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.
References
(In addition to the references below, this article relies on interview evidence described chiefly in Section 5; primary archival sources in the list below are marked *) Search in Google Scholar
Admati, A. R., & Hellwig, M. F. (2014). The bankers’ new clothes: What’s wrong with banking and what to do about it. Princeton, NJ: Princeton University Press.10.1515/9781400851195Search in Google Scholar
* Allen, M. (2006). Melissa Allen to international accounting standards board. Letter of Comment No. 109, No. 1260–001. London, U.K.Search in Google Scholar
Allen, A. M., & Ramanna, K. (2013). Towards an understanding of the role of standard setters in standard setting. Journal of Accounting and Economics, 55, 66–90. https://doi.org/10.1016/j.jacceco.2012.05.003.Search in Google Scholar
Biondi, Y. (2016). Empowering market-based finance: A note on bank bailouts in the aftermath of the north atlantic financial crisis of 2007. Accounting, Economics, and Law, 6, 79–84. https://doi.org/10.1515/ael-2016-0004.Search in Google Scholar
Biondi, Y. (2018). Fair value and the formation of financial market prices through ignorance and hazard. eds. G. Livne and G. Markarian (Vol. 16) [online].10.4324/9781315621876-16Search in Google Scholar
Biondi, Y., & Giannoccolo, P. (2015). Share price formation, market exuberance and financial stability under alternative accounting regimes. Journal of Economic Interaction and Coordination, 10, 333–362. https://doi.org/10.1007/s11403-014-0131-7.Search in Google Scholar
* Bullen, H. G., & Crook, K. (2005). A new conceptual framework project. FASB Report.Search in Google Scholar
Camfferman, K., & Zeff, S. A. (2007). Financial reporting and global capital markets: A history of the international accounting standards committee, 1973–2000. Oxford, U.K.: Oxford University Press.10.1093/acprof:oso/9780199296293.001.0001Search in Google Scholar
Camfferman, K., & Zeff, S. A. (2015). Aiming for global accounting standards: The international accounting standards board, 2001–2011. Oxford, U.K.: Oxford University Press.10.1093/acprof:oso/9780199646319.001.0001Search in Google Scholar
Christensen, H. B., & Nikolaev, V. (2013). Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, 18, 734–775. https://doi.org/10.1007/s11142-013-9232-0.Search in Google Scholar
* Conceptual framework: Statement of financial accounting concepts No. 8. Financial Accounting Standards Board (FASB) (2010).Search in Google Scholar
* Conceptual framework issues arising during drafting of phase A ED and phase D DP/PV. International Accounting Standards Board (IASB) (2008).Search in Google Scholar
* Conceptual Framework (minutes of the FASB-IASB joint meeting). ISTAR (2004).Search in Google Scholar
* Conceptual framework phase A redeliberations: Qualitative characteristics of decision-useful financial reporting information. Financial Accounting Standards Board (FASB) (2007).Search in Google Scholar
* Conceptual framework qualitative characteristics 1: Relevance and reliability. Financial Accounting Standards Board (FASB) (2005).Search in Google Scholar
Culpepper, P. (2010). Quiet politics and business power: Corporate control in Europe and Japan. Cambridge, U.K.: Cambridge University Press.10.1017/CBO9780511760716Search in Google Scholar
Dal Bo, E. (2006). Regulatory capture: A review. Oxford Review of Economic Policy, 22, 203–225. https://doi.org/10.1093/oxrep/grj013.Search in Google Scholar
Desai, M. (2012). The incentive bubble. Harvard Business Review, 90, 124–133.Search in Google Scholar
Dichev, I. D. (2008). On the balance sheet-based model of financial reporting. Accounting Horizons, 22, 453–470. https://doi.org/10.2308/acch.2008.22.4.453.Search in Google Scholar
Dopuch, N., & Sunder, S. (1980). FASB’s statements on objectives and elements of financial accounting: A review. The Accounting Review, 55, 1–22.Search in Google Scholar
