Constituent support and preparer compliance are importan t features of public accountability (Section 3.5). The level of compliance with professional accounting rules and standards is influenced by two important aspects: the enforceability of those standards and their acceptability to preparers and stakeholder groups (Masel 1983, p.542; Stamp 1 979, p.2 l ). Accounting rules and standards which are not generally accepted and do not have strong enforcement capabilities are unlikely to generate the nature of information sought by their makers because of low levels of compliance. Failure to understand the powers and reactions of various interest groups may lead to non-acceptance of the accounting standard (Mathews & Perera, 199 1 , p. 1 05). The degree that an accounting promulgation acquires and maintains political support can thus be crucial (Borngren, 1 973, p.65).
4.6.1 Politics of standard setting
It is considered that as part of the due process procedures the political nature of standard setting should be acknowledged and accepted (Section 2.4. 1 .2). Support will be higher when constituents feel that their views are heard by the standard setting body (Tower & Perera, 1 989, p.2 1).
It was originally thought that accounting rules were nonpolitical (Solomons, 1978, p.65). Hope & Gray ( 1 982, p.53 1 ) believe, however, that the lack of clear guidelines and a conceptual framework, and the potential economic consequences of these rules virtually guarantee all accounting standards have some element of controversy. Zeff ( 1978, p.56) discusses the increasing trend of outside forces participating in the accou nting rule-making process. H e reasons this was because of economic consequences 7 which he defines as the "impact of accounting reports on the decision making behavior of business, government, unions, investors and creditors" ( 1978, p.56). Lev ( 1 988, p. 1 6) criticises much of the economic consequence research for focusing on the economic interests and behaviour of the average investor, whilst ignoring the welfare of the individual.
7 . Since Zeff's ( 1 978) seminal work there have been numerous empirical studies on the economic consequences of financial accounting standards. For example, research has been conducted on: leases (Imhoff & Thomas, 1 988, p.278; Taylor
& Turley, 1 9 8 5 , p . 60); foreign currency (Griffin, 1 982, p.56); extractive industries (Collins, Rozeff, & Dhaliwal, 198 1 , p.63; Deakin, 1989, p. 150; Jain, 1983, p.637; Larcker & Revsine, 1 983, p.7 1 7); and various other accounting issues (Chow, 1983, p.499; Ingram & Chewning, 1 983, p.562; Meek, 1 983, pA0 1 ; Pownall, 1986, p.3 14). These studies tend to accept the neo-classical assumptions of the individual as the welfare maximiser (see for example (Hakansson, 1 98 1 , p.4; Sunder & Haribhakti, 1984, p. 1 66).
63
The political nature of the standard setting process is now widely acknowledged (Hope & Briggs, 1 982, p.83; Horngren, 1 973, p.6 l ; O'Leary, 1 985, pp.96-98).
Hussein & Ketz ( 1 980) consider the term, political, as referring, "to situations involving conflict and an institutional means of resolving the conflict" (p.357). They state that accounting standard setting bodies attempt to regulate the conflict. Gerboth ( 1 973) feels the c hief obstacle for a standard setter is dealing with the conflict between interest groups and argues, "Accountants' value judgements ... will prevail only if the financial community has confidence in the fairness of accounting's rule making tribunal and the procedures it follows in making its rules" (pA79). Thus, it is asserted that acceptance of the standard setting process by the relevant parties is a necessary condition for the success of the accounting standards.
Walker ( 1987, p.283) believes that regulation of accounting has become more closely aligned to a type of interest group politics called neo-corporatism where efforts to secure consensus are achieved through government recognition of interest groups and the granting to those groups of privileged access to the policy making process. Daley & Tranter ( 1 990, p . 1 5 ) acknowledge the political element when they state that decisions should be based on a hierarchy of desirable social effects. As Gerboth (1973) argues,
. . . a politicalization of accounting rule-making was not only i n evitable, b u t j u st. In a society committed to democratic legitimization of authority, only politically responsive institutions have the right to command others to obey their rules. To remove that kind of power from politics is to remove it from the public scrutiny and accountability that are essential to democracy (pA8 1 ).
4.6.2 Lobbying activities
Poli tic al con siderations are regarded as a legitimate component of public accountability, in the accounting standard setting arena these views are usually expressed through lobbying efforts. Lobbying is described by Sutton ( 1984) as the "actions which 'interested parties' take to influence the rule-making body" (p.8 1 ). S tudies examining lobbying influence implicitly accept the political nature of accounting (Gerboth, 1 973, pA80).
