Accounting, Auditing & Accountability Journal: Article Information

Accounting, Auditing & Accountability Journal
Political Aspects of Financial Accounting Standard Setting in the USA

Timothy J. Fogarty, Mohamed E.A. Hussein, J. Edward Ketz,
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Timothy J. Fogarty, Mohamed E.A. Hussein, J. Edward Ketz, (1994) "Political Aspects of Financial Accounting
Standard Setting in the USA", Accounting, Auditing & Accountability Journal, Vol. 7 Issue: 4, pp.24-46, https://
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AAAJ
7,4 Political Aspects of Financial
Accounting Standard Setting
in the USA
24
Timothy J. Fogarty
Case Western Reserve University, Cleveland, Ohio, USA,
Mohamed E.A. Hussein
University of Connecticut, Storrs, Connecticut, USA and
J. Edward Ketz
Pennsylvania State University, University Park, Pennysylvania, USA
Financial accounting standards in the United States are set by the Financial
Accounting Standards Board (FASB). This private sector organization is
empowered by the Securities and Exchange Commission (SEC) through a
delegation of its authority created under the amended Securities Act of 1934
and is charged with specifying the content of Generally Accepted Accounting
Principles (GAAP). Rule 203 of the American Institute of Certified Public
Accountants’ Code of Ethics obligates members, except in unusual
circumstances, to refrain from asserting conformity to GAAP that does not also
follow FASB pronouncements. This article pertains to this regulatory process at
its focal point of the FASB[1]. This article proposes that the standard setting
process can be better understood by recognizing its political nature. However, to
do so requires the identification and isolation of that which constitutes the
political. A new understanding of the political dimensions requires an
intellectual grounding sensitive to the nature of the power, rhetoric and the
ideology of interested parties.
The many meanings attributed to “politics” requires some initial
stipulations. In one sense the envelopment of any specific action with a broader
social environment suggests a contextual meaning of “politics”. This implies
that the realm of politics cannot be artificially separated from the social and
that a certain degree of integration between various levels of analysis (e.g.
individual, group, organizational) is necessary. “Politics” also refers to the
process of consensus development. In this vein, matters such as socialization,
participation and the antecedents of efficacy are put into issue. Again, a micro-
macro perspective problem must be addressed to go beyond descriptions of
Accounting, Auditing &
what should happen in any particular episode. Finally, “politics” also describes
Accountability Journal, Vol. 7 the outcomes or consequences of social action. Who achieves what by virtue of
No. 4, 1994, pp. 24-46. © MCB
University Press, 0951-3574 a mixed co-operative competitive orientation to action always merits
development in a milieu of scarce resources. The stability of particular Political Aspects
resolution, as well as the impact of resolutions on the process also requires of Financial
consideration. Accounting
Politics in Accounting Standard Setting: Previous Approaches
FASB leaders have freely admitted the political potential of standard setting
(see Armstrong, 1977; Kirk, 1978; Wyatt, 1986). However, the recognition that 25
accounting is political does not necessarily result in the acceptance of that
situation (Solomons, 1978; 1991). Many professional leaders believe that
standard setting should be insulated from politics (e.g. Armstrong, 1977; Kirk,
1978; 1986; and Wyatt, 1990). This preference contrasts sharply with many
academic treatments of politics. In cases where standard setting is influenced
by, and in turn affects, the frontier of technical and social turmoil[2] the
disjuncture of these beliefs may be consequential. This article concerns itself
with the extent to which academic treatments have provided, and could provide,
useful knowledge about these political dimensions.
The emergence of a broad realization of political factors in standard setting,
derived from the recent recognition of the importance of the economic
consequences of accounting standard setting. Economic consequences[3] are the
results of the reallocative outcomes of accounting rules, and hence form the
central political outcome. Zeff (1978) linked the recognition of economic
consequences by the FASB with a variety of social trends, and asserted that
dealing appropriately with them would persist as the chief challenge to
standard setters.
Seen in these terms, economic consequences conflict rather decisively with
the FASB’s stated goal of providing neutral information regardless of effects on
particular interests (see FASB, 1980, paragraph 98). The position of the FASB,
however, seems to be that economic consequences provide the FASB with
information that can be abstracted from its political nature. In furtherance of
this belief, FASB members have stated that an appeal based on the economic
consequences that a proposed standard might impose on particular interests
would not be as favoured as an appeal that was logical, well-reasoned, and of a
suitable length (Miller and Redding, 1988). On one level, the FASB is officially
blind to the self-interest of advocates. At the same time, these motivations are
tolerated and encouraged sub rosa if translated into the neutral language of
standard setting and accounting theory.
The aversion to politics in the standard setting process may be attributable to
the historic association of politics with government intervention in US standard
setting[4]. The casual definition of politics as that which occurs in government
tends to obscure the more robust meanings of the term. Furthermore, given the
strong and persistent opposition to government-set accounting (Ronen and
Schiff, 1978), this conceptual overlap tends to cast unwarranted aspersions on
political processes in this context.
AAAJ A Classification of the Literature
7,4 An understanding of past work on the political dimensions of standard setting
for financial accounting can be organized into three interpenetrating topics.
The first sets out to illustrate the impossibility of the conventional wisdom of
apolitical action. The second builds on the first by identifying the existence and
operation of special interests. The third accepts the first two in order to
26 construct political milieux.
The literature that has challenged the sufficiency of the conceptual
categories and processes of the FASB is too vast to summarize fairly.
Suggestions that accounting theory was not critical or definitive to the final
regulatory outcome precede the organization of that body (e.g. Gerboth, 1973).
Since that time, the Conceptual Framework project has drawn the most
criticism since it represents the apogee of hope for a deductive theory-driven

