Simple theories for complex processes: Accounting policy and the market for myopia

The tendency to use simplified models to capture and predict complex phenomena in the social sciences is discussed and criticized by examining a paper on policymaking, Watts and Zimmerman's “Demand for and Supply of Accounting Theories: The Market for Excuses.” Criticism of the paper takes three forms: 1) the methodology and testability is shown to be suspect; 2) the applicability of the evidence cited to the propositions stated is questioned; 3) contrary evidence is given to rebut the theory.     

Duty,obligation, and responsibility in accounting policy making

The Financial Accounting Standards Board has been under considerable pressure in recent years to choose among accounting standard alternatives based on their anticipated economic consequences. It is the Boards's stated position, however, that standards ought to be chosen for the faithfulness of the representations they will bring about. This paper examines the philosophical justification for the opposing positions on the economic consequences issue. The issue is first examined as one of ends and means, and it is found that accounting policy makers have a stronger obligation to pursue faithful representations than they have a responsibility to pursue good economic consequences. A similar result is found when the ends—means distinction is dropped and the issue is examined as involving conflicting duties to refrain and to act. The conclusion is reached that there is no justification for departing from faithful representations.     

The effects of governmental accounting methods on asset-acquisition decisions: A theoretical model and three case studies

This study explores possible effects of municipal accounting practices on asset-acquisition decisions. Theoretical decision models are developed using expenditure and depreciation accounting for reporting performance. The models suggest that expenditure accounting may lead to uneconomical leasing. Case studies of three cities focused on comparing present values of their leases to purchase alternatives and on interviewing department administrators. Significant uneconomical leases were found. The case studies suggest that a complete model of municipal administrators' acquisition decisions include consideration of accounting methods used to report performance; perceived risk of obsolescence; restrictions of grantors, third-party reimbursers and higher management; and administrators' background and training.     

The possible new shape of accounting in the United States

The Dingell Hearings currently under way in the House of Representatives may be the most likely opportunity for a major alteration in the structure of accounting control in the United States since the passage of the Securities Acts in 1933–1934. One should assume that the subcommittee is serious about its objectives of providing for tighter SEC control over the accounting function and for increasing the effectiveness of auditing. In the following pages, I will offer my views on the crucial issues being considered by the subcommittee looking at the SEC and the accountants, and I will conjecture on the possible alternatives for congressional action. Finally, I will speculate on what these changes might mean to the structure of accounting practice and government regulatory activity, and I will make suggestions regarding some possible areas of future research into accounting institutions and policy.     

Integrating human resource accounting into the public policy process: An illustration

Traditionally, public policy formulation has been accomplished through political compromise. In recent years, growing public pressure for austerity and accountability in the use of public resources has made the analytical approach to policy formulation and evaluation increasingly important. This exploratory study illustrates how the human resource accounting model can contribute to an objective and systematic evaluation of a complex public policy issue. The study considers the attrition of commissioned officers from the U.S. Army as a loss of human resources and examines the relative investment in human resources from two primary sources of commissioning. This type of systematic analysis provides valuable information for the policy maker in making logical decisions on human resource development.     

State regulation of accounting practices and municipal borrowing costs

This article examines the association between state regulation of accounting practices and municipal borrowing costs. The results demonstrate that stringent accounting regulations do have an effect on borrowing costs after abstracting the effects of other explanatory variables. The direction of the observed effect is difficult to assess due to presence of multicollinearity in the model. However, lower borrowing costs are suggested by the analysis.     

Inventories,credit transactions,and the marginal effective tax rate

It is observed that marginal effective tax rates (METR), as conventionally calculated, can only consider working capital requirements to a limited extent. A formula is derived to incorporate inventory requirements into the calculation and, via a numerical example, it is shown that such an incorporation can radically alter METRs from those conventionally calculated. The analysis is extended to credit transactions without affecting the above conclusion. Thus, if METRs are to be used as a means of evaluating the effects of tax policy on the incentive to invest, working capital requirements need to be explicitly allowed for.     

Theories of the state and the state of accounting: Economic reductionism and political voluntarism in accounting regulation theory

It has recently been suggested that the inability of the economics-finance literature to say anything definitive about the appropriate form of accounting regulation highlights the need to augment neoclassical economic analysis with sociopolitical considerations. It is argued in this paper that patching up the orthodox theory would be futile; that the flaws are so fundamental as to warrant abandoning neoclassical state theory and embarking on a serious debate about radical theoretical alternatives. Economic reductionism and political voluntarism are shown to be the main flaws in the neoclassical theory, and these deficiencies are primarily responsible for the present theoretical disarray. After a brief overview of radical theories of the state, this paper suggests that replacing—not refurbishing—neoclassical state theory is the most plausible strategy for accounting researchers.     

Institutional legitimacy and the FASB

A spectre, Demski's Impossibility Theorem, has stalked the classrooms and seminars of accounting academia for over a decade. After noting the reasons that make Demski's Impossibility Theorem largely irrelevant to assessment of the legitimacy of a real world institutional process like the FASB, this paper assesses the legitimacy of the FASB in terms of “individualistic constitutional calculus,” an approach that has recently evolved in the economics/political science literature. In line with this “individualistic constitutional calculus,” the paper next suggests three conditions of criteria that are sufficient to establish the legitimacy of an institution like the FASB. Finally, the FASB's ability to satisfy those conditions is evaluated by examining the nature of the standard-setting process and the economic and political environment in which it operates. Although the complexity of the empirical domain being considered necessitates reliance upon evidence that is largely anecdotal, the authors find support for the assertion that the FASB possesses institutional legitimacy.     

Corporate director liability and monitoring preferences

An important issue in the regulation of corporate behavior is its impact on the monitoring configuration selected by top management. In this article, we provide evidence consistent with the notion that the recent trend toward audit committee formation, and the movement toward Big-Eight auditors, are responses to increased legal exposure of the board of directors, notably stemming from the passage of the Foreign Corrupt Practices Act of 1977. The costs associated with changes in monitoring configurations are also considered. In particular, it is argued that auditor assistance can substantially reduce the cost of audit committee formation. Because external auditors may have differential incentives to support audit committee formation, a hypothesis linking auditor identity and audit committee formation is offered. Recent auditor changes and audit committee formations of American Stock Exchange companies are examined to provide positive evidence for the theory. The data reveal a clear trend to form audit committees, and a movement to Big-Eight auditors. Underscoring the importance of auditor involvement, it is shown that audit committees were more likely to be formed given recent selection of a new Big-Eight auditor.     

The economic rationale for the nature and extent of corporate financial disclosure regulation: A critical assessment

The regulatory framework for corporate financial disclosure has been the subject of a large literature, most of which has focused on the economic rationale for disclosure requirements. This extant economic analysis has not led to any definitive conclusions regarding the necessity for disclosure regulation nor has it provided public policy guidance as to the nature and extent of required corporate financial disclosure. It is evident that broader-based analysis and research incorporating relevant social and political (as well as economic) factors is necessary to gauge appropriate public policy for financial information disclosure.