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A political economy of accounting standard setting

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Abstract

In recent years accounting researchers have identified “political” lobbying as a problem for accounting standard setting. This paper presents a simple game-theoretic analysis of the political process to identify situations where companies have incentives to lobby the political principal instead of participating in the usual due process of accounting standard setting. Analysis of the model suggests that “political” lobbying is more likely to happen in the EU than in the US. Furthermore it is suggested that if the relevant standard setters wish to achieve harmonization of accounting standards between the EU and the US, European companies have more lobbying leverage than their American counterparts because there are more European veto players than American ones.

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Notes

  1. Some researchers have suggested that admitting limited competition among accounting standard setters instead of granting them a monopoly would reduce political interference in the accounting standard setting process (Benston et al. 2003; Dye and Sunder 2001; Sunder 2002a, b).

  2. More recently, interpretations have become a subject of research in addition to standards. E.g., Larson (2007) and Bradbury (2007).

  3. The rare exceptions include Sutton (1984) who models lobbying in a Downsian framework of political action; Lindahl (1987) who extends that framework to coalition building; Amershi et al. (1982) who study strategic aspects of lobbying arising in a multi-period, multi-issue setting; and Chung (1999) who studies private information involuntarily released by the act of lobbying. These theoretical studies attempt to inform traditional, comment letter-based lobbying research. They do not address behind-the-scenes political lobbying.

  4. See Zeff (2005a, b) for a history of the evolution of accounting standard setting in the US.

  5. An overview over international differences in accounting regulation and practice can be found in Nobes and Parker (2006) or Flower and Ebbers (2002).

  6. Annual accounts, which in Europe are often linked to tax accounting, still have to be prepared in accordance with national law in most countries. However, the IAS regulation gives member states of the EU the option to permit or require IAS/IFRS also for annual accounts and reporting by non-listed companies.

  7. Porter (2005) notes a surprising willingness of US government officials to bring US rules more in line with international ones. Perry and Nölke (2006, 2007), on the other hand, argue that harmonization between IFRS and US GAAP favours the Anglo-Saxon over the Rhenish economic model. Similarly, Martinez-Diaz (2005) and Botzem and Quack (2006) see the reason for the international accounting standard setter’s success in the strong alignment of its core values with the interests of the Securities and Exchange Commission.

  8. Mattli and Büthe (2005) argue that the desire to benefit of existing expertise and to shift blame for failures constitute two prime reasons for delegating authority to a private actor in accounting standard setting.

  9. A possible intuition for this particular distribution of preferences might be as follows: the accounting standard setter considers a standard with very little discretion (left-most point on the policy line) optimal. The SEC is sympathetic to the FASB’s point of view but somewhat more willing to compromise. The three political actors, possibly under the influence of corporate lobbying, prefer a higher degree of flexibility in accounting (points farther to the right on the policy line).

  10. Arguably, the EU has made the endorsement process deliberately complicated in order to gain leverage over the IASB. If the IASB wishes its standard to be endorsed by the EU, it now has to fulfil the desires of a number of political actors on the European level.

  11. See IAS Plus (2008) and IASB (2008) for more details.

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  1. Center for Accounting Research, University of Graz, Universitätsstraße 15/F3, 8010, Graz, Austria

    Roland Königsgruber

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Königsgruber, R. A political economy of accounting standard setting. J Manag Gov 14, 277–295 (2010). https://doi.org/10.1007/s10997-009-9101-1

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