standard setting. While many challenged the precision of its distinctions (e.g.
Joyce et al,. 1982), others launched less technical arguments. These ranged from
a recognition that the agenda of organizational survival was paramount (Miller,
1985) to the more salient underlying conditioning of common occupational
values in socialization (Gerboth, 1987). Brought into the specifics of particular
standard setting episodes, concepts such as neutrality, cost/benefit, relevance
and reliability lose substantial credibility (see Daley and Trantner, 1990).
Another branch of this literature, takes issue with the economic presumptions
of standard setting. Exploding Zeff’s (1978) identification of the centrality of
economic consequences, writers such as Hines (1989a) challenge the reality of
an objective, competitive and rational economy for standard setting purposes.
To this, Taylor and Turley (1986) illustrate how standard setting works bad
economics by implicit assumptions of single period simple equilibrium. A third
way of illustrating that what the FASB says it does is not a plausible or
complete explication is to identify procedural shortfalls. Notable studies include
those that have questioned issue disaggregation (Amershi et al., 1982), voting
procedures (Shenoy et al., 1989) and agenda formation (Fogarty et al., 1992;
Young, 1993).
The thrust of this section of the literature is to argue that financial
accounting standard setting by the FASB is political. Where it differs from the
many recognitions of that by FASB board members lies in that this literature
suggests that standard setting must be political[5]. In this tradition, the
intellectual poverty of conventional FASB doctrine is believed by many to allow
accounting to become political. However, this literature tends to settle for this
small victory. Very little guidance is provided on what the content of a political
standard setting might be.
A second classification of the literature on politics in standard setting
identifies specially interested parties to the process. The incentives and
victories of these groups are placed in counterdistinction to the public interest
that should be served by the FASB.
The largest subgroup of this classification is represented by studies that Political Aspects
examine the lobbying process. FASB standard setting invites various forms of of Financial
constituent participation and therefore there is very little to be said other than Accounting
to report on the explicit and legitimate attempts to sway the results (see Hope
and Gray, 1982). For these purposes, the tendency to use standard setting
episodes as discrete units of analysis tends to project the notion that coalitions
are evanescent and results are difficult to generalize. Some studies remove 27
themselves further from the political action by endeavouring to predict
participation through economic conditions and incentives (e.g. Watts and
Zimmerman, 1978). More common, however, is the attempt to classify
participants and correlate their common positions to accounting standard
outcomes (e.g. Brown, 1981; Haring, 1979; Moody and Flesher, 1986). These
results, used on an inductive basis, have supported inferences about the

distribution of participant “power” (Newman, 1981a; 1981b; 1982). In a similar
approach, Hussein and Ketz (1980) examine the unity of similarly situated
participants to decide whether rule-making by the FASB was more pluralistic
or élite dominated. Most studies in this tradition tend to be without the explicit
guidance of theory. However, Sutton (1984) and Johnson and Messier (1982) use
economic models to generalize the role of special interests in lobbying for or
“demanding” accounting standards.
Public accountants have only recently been recognized as a specially situated
influence group for these purposes. Hussein and Ketz (1991) detail the many
means whereby the accounting profession has special access, and attribute its
rise to a proactive concern over legal liability. This conflicts with Puro’s (1984)
empirical assessment wherein public accountants were shown to take positions
as advocates for the interests of current and potential auditing clients.
Whatever its true motivation, the notion that accountants possess a
professional obligation for the conceptual integrity and the overriding spirit of
standards has been blurred (see Dermer and Robinson, 1989; Gerboth, 1987).
A second branch of studies in the special interest group tradition studies the
capabilities of the FASB to manage the exertion of political influence. In
economic terms, this has been described as the “supply” of standards that
corresponds to the aforementioned demand (e.g. Johnson and Messier, 1982;
Watts and Zimmerman, 1979). How this is accomplished varies greatly in the
literature from the pursuit of implicit negotiation in relatively reactive modes
focusing on political astuteness and marketing skills (Horngren, 1973; 1976) to
more proactive strategic alignment and economic consequence imposition
(Bryant and Mahaney, 1981; Haring, 1979). Key resources brought to bear by the
FASB in political management include inclusive procedures (see Miller and
Redding, 1988), consensus building in advance of initiating action (Johnson and
Solomons, 1984) and conceptual frameworks (Hines, 1989a). The process of
political management is itself tempered by the need for the appearance of an
independent and objective pursuit of the public interest, as well as by
AAAJ intellectual discipline and the bona fide constraints of interpersonal agreement
7,4 about “good accounting” (Gerboth, 1987).
Although most would agree that the existence of special interests in the
standard setting process requires a standard setting entity that is responsive
but not subservient and that offers more responses than solutions, the role of the
FASB is not settled. Whereas Hussein and Ketz (1991) argue that the FASB is
28 not a participant as much as a resolution facilitator, Fogarty (1992) suggests
that the FASB’s legitimacy agenda removes self-interested advocacy to a
secondary role. This disagreement reflects the limitation of all studies in this
classification. Although they recognize the parties to standard setting conflict,
these articles fail to specify the processional elements of this political action.
The third classification of studies pertaining to politics in standard setting
attempt to broaden the conceptual limitations of this research. By casting a

