A Study on the Rationality and Legitimacy of the Accounting Standard-Setting Process: Focusing on the Experience of the U.S. FASB
Asian Tax Journal Vol. 1 No. 2 (2000), pp. 85-131
Abstract
This study examines the theoretical foundations of the rationality of accounting standards in terms of the legitimacy of the standard-setting process and reviews existing research on the U.S. FASB's standard-setting process and its legitimacy. Various perspectives exist regarding the possibility of establishing rational accounting standards. Shapiro (1997, 1998) pointed out that differences in views on the objectives of accounting, rather than the nature of accounting itself, are the cause of debates over the rationality of accounting standards. According to the view of accounting as a consensus judgment, accounting standards established through a process of evaluating stakeholder arguments via social consensus gain objectivity. The codification approach establishes rational accounting standards through due process. Accounting standards in the U.S., the U.K., and International Financial Reporting Standards are established using this approach. The 'individualistic constitutional calculus' theory, which analyzes the legitimacy of standard-setting bodies based on their processes, posits that a body is legitimate if it meets the conditions of sufficient authority, substantive due process, and procedural due process (Johnson & Solomons, 1984). A standard-setting body must possess sufficient authority through delegation from a legitimate entity, satisfy substantive due process by providing logical justifications for chosen alternatives, and satisfy procedural due process by collecting information from stakeholders and providing them with opportunities to influence the process. For accounting standards to be rational, stakeholders must: 1) justify their arguments with evidence and counter opposing views, 2) adhere to rules of rationality (e.g., Grice's maxims or Van Eemeren & Grootendorst's rules), and 3) objectively evaluate whether accounting alternatives achieve the objectives set by the standard-setting body (Shapiro, 1997, 1998). If a standard-setting body establishes standards through a process that meets these legitimacy conditions, the standards gain rationality and objectivity, and the body itself gains legitimacy. The FASB, along with the FAF and FASAC, constitutes the U.S. accounting standard-setting system. The FASB establishes standards such as SFAS, interpretations, technical bulletins, and SFACs through due process. The process consists of preliminary review, agenda setting, initial deliberation, tentative conclusions, further deliberation, and final conclusions, involving discussion memoranda, ITCs, exposure drafts, and public hearings. Standards are approved by a two-thirds majority, with dissenting opinions documented. Most existing research on the FASB's legitimacy suggests that it maintains its legitimacy by meeting the necessary conditions, with active stakeholder participation. However, some studies indicate that due process does not always lead to optimal standards. To enhance the legitimacy of accounting standard-setting bodies, further research on the effectiveness and conditions of due process and the promotion of stakeholder participation is required, along with supplementary measures to facilitate information disclosure and engagement.
Keywords
- Accounting Standards
- Accounting Standard-Setting Process
- Validity of Accounting Standard-Setting Process
- FASB
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