The Political Nature of Accounting Standard Setting

Economic incentives associated with accounting principles might motivate an additional element of managerial behavior. The FASB conducts an elaborate due process procedure prior to issuing an accounting standard. This process provides corporate managers an opportunity to lobby the FASB. What underlies their comments to the board? Again, two possibilities exist. The comments may reflect managers’ assessments of which principles generate the most useful financial statement information. Alternatively, their comments may also reflect, perhaps in a disguised way, how the various accounting principles will affect their wealth.

Some observers believe that the FASB has been overly responsive to the latter arguments. Of course, others believe that the FASB is not sufficiently sensitive to the effects its pronouncements have on individual managers or firms. Thus, accounting standards setting is now widely recognized as a political process in which various parties argue for the selection of the accounting principles that further their own selfinterest. Some accountants believe that self-interest arguments have had a negative effect on the usefulness of the information required by some FASB rulings.

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