wider theoretical structure, these studies subsume work in the first two
categories and lay the groundwork for better understanding of the political.
Several studies extend the logic that the demise of conventional theory will
offer new perspectives on standard setting. Hines (1989b) shows that the belief
by standard setters in an unproblematic economic reality creates an apparatus
of power that provides the process of standard setting with flexibility to
accomplish many implicit goals. O’Leary (1985) focuses more on the
underdetermination of accounting theory and agenda control to present a
milieu of politics based on the periodic and strategic suspension and
falsification. These studies may also be thought to cumulate into the humorous
but telling insights in Hines (1988).
Other pieces in the literature build more on the self-interested category
above. For example, Laughlin and Puxty (1983) expand the typical idea of
special interests into a framework of worldviews. This questions the episodic
coalition tendencies of the literature and contributes a fresh perspective on
“user needs” as political ammunition. Although not specifically addressed to
financial standard setting, Burchell et al. (1980) serves as a reminder to avoid
oversimplifications of the intertwinement between accounting and
sociopolitical forces. This study suggests that the causal assumption that these
forces create accounting regulation should not be made without a consideration
of the converse. Cooper and Sherer (1984), in arguing for a political economy of
accounting, contribute the need to be always aware of distributional
consequences. They also construct a theoretical model of financial accounting
that is designed purposefully to avoid economic reductionism. Finally, Hope
and Gray (1982), in the examination of standard setting episode in the UK,
assert that the study of politics in this context requires a theoretical conception
of power as a omnipresent, unifying force.
These studies come closest to a specification of the political. Although they
point to different aspects and outcomes of the process, they collectively provide
materials to build upon. However, none of the studies in this section specifically
address the FASB and its unique institutional setting. Nonetheless, they offer
the beginnings of treatments less disposed towards the idea that political Political Aspects
standard setting is either transparently evil or an unknowable black box. of Financial
Accounting
Politics in Standard Setting: Some Initial Ideas
Recognizing that accounting is political is tantamount to acknowledging
disparate, conflicting interests among participants. A necessary further step is
to anticipate that those interests will have some impact on the output of the 29
standard setting process. The recognition of differing preferences among
participants tends to obscure the more important issues about who wins and
who does not, about how winning is accomplished and about how losers
accommodate themselves to defeat. Schattschneider (1975, pp. 1-19) offers one
avenue of more direct study by portraying how “winners” tend to renew their
support for the solution process, whereas “losers” advocate its reform and
reconstitution.
In the present context, winning and losing entities are sometimes difficult to
identify, due partially to the diversity of participants and the heterogeneous
uses of accounting information. However, this difficulty does not gainsay that
more attention should be given to allocation consequences, the relationship
between advocacy and result, and the process of consensus building. Disputes
over “good accounting” and accounting progress are rather incapable of
offering progress in those directions. As long as these other constructs garner
most of the attention, politics is marginalized and treated as a perversion. In an
equally credible view, “the political” is the appropriate and necessary milieu for
resolution of matters, such as accounting, that are not characterized by
indisputable fact and unanimous preference. Given scarce resources, conflict is
as inevitable in the setting of accounting standards as it is in deciding the
proper use of public monies. However viable the societal mechanisms for its
management, conflict’s omnipresent nature should not be suppressed.
For political resolution in standard setting not to become akin to “horse
trading” (Gerboth, 1987), it has to be achieved within theoretical and empirical
foundations. Despite its notable shortcomings, accounting theory is capable of
guiding standard setting and is likely to be the most important force in those
instances where standard setting action escapes attention and notoriety (Zeff,
1974). This tends to preclude certain resolutions notwithstanding political
pressures. However, Hendriksen and Van Breda (1992, p. 255) believe that even
technical issues are embedded in the political process since, following
exhaustion of technical processes, dissatisfied users possess rights to political
remedies. In a business community increasingly sensitized to the importance of
accounting to reporting results (e.g. Loomis, 1988), instances of theoretical
determinism decline in number. Standards on leasing (SFAS 13), on
restructuring of troubled debt (SFAS 15) and on pensions (SFAS 87) are
examples of standards where lobbying overwhelmed theoretical and conceptual
considerations (Wyatt, 1989).
In summary, there appears to be great confusion about the role of politics in
accounting standard setting despite broad tacit awareness that the process is
AAAJ “political”. Although some writers see the action agenda that this situation calls
7,4 forth as one of keeping the Government at bay by gainsaying economic
consequences, this article suggests that the milieu of politics in standard setting
must be more squarely embraced.
New Dimensions for Understanding FASB and Its Actions

30 The above discussion suggests that conventional approaches and categories are
insufficient for understanding accounting standard setting. A new set of
concepts need to be made more salient if the division between manifest and
latent political process is to be, if not narrowed, at least laid bare.
If accounting standard setting is political, in the full sense of the term
outlined above, power must be appreciated as a means to provide some
predictability of outcome possibilities when preferences are antagonistic. But a

consideration of power should not be limited to the power of the constituent
groups to influence the FASB. Instead, an inquiry into the extent and source of
the power of the FASB is also necessary. A second important concept in
understanding the political process is ideology. Ideology is a construct that
attempts to investigate less obvious aspects of why different preferences exist.
This may be helpful when potential gainers and losers cannot be readily
identified. But in order for ideology to have a role in standard setting, it must be
made manifest through the language of persuasion. This terrain necessitates
the study of rhetoric. Although the constructs of power, ideology and rhetoric,
either separately or together, cannot provide a full understanding of the politics
of standard setting, their importance and relevance can be defended as superior
to more conventional analysis. They provide a starting point for understanding
political aspects, rather than simply dropping the analysis after the conclusion
that political action is afoot is reached.
Power: A Problematic Concept

