Why (U.S.) politicians actively intervene in accounting regulation
TRR 266 researchers Jannis Bischof and Holger Daske, together with Christoph Sextroh, analyzed public statements of U.S. Congress members to determine the influence of politicians on accounting regulation. They found that almost one-third of the politicians were actively involved in the nitty gritty details of accounting regulation. More importantly, when trying to answer the question why these politicians intervened, the research team was able to identify two main groups: one was motivated by their ideology, the other by their strong connections with industry. The first group intervenes irregularly – mostly when the topic is ‘hot’ – whereas the latter is consistently involved. Bischof and Daske explain this political process of standard-setting below.
Regulation, and especially a technical issue such as financial accounting, is often considered a matter for bureaucrats, not for politicians. In doing so, we tend to neglect that many accounting rules have real economic or social consequences. For example, accounting rules for stock option plans directly affect how companies compensate their management. Similarly, the accounting valuation of bank assets affects regulatory capital. Less restrictive requirements for loss recognition thus reduce the likelihood of bank bailouts.
Reviewing public statements
We systematically reviewed public speeches by all 435 members of the U.S. congress – including television and radio interviews, press releases and speeches – resulting in a rich dataset of statements. We chose to focus on the USA because of the systematic access to the data on congress members’ financial connections. Based on this data we explain why high-ranked politicians were so interested in the supposedly very technical aspects of accounting, instead of leaving this topic to experts. We found that those politicians that intervened could be divided into two distinct groups, one motivated by ideological views on the economic or social consequences of the regulation and the other one driven by their connections to the industry and, ultimately, special interests.
One distinct group of politicians is ideologically motivated and only intervenes in the political debate when the topic receives a fairly high level of public attention, especially in the media. As such, they focus mostly on the economic consequences of the regulation, such as bank bailouts or the restriction of potentially excessive management compensation. These politicians share a strong and homogeneous ideological view on these consequences. For example, we observe that very fiscally conservative Republicans, who strictly oppose government interventions and bank bailouts, are in favor of easing accounting rules that artificially increase banks’ capital. Similarly, we see left-wing liberal democrats, who are committed to limiting management remuneration, arguing for the recognition of all stock option expenses thus making stock option plans less attractive for firms.
Links to industry
A second group of politicians is more continuously involved and exerts greater influence on the technical design of the regulations. They focus less on the economic consequences of regulation and more on technical factors such as the volatility of earnings per share, which relates to the relevance and predictability of profits. This focus makes them come across as being more objective, more factual, in their argumentation. However, we observed that precisely this group has strong links, for example through financial campaign contributions, to affected interest groups. This group of politicians usually takes position on regulations that are in line with economic interests of these groups. For example, those who receive campaign contributions from the financial industry are more likely to advocate accounting rules that help banks avoid loss statements in times of crisis in order to preserve their equity.
Prof. Dr. Jannis Bischof
Jannis Bischof is Professor of Accounting at University of Mannheim. His research addresses the role of disclosure and transparency in the financial sector and other settings, the regulation of financial institutions, and managerial discretion in reporting decisions. His research is published in journals such as Journal of Accounting Research, Journal of Business, Finance & Accounting, or Schmalenbach Business Review. He is Research Associate at the Leibniz Institute für Financial Research (SAFE) and is member of the EFRAG’s Financial Instruments Working Group. He is member of the Editorial Board of several international journals (Accounting and Business Research, Business Research, European Accounting Review, Journal of Business Economics).
Prof. Dr. Holger Daske
Holger Daske is Professor for Accounting and Capital Markets at University of Mannheim. His research interests include capital markets and the intersection of Accounting and Finance. Current work analyzes the economic consequences of the implementation of International Financial Reporting Standards (IFRS) on capital markets worldwide and the impact of firms reporting incentives on actual financial reporting quality. His research is published in leading journals such as the Journal of Accounting Research, the Journal of Business Finance & Accounting, Abacus, Accounting & Business Research and the German Zeitschrift für betriebswirtschaftliche Forschung (ZfbF). Additionally, he is member of the working group “Cash Flow Reporting” of the Schmalenbach-Gesellschaft and member of the IFRS Advisory Council of the IFRS Foundation.
Our research shows that economic interest groups (in the USA) are capable of influencing technical accounting regulation through politicians, thereby asserting their own economic interests. Even though much of what happens in Europe takes place behind closed doors, we do assume that such connections to industry can also be found here. The main lesson learned is that we should not view accounting standard-setting as being isolated from political influence and ideological views on its consequences. Instead we should approach accounting standard-setting as being subject to the same political forces that shape policymaking in other fields.
Our team is currently working on the empirical investigation of corporate risk disclosure behavior and addressing the determinants of voluntary choices as well as firm responses to disclosure regulation.
First, we explored the content of politicians’ statements by means of textual analysis. We linked the political argument embedded in these statements to the politicians’ ideology and special interest connections. In the second step, we use the variation in timing of the political statements and thus the varying role of ideological views on potential economic consequences (bank bailouts and top-management compensation) at the time of these statements. Secondly, we use the cross-sectional variation in politicians’ ideological preferences regarding these economic consequences to disentangle the roles of ideology and special interest in a regression framework.
We study two prominent accounting debates. The first debate concerned fair value accounting during the 2008-2009 financial crisis. It led to the relaxation of the FASB’s fair value accounting rules in April 2009. The second debate addressed the expensing of stock options that firms grant to their employees and happened in 2003-2004, around the FASB’s adoption of SFAS 123.
Read the full article “Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests” by Jannis Bischof, Holger Daske and Christoph J. Sextroh in Journal of Accounting Research. https://doi.org/10.1111/1475-679X.12300
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