Because of its political nature accounting issues can be decided by voting rule (May
& Sundem, 1976, p.750). Sutton ( 1 984, p. 83) observes that Down ' s voting model is readily transposed to a lobbying8 context. Downs ( 1 957, p. 1 38) argues that the 8. Sutton ( 1 984, pp. 84-85) lists the major differences between lobbying and
rational individual will vote only if the perceived benefits from voting exceed the costs in that the voter will take account of the likelihood that his/her decision to vote will sway the outcome. As Downs (1957, p.141) points out, it is the size of the potential gain from shaping government policy that turns voters into influencers (also see Sutton, 1984, p.83) . Consequently, an important explanation for the lack of stakeholder input within the accounting standard setting process is offered. Stakeholders, given very limited access and power, do not usually participate because they judge the likelihood of changing the standard setters perceptions very small. A rearrangement of regulatory structures is needed to ensure greater stakeholder participation.
Morris (1986, p.46) states that lobbying of accounting standards may take different forms : financial, media interest, oral or written submissions. It is, however, very difficult to detect all forms of evidence in this area since there is a strong probability that written submissions are only a part of the process of influence (Hope & Gray, 1982, p.553). Currie, Robinson & Walker (1987, p.1) note the likelihood of informal and oral submissions influencing the process.
Feroz (1987, pp.8-9) observes that lobbying efforts are expensive involving both time and effort outputs . He draws three implications from this: 1) costs will limit the number of lobbyers, 2) only those who expect large benefits will lobby and 3) a group is more likely to lobby on provisions specific to the industry in which it operates (p.9) . Sutton (198 4, p.86) believes that preparers of financial statements have a greater incentive to lobby than stakeholders since their homogeneous interests makes it easier for them to form temporary lobbying organisations. Currie et al. (1987, p.21) maintains that non-participation is (at least in part) explained by ignorance9 either of the proposals, or of their implications. Another reason for stakeholder non participation is the small expectation of having a. consequential impact upon the process.
9. Thus the importance of educating the public, as to the impact of accounting standards and modes of expressing their opinions, is highlighted.
Morris (1986, pA8) emphasises an important implication of research critiques in this area: lobbyers seem to differ systematically from non-lobbyers, therefore, standard setters 1 0 are receiving a biased s ample of opinion. Yet, conventional Anglo American accounting standard setting procedures place great emphasis on lobbying activity through the exposure draft process indicating a flaw in their contemporary due process procedures.
4.6.3 Dynamic nature of regulation
Rules and rule-making bodies evolve and change over time (Mimick, 1 980, p.3 1 ). Nevertheless, a frequent criticism is that many researchers treat the regulatory body as a neutral, static, black box (p. 1 20). Hopwood ( 1 990, p. 84) observes that accounting institutions are concerned with both the immediate problems of regulation of accounting and the longer-term issue of who regulates accounting.
The regulatory changes and adjustments are highlighted in Bernstein's classical 1955 work in describing the life cycle of a regulatory commission. This life cycle is in effect a theory of decay. Bernstein's regulatory bodies, as detailed in Figure 4.1 , has four phases: gestation, youth, maturity and old age.
The dynamic nature of regulation is highlighted in Figure 4. 1 . Regulatory forms, in confonnity with a public accountability perspective, exist in the wider environment
and are subject to changes and adjustments from time to time in response to changing conditions and circumstances.
Davis & Menon ' s ( 1 987, p. 1 96) case study of the American Cost Accounting Standards Board (CASB) provides evidence for the Bernstein model. They believe
1 0. There have been numerous lobbying studies on the issue of interest group domination in the accoun ting s tandard setting process (see for example Coombes, 1 983, chaps 5-6; Coombes & Stokes, 1985, pA l ; Haring, 1 979, pp.5 1 4-5 1 5 ; Hussein & Ketz, 1 980, p.363 ; Hussein & Ketz, 1 99 1 , p.70; Newman, 198 1 a, p.26 1 ; Newman, 198 1 b, p. 140; Puro, 1 984, p.645; Rockness
& Nikolai, 1 977, p. 1 67 ; Selto & Grove, 1982, p.680; Selto & Grove, 1983, p.622). Currie et al. ( 1 987, pp.8- 10) and Hope ( 1 985, p.5) offer important critiques of research in this area when they state that the research conclusions are drawn from a limited component of the process (i.e. submissions to exposure drafts) and note the tendency to overly generalise conclusions. Studies have also examined the variables that could predict lobbying efforts (Francis, 1 987, p.52; Kelly, 1 985, pp.629-630). However, Griffin ( 1 983, pp. 1 36- 1 37) found that many variables such as size, return and leverage were only marginally better at predicting lobbying activity than a random model. Amershi, Demski & Wolfson ( 1 982, p.20), in a general critique, considers that much of the research in these areas focuses on single-item or single-period therein missing possible important gaming strategies.
that the absence of a strong constituent group for the CASB was a major feature of the demise of this regulatory body and argue that,
Changes in the sociopolitical environment in the late 1 970s altered the incentives of elected officials, encouraging them to dismantle agencies or reduce their regulatory ambit.. .. In the new regulatory
environment, an agency that lacks a strong supportive constituency is likely to have to fight hard to retain its funding and survive ( 1987, p. 197).
