THE IMPACT ON THE INDEPENDENCE OF ACCOUNTING
REGULATORS OF STRUCTURE, PROCESS AND INPUTS.
R G D A Y
1997
SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF
PHILOSOPHY
AT
UMI Number: U119327
All rights reserved
INFORMATION TO ALL USERS
The quality of this reproduction is dependent upon the quality of the copy submitted.
In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed,
a note will indicate the deletion.
Disscrrlation Publishing
UMI U119327
Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC.
All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code.
ProQuest LLC
789 East Eisenhower Parkway P.O. Box 1346
F
ABSTRACT
The thesis describes a m odel of regulatory independence based on th e
m axim isation of certain characteristics a n d m inim isation of others.
The detailed regulation of accounting in the UK has, since 1970 been
carried o u t in the private sector. The fact that this has b een allow ed to
co n tin u e w ould im ply th at the g o v ern m en t is p rep ared to accept this as
th e status quo, despite the constitutional anom aly of n o n -g o v e rn m e n ta l
rule-m aking. The regulation of accounting is not m erely technical, b u t has
econom ic consequences w hich stretch beyond the capital m arket.
O ne of the m ain justifications for regulatory activity being p erfo rm ed
o u tsid e of governm ent is th at of bringing about in d ep e n d en t action. F ro m
a review of the theory and practice of regulatory agencies, several key
characteristics em erge w hich it is argued, im pact u p o n the in d ep e n d en c e
of agencies. These characteristics m ay be grouped u n d e r th e follow ing
headings: m otives for agency creation, agency tasks, stru ctu re a n d m e th o d
of operating.
In order to exam ine the im pact of these characteristics on agencies tw o
m a in approaches are used, both based u p o n the reg u lato rs an d th e ir
regulatory en v iro n m en t. Firstly general characteristics of acco u n tin g
regulatory bodies are exam ined. Secondly, w here specific processes are
b ein g studied, the d ev elo p m en t of tw o accounting stan d ard s. S ta te m en ts
of Standard A ccounting Practice (SSAP's) 20 and 22 are used.
From these particular cases it em erges th at the regulators a p p ea r to h a v e
b e en influenced in their actions by those com panies w ho w o u ld b e affected
by their p ronouncem ents. The role of the g o v ern m en t in the process is
also significant in th at they appear to attem p t to influence the outcom e of
accounting standards in the sam e w ay as other participants in th e process.
T he m odel th at is developed is th e n com pared w ith general
capture, iron triangle an d agency life-cycle. It is concluded th at th e
m axim isation of the 'in d ep en d en ce m odel' is difficult to achieve, g iv en
ACKNOWLEDGEMENTS
To Emily an d Laura, w ho gave me so m uch help w ith o u t ever know ing it.
I w o u ld like to acknow ledge the guidance an d su p p o rt of Professor
M ichael B rom w ich of the D epartm ent of A ccounting an d Finance at th e
L ondon School of Economics, w ho probably could n o t foresee the lo n g
term n atu re of his su p erv iso r's role at the o u tset of m y research.
Also I w o u ld like to express m y thanks to the staff at the John R ylands
Library, U n iv ersity of M anchester for p ro v id in g m e w ith n u m ero u s files
from the A ccounting Standards C om m ittee A rc h iv e , often at very sh o rt
notice, an d to those colleagues at B o u rn em o u th U niversity w ho listen ed
patiently to m y ideas an d helped m e u n d e rsta n d the intricacies of w o rd
processing.
All o th er efforts and errors represent m y o w n m isconceptions o r
TABLE OF CONTENTS
Page
Abstract 2
A c k n o w le d g e m e n ts 4
Table of Contents 5
List of Tables and Figures 8
Plan o f the Thesis 10
CHAPTER 1 ACCOUNTING REGULATION A N D ITS
E N V IR O N M E N T 12
INTRODUCTIO N 12
THE SIGNIHCANCE OF ACCOUNTING
REGULATION 20
THE CONSTITUTIONAL ENVIRONM ENT 30
SUM M ARY 37
CHAPTER 2 A G E N C Y CLASSIFICATIONS A N D
C H A R A C T E R IS T IC S 38
INTROD UCTIO N 38
DEFINITIONS 39
CLASSIFICATIONS A N D CHARACTERISTICS 40
THE REGULATORY ENVIRONM ENT 52
SUM M ARY 55
CHAPTER 3 M OTIVES FOR A G ENC Y CREATION 57
INTROD UCTIO N 57
CLASSIFICATIONS OF REGULATION 58
EARLY THEORIES OF AGENCIES 61
M ODERN THEORIES 62
FURTHER THEORIES 79
CHAPTER 4 AGENCY TASKS 83
INTRODUCTION
COMPANY LAW AND ACCOUNTING
83
STANDARDS 83
EXPERTISE 86
SERVING THE PUBLIC INTEREST 87
SUMM ARY 93
CHAPTER 5 AGENCY FUNDING A N D PERSONNEL 95
FU N D IN G 95
PERSONNEL 100
SUMM ARY 109
CHAPTER 6 ACCOUNTABILITY 111
INTRODUCTION 111
NEW CONCEPTS OF ACCOUNTABILITY
THE ROLE OF ACCOUNTABILITY IN THE
112
PRINCIPAL-AGENT MODEL 125
SUM M ARY 137
CHAPTER 7 AGENCY OPERATIONS 139
INTRODUCTION 139
THE REGULATORY PROCESS 141
STUDY 1 - SSAP 20 142
STUDY 2 - SSAP 22 151
METHOD OF OPERATIONS 158
CHAPTER 8 THE GOVERNMENT ROLE IN ACCOUNTING
R EG U LA TIO N 164
INTRODUCTION 164
THE STUDY 165
INTERVIEWS W ITH DEPARTMENTS AND
AGENCIES 167
GOVERNMENT AS A USER 180
GOVERNMENT REPLIES TO EXPOSURE DRAFTS 182
THE ACCOUNTING STANDARDS ROLE OF THE DTI 186
SUMM ARY 189
CHAPTER 9 COMPARISONS, SU M M A R Y A N D CONCLUSIONS 192
INTRODUCTION 192
AGENCY CAPTURE 192
ARE ACCOUNTING REGULATORS CAPTURED? 195
THE IRON TRIANGLE 196
LIFE CYCLE THEORIES 198
THEORIES OF LOBBYING 201
INDEPENDENCE REVISITED 204
FURTHER RESEARCH 209
REFLECTIONS 214
References 217
LIST OF TABLES AND FIGURES
Table Page
3.1 Replies to exposure d rafts on foreign exchange
an d goodwill. 68
3.2 The chronological d evelopm ent of SSAP 20. 69
3.3 ASC standards and drafts issued 1977-1983. 70
3.4 CCAB members responding to E D 's 16,21 and 27. 74
4.1 Subjects covered by stan d ard s a n d the law. 84
5.1 F unding structure of the ASC. 97
5.2 F unding structure of the FAF. 99
5.3 Analysis of ASC m em bers 1978-1987. 102
7.1 Com parison of ED 27 a n d SSAP 20. 144
7.2 Categorisation of com m ent letters received on ED 27. 145
7.3 T ranslation m ethod preferences expressed in com m ent
letters. 146
7.4 Profit translation m ethod preferences expressed in
com m ent letters. 146
7.5 Offset preferences expressed in com m ent letters. 147
7.6 Preferences for treatm ent of inter-com pany loans
expressed in com m ent letters. 147
7.7 M ethods of translation u se d 1970-71 and 1978-79. 149
7.8 C om parison of ED 20 a n d SSAP 22. 151
7.9 C ategorisation of com m ent letters received on ED 30. 152
7.10 Preferences expressed in co n u n en t letters for
accounting treatm ent of goodw ill. 153
7.11 Preferences expressed in com m ent letters for p erio d of
am ortisation (years). 153
7.12 Preferences expressed in com m ent letters for treatm en t
of non-purchased goodw ill. 154
7.13 The accounting treatm ent of goodw ill 1968-69, 1975-76
and 1982-83. 156
8.1 A nanlysis of G overnm ent replies to E xposure Drafts
Figure Page
3.1 The reg u latio n of financial rep o rtin g . 58
3.2 International classification of creatio n an d
enforcem ent of accounting rules. 60
PLAN OF THE THESIS
This thesis represents a study into the structures and processes of p riv a te
sector accounting regulation in the UK, concentrating p rim arily on th e
A ccounting Standards Com m ittee. D raw ing on theories m ainly d ev elo p ed
in the contexts of political an d adm inistrative science, it attem pts to
identify those factors w hich im pact u p o n the in d ep en d en ce of p riv a te
sector regulators. Each of the factors identified is tested against e ith e r
p erm an en t characteristics of the regulatory body concerned or exam ples of
incidences of regulatory p ro n o u n cem en ts. The paucity of research in th e
UK on this subject could lead to this thesis being seen as a pilot study,
p o in tin g the w ay to future research on the subject.
