Abstract
In 2010, the U.S. accounting rulemaker (FASB) updated its longstanding constitution to eliminate “reliability” as a fundamental accounting property. FASB argued that “reliability” was misunderstood in practice and that this amendment clarified its original intent. Drawing on primary archival resources and field interviews with regulators, I provide evidence that the change also sought to legitimize the rise of fair-value accounting. By eliminating the need for accounting to be “reliable,” the change attempted to neutralize concerns about the subjectivity in fair-value estimates. Such subjectivity can facilitate accounting manipulation, and some fair-value rules can be attributed to lobbying by managers who stand to benefit. The change illustrates “conceptual veiling,” wherein regulators, seeking to diffuse criticism, including suspicions of capture, manufacture costly conceptual narratives for justifying their actions.
Acknowledgments
I thank William Baber, Richard Barker, Yuri Biondi, Jon Cell, John Coates, Pepper Culpepper, Howell Jackson, S.P. Kothari, Michael Power, Eugene Soltes, Shyam Sunder, Wei-Guo Zhang, Steve Zeff, and workshop participants at Harvard Law School for helpful comments. Zach Markovich and Mason Ji provided research assistance. Funding from the University of Oxford, Harvard University, and the Charles Koch Foundation is gratefully acknowledged. Responsibility for any errors accrues solely to me.
Appendix 1: Brief Profiles of Some FASB and IASB Employees Involved in the Conceptual Framework Changes on Reliability and Verifiability
Mary E. Barth, Board member, IASB, 2001–09; Academic advisor, IASB, 2009–11; Professor of accounting at Stanford prior to, during, and after her IASB appointments.
George J. Batavick, Board member, FASB, 2003–08; Comptroller at Texaco prior to his FASB appointment.
Ann Benson, Staff member, FASB, 2006–07; Graduate student at University of Notre Dame prior to her FASB appointment; Manager at KPMG after her FASB appointment.
Halsey G. Bullen, Staff member, FASB, 1983–2006; Studied under Robert Sprouse at Stanford; Worked at Haskins & Sells (now Deloitte) prior to his FASB appointment; Retired from the FASB.
G. Michael Crooch, Board member, FASB, 2000–08; Partner at Arthur Andersen prior to his FASB appointment.
Kimberley Crook, Staff member, IASB, 2001–05; Staff member at the New Zealand Institute of Chartered Accountants after her IASB appointment, then partner at Ernst & Young.
John M. “Neel” Foster, Board member, FASB 1993–2003; Vice president and treasurer at Compaq prior to his FASB appointment; Independent consultant and member of the boards of AIG and PJM Interconnection after his FASB appointment.
Robert H. Herz, Board member, IASB 2001–2002; Board member and chair, FASB, 2002–10; Partner at PricewaterhouseCoopers prior to his FASB and IASB appointments.
Jeff Johnson, Staff member, FASB, 2002–08; Worked at PricewaterhouseCoopers prior to his FASB appointment; Worked at General Electric after his FASB appointment.
L. Todd Johnson, Staff member, FASB, 1979–1982, 1990–2009; Professor of accounting at Rice prior to his first FASB appointment; Professor of accounting at University of Houston prior to his second FASB appointment; Retired from the FASB.
James J. Leisenring, Board member, FASB, 1987–2000; Board member, IASB 2001–2010; Staff member, FASB, since 2010; Chairman of the AICPA Auditing Standards Board prior to his FASB appointment.
Li Li Lian, Staff member, IASB, 2006–2014; Worked for the International Federation of Accountants prior to her IASB appointment; Worked for Monitise and Moody’s after her IASB appointment.
Thomas J. Linsmeier, Board member, FASB, since 2006; Professor of accounting at Michigan State prior to his FASB appointment.
Kristen Mathys, Staff member, FASB, 2008–09; Worked at Deloitte prior to her FASB appointment; Worked at KPMG after her FASB appointment.
Warren McGregor, Board member, IASB, 2001–11; Independent consultant prior to his IASB appointment; Consultant to the Australian Accounting Standards Board and to PricewaterhouseCoopers after his IASB appointment.
Patricia O’Malley, Board member, IASB, 2001–07; Staff member, IASB, 2007–09; Chair of the Canadian Accounting Standards Board prior to and after her IASB appointment.
Katherine A. Schipper, Board member, FASB, 2001–06; Professor of accounting at Duke prior to and after her FASB appointment.
Leslie F. Seidman, Board member, FASB, 2003–13; Board chair, FASB, 2010–13; Independent consultant prior to her FASB appointment; Worked for Pace University and board member for FINRA and Moody’s after her FASB appointment.
Edward W. Trott, Board member, FASB, 1999–2007; Partner at KPMG prior to his FASB appointment.
David Tweedie, Board member and chair, IASB, 2001–11; Chairman of the U.K. Accounting Standards Board prior to his IASB appointment; President of the Institute of Chartered Accountants of Scotland and chairman of the International Valuation Standards Council after his IASB appointment.
Wayne Upton, Staff member, FASB, 1984–2001; Staff member, IASB, since 2001.
Donald M. Young, Board member, FASB, 2005–08; Independent consultant prior to his FASB appointment; Managing director at TomCat investments after his FASB appointment.
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