Eichenwald, K. (2002). Enron’s many strands; executive compensation. [online]. New York Times. http://www.nytimes.com/2002/03/01/business/enron-s-many-strands-executive-compensation-enron-paid-huge-bonuses-01-experts.html [Last visited Nov 2017].Search in Google Scholar
Erb, C., & Pelger, C. (2015). ‘Twisting words’? A study of the construction and reconstruction of reliability in financial reporting standard-setting. Accounting, Organizations and Society, 40, 13–40. https://doi.org/10.1016/j.aos.2014.11.001.Search in Google Scholar
Fink, R., & Leone, M. (2006). FASB’s new seventh man: A Q&A with new FASB member Thomas Linsmeier. CFO.com. [online]. http://ww2.cfo.com/accounting-tax/2006/06/fasbs-new-seventh-man/ [Last visited Aug 2015].Search in Google Scholar
* Foster, J. M., & Johnson, L. T. (2001). Why does the FASB have a conceptual framework? Understanding the Issues—FASB.Search in Google Scholar
Greenwood, R., & Scharfstein, D. (2013). The growth of finance. The Journal of Economic Perspectives, 27, 3–28. https://doi.org/10.1257/jep.27.2.3.Search in Google Scholar
Healy, R. E. (1938). The next step in accounting. The Accounting Review, 13, 1–9.Search in Google Scholar
Healy, P. M., & Palepu, K. G. (2003). The fall of enron. The Journal of Economic Perspectives, 17, 3–26. https://doi.org/10.1257/089533003765888403.Search in Google Scholar
Holthausen, R. W., & Ross, L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics, 31, 3–75. https://doi.org/10.1016/s0165-4101(01)00029-5.Search in Google Scholar
Ijiri, Y., & Jaedicke, R. K. (1966). Reliability and objectivity of accounting measurements. The Accounting Review, 41, 474–483.Search in Google Scholar
* Johnson, L. T. (2004). The project to revise the conceptual framework. FASB Report.Search in Google Scholar
* Johnson, L. T. (2005). Relevance and reliability. FASB Report.Search in Google Scholar
* Joint conceptual framework project. Financial Accounting Standards Board (FASB) (2005).Search in Google Scholar
Joyce, E. J., Libby, R., & Sunder, S. (1982). Using the FASB’s qualitative characteristics in accounting policy choices. Journal of Accounting Research, 20, 654–675. https://doi.org/10.2307/2490891.Search in Google Scholar
Kalt, J. P., & Zupan, M. A. (1984). Capture and ideology in the economic theory of politics. The American Economic Review, 74, 279–300.Search in Google Scholar
Khurana, R. (2007). From higher aims to hired hands: The social transformation of American business schools and the unfulfilled promise of management as a profession. Princeton, NJ: Princeton University Press.10.1515/9781400830862Search in Google Scholar
Kothari, S. P., & Lester, R. (2012). The role of accounting in the financial crisis: Lessons for the future. Accounting Horizons, 26, 335–351. https://doi.org/10.2308/acch-50134.Search in Google Scholar
Kothari, S. P., Ramanna, K., & Skinner, D. J. (2010). Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics, 50, 246–286. https://doi.org/10.1016/j.jacceco.2010.09.003.Search in Google Scholar
Kwak, J. (2014). Cultural capture and the financial crisis. In Carpenter, D., & Moss, D. A. (Eds.), Preventing regulatory capture. Cambridge, U.K: Cambridge University Press.Search in Google Scholar
Laux, C., & Leuz, C. (2010). Did fair-value accounting contribute to the financial crisis? The Journal of Economic Perspectives, 24, 93–118. https://doi.org/10.1257/jep.24.1.93.Search in Google Scholar
Maines, L. A., & Wahlen, J. M. (2006). The nature of accounting information reliability: Inferences from archival and experimental research. Accounting Horizons, 20, 399–425. https://doi.org/10.2308/acch.2006.20.4.399.Search in Google Scholar
McCarty, N., Poole, K. T., & Rosenthal, H. (2013). Political bubbles: Financial crises and the failure of American democracy. Princeton, NJ: Princeton University Press.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2005a), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2005b), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2006), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2007a), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2007b), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2008a), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2008b), Norwalk, CT.Search in Google Scholar
