AAAJ

7,4 Political Aspects of

Financial
24 Accounting Standard
Setting
in the USA
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

Accounting, Auditing &
Accountability Journal, Vol.
7 No. 4, 1994, pp. 24-46.
MCB University Press, 0951-
3574
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 what should happen in any particular episode.
Finally, politics also describes the outcomes or consequences of social
action. Who
achieves what
by virtue of a
mixed co-
operative
competitive
orientation to
action always
merits
development in a milieu of scarce resources. The stability of Political
particular resolution, as well as the impact of resolutions on Aspects
the process also requires consideration. of Financial
Accountin
Politics in Accounting Standard Setting: Previous
Approaches g
FASB leaders have freely admitted the political potential of standard
setting (see Armstrong, 1977; Kirk, 1978; Wyatt, 1986). However, the
recognition that accounting is political does not necessarily result in the 25
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 FASBs 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
26 operation of special interests. The third accepts the first two in
order to 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 Zeffs (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 Political
that examine the lobbying process. FASB standard setting invites Aspects
various forms of constituent participation and therefore there is very
of Financial
little to be said other than to report on the explicit and legitimate
attempts to sway the results (see Hope and Gray, 1982). For these
Accountin
purposes, the tendency to use standard setting episodes as discrete g
units of analysis tends to project the notion that coalitions are
evanescent and results are difficult to generalize. Some studies remove
themselves further from the political action by endeavouring to predict 27
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 lite 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 Puros (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
7,4 interpersonal agreement 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
28 of the FASB is not settled. Whereas Hussein and Ketz (1991) argue that the
FASB is not a participant as much as a resolution facilitator, Fogarty (1992)
suggests that the FASBs 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. OLeary (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 standard setting is either transparently evil or an Aspects
unknowable black box. of Financial
Politics in Standard Setting: Some Initial Ideas Accountin
Recognizing that accounting is political is tantamount to g
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 standard setting process. The 29
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, conflicts
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
7,4 situation calls 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.

30 New Dimensions for Understanding FASB and Its

Actions
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 Political
systematic inquiry in the context of accounting standard Aspects
setting. of Financial
The theoretical nature of power seems highly consistent with the
nature of standard setting. Power and standard setting are multi- Accountin
dimensional, allowing for numerous tradeoffs and overall results that are g
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 (Amershi et al., 31
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 partys 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
7,4 must act to 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.
32 Questions beyond the theoretical nature of power typically centre around
its distribution. The pluralism model of power suggests a broad distribution,
whereas litist 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 litist 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 litist 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; OLeary, 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 FASBs 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
Power, as theorized by Foucault (1979), represents one conception Aspects
of how power may be relevant to accounting standard setting. Since of Financial
Foucaults interpretation puts power at the heart of how society is
constructed, particular instances of its application are not seen as
Accountin
exceptional events. An application of such an analysis would centre g
upon how FASB standard setting became accepted as the normative
definition of proper accounting and the consequences that this
acquiescence has had for the definition and sanctioning of deviance. 33
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 Foucaults 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,
34 Chapter 11).
The powers of the collective in the USA must be scrutinized closely.
Despite Lockes 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 Political
Alexis de Tocqueville (1945, Chapter 4), who argued that when Aspects
equality is valued over freedom, people are gradually prepared for of Financial
their loss of free agency to government. In numerous ways, the
empty phantom of public opinion chills innovation and weakens Accountin
the intellect. The governmental manipulation of these tendencies g
produces a very subtle denial of liberty (Paine, 1942, pp. 21-3).
However, the prerogatives of majority rule tend to be based on
fictitious homogeneity and fleeting conditions, and are likely to lead 35
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 FASBs
Achilless 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
36 predictable basis. The existence of 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 partys 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 Political
among producers that would help to interpret standard Aspects
setting. of Financial
One obvious approach is to separate producers according to the size of
their organizations. Watts and Zimmerman (1978) provide evidence that Accountin
suggests that interests in the standard setting process differ as a function of g
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 possibility that the particular nature of flexibility desired in 37
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 groups alienation from the standard
setting process (Seidler, 1978). This sheds new light on the FASBs 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
7,4 medium 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).
38 The study of rhetoric implies challenges to the supremacy of the expert.
By 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 pursuers 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 Political
subjected to analysis. Standard setting involves extensive Aspects
communication about which little is actually known. Very likely,
of Financial
extensive assumptions are being made without any explicit rationale.
Which aspects of financial reporting the FASB chooses to enliven and
Accountin
which it suppresses have been greatly underappreciated in a g
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 communication needs of the FASB and its projected audiences[7]. 39
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
7,4 helping 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
40 relationship among accounting and 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 Political
the meaning of texts will provide accounting researchers with Aspects
the opportunity to pursue extensive and valuable avenues of of Financial
research.
Accountin
g
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 societys 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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