Parsons (1963, p. 237) defined power as “the generalized capacity to secure the
performance of binding obligations”. Weber (1968) added to the concept the
necessity of overcoming the resistance of another. However intuitive these
statements may be, power as a social-psychological concept involves a lack of
consensus on several central issues (see Mooney, 1984). That power is a
relationship rather than a characteristic, that power can assume a variety of
forms, and that power is not synonymous with control, are among the few
statements that can be agreed on. Furthermore, future definitional harmony is
unlikely (Hope and Gray, 1982; Parsons, 1963). The proliferation of topologies of
power (see Kalbers, 1989, Chapter 6) has obscured as much as enlightened the
construct. A tendency for power to be unobserved in its overlay with
consequential actions (Farrell and Peterson, 1982) also hampers its use. In such
circumstances, a grounded approach that allows a certain degree of richness of
explanation, even at the expense of parsimonious closure, would seem
appropriate (see Hope and Gray, 1982; Newman, 1981a; 1981b) for the purpose
of arguing that power is a construct worthy of more systematic inquiry in the Political Aspects
context of accounting standard setting. of Financial
The theoretical nature of power seems highly consistent with the nature of Accounting
standard setting. Power and standard setting are multi-dimensional, allowing
for numerous tradeoffs and overall results that are not necessarily zero sum
(Hussein and Ketz, 1991; Parsons, 1963). Winning and losing are matters of
interpretation and are highly influenced by the interpretive time frame adopted 31
(Amershi et al., 1982). Exercising power and influencing standards involves a
mobilization of resources (Miller, 1991; Pfeffer, 1981, Chapter 5). Payoffs exist for
winners (Sutton, 1984) and coalition formation is an essential technique (Moody
and Flesher, 1986; Newman, 1981a; 1981b). While specific instances of the
exercise of power will vary in their methods and results, the concern with power
requires treatments beyond the consideration of benign intentions, expertise

and authority. In the rest of this section three conceptions of power are offered
as viable frameworks for these purposes.
Exchange and Dependency

