Accounting Science

Impact of Political Changes on Accounting Practices

Posted by

mariam elghandour

March 15, 2025

On February 20, 2025

Financial accounting does not operate in a vacuum; it is significantly influenced by the political, economic, and social context in which it is practiced. Political changes, such as changes in governments, the enactment of new laws, and shifts in economic policies, are among the most important factors affecting Accounting Practices. In this article, we will discuss the impact of political changes on Accounting Practices, and analyze how these changes can lead to adjustments in accounting standards, changes in financial disclosures, and impacts on corporate governance. We will also highlight the importance of understanding this impact to ensure the quality and reliability of financial reports.

What is Meant by Accounting Practices?

Accounting Practices are the set of specific methods, procedures, and techniques used by companies to record, process, summarize, and present financial information. These practices include how to recognize revenues and expenses, how to measure assets and liabilities, and how to prepare and present financial statements.

What are the Political Changes Affecting Accounting?

Political changes can take many forms, including:

Changes in Governments: Changes in governments may lead to changes in economic and tax policies, which may affect Accounting Practices.
Enactment of New Laws and Regulations: New laws and regulations may lead to changes in financial reporting and disclosure requirements.
Changes in Economic Policies: Changes in economic policies, such as monetary and fiscal policies, may affect Accounting Practices.
Political Instability: Political instability, such as wars and revolutions, can lead to economic instability, which can affect Accounting Practices.
Changes in Regulatory Bodies: Changes in regulatory bodies, such as financial market regulators, may lead to changes in financial reporting requirements.
Joining Economic Blocs: A country’s accession to a specific economic bloc, such as the European Union, may require changes in Accounting Practices to comply with the bloc’s standards.

How Do Political Changes Affect Accounting Practices?

Changing Accounting Standards:
- Political changes may lead to changes in the accounting standards applied in a country. For example, a country may decide to adopt International Financial Reporting Standards (IFRS) instead of national accounting standards.
- Political changes may lead to changes in the interpretation and application of existing accounting standards.
Changing Disclosure Requirements:
- Political changes may lead to changes in disclosure requirements in financial statements. For example, companies may be required to disclose additional information about political risks or the impact of changes in tax policies.
Impact on Corporate Governance:
- Political changes may lead to changes in corporate governance rules, which may affect the role of the board of directors and the audit committee in overseeing the financial reporting process.
Impact on the Business Environment:
- Political changes may lead to changes in the business environment, such as changes in tax rates, interest rates, or exchange rates, which may affect the company’s performance and financial position.
- Political changes might lead to changes in how Management behaves.
Impact on the Work of Auditors:
- Political changes may increase audit risk, requiring auditors to exert more effort to assess these risks and design appropriate audit procedures.

Historical Examples of the Impact of Political Changes on Accounting Practices:

The Global Financial Crisis of 2008: The global financial crisis led to increased scrutiny of the Accounting Practices of banks and financial institutions and led to changes in financial accounting standards related to financial instruments and impairment.
The Sarbanes-Oxley Act of 2002 in the United States: This law was enacted after major accounting scandals, such as the Enron scandal, and aims to improve corporate governance and enhance the reliability of financial reports. The law led to significant changes in Accounting Practices and auditor responsibilities.
Adoption of International Financial Reporting Standards (IFRS) in Many Countries around the World: The adoption of IFRS led to significant changes in Accounting Practices in these countries, especially with regard to measuring assets and liabilities and recognizing revenues.
Changes in Tax Systems: Changes in tax systems, such as the introduction of value-added tax or changes in income tax rates, lead to changes in Accounting Practices related to taxes.

Importance of Understanding the Impact of Political Changes on Accounting Practices:

Understanding the impact of political changes on Accounting Practices is essential for:

Accountants: To understand how political changes affect their work and how to adapt to them. Accountants must be aware of changes in laws, regulations, and accounting standards.
Auditors: To assess audit risk correctly and design appropriate audit procedures. Auditors must understand how political changes affect the Accounting Practices of the companies they audit.
Investors: To understand how political changes affect the performance and financial position of companies. Investors must assess the impact of political changes on the financial statements of the companies in which they invest.
Creditors: To assess credit risk correctly and make informed lending decisions. Creditors must understand how political changes affect companies’ ability to repay their debts.
Policymakers: To understand how political changes affect financial accounting and financial reporting. Policymakers must consider the impact of political changes when developing accounting standards, laws, and regulations.
Academics: To conduct research on the impact of political changes on financial accounting. This research can help improve our understanding of how politics affects financial accounting.

