The economics of Accounting for Growth

Abstract

This is a study of the accounting policies of the leading UK companies analysed by Terry Smith in Accounting for Growth (1992). Smith's critical survey achieved a certain notoriety at the time both for the content, which catalogued important ambiguities in UK GAAP, and also because the author was a leading investment analyst whose employers attempted to suppress the publication. The events that led to his dismissal were extensively reported in the financial press. In this paper we revisit the original analysis in the context of recent advances in the economics of accounting policy choice. Agency theory variables are used to predict the individual accounting policy choices and combinations of policies in Terry Smith's analysis. In particular, size, gearing, the presence of an industry regulator and industry classification are good predictors of accounting policy choices. Our results are stronger for the whole set of accounting policies than for each individual policy. This is consistent with accounting policy choice being a strategic and comprehensive selection from interactive policies rather than a series of independent decisions.