Some perceive dependency to be the central feature of power. Those dependent
upon others are inclined to accept the influence of others as a precondition for
the acquisition of the deficient object (Pfeffer, 1981, Chapter 4). Emerson (1962)
predicts that one party’s attempt to gain power over another will be
proportional to the perceived value of the resources controlled, and the relative
scarcity of alternative sources. The FASB is dependent upon its collective
constituents for legitimacy as well as for financial support. Those groups that
can effectively threaten to withhold these resources from the FASB (see USC
Study Group, 1991) may be able to garner power over outcomes. On the other
hand, some groups have not provided these resources and have not
demonstrated a capacity to articulate the conditions of dependency. Since this
perspective translates this scenario to the absence of power, any impact upon
standards could be predicted to be no more than incidental. The ability to create
dependency conditions tilts standard setting in favour of highly organized
entities that are positioned well enough in the social structure to control valued
outcomes for the FASB.
Power in the standard setting process might be usefully conceived as part of
a broader process of inter-organizational exchange. In this perspective,
influence over another is obtained by providing rewards for such an
acquiescence. Baldwin (1978) suggests that such a view is advantageous to
overcoming the misconceptions that power is necessarily asymmetrical,
unilateral, punitive and villainous. This view is not inconsistent with
dependency since there have to be patterned incentives to create and sustain an
exchange relationship. Differential control over resources also necessarily
connotes a structural location (Foa and Foa, 1976). This conception advocates
the examination of the relationship between different sectors of the economy
that engage in exchange through FASB action. If the FASB conforms to the
AAAJ survival tactics of agencies dependent upon constituent support, it must act to
7,4 keep these parties “optimally disgruntled” (Wilson, 1980, p. 361), in recognition
of their respective power in the exchange between each other. “Economic
consequences” becomes the currency that helps quantify the exchange that is
organized around the road set out by ‘“due process”.
Questions beyond the theoretical nature of power typically centre around its
32 distribution. The pluralism model of power suggests a broad distribution,
whereas élitist models describe more narrow distributions. If the realistic ability
to influence the FASB exists widely on both a within and between group basis,
the process is well described by the pluralistic official mission statement and its
official proponents. An élitist model would be able to pinpoint a cluster of key
participants whose positions carry more influence than others. Bachrach and
Baratz (1970) argue that the pluralism model equates potential power with
actual power. They suggest that actual power is marked by a severe
concentration of power in favour of the proponents of the status quo. Evidence
for an elitist model in accounting standard setting would begin with the narrow
bands of actual “due process” involvement, overlooking potential involvement.
Massive “economic consequences” assertable by larger organizations would
also systematically skew standard setting towards these entities in élitist
conceptions. This is not necessarily controverted by findings that predictable
voting blocs do not always form (Brown, 1981; Moody and Flesher, 1986).
A larger question is what standard should be used to support the conclusion
that an act of power has occurred. The requirement of overt displays may miss
real power behind the scenes. However, implicit power presents measurement
problems that some would argue involve unavoidable leaps of faith.
Consistently, overt conceptions show that the exercise of power is nearly
random (Hussein and Ketz, 1980) whereas covert conceptions imply that power
is much more omnipresent than conventional research methods are capable of
observing (Hope and Gray, 1982). There is much to be said for the latter
approach since it recognizes the selectivity of action, the expectational basis of
interaction, and the possibilities for agenda and consciousness control
(Bachrach and Baratz, 1970, pp. 4-9, 39-51; Lukes, 1974, pp. 21-5; O’Leary, 1985;
Parsons, 1963). Brown (1986) conceives of power as occurring in covert as well
as overt ways and as including instances of “co-optation” as well as those of
conflict. These possibilities necessitate a closer examination of the projects that
appear and fail to appear on the FASB’s agenda. Rather than taking positions
on their face, how participants come to favour resolutions and how they
visualize the range of alternatives are issues that would need to be addressed.
However, continued problems of data unavailability, baseline identification and
hypothetical alternatives may limit this research (Wolfinger, 1971). Even so, the
recognition of these possibilities, asserted with the appropriate modesty, and
backed by experimental proxies (e.g. Molm, 1981) would represent progress.
Lukes (1974, p. 47) argued that it is not impossible to adduce indirect evidence
that an apparent case of consensus is imposed rather than genuine.
A Foucauldian Conception Political Aspects
Power, as theorized by Foucault (1979), represents one conception of how power of Financial
may be relevant to accounting standard setting. Since Foucault’s interpretation Accounting
puts power at the heart of how society is constructed, particular instances of its
application are not seen as exceptional events. An application of such an
analysis would centre upon how FASB standard setting became accepted as the
normative definition of proper accounting and the consequences that this 33
acquiescence has had for the definition and sanctioning of deviance. How the
forces that once composed the FASB subsequently became subservient to it
represents a Foucauldian power.
A Foucauldian analysis would also focus the accounting profession and its
role in the development of various discourses that came to define the subjects
that are the targets of the search for knowledge. The FASB cannot be
understood apart from the power implicit within the data accumulation and
irregularity identification that originated accounting technology. The essence
of this analysis is the duality of knowledge and power. The formalization of
knowledge and the acquisition of power are mutual reinforcing phenomena
that, while not causally limited, are pervasive, strategic, intentional and
calculative (Goldstein, 1984; Miller, 1987, Chapter 4).
Despite the lack of any clear “theory” of power in Foucault’s writings, there
are several points of appreciation for FASB standard setting. FASB research can
be thought of as indirectly extending FASB power over its constituents.
Furthermore, related academic research objectifies and perpetuates the implicit
facts of power relations (Hines, 1989a). FASB standards, invoking the
abstractions of accounting classification, extend the monopoly claim of the
profession over the content of information produced by corporations. Each
standard invokes the implicit power that ultimately results in the unconscious
self-regulation of the ruled through the internalization of the discipline of the
accounting standard setting process. Therefore, FASB due process may be
approached as what Foucault calls the universal reign of the normative (1979,
Chapter 6). Additionally, the FASB could be seen as obtaining power through an
examination process, insofar as due process extracts from participants’
knowledge of their economic consequences. In turn, the content of standards
become new objects of knowledge that deepen the purview of those with the
expertise to manipulate them. In sum, an appreciation of Foucault offers new
potential for the identification of open-textured and omnipresent power
relations in accounting standard setting.
A Libertarian Conception
An alternative perspective on power begins with an examination of the
sociopolitical conditions that lead to the formation of the social collective in the
US. Since individuals have been viewed historically as the basic units of that
society, the “natural” and “inalienable” rights claimed for them should be
recognized. Collective bodies, such as government, are formed to enforce these
AAAJ rights through the rule of law and the maintenance of those conditions
7,4 necessary to the removal of obstacles to liberty (Hayek, 1960, Chapter 15;
Hobbes, 1947, pp. 92-105; Locke, 1960, Chapter 3). However, power remains with
the people to form purposes and plans, as does the responsibility to act based on
personal knowledge and moral principles (Hayek, 1960, Chapter 13; Ostrom,
1987, Chapter 1; Siegan, 1980, Chapter 11).
34 The powers of the collective in the USA must be scrutinized closely. Despite
Locke’s keen concern with the need for a strong government to protect and
secure the individual, he was cognizant of the need for limited powers through
the subjugation of statutes to a higher law. Thomas Paine (1942, pp. 17-21)
characterized government as a necessary evil, and expressed a sentiment
that pervaded the design of the US government as a “compound republic” (see
Ostrom, 1987, Chapter 7). Hayek (1960, Chapter 14) distinguished the permissible
governmental function of facilitating order from the suffocating usurpations of
individual liberties implicit in the maintenance of order. In order to constrain
government in its proper role, both formal and informal devices must be in place,
including constitutionalism and willing citizen challenge (Ostrom, 1987, Chapter
3), principled lawmaking (Hayek, 1960, Chapter 9), overlapping responsibilities
(Ostrom, 1987, Chapter 7), and judicial review (Siegan, 1980, Chapter 14).
Governments’ coercive power, especially over individuals’ contractual freedoms,
is very likely to be misapplied and abused, even if exercised in the spirit of
rationality and public betterment (Hayek, 1960, Chapter 1; Siegan, 1980, Chapter
15). In this view, the liberty of individuals must be protected diligently against
the coercion by leaders who become tyrants in exercising their powers beyond
that necessary for the prevention of harm to others.
The premiss that social advance is most possible under conditions of
individual liberty is believed based on the essentially unconscious nature of
social evolution and progress (see Hayek, 1952, Chapter 9). In an unregulated
market, wherein each person is given freedom to formulate both means and
ends, the human condition is enhanced. No single criterion of merit exists nor
does any particular definition of success. Only in the resulting proliferation of
trial and error lies the route to fullest human development. However, the
collective has interrupted and suspended this marketplace with regulation and
the imposition of governmental monopolies (Hayek, 1960, Chapter 16; Siegan,
1980, Chapter 6). “Planning” is seen as a rational substitute for the market (see
Dahl and Lindblom, 1953, Chapter 1), which may erroneously take pride in
precluding opportunities for failure and meting out limited freedom as “needed”
(Hayek, 1960, Chapter 6). At its essence, the belief that a mastermind can and
should control the course of its own development (Hayek, 1952, Chapter 10)
dictates great reductions in individual liberties.
Governmental coercion in the USA often utilizes the principle of majority rule
to justify its righteousness. This precept, however, may create excessive
potential domination by certain factions and leaves the enslavement of the
individual in its wake (Ostrom, 1987, Chapter 5). The potential tyranny of the
majority in a democracy is precipitously and eloquently described by Alexis de Political Aspects
Tocqueville (1945, Chapter 4), who argued that when equality is valued over of Financial
freedom, people are gradually prepared for their loss of free agency to Accounting
government. In numerous ways, the “empty phantom” of public opinion chills
innovation and weakens the intellect. The governmental manipulation of these
tendencies produces a very subtle denial of liberty (Paine, 1942, pp. 21-3).
However, the prerogatives of majority rule tend to be based on fictitious 35
homogeneity and fleeting conditions, and are likely to lead to inflexibility,
unwanted results, and the increased coercion of both political losers and winners
(Hayek, 1960, Chapter 7).
This intellectual tradition applies to accounting standard setting in several
ways. The delegation of regulatory power to the FASB violates the spirit of the
concentric power of the compound republic (see Ostrom, 1987, Chapter 8) and
may be an unconstitutionally extensive use of control over commercial speech
(see Committe, 1990; Johnson, 1981). Not only does this delegation heighten the
coercion of individuals in its effects. It also removes regulation from whatever
protection existed in the democratic control over elected officials (see Committe,
1990; Siegan, 1980, Chapter 13). Even worse than the delegation itself is the lack
of a substantive judicial review for accounting standards. External review of
FASB action is justified by the need for political restraint, the desirability of
social change and the need to establish a presumptive burden against
administrative coercion.
The increasing specificity of FASB pronouncements (see Previts, 1991), as
well as the more discrete transition from guideline to mandate, may be part of a
more general move away from a rule of law that would meaningfully constrain
administrative action (Hayek, 1960, Chapter 16). Not only does this deepen the
departure from individual liberty, it also makes the societal accumulation of
knowledge that benefits all, less likely. The demand that everything in
accounting be controlled may denote ignorance of how these social forces must
operate (Hayek, 1952, Chapter 8). As applied to due process, the singularity of the
FASB as an authority is likely to prevent the proper articulation of interests
(Ostrom, 1987, Chapter 7). This may be due to narrowness of constituent
interests (Siegan, 1980, Chapter 10) and the construction of knowledge as
ammunition in such a context (Lindblom and Cohen, 1979, Chapter 15).
Accounting standard setting may presume more power than it is entitled to by
failing to recognize the looseness of the nexus between value and merit, the
difference between facts and models, and the relative contribution of action and
ideas. For these purposes, the FASB’s Achilles’s heel may include its mandate for
cost benefit analysis that is subject to speculative definition, evanescent
conditions, and the presumption of omniscience. Accounting standards that
idiosyncratically embrace contractual freedom may produce unintended wealth
redistributions, and sometimes work more harm than good on US society. To the
extent that the FASB serves as a model for accounting regulation in other
countries, the damage may not be limited to those boundaries.
AAAJ The Role of Ideology
7,4 The role of ideology in accounting regulation has been mostly ignored despite
its potential to provide a more systematic appreciation of the standard setting
process. Generally defined as an organized set of fundamental beliefs that vary
across groups, ideology would include the tendency to advocate different
regulatory solutions on a somewhat predictable basis. The existence of
36 ideological differences among groups envisions the mobilization of political
influence to reproduce or transform the nature of accounting in accordance with
varying perceptions of how things should work. Ideologies are versions of
reality that are based on unshakeable presumptions that are not uniformly held,
thereby engaging those that hold them into conflict. This process can be
expected to use facts selectively and purposefully (Buckley, 1978) and to have
espousals vary with actualities when such is advantageous (Enz, 1988).