FIGURE 4.1
Gestation
B ERNSTE IN ' S ( 1955) LIFE CYCLE OF REGULATORY BODIES
The conception of a regulatory body is often sparked by a crisis. The struggle to establish the regulatory institution usually leads to a compromise solution about the eventual make-up. Short-tenn simplistic solutions are sought.
Youth
Vigorous, crusading attitude is exhibited. The body encou nters well organized resistance from the regulated industry. The regulated industry begins to influence the regulatory body.
Maturity
The regulatory body is less active as it now relies on precedence and routine. It loses support from the legislature and becomes captive to the regulated industry.
Old Age
Staff and management declines. Maintenance of the status quo is a high priority and the regulatory body i s unwilling to adapt to changing needs. It now protects the regulated industry. The legislature is now unwilling to maintain funding.
Scandal, crisis or emergency can once again trigger a drive for a strong regulatory mechanism and hence the cycle may repeat itself.
Source: Adapted from Mitnick ( 1 980, p.46).
As emphasised by Bernstein ( 1 955), changes in regulatory mechanisms are usually caused by a perceived crisis. This crisis theme is applicable to accounting (see for example Rahman, 1 9 8 8 , p.99; Wells, 1 978, p. 1 6). Kirk, the past FASB Chairman, describes this element,
The extent of standard setting w ill depend on the economic en vironment-turbulent times will demand more standards than stable times. Without economic stability, government intervention is likely to increase. Instability encourages regulation of economic
Hope & B riggs ( 1982) argue that " ... the survival of the policy making body must rest ultimately on public confidence in its standard-setting procedures, a process is needed which is seen to be open and fair by interest groups" (p. 95). The importance of constituent support is consequently deemed crucial to the survival of the regulatory institution, without it new institutions may be instituted 1 1 .
4.7 REGULATORY ARRANGEMENTS
As emphasised above, broad representation of the stakeholder and preparer groups on the standard setting body would provide a strong constituent group base for its activities. This would help enhance the level of acceptability accorded to the standards by those groups, and therein improve public accountability. As Horngren ( 1 973) states w hen describing the FA SB arrangement, "The key to a successful enterprise is to generate a product that is acceptable to customers" (p.62). A crucial element in this acceptance is how the rule-making body is viewed by its constituents i.e. how equitable and efficient is the process? The accounting regulatory (standard setting) process can be examined in three phases : the design phase, the approval phase and the enforcement phase (Morley, 1 985).
4.7.1 Design phase
The design p hase of developing accounting standards i s important because it effectively sets the agenda for selection and can thus establish priorities. Hope &
Gray ( 1982, p.55 1 ) note the importance of a crucially placed person (i.e. chairperson) in the proces s. Cobb & Elder ( 1 972) discuss three stages in the agenda building process: 1 ) issue creation often arises with regulation via a crisis situation, 2) issue expansion is the stage where support is mobilised to gain access to the deci sion makers' formal agenda, and 3 ) agenda entrance which entails dealing with the ' gatekeepers ' , normally considered the politicians and key bureaucrats. Plott &
Sunder ( 1 98 1 , p. 237) believe that agendas are used to determine (within limits) the choice of a voting group.
Another aspect of accounting standard setting that needs to be considered is adequate fu nding. For example, both the Wheat Committee in America and the Dearing Committee in Britain sought to ensure that adequate funding was available for the standard setting body when they made their recommendations to establish the FASB and ASB respectively. As Zeff ( 1 9 8 8 ) state s, without adequate resources, "the
1 1 . As discussed i n Section 9.3, the accounting regulatory arrangements in New Zealand lack constituent support and are being altered.
quality of the draftin g will be made to depend on the uncertain suppon services likely to be provided by the members ' companies or flrms" (p.20).
