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Review of Accounting Studies

Erschienen in:

16.11.2018

Ideological diversity in standard setting

verfasst von: Jivas Chakravarthy

Erschienen in: Review of Accounting Studies | Ausgabe 1/2019

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Abstract

I compare voting positions taken by Financial Accounting Standards Board (FASB) members on standards to positions taken by constituent sponsors in comment letters both before and after the emergence of the FASB’s conceptual framework. I find that, relative to the Pre-CF regime (1973–1986), FASB members in the CF regime (1987–2007) take positions that are (i) less like their constituent sponsors and (ii) more like one another. Both shifts are associated with standards increasing accounting relevance; in the CF regime, such standards are likely a product of the framework’s broad focus on decision usefulness. From 1996 to 2007, all but one dissenting vote on fair value standards explicitly argues for an even greater use of fair values, while none argue for less use. To the extent standard-setters’ idiosyncratic ideologies influence their voting positions, the evidence is consistent with a decline in the level of ideological diversity among FASB members.

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I additionally confirm information in section 2.1 through review of the FAF’s historical bylaws, which I obtained from the FAF by request in 2013. They provided 12 such documents from the Public Record.

This describes the process from 1977 until 2002, when the process changed for every group (except for the government), such that the existing FAF Board of Trustees elected new Trustees from candidates provided by the sponsors. This changed again in 2008 to fully remove all formal authority of the non-government sponsors to elect FAF Trustees (FAF 2008). The latter change did not take effect until after all standards covered in this study were issued.

Little research has been done over the FAF’s actions, perhaps because some of its activities, including meetings to determine the selection of FASB members, are conducted in private (Miller et al. 1994).

See Zeff (1971, pp. 134–236) as a reference for the preceding portion of the paragraph.

For example, from SFAS 48: “…the Board may wish to evaluate the standards in this Statement when its conceptual framework project is completed” (FASB 1981, para 17).

The institutional structure central to this study, described in Section 2.2, ended in 2008; see Note 2. Further, in 2008 the first Exposure Draft for an update to the FASB’s conceptual framework via the FASB-IASB convergence project was issued (FASB 2008). The convergence project resulted in two updates in 2010 before the project ended in 2014.

Baxter (1962) does not reference the idea of a conceptual framework. However, in a follow-up article Baxter stated of the FASB’s then in-progress conceptual framework that “such a super-standard of ultimate principles would be a fearsome extension” towards the future direction he was arguing against (Baxter 1981, p. 6). Others have presented similar arguments that detailed standards can discourage professional debate and experimentation (Sunder 2010).

H1a and H1b provide some evidence toward this because the distinction between the Pre-CF and CF regimes is not just an arbitrary break in time—the data underlying Fig. 2 provide evidence of a systematic difference in standards across regimes that directly relates to the framework itself.

The initial U.S. standard setting body, the AICPA’s Committee on Accounting Procedure, began publishing dissenting arguments in 1939 to distinguish between these two types of opposition (Zeff 1971, p. 138).

Typically, each sponsor has a committee specifically designed to interact with the FASB that prepares these comment letters. In fact, the signatories of the sponsors’ comment letters include 10 individuals who later became Board members, including at least one member from each of the four major constituencies. Starting from the first signatory selected onto the Board, this represented 10 of the next 28 FASB members, indicating that the signatories of sponsors’ comment letters are likely one of the best sources of prospective FASB members.

An Exposure Draft is “essentially a pro forma final document” that must be published for all projects that lead to a standard (Miller et al. 1994, p. 73). The FASB is supposed to incorporate only minor changes from an Exposure Draft into the final standard; otherwise, the Board is to issue another draft for public review. As such, for each standard, I use comment letters submitted on the final Exposure Draft. I address potential confounds arising from this issue in section 4.4.3.

The FASB’s due process procedures have undergone numerous changes in order to balance standard setting timeliness with sufficient constituent outreach (Van Riper 1987). If the net effect has increased (decreased) constituent outreach prior to the Exposure Draft stage, that may lead FASB positions to converge with (diverge from) sponsors’ positions in the CF regime, relative to the Pre-CF regime. Therefore, due process changes that are unrelated to the conceptual framework are potential confounds, as they may drive spurious results for H1a/H1b. I address this matter in section 5.1.1.

In a U.K. study, Georgiou (2004) finds that firms’ use of unobservable lobbying in the standard setting process is significantly associated with their use of comment letters. Further, a U.S. study finds a strong complementary association between various forms of lobbying by interest groups (Ansolabehere et al. 2002). Therefore, positions stated within comment letters are likely to be associated with sponsors’ preferred positions.

I expect sponsors will submit comment letters when the benefit of doing so exceeds the cost. Therefore, the set of comment letters I observe for each sponsor likely represents those standards that have meaningful priority to that organization, while the standards on which no letter is submitted are likely immaterial.

While the sponsors represent an ideal comparison group, this process does not represent a clean control match, as in a controlled laboratory experiment, and I do not imply this by using the term “matched sample.”

I aggregate votes for each standard (rather than analyzing each individual vote) to identify the positions of the Board as a whole, because the FAF collectively elects FASB members (i.e., sponsors do not select their own representative; see section 2.1). Further, I match each member’s vote to his or her sponsors’ position (rather than to the average sponsor position) because I expect the Board’s composition to be a function of each constituent group’s relative influence at that time. That is, I do so to control for changes over time in the relative influence of each constituent group. In supplementary analysis, I re-perform hypothesis tests using an alternate measure in which I match each FASB vote to the average constituent group position; see section 4.4.2.

