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The Political Implications of Accounting and Accounting Standard Setting* David Solomons
It is now some fifty years since a few concerned individuals in America began discussions lhat have broughl us to the position where. in our two countries. accounting standards, carrying varying
degrees of authority, are an established pari of the financial reporling scene. I wish I could have found" significant date as long ago as that in the British history of standard selling. After all, the Scollish Institule had by then pas ed its 75th birthday and the English Institute was celebrating its fiftieth. But any kind of institutional interesl in accounting standards in the UK belongs to a later period. I
arguments for not permitting complete freedom in the choice of reporting methods. The first argument is that the market cannot be depended on to discipline promptly corporations that are left free to choose "hat to report and ho\V to report to their investors and creditors. Even if good accounting can be relied on to drive out bad in the long run. too much damage may be inflicted on investor in the short run to make
By now, however, there is general agree-
mcn t that. though not everyone likes the position
we have reached. there can be no return to a SHue
\ here, from a multiplicity of alternative accounting methods, the managers of each business enterprise can be left entirely free to choose whichever ones suit them.
freedom from regulation in this field an acceptable policy. This argument rests on the peculiarities of informalion as a commodity. Its consumption or enjoyment by one individual or group does not reduce its av,lilability to others. It is difficult to exclude 'free riders when information is made available to those who initially might be willing to pay for it, and this fact may be expected to depress the effective demand for it in a free market. On the supply side, there may be greater gains to managers who have inrormation rrom
The case for accounting standards
Since there is not universal agreement about
lhe desirability of accounting standa rds. it is wOrlh brieOy restating the case for them. It needs. however. 10 be made clear tha t arguments for accounting standards are not necessarily arguments for the present accounting model. That model. rooted as it is in the use of historical cost information, is ill adapted to serve investors and other users nf financial statements. But whatever model may one da} take its place. there are four -ThiS paper. now revised and updated, wns presented as the
third Arthur Young lecture at the University
22nd October. 19 O I am grateful for suggestions for Improve. ment from nn revlc\.\er. I
withholding it than from disclosing it; so supply may likewise be depressed. Hence the normal forces of demand and supply may not operate elTeetively in the market for information. and regulation is needed to correct these murkct imperfections. The second argument rests on the need for comparability of the financial information published by business enterprises. The value of information provided by each enterprise to its stockholders is greatly enhanced if it can be compared easily with...