It is the rare academic article that explicitly considers the objective function of the regulator.  William Bratton is a law professor from Georgetown who takes exactly this focus, and will joins us at the FASRI Roundtable on Wednesday, October 14th at 11am ET to lead us through the thicket of political pressures and machinations that gave us the FASB we now have.

The discussion will be based on Bratton’s paper, “Private Standards, Public Governance: A New Look at the Financial Accounting Standards Board“, For me, the paper brought three new insights, all helpfully spelled out in the abstract.  First, the founders of the FASB made a very high-level choice on what their objective function would be:

The FASB’s founders made a strategic choice between two models of a public regulatory agency, the New Deal model of an independent expert and the post-war pluralist model of a politically responsive regulator. They opted for the New Deal model, structuring the FASB to emphasize independence.

The paper then emphasizes just how dramatically the Conceptual Framework dramatically tilted the playing field toward users, and provided a defense against political pressures from auditors and preparers:

Because the New Deal model calls for a normative goal to channel the agency’s exercise of discretion, they also undertook to set out a coherent theory of accounting, the “Conceptual Framework,” to contain and direct the FASB’s decisions and thereby import legitimacy. The Conceptual Framework, however, neither determined nor justified the FASB’s subsequent decisions. It nonetheless contributed to the FASB’s institutional success by disavowing a neutral posture respecting the conflicting interests of the FASB’s leading constituents, explicitly privileging the interests of the users of financial reports (investors and market intermediaries) over the interests of the reports’ preparers (large firms and their managers).

Finally, Bratton spells out the benefits of the Conceptual Framework, which in his eyes are political, more than anything.

The FASB’s consistent adherence to this repudiation of pluralist responsiveness has had three results. First, it made the FASB’s general approach defensible as a matter of economic theory. Second, it triggered political opposition from the preparers that muted allegations of capture even as it resulted in occasional political reversals. Third, it aligned the FASB’s institutional mission with that of the SEC, its public overseer, importing institutional stability if not political invulnerability.

The paper contains a great history of the FASB, but I am sure our discussion will focus more on the present day — with particular emphasis on how this political understanding might inform new research studies.  When is the last time someone has seriously analyzed comment letters, voting decisions, or other data that might shed light on the political environment in which FASB operates? It would be great to see more of this.  (And as editor of Accounting, Organizations and Society, let me encourage everyone to send such papers my way!)