The Roots of Regulatory Change in Financial Reporting

Abstract

Financial reporting standards published by regulatory agencies, such as the FASB and IASB, determine how the business activities of a large number of listed companies around the world are represented. The existence of explicit, formalised processes for the development of these standards would seem to suggest that reporting rules emerge as a best response to specific accounting problems. However, I find that it is often informal processes, contingent events and the advocacy of key individuals which are jointly responsible for the success or failure of particular standard setting projects, and thus for the development of reporting rules. An analysis of rules requiring the use of economic recognition and valuation bases for pensions, financial derivatives and contingent liabilities highlights the role played by these informal features in the development of accounting standards. I develop a qualitative causal model, which explains the success of standard setting projects in terms of five individually necessar...