Unfortunately, like terms such as “power” and “politics”, “ideology” has
unnecessarily pejorative connotations that have tended to limit its use.
Ideologies differ by virtue of the structure of social relations within and
through which they are formulated and legitimated (Willmott, 1984). As such,
they bear a systematic relationship with self-interest, as perceived by parties.
Accounting, as an activity whose current existence is highly dependent on
corporate patronage and state-defined needs and customers, produces
ideologies that pattern various structural positions within this social edifice.
Continued exposure and consistent affiliations perpetuate an interested party’s
ideological position. Ideology implies a genuine inability to appreciate
inconsistent positions, rather than a purposeful strategy of deceit.
The consideration of ideology within standard setting is similar to the
recognition of cultural relativity in accounting systems. Like ideologies,
cultures produce group values as their principal measurable product (Soeters
and Schreuder, 1988). Just as culture shapes accounting forms (Violet, 1983a),
the objectives sought by participants in accounting standard setting episodes
are ideologically organized. Accounting must also reflect basic postulates of
culture (Violet, 1983b). Likewise, standard setting can be understood in terms of
the ideologies of participants. Part of this may include varying degrees of
acceptance for the preference of judgement over strict compliance and of
secrecy over full disclosure (Perera, 1989).
Laughlin and Puxty (1983) provide the most sustained consideration of
ideology as a means of understanding standard setting. Acknowledging the
political realm, they introduce the concept of “world view” as a systematic
socially constructed approach that parties bring to the standard setting task.
They contrast the two a priori world views of users and producers in this
process. However, this analysis is somewhat limited by the official endorsement
of the user perspective (FASB, 1990) and by the lack of any meaningful user
input. The user perspective, rather than a true ideology, may be an ideological
ammunition for all parties including the FASB. Therefore, the user-producer
schism also may act to obscure more important ideologies among producers Political Aspects
that would help to interpret standard setting. of Financial
One obvious approach is to separate producers according to the size of their Accounting
organizations. Watts and Zimmerman (1978) provide evidence that suggests
that interests in the standard setting process differ as a function of size. Even if
“political” costs of visibility exist, as those authors suggest, the homogeneity
among producers that it implies is a serious limitation. Also relevant is the 37
possibility that the particular nature of flexibility desired in accounting
methods is a qualitatively different phenomenon for large and small firms
(Mosso, 1985). The persistently lower level of satisfaction with the FASB by
small business (Ronen and Schiff, 1978; Upton and Ostergaard, 1986) has been
interpreted as that group’s alienation from the standard setting process (Seidler,
1978). This sheds new light on the FASB’s rather tepid response to the
standards overload problem that is asserted periodically by small business[6].
In general, such ideological positions would predict that differential power held
by larger organizations would allow their desires to be more firmly imprinted
upon accounting standards. However, large versus small business remains a
rather primitive a priori classification that should be interpreted as a limited first
step toward an appreciation of the role of ideology.
The FASB itself cannot be considered ideologically neutral (see the debate
between Solomons, 1991 and Tinker, 1991). Laughlin and Puxty (1983) assert
that members of the regulatory body develop a user orientation that reflects
genuine beliefs through their socialization as standard setters. This negates
alternative interpretations of any possible self-interest. However, for each
individual, there are unspecified “ideological payoffs” associated with being part
of a successful coalition (Anderson, 1982; Laughlin and Puxty, 1983; Newman,
1982). Beyond this, individuals on the FASB may have ideological positions that
are in various degrees of congruity with other participants. If congruence
translates into perception of power and effectiveness (Enz, 1988), the degree of
consideration each constituent argument receives may be better understood. The
vague method by which positions are converted into standards could facilitate
something other than the ideological blindness currently asserted as the party
line (see Beresford, 1988).
Interpreting the FASB itself as an ideological player is tantamount to
suggesting that the process is likely to be influenced by the overriding ideology
of institutional legitimacy. Arguments by other parties that imply, in their
consequences, a possible lack of adherence to the righteousness of the private
sector standard setting process, transcend the particulars of an issue and
engineer ideological conflict that, ceteris paribus, makes other factors less
salient.
Rhetoric and Validity Claims

