committees. The Act requires
that audit committees pre-approve all audit and non-audit services, receive
regular reports from the auditor on accounting treatments, be responsible for
oversight of the auditor, and be independent of the company who registers and
sells securities.
Creates public accounting firm restrictions. The Act creates a new
Accounting Oversight Board to set standards and supervise accounting firms,
requires all audit or review working papers to be retained for 7 years that support
conclusions in audit reports, requires the rotation of audit partners every 5 years,
and requires audit team members to wait a year before accepting employment
with a client in key financial positions.


Eddy R.Rasyid
Andalas University
Samples of the Parts
Section 302 Required the CEO and CFO to personally sign off on the
appropriateness of the firm's financial statement. Sentences for perjury increased
dramatically.
Section 407 At least one member of the audit committee be a "financial expert"
caused many firms to scramble to find new directors at the same time that they
were facing a crisis in the market for directors insurance. Note: Enron AC Chair
was a financial expert!
Section 404 of the Act has two parts:
Section 404(a) describes managements responsibility for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting. It also outlines managements responsibility for assessing
the effectiveness of internal control over financial reporting.
Section 404(b) describes the independent auditors responsibility for
attesting to and reporting on managements internal control assessment.
Section 409 - REAL-TIME ISSUER DISCLOSURES Each issuer reporting
under section 13(a) or 15(d) shall disclose to the public on a rapid and current
basis such additional information concerning material changes in the financial
condition or operations of the issuer, in plain English, which may include trend
and qualitative information and graphic presentations, as the Commission
determines, by rule, is necessary or useful for the protection of investors and in
the public interest.
Eddy R.Rasyid
Andalas University

Post-Enron Regulatory Change:
Focus on Financial Reporting and Internal Control
Eddy R.Rasyid
Andalas University
Paradigm shift of control and risks

The new approach to controlling business risks may be characterized by the new rules of prevent
and monitor and build in quality as opposed to the old rules of detect and correct and
inspect in quality.
Old Paradigm New Paradigm

Only AUDITORS and TREASURY
are concerned about risks and
controls
EVERYONE, including operations, is
concerned about managing business
risks
FRAGMENTATION Every function
and department does its own thing
(SILO MANAGEMENT)
Business risk assessment and control
are FOCUSED and COORDINATED
with senior level OVERSIGHT
NO BUSINESS RISK CONTROL
POLICY
FORMAL BUSINESS RISK CONTROL
POLICY approved by management and
the board
INSPECT for and DETECT business
risk and REACT to it
ANTICIPATE and PREVENT business
risk at the source and MONITOR
business risk controls continuously
Ineffective PEOPLE are the primary
source of business risk
Ineffective PROCESSES are the
primary source of business risk

Eddy R.Rasyid
Andalas University

Governance over financial reporting:
parties involves in the organization
Eddy R.Rasyid
Andalas University
SAS 112
Reinforces the responsibility of management for internal control systems.
The auditors cannot be a part of the internal control process for preparing
the financial statements during the audit.
44
The management

provides reasonable assurance about
the entitys objectives with regard to
reliability of financial reporting,
effectiveness and efficiency of
operations, and compliance with
applicable laws and regulations.
responsible for making decisions
concerning costs to be incurred (and
related benefits) in relation to the
existence of significant deficiencies or
material weaknesses .

The auditors
must evaluate internal control
must evaluate identified control
deficiencies and determine whether they
are significant deficiencies or material
weaknesses.
If significant deficiencies or material
weaknesses are identified, they must be
reported in writing to management and
those charged with governance (Audit
Committee).
Opine on Consolidated Financial
Statements on 2008.


Eddy R.Rasyid
Andalas University
Deficiency
A control deficiency exists when the design or operation of a
control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis.
A significant deficiency is a control deficiency(ies) that adversely
affects the entitys ability to initiate, authorize, record, process or
report financial data reliably such that there is a remote likelihood
that a misstatement of the entitys financial statements will not be
prevented from being detected.
A material weakness is a significant deficiency(ies) that results in
more than a remote likelihood that a material misstatement of the
financial statements will not be prevented or detected.