C hapter 1 comm ences w ith an in tro d u ctio n to the in stitu tio n a l stru c tu re
of p riv ate sector accounting regulatory bodies in the UK, tracing th e ir
developm ent from 1969 to date. The public policy elem ent of acco u n tin g
regulation is then explained by reference to the econom ic consequences of
accounting. Finally, the chapter looks at the problem of d ecisio n -m ak in g
outside of the State. Characteristics of regulatory agencies are identified in
C hapter 2 from a study of the literatu re on regulatory agencies, m u ch of
w hich em anates from the US. From this study, certain characteristics are
show n to be significant factors w hich m ay im pact on the in d ep en d en ce of
regulatory agencies. Those factors w ill be exam ined in th e follow ing five
chapters w ith a view to indicating their relevance to reg u lato ry
independence.
C hapter 3 takes the first of these characteristics, the m otives for agency
creation and exam ines it in the context of the d ev elo p m en t of tw o UK
A ccounting Standards. C h ap ter 4 takes a sim ilar approach, looking at
agency tasks both in general an d as applied to the sam e tw o A cco u n tin g
Standards. C hapter 5 takes a m ore general approach, looking at fu n d in g
and personnel structures over tim e w ithin each of the three UK
accounting regulatory bodies. The corresponding US bodies are also
included in order to achieve a w id er perspective on these factors. T h e
general approach is continued in C hapter 6 w hich exam ines accountability
as a factor best evidenced th ro u g h general characteristics rath er th a n
specific pronouncem ents.
external influences on accounting standards. As an actor closely in v o lv e d
in the process, the g o v ern m en t's relationship w ith the regulators is
significant. This relationship is exam ined in C h ap ter 8 in o rd er to identify
the influence th at g o v ern m en t m ay have on regulatory outcom es. In th e
final chapter, the findings of this stu d y are th en related to overall th eo ries
of regulatory agency b eh av io u r such as agency capture, agency life cycle
an d iron triangle theories.
My co n tribution to accounting know ledge th ro u g h this study is
sum m arised th ro u g h a reflection on the in d iv id u a l factors and th e ir
applicability to the d ev elo p m en t of a m odel of regulatory in d ep en d en ce.
Finally, areas for fu rth er research into the accounting regulatory process
CHAPTER 1
A C C O U N T IN G REGULATION A N D ITS ENVIRONM ENT
INTRODUCTION
This c h ap ter com m ences by looking at the origins of p riv ate sector
acco u n tin g reg u latio n in the UK, briefly tracing th e in s titu tio n a l
d ev elo p m en ts from 1969 o nw ards an d exam ining the background to these
changes. The significance of the w ork of the regulators is explained by th e
econom ic consequences of accounting, w hereby regulatory decisions affect
m atters of w elfare, b ehaviour and distribution. Because of these effects,
acco u n tin g reg u latio n m ay be seen as a form of public policy-m aking an d
therefore subject to political processes, despite taking place outside th e
public dom ain. The problem s of the exercise of pow er outside of the state
is exam ined in the final section.
In T he B eginning
In the UK, th e first accounting standard w as issued in 1971 by th e
A ccounting S tan d ard s Steering C om m ittee (ASSC). Prior to this, b etw een
1942 an d 1969 a series of tw enty nine recom m endations had been issued by
the In stitu te of C hartered A ccountants in England and W ales (IC A EW )\
Up u n til th a t tim e, the Institute's Council had,
'...stood aloof from its m em bers' accounting and au d itin g activities,
n ev er h a v in g published a booklet of guidance statem ent in the
tech n ical field.' (Zeff 1972 p. 7)
The o rig in of these initial p ro n o u n cem en ts was the Taxation a n d
Financial R elations C om m ittee of the ICAEW, w hich is described by Zeff
(1972) as exceeding its original p u rp o se in seeking an d gaining th e
ap p ro v al of th e C ouncil to draw u p drafts of accounting principles.^
W hilst a d m ittin g th a t no h a rd evidence w as available, he (Zeff) n o ted th a t
^ These were termed Recommendations on Accounting Principles
^ Its' object was to consider matters affecting taxation and the financial relationship of the business community with the Inland Revenue. It was later named the Taxation and
'inform ed observers attest to the effectiveness of the R e co m m e n d a tio n s'
(p. 22). H ow itt (1966) describes how the substance of some of the earliest
R ecom m endations issued u p u n til 1944, found its' way into the report of
the Com m ittee on Com pany Law A m endm ent an d eventually into th e
Com panies Act 1948. There w ere how ever m any critics of the accounting
choices contained w ithin the R ecom m endations (see C ham bers, 1965;
Zeff, 1971), w ith Leach (1981) also noting that they did little to help th e
auditor to persuade his client to use best accounting practice. H ow ever th e
flexibility allow ed in these R ecom m endations w as the price of th e
'w idespread compliance' described by Edw ards (1989 p. 245).^
In addition to the problem of the alternative approaches allow ed by th e
R ecom m endations, these early attem pts at regulation had no m an d a to ry
status, they also took a long tim e to produce and there w as no consultation
w ith interested parties (Taylor & Turley, 1986). The latter tw o p roblem s
w ere a result of the procedures for the d ev elo p m en t of a R ecom m endation w hich m eant that the m atter w as considered by a
com m ittee of the Council (of the ICAEW) and finally by the C ouncil itself,
w hich m eant that;
'By this tim e some 300 chartered accountants m ight have
contributed to the p rep aratio n of the docum ent in one w ay or
a n o th e r'. (Howitt 1966 pp. 103/104)
Despite the existence of a D isciplinary Com m ittee w ith in the ICAEW, th e
lack of a structure for enforcem ent of standards has been com m ented o n
by Sharp (1971), w ho noted that
'..it has been rare indeed for any form of technical lapse (as
opposed to failure to carry out a duty) to be a m atter for disciplinary
procedure' (p. 242)
N otw ithstanding the shortcom ings of the series of R eco m m en d atio n s,
Edw ards (1989) describes the p o pular view of accounting in the m id 1960's
as providing a 'reliable statem ent of a com pany's financial position' (p.