I use SFAS 87 as an example to explain the intuition behind the metric. There were six matched FASB votes on SFAS 87 (n_i,t = 6), three assents and three dissents (∑ POS_i,t = 3). The matched constituent positions were 0.5, 0.5, 0.5, 0.125, 0.75, and 0.75 (∑ POS_j,t = 3.125). Therefore the numerator is equal to 0.125, the quotient is equal to 0.02, and R_t is equal to 0.98, indicating strong alignment between the FASB and its sponsors.

I use a difference-of-sums construction (rather than a sum-of-differences) to identify the positions of the Board as a whole because the FAF collectively elects FASB members (see Note 14).

APB Statement No. 4: Relevant information “bears on the economic decisions for which it is used” (APB 1970, para 88). CON 5: Relevant information “is capable of making a difference in user decisions” (FASB 1984, para 63).

This is done via the following process. First, all uses of the word stem “relevan” are extracted from each letter. Second, an RA assesses whether each reference is used in a positive context or whether the usage is irrelevant. Finally, the measures are determined based on the position within the letter of the first positive reference, such that the value of inc_relv is higher the earlier the first reference appears.

Results for all specifications using Tobit regressions (i.e., Eq. 2 in Table 3 and Eq. 4 in Table 5) are qualitatively unchanged when estimated using OLS.

At various points, the FASB has either had a seven-person Board with a requirement for a 5–2 supermajority, a seven-person Board with a simple majority requirement, or a five-person Board with a simple majority requirement.

To achieve an appropriate balance of combinations and total standards, I require a combination to have at least five associated standards. Therefore, combinations were identified by starting at SFAS 1 and changing combinations at every change in membership after the fifth standard attributed to each combination. This provides for 17 combinations of FASB members across the 163 standards.

I exclude combination fixed effects, as they capture explanatory power related to systematic differences between each combination of FASB members, which is one of the elements the regime split is designed to capture. A number of additional variables identified by prior literature as determinants of standard setting outcomes (e.g., political affiliation, professional background, etc.) are time-invariant personal characteristics and therefore also relate to differences between combinations of FASB members. As such, they are also excluded from my model.

The coding process operated as follows. I read every dissenting argument (based upon a random order of standards) and coded/categorized each one. A research assistant (RA) who was not provided with the initial coding decisions then independently coded each argument. Where there was a disagreement between our coding decisions, the RA re-reviewed the argument and determined the final argument type. The RA is an accounting doctoral student and licensed CPA who was not informed about the topic or objectives of this study.

As described in section 3.1, a significant coefficient in both regimes demonstrates a strong association. Because dissent decreased, this represents a positive (negative) coefficient for the Pre-CF (CF) regime. The Pre-CF coefficient is positive and significant in both specifications. The CF coefficient is significant when adjusting for inside dissents on fair value standards, which, by construction, are in the set of Inc_Relv standards. As such, the modified variable more precisely measures the positions taken by FASB members on these standards. This demonstrates a strong association: Inc_Relv standards are associated with a greater diversity of FASB positions during the Pre-CF regime as well as with a lower diversity during the CF regime.

As described in section 3.2, a significant coefficient in one regime demonstrates an association. Because R_t decreased, this represents a positive (negative) coefficient for the Pre-CF (CF) regime. As the CF coefficient is negative and significant, this demonstrates an association: Inc_Relv standards are associated with lower FASB representativeness during the CF regime. While the Pre-CF coefficient is also negative, the impact in magnitude is much larger during the CF regime, where there were many more Inc_Relv standards—an increase of more than 500% over the Pre-CF regime (per Table 1, Panel B).

Some of the opposition embedded in constituent positions may also come from the inside. Relative to the other constituent groups, financial statement users demonstrated the greatest support for the direction taken by the FASB in the CF regime (Table 1, Panel B), and I note a total of four user dissents across the entire CF regime (Table 2, Panel B). As such, it is unlikely that many of these constituent dissents reflect requests for greater use of fair values.

I identified the standards using the following criteria: standards in the CF regime with either (i) four or more constituent dissents or (ii) with at least three matched votes and a constituent dissent percentage greater than 67%. The 13 standards are SFASs 94, 101, 113, 125, 130, 131, 142, 143, 146, 147, 150, 132R, and 141R.

In general, I re-perform tests of H1a and H2a [H1b and H2b] by re-estimating columns (2) and (6) of Table 3 [Table 4], respectively. Here, I also re-perform the difference-in-differences for H1b and re-estimate column (4) of Table 5 for H2b.

To facilitate the removal of individual observations, the jackknife estimations of the regressions in columns (2) and (6) of Table 4 are performed with robust but nonclustered standard errors.

Miller et al. (1994, p. 25) note that one intended benefit of the conceptual framework was to eliminate “redundancy in discussions when the same basic issues are debated over and over again,” indicating the FASB faced incentives to reinforce initial interpretations of the framework.

I estimate separate Pre-CF and CF regressions, rather than estimating the entire sample as before, because the AvgTenure*Pre-CF interaction term introduces collinearity problems.

Such research should also consider any effects of the FASB’s formal attempts to increase its efficiency and responsiveness (e.g., McKenna 2003).

These include an incomplete survey of alternatives, a failure to examine the risks of the preferred choice, a failure to reappraise initially rejected alternatives, and a selective bias in processing information.

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Titel: Ideological diversity in standard setting
verfasst von: Jivas Chakravarthy
Publikationsdatum: 16.11.2018
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 1/2019
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9478-7

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