I really enjoyed the Political Economy roundtable last week hosted by Jeremy Bertomeu and Bob Magee (audio is available if you missed the session).  I am unsure if I understand all of the moving parts in the analytic model, but many of the parts make intuitive sense.  The insight that popular opinion about the quality of accounting seems to move in tandem with business cycles seems consistent with arm chair empirical observation.

I think the authors might be able to benefit from linking their work to prior research.  The first is the Waymire & Basu paper that I mentioned in an earlier post.  That paper considers some very fundamental reasons for why we have accounting and why accounting has evolved in a particular way.  The authors observe that the evolution is not very smooth; significant changes in accounting/financial reporting/auditing seem to occur in the aftermath of crises.   I think the Bertomeu and Magee paper provides some conditions which can lead to the uneven evolution.

In addition, I recently had cause to reexamine some papers on accounting changes.  I found some interesting political economy conclusions in these papers:

Balsam, Haw, & Lilien. “Mandated accounting changes and managerial discretion”, JAE, 1995, 3-29.  Paper examines how and when companies adopted a number of different accounting rules.

“While the primary concern of the FASB is the relevance and reliability of information, the FASB also recognizes that a standard-setting authority must be alert to the economic impact of the standards (Concept No. 2, par. 106).”

“We observe a pattern whereby equity-increasing changes are reported as income while equity-decreasing changes are recorded as adjustments to stockholders’ equity. These findings are consistent with the argument that the FASB, to reduce its political costs, attempts to minimize firms’ costs of implementation.”

As an aside, I found a quote in the paper quite interesting in light of the heavy Congressional pressure on the FASB in recent years: “A former chief accountant of the SEC, John C. Burton, said that a torrent of criticism of the FASB might prompt the accounting profession, Congress, or government regulators to weaken or even replace the rule-making body with a less-independent group (WSJ, 4/6/1993).”

Langer , R. & B. Lev, “The FASB’s Policy of Extended Adoption for New Standards: An Examination of FAS No. 87.”  The Accounting Review, Jul., 1993, 515-533.  Paper examines how and when companies adopted the new (at that time) pension standard.

“The costs of a multiyear adoption period imposed on financial statement users, the absence of compelling evidence supporting the FASB contention that an extended adoption period is needed to alleviate compliance costs, and the existence of pervasive evidence that increasing earnings motivate early adoptions, should, in our opinion, cause the FASB to reconsider its multiyear adoption policy. However, it may be that the FASB’s real reason for granting an extended adoption period is not economic but political, fending off the strong antagonism of major preparer groups to practically every new substantive accounting standard. An evaluation of such a political regulatory motive is beyond the boundaries of this study.”

With the theory of Bertomeu and Magee in hand, maybe some of these conclusions deserve new scrutiny with updated data.