145). In the event, this view tu rn ed out to be short-lived.
The Change
A lth o u g h th e R ecom m endations ap p ear to have been well established and
generally accepted (if not ad h ered to), events were to arise in the latter
p a rt of the 1960's w hich m eant th at a fu n d am en tal change w as to occur.
T aylor an d Turley (1986) describe the GEC-AEI take-over in 1968 as th e
m ajo r catalyst for change, b u t this h a d followed by som e years th e
u n ex p ected collapse of Rolls R azor despite the the professional press
accepting th a t 'The accounts of Rolls R azor Ltd follow m o d e m practice
a n d are m ore inform ative th a n m ost.' (Accountancy, 1964 p. 729).
E lsew here, accounting figures w ere described as relatively tru e ra th e r
th a n absolutely true' (The Econom ist, 1968). The Leasco-Pergam m on affair
in 1969 ag ain b ro u g h t strong criticism of the accounting profession fro m
th e p ress w h o attacked accountants^ reliance on 'integrity an d c o m m o n -
sense, g u id ed by occasional statem ents issued by the v arious p ro fessio n al
in stitu tio n s ' (The Economist, 1969 pp. 43/44). The sam e article c o n tin u e d
by u sin g P erg am m o n as an exam ple of 'the dangerously h it and m iss
m eth o d s by w hich com pany accounts get audited by auditors'.
P ressu re ap p ears to have been grow ing on the ICAEW d u rin g this p erio d
to instigate som e form of change. R enshall (1992) considered a m a jo r
factor b e h in d the creation of the ASSC to be the com plaint to the P resid en t
b y Sir F rank Kearton, the head of C ourtaulds, one of the m ost active of UK
co m p an y acquirers, th at 'his com pany h a d been constantly d isap p o in ted
after an acquisition to find that the biddee's audited accounts w ere n o t to
be relied on.' The open attack in the n atio n al press by Professor S tam p
(The Tim es, 1969), alth o u g h attracting a bitter response from R o n ald
Leach, th e n President of the ICAEW, also served to ferm en t th e
a tm o sp h ere of criticism of accounting.
The final im p etu s for change m ay n o t have been sim ply th e m o u n tin g
p ressu re caused by failures of accounting an d the adverse public criticism ,
b u t the fear of g o v ern m en t in te rv e n tio n in the detailed reg u latio n of
a cco u n tin g (Brom wich, 1981; Taylor & Turley, 1986). Follow ing th e
Pergam m on-L easco affair, this h a d been openly suggested as a possible
cu re '..the accountancy profession w ill seriously have to consider w h e th e r
m o re of its 'best practice' rules sh o u ld n o t be w ritten into th e C o m p an ies
Act' (The Econom ist, 1969 pp. 43/44). The danger of g o v e rn m e n t
served tw o term s on the ASC, totalling 11 years) w ritin g in th e
professional press, felt that, 'had the Institute n o t acted it is probable th a t
legislation w o u ld have been introduced w ith unseem ly h aste' (1971 p.
242)'*. In the event, the Institute did act sw iftly, setting u p the A cco u n tin g
S tandards Steering Com m ittee (ASSC) in D ecem ber 1969.
The First Standard Setters
The ASSC cam e into life w ith the publication of a 'S tatem en t of In ten t o n
A ccounting S tan d ard s in the 1970's', by the C ouncil of the ICAEW (1969).
This S tatem ent included aim s w hich w ere a) to n a rro w the areas of
difference and variety in accounting practice and b) to reco m m en d th e
disclosure of accounting bases and departures from d efinitive standards.
Initially, the ASSC w orked u n d er the u ltim ate au th o rity of the C ouncil of
the ICAEW w hich w as nam ed in its co n stitu tio n as th e go v ern in g body.
This co n stitu tio n rem ained as the basis for all constitutions from 1970 to
1976, am e n d m e n ts being those relating to m em bership. Initially, th e
P resident of th e ICAEW appointed C om m ittee m em bers w ith tw o places
being reserved for Institute of Chartered A ccountants in Scotland (ICAS)
an d Institute of C hartered A ccountants in Irelan d (ICAI) m em bers^. T he
A ssociation of C ertified A ccountants (ACCA) an d the In stitu te of C ost an d
M anagem ent A ccountants (ICMA) joined in 1971, an d the C h artered
Institute of Public Finance an d Accountancy (CIPFA) in 1976.
As a com m ittee of the ICAEW, the ASSC w as served by v a rio u s o th e r
Institute C om m ittees such as the P arliam entary and Law C om m ittee, th e
Technical C o m m ittee an d the Technical an d Research C om m ittee. T h is
w as w ritten into the constitu tio n of the ASSC. N on-accountancy body
m em bers w ere h o w ev er specifically excluded from m em b ersh ip at th a t
tim e.
The First R eform
In 1970, the governing bodies of the professional accounting in stitu tes h a d
form ed the C o n su ltativ e C om m ittee of A ccounting Bodies (CCAB). In
February of 1976, the ASSC was re-constituted as a com m ittee of the CCAB
an d the w ord 'steering' w as dropped from the title. The fundam ental aim s
of the ASC were no different from that of the ASSC and did not alter
th ro u g h o u t it's lifetime. The change was the location of pow er, a lth o u g h
d o m in atio n of the ASC by ICAEW m em bers w as w ritten into the n ew
constitution, w ith 12 m em bers (including the C hairm an) n o m in ated o u t
of a total of 23, the rem ainder being divided betw een the other CCAB
m em ber bodies. The reliance on ICAEW com m ittees was reduced to m o re
of a consultation role, w ith the ASC form ing its ow n w orking parties,
alth o u g h the constitution did allow it to obtain assistance to carry out its
w ork from suitable organisations and persons w ith o u t being specific as to
the criteria for 'suitability'.
In 1978, the ASC set up a group u n d er T R W atts to review the standard
setting process and to consider possible im provem ents. This reflected th e
position of the ASC that it w as time to seek the view s of the public, and in
a m em o from the ASC to its m em bers, the legitim acy of the C o m m ittee
w as of concern: '...it was necessary to seek an overt public m andate' (ASC
2 /3 5 /1 ). One of the problem s was identified in an article by Lafferty (1979).