The accounting function through corporate reponing is deemed a social construct with an obligation to stakeholders acknowledged within the public accountability perspective. As such, accounting regulation needs to be designed in line with societal expectations. The achievement of this aspiration seems improbable in the current Anglo-American systems which have very little stakeholder input (Section 2.4. 1 .2). Accoun ting professional input i s valuable, but is too narrow to monopolise this process. Overall, i t is considered i n this thesis that the design phase i s most appropriately handled by those most technically competent, albeit with a pluralistic approach garnering input from various interest groups. Adequate funding is also reasoned to be essential.
4.7.2 Approval phase
Plott & Sunder ( 1 98 1 ) point out an imponant paradox: the imponance of having knowledgeable people participate in the standard setting process versus the issue of professional self interest and the potential for interest group capture within the regulatory institution. The dilemma is seen in the need to approve standards which are both technically defensible and politically acceptable (Wyatt, 1 990, p. 87), but the choice of the appropriate body and structure for the approval phase is complex (Parker et a I . , 1 9 8 7 , p . 234). Public accou ntability, encompassing a societal perspective, re quires the a'iri n g of a wide range of opinion s . To ensure the consideration of a myriad of views, the approval body needs to rest outside the accounting profession, possessing signiflcant non-accountant representation.
As discu ssed in C h apter Two the membership of Anglo-Americ an accounting standard setters resides almost exclusively with accountants. Hope & Briggs ( 1 982, p.95) argue that the range of expenise should be widened at the approval stage. They feel this could lead to a higher level of public confidence. As Gerboth (1973) states,
I t is bec a u s e our shortcomings are invariably political that accounting rule-making should not be completely turned over to technicians. Nothing in their training necessarily gives accountants particular competence in political matters, and because of that, they too often ignore politics in favor of those lesser aspects of a problem that are amenable to technical solutions (p.480).
There are several tasks the approval body could be asked to perform. First, it could implement an effective conceptual framework to provide clearer guidance (Parker et aI., 1 987, p.240). Second, this phase could seek to establish more definitively worded
standards for better understandability, enforceability and comparability (Walker, 1986). Third, the decision to allow an approval body the power to amend standards which are submitted for approval rather than have the mere power to accept/reject. As Parker et al., ( 1987, p.24 1 ) discuss, the right to amend is similar to the right to design, yet the failure to possess this a uthority inordinately shifts power to the designers.
Based on the above discussion, it is asserted that important elements be incorporated within the approval function for accounting standards. These elements would include the n eed for: wide non-accountant representation, explicit guidance on ways of fulfilling corporate reporting obligations via a conceptual framework and clearer financial accounting standards, and possessing sufficient structural power (i.e. the ability to amend and revoke as well as approve accounting standards).
4.7.3 Enforcement phase
As detailed in Section 2.4. 1 .3, the current procedures for enforcement in Anglo American countries are inadequate. Zeff ( 1987, p.26), in a historical review, notes the increase in mandatory standards without a consideration of the continuous lack of enforcement. Professional self-regulation i s considered a very weak type of enforcement (Craig, 1984, p.5). Typically in Anglo-American countries (excluding Canada) the accounting profession does not have the authority to ensure that the regulation is complied with since they usually only have disciplinary powers over their own members (parker et al., 1 987, p.233). Two suggestions are offered below to improve this facet of regulation: use of the registration method and more direct government intercession.
New Zealand has adopted a disclosure rule philosophy in the capital markets wherein the government only establishes the broad perimeters. Compliance is enforced via the courts which can often be a slow, cumbersome and expensive procedure (Walker, 1 9 8 5 , p.2). Convictions in a court are made much more difficult by vague and ambiguous language (Parker et al., 1 987, p.239). In contrast, registration procedures where the regulatory agency has the power to unilaterally enforce the rules by refusing registration to the capital markets clearly give the regulatory agencies much
greater authority over companies than do disclosure requirements (p.235).
Enthoven ( 1 985, chap.4) believes that government regulations, because of their coercive nature, are more significant than private sector accounting standards. Craig ( 1 986, p . 1 2) notes a crucial dichotomy: the technical knowledge to set accounting
standards rests with the profession, yet the ultimate power to ensure compliance exists only with the state. As Parker ( 1986, p.4) suggests, the enforcement stage should be given to the entity equipped with the power to enforce, that is the government. Zeff ( 1 9 88) also supports this view when he observes "a government agency is in a much better position to enforce compliance with accounting standards than is the council of a professional accounting body" (p.20).
In summary, an accounting standard setting body should have several important regulatory arrangement features in order to pursue public accountability goals such as equity and efficiency. The design phase should utilise the professions' technical expertise supplemented with input from a broad ran ge of interest groups. The