Whereas ideology is grounded in the structure and genesis of belief, rhetoric
prioritizes the discourse employed in the process of persuasion. This approach
AAAJ to the nature of politics involves the careful study of language as the medium
7,4 for the communication of validity claims. “Discourse”, defined as a disciplined
means of constituting subjects and relationships (McGee and Lyne, 1987), is a
pervasive element of all scientific reasoning practices because it deals with
what people ought to believe (McCloskey, 1983).
The study of rhetoric implies challenges to the supremacy of the expert. By
38 demanding to authenticate claims to knowledge, the indeterminacy of these
demands is made more visible through subverting the hegemony of the text.
This allows the terms of the exchange between default liberty and the
submission to expert power to become more apparent. Rhetorical inquiries
attempt to see through the words of an argument to detect defects and implicit
premises necessary to its acceptance (see Arrington and Frances, 1989; Klamer,
1987; McCloskey, 1983; Nelson, 1987a). Rhetoric therefore should improve

debate by delineating degrees of persuasiveness, thereby freeing researchers
from preoccupation with tangential pseudo-questions (Nelson, 1987b).
The very nature of rhetorical analysis entails the abandonment of attempts to
reflect reality and to discover certainty. No a priori models for, or tests of,
“truth” in argumentation exist (Nelson, 1987a; 1987b). The distinction between
knowledge and opinion is not made, conflict is embraced as the essential human
activity, and the convergence to a single rational truth is not seen as the
pursuer’s responsibility (Rorty, 1987). Instead, the complex web of relationships
is filtered to produce self-scrutiny, self-improvement and a more successful
means of “talking” that is primarily interpretive and hermeneutical. The
immutability of any first principle in accounting, as well as the compulsion to
establish one, is a myth (see Arrington and Frances, 1989).
Nelson (1987b) examined the special relationship between rhetoric and
political processes. Politics is discourse that occurs primarily through talk.
Therefore, political action forms a natural laboratory for rhetorical inquiry.
This nexus is amplified when the broad sets of intellectual connections that
converge to form current institutional arrangements, and efforts to improve
upon them, are subsumed into the political sphere. Rorty (1987) goes even
further, arguing that what appears to be objective is, in fact, only a consensus.
Insofar as others have explored the special relationship between economics and
rhetoric (e.g. Klamer, 1987; McCloskey, 1983), they have also added to the case
that ties rhetoric to politics.
The method of rhetorical analysis is much too detailed to summarize fairly.
However, some of the elements include the identification of culturally
unchallengeable axioms (Rorty, 1987), illustrating the use of standardless
standards and metaphors (McCloskey, 1983), and examining the significance of
taken-for-granted and context-free assumptions (Klamer, 1987). Nelson (1987b)
provides a more exhaustive account of the techniques involved in this study of
communications.
The application of rhetorical study to accounting standard setting has not
been initiated, despite its intuitive appeal. The statement that standard setting
in the private sector is superior to that in the public sector is never subjected to Political Aspects
analysis. Standard setting involves extensive communication about which little of Financial
is actually known. Very likely, extensive assumptions are being made without Accounting
any explicit rationale. Which aspects of financial reporting the FASB chooses to
enliven and which it suppresses have been greatly underappreciated in a
communicative tradition. The language of standard setting, as well as that of
due process, needs to be assessed in a rhetorical light sensitive to the 39
communication needs of the FASB and its projected audiences[7].
An Alternative Scenario for the Future of Standard Setting

Accounting standard setting could be reorganized in a way that would call
attention to its immutable political nature. Such an alteration would recognize
the indeterminacy of “good accounting”, the distributive consequences of