'You (Tom W atts) better than anyone m u st be aw are of how m uch
industry bias exists u nder the present set-up of ASC. M uch as we w ould like to see each ASC m em ber thinking only of users w h en he
considers a proposed standard, the reality is th at self-interest is
bo u n d to come through.' (p. 50, brackets added)
In 1978, a draft consultative docum ent w as issued to form the basis for
public discussion and com m ent. In response to this, there w ere 131
w ritten subm issions and public hearings took place in Dublin, Glasgow
and London. The prelim inary paper from W atts dated 10th M arch 1980
indicated that the m ajority of those consulted believed that accounting
standards should continue to be set in the p riv ate sector, and due to th e
technical nature of such standards, the backbone of the standard setting
body should be accountants, although the need for non-accountants to be
m em bers was accepted. The paper also suggested the need for a
supervisory body to ensure compliance w ith accounting standards, and
also urged that standard setters should be seen to act in the general public
interest w ith its activities as open as possible. H ow ever, W atts concluded
C ouncils of the professional bodies, th u s m ain tain in g control of th e
p rocess w ith in the profession. A m eeting of the ASC on 24th M arch 1980,
d ecid ed th at this interim report should rem ain confidential (ASC 2 /3 5 /1 ).
The final version (the W atts Report) w as issued to the CCAB in 1981. T his
rep o rt concluded that accounting stan d ard s sh o u ld be set in the o p en after
p ublic consideration and discussion, th at m em bership should n o t be
restricted to accountants and that a panel sh o u ld be set u p w ith th e Stock
Exchange to review non-com pliance by listed com panies. A dditionally, it
recom m ended that the standard setting b o d y should be of high calibre an d
h e ad e d by a Director of A ccounting Standards. A lthough m an y of its
reco m m en d atio n s were not adopted u n til the form ation of th e
A ccounting Standards Board, som e issues w ere reflected in the a m e n d e d
1982 constitution w hich saw a shift from m em bers in practice to m em b ers
in in d u stry , as well as reserving u p to 5 o u t of 20 places for users w ho n eed
n o t necessarily be m em bers of any of the CCAB professional bodies. T h ere
w as also the introduction of observer m em bers' from academ ia an d th e
g o v ern m en t^ . Links w ith the ICAEW w ere still strong. ASC secretariat
staff w h o held w ide responsibilities for the fo rm u latio n of initial papers
a n d the drafting of docum ents still rem ained p a rt of the ICAEW T echnical
D irectorate.
A lth o u g h the m em bership of the C om m ittee w as w idened over th e life of
the ASC, pow ers to issue standards in th eir ow n right w ere n ev er held .
The v o tin g m ajority for m em bers w as increased in 1982 from tw o th ird s to
th ree q uarters for the approval of any d o cu m en t an d even th en p rio r to
issue, p ro n o u n cem en ts had to be agreed by the Councils of aU m e m b e r
bodies leading to further delays^ (see C hapter 7 for a specific exam ple).
S tan d ard s could be issued only by the professional accounting bodies
them selves, w hich m eant that enforcem ent w as also effectively delegated®.
Failure to observe standards ren d ered a m em ber liable to discip lin ary
action fro m the appropriate accountancy body^, b u t the lack of stro n g
^ There had been an academic member since 1969.
^ The only exception to this being discussion papers (ASC 2/49/2)
® The instigation behind this move came from the Scottish Institute who were reluctant to accept standards which were laid down by a sub-committee of the ICAEW, as the ASSC had been originally. See Slimmings (1981) p 18.
action led to criticism of these bodies (Edw ards, 1989), w ith R enshall (1992)
n o tin g th at to his knowledge, n o m em ber w as ever disciplined for
b reach in g accounting standards d u rin g the lifetim e of the ASC.
A lth o u g h the ASC is credited w ith significantly changing British fin an cial
rep o rtin g practice (Renshall, 1992), it n ev erth eless w as dogged by its
v ario u s lim itations. As well as h av in g to serve (and satisfy) six m asters o n
th e CCAB, th ere was also the problem of the lack of form al c o n su lta tio n
m ech an ism . Despite the setting u p of a co n su ltatio n group to advise o n
m atters of th e program m e, proposals an d w ork, this does n o t appear to
h a v e m et since 1982^°; following the W atts R eport's recom m endations for
a w id e r m em b ersh ip it was felt th at the co n su ltatio n group n o lo n g er
serv ed a usefu l purpose (ASC 2/49/3). Shortcom ings in the stan d ard
settin g process w ere sum m arised in the C h airm an 's b u dget subm ission to
the CCAB for 1986/1987 and w ere specifically identified as staff shortages
causing slow ness of action, lack of research, the ph asin g of projects and th e
inability to review standard avoidance (ASC 1/42/1). The C om m ittee h a d
p ro p o sed in 1987 to resurrect co n su ltativ e panels (Financial R ep o rtin g
A d v iso ry G ro u p and Panel of A cadem ic C onsultants) as w ell as seeking to
u n d e rta k e a review of c o m m u n ic a tio n s^ \ Both of these proposals ap p ear
n o t to hav e been proceeded w ith because of the D earing R eport (1988),
alth o u g h they m ay perhaps be seen as one reason for th at report.
F u rth erm o re, d u rin g its lifetime, the ASC h ad n ev er been able to ach iev e
p o w e r to enforce accounting standards. The C h airm an of the ASC in 1978
su m m arise d th e situation w hich w as to p rev ail for the next tw elve years
in a radio interview , '...we m u st be clear th at w e are a body w hich is
settin g a kind of law and the only w ay w e can do t h a t is by consent o r
p e rsu asio n ' (T Watts)^^. In a m eetin g betw een the ASC an d th e Stock
Exchange on 22.10.85, the Stock Exchange said they w o u ld n o t be in clin ed
to su sp en d com panies for non-com pliance w ith a stan d ard , an d the o n ly
chance of enforcem ent w ould be th ro u g h th e law (ASC 1/81/1). In a
m eetin g the follow ing day w ith th e D ep artm en t of T rade an d In d u stry
(DTI), G odfrey (then C hairm an of the ASC) stated 'The profession h a s
lim ited p ow ers of enforcem ent an d the ASC itself h ad no su ch pow ers a n d
d id n o t seek th em ' (ASC 1/81/1). M uch of the debate on n o n -co m p lia n c e
w as centred on C u rren t Cost Accountings^. T here exists evidence th at at
least on one occasion the ASC sought to have a form of legal backing to
SSAP 16. In a letter to G odfrey dated 13th Decem ber 1985, M ichael H ow ard
of the DTI stated th at '...the legislative approach is n o t one w hich th e
G overnm ent w ould be w illing to take unless there w ere evidence of very
m u ch m ore su p p o rt th an there is at present' (ASC 1/81/1). H ow ever, by
1989, the DTI w ere p rep ared to include a req u irem en t in th e C om panies
Bill for directors to state w hether the accounts w ere p rep ared in
com pliance w ith applicable accounting standards. In m ak in g this decision,
they h a d no doubt considered the new structures for reg u latio n , proposed
b y the D earing Report.