* Memorandum: Board meeting. Financial Accounting Standards Board (FASB) (2009), Norwalk, CT.Search in Google Scholar
* Meyer, C., & Teitler, E. (2006). Conrad Meyer and Evelyn Teitler to international accounting standards board. Letter of Comment No. 82, File Reference No. 1260-001. London: IASB.Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2001).Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2002), Norwalk, CT.Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2003), Norwalk, CT.Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2004a), Norwalk, CT.Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2004b), Norwalk, CT.Search in Google Scholar
* Minutes of meeting. Financial Accounting Standards Advisory Council (FASAC) (2005), Norwalk, CT.Search in Google Scholar
* Minutes of the meeting of the IASB and the FASB. Financial Accounting Standards Board (FASB) (2004a). Norwalk, CTSearch in Google Scholar
* Minutes of the meeting of the IASB and the FASB. Financial Accounting Standards Board (FASB) (2004b), Norwalk, CT.Search in Google Scholar
* Objective of financial reporting and qualitative characteristics—comment letter summary. Financial Accounting Standards Board (FASB) (2007), Norwalk, CT.Search in Google Scholar
Paton, W., & Littleton, A. C. (1940). An introduction to corporate accounting standards. Chicago, IL: American Accounting Association.Search in Google Scholar
Pelger, C. (2016). Practices of standard-setting: An analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting. Accounting, Organizations and Society, 50, 51–73. https://doi.org/10.1016/j.aos.2015.10.001.Search in Google Scholar
Pelger, C. (2018). The comeback of stewardship, reliability and prudence? – an analysis of the IASB’s new conceptual framework. [online].Search in Google Scholar
Peltzman, S. (1976). Toward a more general theory of regulation. The Journal of Law and Economics, 19, 211–240. https://doi.org/10.1086/466865.Search in Google Scholar
Power, M. (2010). Fair value accounting, financial economics and the transformation of reliability. Accounting and Business Research, 40, 197–210. https://doi.org/10.1080/00014788.2010.9663394.Search in Google Scholar
Ramanna, K. (2013). The international politics of IFRS harmonization. Accounting, Economics, and Law, 3, 1–46. https://doi.org/10.1515/ael-2013-0004.Search in Google Scholar
Ramanna, K. (2015). Political standards: Corporate interest, ideology, and leadership in the shaping of accounting rules for the market economy. Chicago, IL: University of Chicago Press.10.7208/chicago/9780226210889.001.0001Search in Google Scholar
* Report of the chairman of the FASB to the FASAC. Financial Accounting Standards Board (FASB) (2003).Search in Google Scholar
Safire, W. (1987). On language; glossary of a scandal. [online]. The New York Times Magazine.Search in Google Scholar
Safire, W. (2008). Safire’s political dictionary. Oxford, U.K.: Oxford University Press.Search in Google Scholar
Schattschneider, E. E. (1960). The semi-sovereign people: A realist’s view of democracy in America. New York, NY: Holt, Rinehart and Winston.Search in Google Scholar
* Statement of financial accounting concepts No. 1. Financial Accounting Standards Board (FASB) (1978).Search in Google Scholar
* Statement of financial accounting concepts No. 2. Financial Accounting Standards Board (FASB) (1980).Search in Google Scholar
* Statement of financial accounting concepts No. 5. Financial Accounting Standards Board (FASB) (1984).Search in Google Scholar
* Statement of financial accounting concepts No. 7. Financial Accounting Standards Board (FASB) (2000).Search in Google Scholar
Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2, 3–21. doi:https://doi.org/10.2307/3003160.Search in Google Scholar