accounting and the lack of correspondence between desired standard setting
and an undisputable economic reality. By reducing the grandiosity of its claims,
accounting standard setting might better protect itself from devastating
criticism and what White (1991) has called the negative spiral of reduced
authority and effectiveness. By making explicit the pressures and constraints
that now exist in an implicit and disguised form, accounting standard setting
might enhance its legitimacy by better conforming to the precepts of
democratic decision making[8]. Such a change probably would have to weather
a short-run crisis since it entails abandoning the pretence that accounting is
neutral (Tinker, 1991). However, the power inherent in the “ostentatious display
of powerlessness” (Meyer, 1983) should not be jettisoned lightly. Although the
need for user confidence in the short run cannot be ignored, this objective is not
necessarily inconsistent with a greater recognition of the political nature of the
proceedings. Over the longer run, however, the viability of standard setting
might actually be enhanced by a greater approximation of service to a broad
conception of social needs than the needs of what the FASB now calls its
constituency.
Revising accounting standard setting in this direction would lead to a new
openness about the political realities of the process. Appreciating political
motivation, the sources of political power, and the issue-specific formation of
political coalitions could normalize the now problematic place of self-interest.
However, standard setting would have to find a new source of credibility beyond
the current skilful manipulation of the ideal.
A more self-admitted political standard setting would embrace, rather than
deny, the role of economic consequences. If economic impacts were more
rigorously studied, their potential use as instruments of private interests would
be lessened and their role in the furtherance of social policy would be better
understood. Distribution consequences would not be inadvertent but could be
part of a systematic trade-off of efficiency and equity. The framework of
economic incidence proposed by Taylor and Turley (1986) might be one means
of information generation and evaluation consistent with these purposes.
AAAJ A new system of standard setting might be an important part of helping
7,4 accounting information escape the rather tight confines of its current
usefulness and relevance. The gap that now exists between desired information
and provided information (see Elliott, 1991) might be narrowed by the
liberalization of our conception of how standards are set. Recognizing the
political means recognizing the relationship among accounting and
40 macroeconomic fluctuations, corporate governance and various interpretations
of fairness. It is also conceivable that this could lead to progress in accounting
for social performance through the incorporation of transactions now
considered externalities. Breaking the bonds caused by the selective
operationalization of objectivity and history, US accounting standard setting
might be able to produce more than a very rarified type of information if it
embraced, rather than denied, the fact that politics is intertwined in its very
essence.
This alternative future for US standard setting will probably not occur.
The institutionalization of societal expectations around standard setting
suggest that change is difficult to accomplish (Fogarty, 1992). A dramatic
turnaround in the substance of standards is more likely than the alteration of
the process by which the standards are set. However, the legal command
retained by the US Government can unilaterally accomplish a change even of
this magnitude. Such change might be triggered by the leadership role the USA
will want to play in the inevitable internationalization of financial accounting.
Future Research
Whether or not the US financial accounting standard setting is reformed to
allow more explicit treatment of power, ideology and rhetoric, this article
recommends a new agenda for accounting research. First, there is a need for
research on the role of power on the standard setting by researchers within all
the major perspectives because power is brought to bear on the FASB.
Conversely, although poorly understood, power is also manifested in the ability
of the FASB to force participants to reverse their future standard setting
positions. In addition, research into the potential conflict between the role of the
large public accounting firms as the enforcers of accounting standards and their
client service to the preparers community should be explored in a power-based
qualitative assessment.
The study of ideology first requires better historical work on the emergence
of current institutional arrangements. Accounting history must be redirected to
greater sociopolitical relevance for these purposes. The boundaries of the
accounting discipline must become more flexible in such inquiries.
The texts produced by the standard setting process (e.g. exposure drafts,
final standards, advocacy letters, etc.) require greater examinations in the
traditions of rhetorical analysis. The research which has been done to date by
conducting primitive counts and classifications, raises more questions than it
answers and has not even exhausted the capabilities of what must be the first
step in content analysis. Finally, more idiographic sensitivity to the meaning of Political Aspects
texts will provide accounting researchers with the opportunity to pursue of Financial
extensive and valuable avenues of research. Accounting
Notes
1. A complete treatment of the US regulatory process would have to consider groups such as
the US Congress, the Securities and Exchange Commission, committees of the American 41
Institute of Certified Public Accountants, the preparer community and several other bodies
in a manner that extends beyond their interaction with the FASB.
2. Recent US examples include standards pertaining to computer software development
(SFAS 86), pension accounting (SFAS 87) and post-retirement non-pension employee
benefit accounting (SFAS 106).
3. Zeff (1978, p. 56) defined economic consequences as “the impact of accounting reports on
the decision-making behaviour of business, government, unions, investors, and creditors”.

While decision making is important, other economic questions could form a broader notion
of economic consequences. To what extent is accounting implicated in issues of income
distribution? To what extent does accounting help or hinder society’s efficient allocation of
scarce economic resources? Does accounting assist in the process of capital formation?
Do accounting numbers contribute or impair international trade? To what extent does
accounting exacerbate problems of inflation or aid in containing it?
4. The investment tax credit debate of the early 1960s proved to be quite a watershed for
private sector standard setting. The APB advocated one method but, following
Congressional action disallowing the prohibition of the alternative method, reversed its
choice. Similar inconsistency over accounting methods between the APB and the SEC, and
between the FASB and the SEC occurred in the areas of accounting for business
combinations and extractive industry accounting. For a fuller rendition of these conflicts
see Moonitz (1966), Burton (1970, p. 6), Gerboth (1973), Ijiri (1979) and Wolk et al. (1992,
pp. 58-68).
5. Academic writers do not uniformly accept this conclusion. See opposite arguments by
Solomons (1978; 1983; 1986).
6. Despite rather broad recognition that small business may be disproportionately burdened
by the proliferation of accounting standards (i.e. Mosso, 1985; Upton, 1987), actual relief
such as provisions for differential measurement has not been generally implemented.
Committees have been formed (see Upton and Ostergaard, 1986), and the problem for the
FASB seems to have been deflected, insofar as less attention to it has appeared recently in
the literature.
7. Since the accounting literature is a primary vehicle for understanding financial accounting
standard setting, it also requires a rhetorical assessment. For a more detailed introduction
see Arrington and Schweiker (1992).
8. It would be revealing to furnish a discussion of the debates within the FASB and to indicate
how compromises were made in order to reach consensus. It may even be more telling if the
FASB would display its evaluations of comments made to it. One place where the FASB can
disclose such information is in the section in the SFAS entitled “Basis for Conclusions”,
which now is mostly limited to commentary on technical details.
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