T he D earing R eport and the FRC
In N o v em b er 1987, the CCAB had set up the A ccounting S tandards
Review C om m ittee u n d e r the C hairm anship of Sir Ron D earing to review
th e accounting standard-setting process. N ot only w ere resource an d
p ro ced u ral deficiencies addressed, b u t also the absence of effective policing
an d enforcem ent of standards. In a letter, S Gray, the academ ic m em ber of
th e ASC recognised this;
'W hile the ASC has achieved some progress I believe th at its
lim itations hav e now become significant to the extent th at m ajor
changes are w a rran ted ....w hat was needed w as a change in the
C om panies Act w hich really confirms m y p o in t ab o u t the prim acy
of law .' (Letter dated 8.7.87 to J O uld
w ith copy to J Renshall, ASC 1 /3 8 /2 )
Later in the sam e letter he com m ented that the ASC sh o u ld w ork m o re
closely w ith the law ' an d th at '...it seems to m e u n realistic to believe th a t
acco u n tan ts have sufficient authority to significantly restrict or expand
legal req u irem en ts'.
The R eview C om m ittee reported in 1988, m ak in g tw o m a in
reco m m en d atio n s: a new non-statutory stru ctu re for setting an d
enforcing standards an d proposals for changes in the law to encourage
com pliance w ith accounting standards. The question of the in co rp o ra tio n
of stan d ard s into law w as dism issed on the grounds that,
'..this inescapably requires a legalistic approach an d a reduction in
the ability of the financial com m unity to resp o n d quickly to new
d e v e lo p m e n ts' (D earing R eport 10.2)
U ltim ately, the recom m endations w ere ad o p ted an d in 1990, the F inancial
R ep o rtin g C ouncil w as set u p w ith its constituent A ccounting Standards
Board, U rgent Issues Task Force and Review Panel. M any of the perceived
shortcom ings of the p rev io u s regulatory system w ere addressed, in that as
w ell as receiving increased fu n d in g and em ploying som e full tim e
m em b ers of the Board w ho operated in d ep en d en tly of the accounting
p rofession (detailed in C hapter 5), accounting S tandards w ere issued by
the ASB itself and the policing of those standards becam e a m atter for th e
R eview Panel.
THE SIGNIFICANCE OF ACCOUNTING REGULATION
In tro d u ctio n
In the 1970's, follow ing th e setting u p of accounting sta n d a rd setting bodies
in b o th the UK and the USA, the term 'econom ic consequences' becam e
p a rt of the accounting vocabulary^^. A lthough su ch consequences h ad
already been identified^^, the particular term w as n o t used. The rules of
accounting found in p rev io u s C om panies Acts in the UK, h a d doubtless
p ro d u ced such consequences. A lth o u g h these w ere n o t p erh ap s explicitly
discussed, they w ere nevertheless illustrated by the ch anging em phasis o n
sh areh o ld er an d creditor protection contained w ith in 19th century
com pany law^^. H ow ever, the separation of law an d econom ic policy was
th o u g h t possible in 1945 by the C ohen C om m ittee w h ich considered th a t
it sh o u ld concentrate o n m atters of law and th at econom ic policy was
o utside th eir term s of reference (Bircher, 1989). The earlier absence of
econom ic consequences co u ld be a resu lt of a less reg u lated e n v iro n m e n t.
The identification of economic consequences is attributed by Cooper & Sherer (1984) to the desire by large US corporations to counter attempts to increase levels of disclosure and change reporting systems.
See for example Zeff (1971) who considered that, 'More than ever was true in the 1940's or 1950's, accounting principles in the 1960's had entered the realm of public policy' p. 229.
since reg u la tio n u sually creates some consequences (and it is this w h ic h
often u n d erlies the rationale for such an act). As G ellein (1978), a fo rm er
m em b er of the Financial Accounting Standards Board in the U n ite d
States, p o in ts o u t 'standard setting w o u ld be purposeless if n o th in g
resu lted from the reporting' (p 75). If the results of accounting rules brin g
about econom ic changes then this will affect m atters of efficiency an d
equity; therefore the regulation of accounting becom es a m atter of in te rest
to the society in w hich it operates.
The Im pact of R egulation
O ne startin g p o in t for exam ining the im pact of regulation w o u ld be to
refer to th e role of financial reporting in society. The role described by
G ellein (1978) involves the 'allocation of available resources to th o se
stan d in g ready to furnish goods and services' (p 75). But, as he p o in ts o u t,
rep o rtin g itself is n o t the allocator^^, it is p a rt of the structure w hereby th e
allocation is m ade an d therefore he suggests at an operational lev el,
reg u latio n sh o u ld focus on decision-m akers u sin g th e in fo rm atio n ra th e r
th a n the consequences, a them e explored later in this thesis. T h is
perspective is seen in various conceptual fram ew ork projects w hich h a v e
com m enced w ith u ser needs (see for exam ple The C orporate R eport, 1975;
ASB Statem ent of Principles, 1991, or the Statem ents of F in an cial
A ccounting C oncepts in the US, 1978).
The direct im pact of financial reporting m ay be seen in three m ain areas;
the b eh av io u r of m anagem ent, the effect on the firm and the effect o n
society, a lth o u g h an inter-relationship exists betw een these areas as, for
exam ple, m an a g em en t m ay decide to act according to the effect on th e ir
firm or on society as a whole. Indeed the effect on the firm an d the effect
on society can in m any instances be considered together. B rom w ich (1985)
describes only allocative and redistributive effects w hich in th e m se lv e s
could be as a resu lt of the behaviour of m anagers to create such effects.
The b e h av io u r of m anagem ent as the in fo rm atio n producer, h as b een
recognised by W atts & Z im m erm an (1978) and Cyert and Ijiri (1974), as a
reaction to the effect on their ow n welfare. This type of im pact o n
m anagem ent decisions has been term ed 'in fo rm atio n in d u ctan ce'
(Prakash & R appaport, 1977; Selto & N eum an, 1981). A ccounting reports
m ay therefore influence the financing and operating decisions of firm s
(Heald, 1980; B utterw orth Gibbins and King, 1981).
The effect on the firm has been described generally by G ellein (1978) as th e
im pact on the enterprise cash flows because of actions taken by o u tsid e
parties. Beaver (1981) describes this in term s of the co m p etitiv e
disadvantage of disclosure w hich could reduce the ability of a firm to reap
the benefits of in n o v ativ e activity. He uses a hypothetical exam ple of a requirem ent to disclose a m anagem ent forecast of earnings w hich m ig h t
in som e circum stances alter the nature of the in v estm en t projects
undertaken, thereby affecting the risk-retum trade-offs associated w ith th e
firm (although this latter exam ple could also be used as an exam ple of
m anagem ent behaviour).
The im pact on society of financial reporting m ay be seen in term s of
distributional issues. Solom ons (1978) explains th at changes in the status quo are effected because standards are set in controversial areas, a
sentim ent echoed by Cooper & Sherer (1984);
'...the outcom es of accounting policy are essentially political in that they operate for the benefit of some groups in society an d to the
detrim ent of others'. (p. 208)
The A m erican A ccounting Association h ad already recognised this in
1978, stating;
'Every policy choice represents a trade-off am ong differing
individual preferences and possibly am ong alternative
consequences'
Indeed May an d S unden (1976) justify the basis for the existence of a
regulatory body by reference to the social welfare im pact of accounting^®.