Eddy R.Rasyid
Andalas University

CEO/CFO Certifications under BAPEPAM Regulation
46
CEO/CFO certification is intended to explicitly
reinforce that certifying officers (CEO/CFO and other
Principal Officers) are DIRECTLY responsible for:
Preparation and disclosure of financial report
Adequacy, accuracy of the financial report
Internal control system in the corporation
Eddy R.Rasyid
Andalas University
Global Convergence on Accounting Standard: IFRS
EQUIVALENCE
PRINCIPLES RULES CONVERGENCE
ISOLATION
Source : Internal Control Reporting Compliance: The UK and European Regulatory Scene, by Robert Hodgkinson, Executive Director-Technical of
The Institute of Chartered Accountants in England and Wales, CPE Conference on SOX 404, Dorchester, UK, 10 May 2007
Eddy R.Rasyid
Andalas University
Moving from Rules Based
towards Principles Based Standards
(SWINGING BACK?)
to general definitions of economics-based
concepts on the other end.
Continuum ranging from highly rigid standards
on one end
Eddy R.Rasyid
Andalas University
Example: Goodwill
Previous practice:
Goodwill is to be amortized over a 40 life until it is fully
amortized.
New IAS rule:
Goodwill is not amortized.
Any recorded goodwill is to be tested for impairment and written down to
its current fair value on an annual basis.

Eddy R.Rasyid
Andalas University
Example: Fixed Asset
Two choices of accounting policy:
cost model), or
revaluation model

Applied on all fixed assets within a same
group
Eddy R.Rasyid
Andalas University
Cost Model
Cost model: After recognition as an asset,
an item of property, plant and equipment
shall be carried at its cost less any
accumulated depreciation and any
accumulated impairment losses.
Eddy R.Rasyid
Andalas University
Revaluation Model
After recognition as an asset, an item of
property, plant and equipment whose fair value
can be measured reliably shall be carried at a
revalued amount, being its fair value at the date
of the revaluation less any subsequent
accumulated depreciation and subsequent
accumulated impairment losses. Revaluations
shall be made with sufficient regularity to ensure
that the carrying amount does not differ
materially from that which would be determined
using fair value at the balance sheet date.
Eddy R.Rasyid
Andalas University




Finally:
Issues in the Future
Eddy R.Rasyid
Andalas University
Issues in the Future
Several of them:
Principles versus Comparability Contradict?
Accounting standards help investors in making better
decision! Really?
Fair value!? Really applicable? Just a rhetorical
device?
Fair value!? Damaging companies?? [especially in
Indonesia]
Economists will be really happy?
Independence of [Indonesia] standard setting body.


Eddy R.Rasyid
Andalas University
Adopted IAS/IFRS 2008
1. IAS 2 Inventories PSAK 14
2. IAS 10 Events after B/S date PSAK 8
3. IAS 11 Construction contracts PSAK 34
4. IAS 16 Property, plant & equipment PSAK 16
5. IAS 17 Leases PSAK 30
6. IAS 18 Revenues PSAK 23
7. IAS 19 Employee benefits PSAK 24
8. IAS 23 Borrowing costs PSAK 26
9. IAS 32 Financial instrument presentation PSAK 50
10. IAS 39 Financial instrument recognition and measurement PSAK
55
11. IAS 40 Investment property PSAK 13
Eddy R.Rasyid
Andalas University
Pernyataan Pencabutan SAK
PSAK 32 Akuntansi Kehutanan
PSAK 35: Akuntansi Pendapatan Jasa
Telekomunikasi
PSAK 37: Akuntansi Penyelenggaraan
Jalan Tol
Eddy R.Rasyid
Andalas University
Program Kerja DSAK 2009
Adopsi:
IAS 1 PSAK 1
IAS 27 Consolidated and separate F/S PSAK 4
IFRS 8 Segment reporting PSAK 5
IAS 21 The effects of changes in foreign exchange rates PSAK 10 & 11
IAS 31 Interests in joint ventures PSAK 12
IAS 26 Accounting and reporting by retirement benefits plans PSAK 18
IAS 38 Intangible assets PSAK 19
IFRS 3 Business combination PSAK 22
IAS 8 Acconting policies, changes in accounting estimates and errors PSAK 25
IFRS 4 Insurance contracts PSAK 28 & 36
IFRS 6 Exploration for and evaluation of mineral resources PSAK 29 & 34
IAS 12 Income taxes PSAK 46
IAS 36 Impairment of assets PSAK 48

Eddy R.Rasyid
Andalas University



THANK YOU!!!
AND
SEE YOU AGAIN