Stocker, J. (2011). Oral history project interview with James Leisenring. Securities and Exchange Commission Historical Society (SECHS). [online]. http://www.sechistorical.org/collection/oral-histories/20110412_Leisenring_James_T.pdf [Last visited Sep 2015].Search in Google Scholar
* Summary of responses to the annual FASAC survey. Financial Accounting Standards Advisory Council (FASAC) (2002).Search in Google Scholar
* Summary of responses to the annual FASAC survey. Financial Accounting Standards Advisory Council (FASAC) (2003).Search in Google Scholar
Sunder, S. (2008). Econometrics of fair values. Accounting Horizons, 22, 111–125. https://doi.org/10.2308/acch.2008.22.1.111.Search in Google Scholar
Swieringa, R. J. (2011). Robert T. Sprouse and fundamental concepts of financial accounting. Accounting Horizons, 25, 207–220. https://doi.org/10.2308/acch.2011.25.1.207.Search in Google Scholar
* The FASB’s conceptual framework: Relevance and reliability. Financial Accounting Standards Board (FASB) (2004).Search in Google Scholar
The Richard C. Adkerson gallery on the SEC role in accounting standards setting. Securities and Exchange Commission Historical Society (SECHS) (2013). [online]. http://sechistorical.org/museum/galleries/rca/(Last visited Sep 2013).Search in Google Scholar
* Upton, W. S.Jr. (2001). Business and financial reporting, challenges from the new economy. FASB Special Report.Search in Google Scholar
Walters, R. (2006). Crime, bio-agriculture and the exploitation of hunger. British Journal of Criminology, 46, 26–45. https://doi.org/10.1093/bjc/azi049.Search in Google Scholar
Watts, R. L. (2003). Conservatism in accounting Part I: Explanations and implications. Accounting Horizons, 17, 207–221. https://doi.org/10.2308/acch.2003.17.3.207.Search in Google Scholar
Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: An alternative view. Abacus, 44, 139–168. https://doi.org/10.1111/j.1467-6281.2008.00255.x.Search in Google Scholar
* Work plan for the consideration of incorporating international financial reporting standards into the financial reporting system for U.S. issuers: Final staff report. Securities and Exchange Commission (SEC) (2012). http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf (Last visited Nov 2013).Search in Google Scholar
Young, J. J. (1995). Getting the accounting ‘right’: Accounting and the savings and loan crisis. Accounting, Organizations and Society, 20, 55–80. https://doi.org/10.1016/0361-3682(93)e0006-3.Search in Google Scholar
Young, J. J. (2003). Constructing, persuading and silencing: The rhetoric of accounting standards. Accounting, Organizations and Society, 28, 621–638. https://doi.org/10.1016/s0361-3682(02)00016-8.Search in Google Scholar
Zeff, S. A. (2005). The evolution of U.S. GAAP: The political forces behind professional standards Part 1: 1930–1973. CPA Journal, 75, 18–27.Search in Google Scholar
Zeff, S. A. (2007). The SEC rules historical cost accounting: 1934 to the 1970s. Accounting and Business Research, 37, 49–62. https://doi.org/10.1080/00014788.2007.9730085.Search in Google Scholar
Zeff, S. A. (2015a). The wheat study on establishment of accounting principles (1971–72): A historical study. Journal of Accounting and Public Policy, 34, 146–174. https://doi.org/10.1016/j.jaccpubpol.2014.12.004.Search in Google Scholar
Zeff, S. A. (2015b). The SEC suppresses fair value – until the 1990s [online].Search in Google Scholar
Zeff, S. A. (2016). The trueblood study group on the objectives of financial statements (1971–73): A historical study. Journal of Accounting and Public Policy, 35, 134–161. https://doi.org/10.1016/j.jaccpubpol.2015.10.001.Search in Google Scholar
Zingales, L. (2014). Preventing economists’ capture. In Carpenter, D., & Moss, D. A. (Eds.), Preventing regulatory capture (pp. 124–151). Cambridge, U.K: Cambridge University Press.Search in Google Scholar
© 2021 CONVIVIUM, association loi de 1901