Exam ples of Research into Economic C onsequences
M uch of the research into economic consequences quoted in this section
has been based on w ork carried out in the U nited States. The reason for
this m ay be the greater n u m b er of standards issued or m ay be a resu lt of
the larger am o u n t of research carried o u t in the US, b u t n evertheless, at
the very least it does illu strate the probable consequences of sim ila r
accounting standards in the UK. The follow ing constitutes an illu stra tiv e
cross-section of research into the im pact of accounting reg u latio n s,
com m encing w ith the effect o n the firm.
Marketable Securities-Statement of Financial Accounting Standard (SPAS) 12
By treatin g such securities in a different w ay from stocks, sm aller an d less
frequent w rite-dow ns of such securities are necessary^^. A n adverse effect
on earnings could be avoided by treating the entire portfolio as n o n -
cu rren t a n d w riting-dow n v alu e losses against sh areh o ld er's equity th u s
m ak in g th e earnings of in v estin g firm s less volatile (Daley & T ran ter,
1990).
Foreign Exchange (SPAS 8)
Solom ons (1978) described h o w the result of the stan d ard w as to increase
greatly th e volatility of rep o rted earnings of com panies w ith fo reig n
operations by m andating the u se of the tem poral m ethod.
Leasing
In the US, R uland (1984) quotes exam ples of opponents of cap italisatio n
claim ing th a t this policy w o u ld depress ratios and therefore increase th e
cost of capital for US firms.
G oodw ill
The req u irem en t for US com panies to w rite off p u rch ased goodw ill w as
said to give an advantage to foreign com panies in b id d in g for US
businesses (Daley & T ranter, 1990). This particular im pact w as also
recognised in the UK an d the stan d ard on goodwill is explored in greater
detail in a later chapter.
Deferred Tax - Statement of Standard Accounting Practice (SSAP) 11
The original UK stan d ard advocated the full allocation m eth o d of
accounting for deferred tax. A gainst a background of 100% capital
allow ances, 30% inflation and stock appreciation relief, H ope & Briggs
(1982), in the UK pointed o u t th at com panies w o u ld re p o rt red u ced after
tax profits because of the deferred tax charge, as w ell as disclosing v ery
large deferred tax liabilities in the balance sheet^°. T his sta n d ard was
subsequently replaced by SSAP 15 w hich used the p a rtia l allo catio n
m e th o d .
These types of research studies have often been criticised from a n u m b e r
of different view points. Foster (1980) for exam ple n o ted th e inco n sisten cy
of Lev's (1979) research into SFAS 19 (Oil and Gas E xploration), claim in g
th at this w as indicative of the general failure of such tests to specify a
theory of expected m arket effect. Taylor and Turley (1985) w a rn of the care
th at sh o u ld be taken in in terp retin g the results of research, d u e to th e
difficulty of isolating a particular item of reg u latio n from aU o th e r
influences in the m arket. They also criticise the n a rro w n ess of such
research, stating; 'Economic consequences will n o t stop a t th e b o u n d a ry of
the stock m arket, b u t will extend into other m arkets' (p. 117).
Studies of M anagem ent D ecisions
Studies of m anagem ent decisions are in m any w ays a su b set of m ark et-
based research, in that a change in a m an ag em en t decision w ill h av e a
m ark et effect and the anticipated m ark et effect w ill influence m anagem ent
decisions. Forcing m anagers for exam ple to disclose th a t w h ich they w ould
rath er n o t disclose could bring about sub-optim al decisions. For exam ple,
if a m anager is forced to disclose e n v iro n m en ta l in fo rm atio n , he m ay n o t
u n d e rta k e certain activities w hich m ig h t have m axim ised firm s' profits.
This could lead to a m arket effect w hereby share price is red u ced d u e to
m ark et perception of foregone opportunities.
R esearch a n d D evelopm ent (SFAS 2)
The FASB (Financial A ccounting Standards Board) w as told by th e
resp o n d en ts to its exposure draft th at such a stan d ard o n research an d
d ev elo p m e n t w ould discourage spending on research w h ich w o u ld
oth erw ise be in the best interests of the m arket (Gellein, 1978). S o lo m o n s
(1978) claim s that the stan d ard w as said to co n stitu te a th rea t to
technological progress especially in the case of new com panies com ing to
the m arket, alth o u g h V igeland (1977) found no ap p aren t m arket reactio n
to the standard. This w as in m arked contrast to the findings of H orow itz &
Kolodny, 1980 and 1981, and D ukes et al (1980), th at firm s w ho p re v io u sly
capitalised research an d d evelopm ent expenditure, significantly reduced
such expenditure follow ing the introduction of the standard.
C ontingencies (SFAS 5)
The proposal to proscribe self-insurance reserves on gro u n d s th at the n e e d
for insurance w ould exceed the capacity of US insurance m arket, m e a n t
th at overseas insurers w o u ld have to be used, thus im pacting u p o n the US
balance of paym ents ( Gellein, 1978; Solomons, 1978).
Foreign Exchange (SFAS 8)
In order to m itigate the effect of this standard, it has been reported th a t
additional currency hed g in g w as used to m inim ise such flu ctu atio n s
(Griffin, 1979). In v estm en t and financing decisions by US com panies are
also felt to have been affected (Evans et al, 1978; Shank et al, 1980).
O il and Gas E xploration (SFAS 19)
This stan d ard w as over-ruled by the Securities and Exchange C o m m issio n
on the gro u n d s th at exploration activity could reduce if the basis of
accounting w ere changed to ’successful efforts'.
T ro u b led D eb t R estructuring (SFAS 15)
This stan d ard avoided b anks h av in g to w rite-dow n debts w h en they h a d
been restructured. Daley & T ranter (1990) describe this treatm en t h a v in g
been adopted because of th e possible effect on reduction of capacity and th e
w illingness of banks to lend.
Leasing (SSAP 21)
Taylor an d Turley (1986) describe the UK effect in term s of the direct
consequences of a red u ctio n in investm ents^, as w ell as the indirect effect
e.g. changes in cost, th u s altering the in v estm en t an d financing decisions
of m anagers. In the US, th e capitalisation of finance leases has also b e en
the subject of research w hich suggests th at m anagers w ill try to
structure leases in such a way as not to qualify as finance leases (Abdel-
Khalik 1981)"".
Lobbying and R egulation
Even in the absence of m arket-based or other em pirical tests of econom ic
consequences, the presence of such consequences, potential or real m ay be
evidenced through the actions of those parties interacting w ith accounting
inform ation either as a producer or user. R uland (1984) describes th e
economic consequences approach existing;
'...implicitly by parties lobbying for or against standards w hich w ill
affect their welfare' (p. 224)
Lobbying is described by Sutton (1984) as the taking of an action to
influence a rule-m aking body. Such actions are exam ined in detail in later
chapters in the context of the developm ent of tw o UK standards.