How Can Companies Adapt to the Impact of Political Changes on Accounting Practices?

Monitor Political Changes: Companies must monitor potential political changes and their impact on Accounting Practices. This can be done by following economic and political news and communicating with legal and accounting consultants.
Assess the Impact of Changes: Companies must assess the impact of political changes on financial statements and business operations. This includes assessing the impact of changes on revenues, expenses, assets, liabilities, and equity.
Update Accounting Policies and Procedures: Companies must update their accounting policies and procedures to reflect changes in accounting standards or laws and regulations. These changes must be clearly documented.
Train Employees: Companies must train their employees on changes in Accounting Practices and how to apply them. This includes training accountants on new accounting standards and training other employees on how the changes affect their work.
Communicate with Stakeholders: Companies must communicate with stakeholders, such as investors and creditors, to explain the impact of political changes on the financial statements. This includes disclosing any risks or opportunities arising from these changes.
Consult with External Experts: Companies can consult with specialized accounting experts to provide advice and support in applying changes in Accounting Practices. Experts can also help companies assess the impact of political changes on their businesses.
Use Technology: Accounting software and Enterprise Resource Planning (ERP) systems can help companies adapt to changes in Accounting Practices by automating processes and providing regular updates to accounting standards.

Role of Technology in Adapting to Political Changes:

Accounting Software and Enterprise Resource Planning (ERP) systems can help companies adapt to the impact of political changes on Accounting Practices by:

Automating Accounting Processes: Software helps automate accounting processes according to new standards, reducing the risk of errors and saving time and effort.
Providing Regular Updates: Many accounting software programs provide regular updates that reflect changes in accounting standards, laws, and regulations.
Issuing Compliant Financial Reports: Software helps issue financial reports that comply with the latest regulatory requirements.
Improving the Accuracy of Financial Data: Technology helps improve the accuracy of financial data by reducing human errors and improving data quality.

Contemporary Examples of the Impact of Political Changes on Accounting Practices:

The COVID-19 Pandemic: The COVID-19 pandemic led to significant changes in the business environment, leading the IASB to issue guidance on how to apply IFRS under these exceptional circumstances. These guidelines included topics such as impairment of assets, fair value measurement, revenue recognition, and accounting for government grants.
The UK’s Exit from the European Union (Brexit): Brexit led to changes in the Accounting Practices of British companies, especially with regard to applying IFRS. The UK has developed its own accounting standards that are in line with IFRS but with some modifications.
Climate Change: Increasing interest in climate change is leading to a greater focus on financial sustainability, which may lead to changes in Accounting Practices and methods of measuring assets and liabilities. Some companies have begun to integrate sustainability standards into their financial reports.
The Russian-Ukrainian War: The war led to economic sanctions being imposed on Russia, which affected the Accounting Practices of companies that have operations in Russia or deal with Russian companies. These companies had to assess the impact of sanctions on their assets, liabilities, and revenues.

Impact of Political Changes on Startups:

Political changes may particularly affect startups, as these companies may not have the resources or expertise to adapt to rapid changes in accounting standards or laws and regulations. Therefore, it is important for startups to monitor political changes closely and seek advice from accounting experts when needed. Advanced methods of liquidity analysis and cash management can be used.

Conclusion:

Political changes are among the most important factors affecting Accounting Practices. Companies must be aware of these changes and adapt their Accounting Practices accordingly. Understanding the impact of political changes on Accounting Practices is essential for accountants, auditors, investors, and all stakeholders.

By monitoring political and economic developments, investing in training and technology, and collaborating with experts, companies can adapt to these changes and ensure the quality and reliability of their financial reports. Finally, political changes present opportunities to innovate and improve Accounting Practices, and companies must seize these opportunities to enhance the transparency and credibility of their financial reports. Remember that financial accounting is an essential tool for understanding an entity’s performance, assessing risks, and making decisions, and understanding the impact of the political environment on it enhances the accuracy and effectiveness of this tool.