Direct lobbying of the standard setting body could either be b y governm ent,
governm ental agency, by industry (including professional bodies) or by
any other inform ation user. In the first instance it is som etim es difficult to discover w hether the governm ent instigates its ow n actions in lobbying
or is m erely passing on pressures exerted on it from outside. S o lo m o n s
(1986) and Daley & Tranter (1990) quote the exam ple of the A ccounting
Principles Board in the US being o v ertu rn ed by both the SEC (Securities
and Exchange Com m ission) and Congress on the issue of accounting for
investm ent tax credits. FASB received sim ilar pressure from the SEC o v e r
their attem pted standardisation of oil and gas accounting in FAS 19
(Solomons 1986), following the anti-trust division of the D epartm ent of
Justice testifying to the SEC on this standard (Beaver 1981 p 50). S o lo m o n s
(1981) considered that the origin of this action w as outside of govenunent;
'...the Securities and Exchange Com m ission w ould n o t have acted...
to over-rule this standard if there h ad not been political p ressu re
from certain oil and gas com panies' (p. 68)
In the case of troubled debt re-structuring, FAS 15, it was the C o m p tro ller
of the Currency w ho lobbied the SEC (Daley & Tranter, 1990), a lth o u g h
they also quote examples of the SEC being lobbied b y in d u stry on the sam e
issue. A dditionally, Daley & T ran ter (1990) in the case of the o rig in al
exposure d raft on m arketable securities describe the insurance in d u stry as
lobbying the SEC.
T here are also UK exam ples of direct g o vernm ental in te rv en tio n in th e
process of regulation. A ccording to Solom ons (1986) the S an d ilan d s
C om m ittee w as set u p to circu m v en t the C onstant P urchasing Pow er
S tandard (PSSAP 7), because of th e proposed use of indexation in th e
stan d ard . Indeed in the term s of reference, the Sandilands C om m ittee w as
told to take into account the need to restrain inflation, a lth o u g h
suggestions have been m ade th at it w as also an in ten tio n to re-distribute
w ealth from w orkers to shareholders. (See Cooper & Sherer, 1984). O th er
exam ples of the UK governm ent acting as a pressure group w ith regard to
accounting regulators are exam ined in C hapters 7 and 8.
A lth o u g h governm ents bo th in th e UK an d the US appear to h a v e
effectively over-ruled accounting regulators on occasions, in d u stry lobbies
do also ap p ear to be successful w h ere som e standards are concerned (tw o
of w hich are looked at in detail in a later chapter). H ope an d Briggs (1982)
state th at th e first standard on deferred tax (SSAP 11) w as effectively
w ith d ra w n in the face of in d u stria l opposition. W idespread refusal to
com ply w ith SSAP 16 (C urrent C ost A ccounting) w as a contributory factor
to its demise. Evidence of lobbying can be seen in the replies to Exposure
Drafts both in the UK and the US, and although this is often the on ly
visible evidence of lobbying, it m u st be noted th at there are m any o th e r
stages at w hich it may take place (Lindahl, 1987; Sutton, 1984).
A ccounting R eg u latio n - Political or T echnical?
H o m g ren (1973) is not alone in believing:
'The setting of accounting stan d ard s is as m uch a process of p o litical
action as of flawless logic or em pirical findings' (p. 61)
The process tends to be political because the outcom es of standards is re
d istributive and affects the w elfare of groups in society (Brom wich, 1985).
A t the sam e tim e he (Bromwich) claim s th at there is little evidence th a t
Pareto solutions exists. In th at case, n o t only are those w h o m ight b en efit
m ig h t lose. The welfare issue tends to be centred a ro u n d different u se r
groups^^ ,and in the absence of optim al accounting policies, reg u la to rs
h a v e
'...a political role of trad in g off conflicting objectives of financial
statem en t user groups' (C ushing 1977 p. 311)
Solom ons (1978) in em phasising the behavioural view of a cco u n tin g
reg u latio n , points out that accounting is not u n iq u e in affecting
b eh av io u r, u sing paradigm s from physics, geology an d m edical research to
illu strate behavioural effects. H aw kins (1978) considers th at FASB, because
it has the p o w er to influence econom ic behaviour, also has th e o b lig atio n
to su p p o rt (governm ent) econom ic plans. Thus he takes th e so m e w h a t
radical v iew that m acro-econom ic objectives should be p a ra m o u n t in
d e te rm in in g accounting standards^^. O ther w riters such as R a p p ap o rt
(1977) advocate a perspective broader th an pure technical c o n sid era tio n s,
w h ile Buckley (1976) criticises US standard setters for only u sin g
theoretical argum ents and being oblivious to social im pact. O nce this v ie w
is ad o p ted , the regulatory process m u st become in te n tio n a lly political.
T his is defended by G erboth (1973) on the grounds th at p o liticisatio n of
accounting is a necessary p art of the dem ocratic legitim isation of authority.
The FAF (Financial A ccounting Foundation), the o rg an isatio n o v e rse e in g
th e w o rk of the FASB, appears to h av e accepted this a rg u m en t, th r o u g h
th e ir ad m issio n that standard setting requires som e perspective an d th a t
th e regulators are representatives of the entire constituency of u sers,
im p ly in g a political process. This 'rep resen tativ e' role is h o w e v e r
so m e w h at difficult to reconcile w ith the fact that no set of sta n d ard s exist
w h ic h are able to rank alternatives in accordance w ith p references a n d
beliefs (see Demski, 1973; Arrow, 1963).
T he ten tativ e (and perhaps optim istic) solution to this is suggested by
C ooper & Sherer (1984) ;
^ Recent conceptual framework projects have tended to emphasise the investor user group justifying this choice 'As investors are providers of risk capital to the enterprise, the provision of financial information that meets their needs, will also meet most of the needs of other users that financial statements can satisfy',( Para 10, Accounting Standards Board, Exposure Draft, Statement of Principles).
'It is necessary to m ake explicit a social welfare function w hich
enables trade-offs to be m ade betw een individuals an d society'
(p. 214) W hile this assum es that such a function could be disclosed, it m ay also be
said to involve some com pensation principle w here a Pareto so lu tio n
cannot exist. Both the acceptance of a social welfare function and any
ensuing com pensation are how ever, political acts^^.
A ccounting as Public Policy
It w ould ap p ear from the research carried o u t into econom ic consequences
th at these do exist and therefore th at accounting regulation like any o th e r
political actions has an effect on the com m unity in w hich it is carried out.
The argum ents used in regulation m ay be technical, but the results
involve changes in welfare and are therefore political. The process
w hereby standards are set im itate parts of a political process w hereby th e
regulators are lobbied by those having an interest in the area u n d e r
discussion. The objective of accounting should be n eu tral according to Solom ons (1978) who considers that the intention to achieve a n y th in g
other th an 'pure m easurem ent ends', w ould 'destroy faith in accounting'
(p 69). R uland (1984) looking at accounting regulation from the v ie w p o in t
of ethical philosophical thought and in term s of deontology and teleology,
concludes th at the form er th ro u g h the p u rsu it of rep resen tatio n al
faithfulness^^ should guide the regulators and describes FASB's conceptual
fram ew ork project as an 'effort to operationalise the rep resen tatio n al
faithfulness approach' (p 224).
R epresentational faithfulness how ever, in a w ay rem iniscent of
Solom ons' (1978) 'financial m ap-m aking', is not universally accepted an d
appears to be at odds w ith the social welfare view of accounting. C u sh in g
(1977), describes optim al accounting principles as those w hereby u sers
achieve an expected payoff w hich is greater th an or at least equal to th e
corresponding payoff u n d er an alternative principle. There is im plicit in
^ If, for example, the interests of the equity investors are exclusively satisfied, this may involve a wealth transfer from labour to capital. If however subsequent legislation is passed which guarantees minimum wages or shorter hours, this could represent the re distribution.
such a statem ent th at the objective of regulation is to seek Pareto o p tim al
solutions. This changes the role of accounting to one of social policy ra th e r
th an p u re description. Beaver (1981) adds to this by talking of the relativ e
im portance w hich sh o u ld be assigned to the preferences of each u ser
group. A ny ensuing w elfare decisions m ay n o t necessarily be m ade by th e
regulators them selves b u t from other sources as R uland (1984) suggests;
'...if one refrains from acting for the w elfare of others, it is not at all
certain th at th eir welfare will not be atten d ed to by other m eans
(p. 233)
This is rem iniscent of the Carsberg, A rnold and H ope (1977) suggestion of
choice betw een accounting alternatives becom ing p a rt of a dem ocratic
political process.
This leads to tw o possible approaches to accounting regulation. Firstly th e
n eu tral an d secondly the pre-determ ined social w e lfa re /n a tio n a l goals
approach. If the form er approach is adopted by the regulators, then on a
stan d ard b y standard basis they will be lobbied by those seeking to increase
their ow n w elfare as there is no universal acceptance of the in te rp re ta tio n
of neutrality. If the latter approach is taken, th en again those seeking to
m axim ise th eir ow n welfare w ill attem pt to change the social w elfare
objective of the regulators. U nder both circum stances, the process of
reg u latio n is in the political arena and the reg u lato rs m u st attem p t to
insulate them selves from such influence if they are to act independently.
THE CONSTITUTIONAL ENVIRONMENT
A ccounting regulation how ever is only one p a rt of th e b roader context of
the general system of rules affecting society. The fram ew o rk for such ru le-
m aking is a constitution, defined by G raham an d Prosser (1988) as follows;
'A constitution, w ritten or unw ritten, outlines th e basic stru ctu re of
the state, the relative pow ers of the organs an d lays d o w n particular
principles for the action of public bodies, for exam ple the due
process clause in the US constitution.' (p. 4)
W riting in the n in eteen th century. Dicey (ed. W ade, 1959) considered th a t
sovereignty of Parliam ent and the Rule or Suprem acy of law. B radley
(1985) describes the legal sovereignty of Parliam ent as a doctrine of
c o n stitu tio n al law w hich m eans th at are no legally enforceable lim its to
the legislative au th o rity of the Parliam ent. The fact th at the courts are able
only to review the ad m in istratio n rather th an the validity of leg islatio n
im plies th at such pow er is absolute. Dicey stated th at the legislature h a s
'th e rig h t to m ake or unm ake any law w h atso ev er' and th at n o body o r
p erso n outside of the legislature 'is recognised by the law of E ngland as
h av in g a right to override or set aside the legislation of P arliam en t' (p. 40).
Liberal D em ocratic Principles
The 'W estm inster' system is described by O liver (1991) as an expression of
the liberal-dem ocratic political tradition, u n d e r w hich the exercise of state
pow er is justified in term s of the public interest rather th a n of th e in te re s t
of one class or groups The tradition dates back to the 17^' cen tu ry w h e re
the term 'co m m o n good' (Locke), 'general interest' (Mill) an d 'g e n era l
w ill' (Rousseau) are all expressions used to describe approxim ately th e
sam e ideas as the public interest. Finer (1970) outlines six basic
assu m p tio n s for the liberal-dem ocratic state. The first of these is th a t
g o v ern m en t is derived from public o p in io n and is accountable to it.
A ccountability im plies an ongoing test of the rep resen tativ en ess of
governm ent: it is not sufficient for p o w er to have been granted in the p ast
based o n public o p inion at th at tim e. The second of these a ssu m p tio n s
concerns the expression of public o p in io n w hich im plies som e k in d of
suffrage carried o u t th ro u g h a system of representatives. T he th ird
assu m p tio n is th at in m atters of contention, it is the m ajority w ill th a t
should prevail. The rem aining assu m p tio n s tend to qualify rath e r th a n
co m p lim en t characteristics of democracy. The first of these is th a t
g o v ern m en t is lim ited in th at certain rights of the in d iv id u a l a n d of th e
private association are safeguarded. A dditionally, society is recognised as
being pluralistic, hence the rule of governm ent is not confined to any o n e
group, b u t sh o u ld operate in the com m on interest, p u ttin g o n
g o v ern m en t the rath er onerous task of reconciling different v ie w p o in ts.
The final qualification concerns the denial of any objective science of
society or of m orals and again serves the p u rpose of lim itin g p o w e r
th ro u g h the adm ission of tolerance based partly on the p rem ise th a t
v iew s as to w h at is true and p ro p er for g o v ern m en t to act u p o n w ill
ch an g e over time^®.
T he Sovereignty of P arliam en t
T he sovereignty of Parliam ent is described by Jowell (1985) as being o n e
of th e m ajor prem ises u p o n w hich dem ocratic theory rests. Bradley (1985)
states th at even the right to m ake constitutional changes by o rd in a ry
processes of legislation is in th eir pow ers. This sovereignty is b u ilt u p o n
th e legitim acy of parliam ent to act an d is the process by w hich au th o rity is
g iv en to those w ho w ield pow er (Halsey, 1986). Legitimacy is g iv en to th e
legislative process because of th e system of elected rep re se n ta tiv e s
(Bradley, 1985). A lth o u g h au th o rity can be derived from tradition^
m o d e m societies see th at u n iv ersal and u n co n strain ed acceptance is a
necessary condition for legitim isation (for exam ple see R ousseau).
A lth o u g h obedience to the state w as traditionally view ed as being b ased on
h a b it an d custom (see M oore, Johnson, Marx), social contract th eo ries
rested m ore o n the idea of obedience being based on the consent of th e
governed^®. B entham considered th at the m ajority opinion rep re se n te d
th e greatest sum of happiness. A n alternative view of au th o rity is g iv e n
by Finer (1970) w ho considers th a t the exercise of pow er is acceptable
because its advocates are regarded as the wisest, the best or th e m o st
rep re se n ta tiv e or because '...it appears conducive to happiness o r w elfare
o r greatness or w hatever other v alu e has an over-riding v a lu e ' (p. 15).
This echoes both B entham w h o believed th at m ajority o p in io n
rep resen ted the greatest sum of happiness an d Burke in his d escription of
th e State as h o lding 'th e accum ulated w isdom of generations', a lth o u g h
F in er's (1970) acceptability of p o w er does reflect changes in society o v e r
tim e .
A u th o rity does not how ever necessarily achieve these objectives. H alsey
(1986), w hile acknow ledging th a t general rules m ay be based on th e
preferences of the m ajority, p o in ts o u t th at bureaucrats m ay easily a n d
frequently 'break the chain from p o p u lar w ill to executive d ecisio n '
^ Reminiscent perhaps of Counsers opinion on the meaning of True and Fair.
For example the dynastic legitimacy of absolute monarchy which Cranston (1966) describes as the Divine Right of Kings, a widely accepted belief throughout Europe in the 17th century.
