Financial Accounting Foundation Research Articles

Information asymmetry and accounting disclosures for joint ventures

In September 1999, the Financial Accounting Foundation issued a special report recommending the use of the equity method supplemented with appropriate disclosures for corporate joint ventures in the United States. This study, using data for corporate joint ventures in Singapore, provides some preliminary evidence regarding the effect of the supplementary information disclosure on information asymmetry among market participants as measured by bid–ask spreads. The results show that the disclosure of supplementary information of joint ventures is associated with a significant decline in bid–ask spreads. The results also indicate that the decline in information asymmetry is larger when the investment in joint ventures is significant and that larger investing firms tend to have a smaller decline in information asymmetry compared to smaller investing firms. The implications of this study, that the provision of supplementary information about joint ventures could reduce information asymmetry among participants in equity markets, thus leveling the playing field among traders, could have implications for policymakers.

Viewing the 1996 FAF Restructuring as Policy Making without a Formal Due Process

In 1996, a major financial reporting controversy emerged, escalated, and was resolved without substantial exposure or a formal due process. Specifically, a committee of the Financial Executives Institute (FEI) sent a letter to the chair of the Financial Accounting Foundation (FAF) asserting that the Financial Accounting Standards Board (FASB) “process is broken and in need of substantive repair.” When Securities and Exchange Commission (SEC) Chair Arthur Levitt determined that neither FAF nor public accounting leaders were dealing with the FEI proposals to his satisfaction, he acted to defeat this perceived threat to FASB's independence, focusing on the composition of the FAF. In response, the FAF trustees resisted because they viewed his intervention as a threat to FASB's independence. When the trustees did not voluntarily change, Levitt proposed reconsidering Accounting Series Release No. 150, which designates FASB as the sole source of GAAP for SEC filings. Eventually, Levitt prevailed. This paper describes this intervention as a case of policy making without a formal due process and adds to the already weighty evidence that accounting standards are political.

Exposure Draft, February 1981

Editor's Note: In February 1981 the Governmental Accounting Standards Board Organization Committee (GASBOC) recommended the establishment of a governmental accounting standards board. Its exposure draft will be the subject of intense examination in the coming months. Shortly after the draft was issued, the Financial Accounting Foundation, which is involved in accounting standards for private organizations, called for a single group to set standards for both public and private entities.Much more is involved than the jurisdictional issue of whether a single or a dual structure should be established for accounting standards. Once in operation, these standards will shape governmental accounting and reporting practices, much in the way that standards now dictate the accounting procedures of private firms. Many state and local governments will have to revamp their accounting structures in order to satisfy the new standards. At issue also is the question of whether standards should primarily satisfy the needs and interests of external users or those of the governmental unit. Should governments be accountable principally through the political process or through externally enforced rules? This question goes to the heart of American democracy. The way it is answered will not only influence financial management, but also the conduct and quality of government.In order to encourage informed debate, excerpts from berth the GASBOC exposure draft and the FAF statement are published here. In addition, a selected bibliography by James Chan should help readers work their way through the maze of accounting standards.

An Investigation of the Distribution of Power in the APB and FASB

The method of self-regulation exercised by the accounting profession has been increasingly criticized in recent years with one of the most direct assaults contained in the Metcalf Staff Report, The Accounting Establishment: A Staff Study [1976]. There it is implied that effective control over policy making boards is held by several large accounting firms (the Big Eight). This power is claimed to derive from the disproportionate representation on the Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB) maintained by the Big Eight, along with alleged control over board funding, staffing of research support groups, and representation on the overseeing Financial Accounting Foundation. Although no evidence of actual manipulation is presented, the subcommittee staff attempts to make a convincing case against the accounting establishment based on potential usurpations of the system by the Big Eight. Instigated by these and previous criticisms of private-sector policymaking in accounting, a number of changes have been made in the structure and composition of the policymaking mechanism. The accounting profession has become much more sensitive to its public image, desiring at least to convey the appearance that the standard-setting process is equitable to all interested constituencies. Thus, although bloc voting has not yet been documented (e.g., see Brown [1981]), it is still considered desirable to reduce any ostensible control by a single group such as the Big Eight. Accountants therefore should be concerned about

Accounting Rules and "The Accounting Establishment"

Certified public accounting involves the expression of an opinion that corporate financial statements present fairly the financial positions of firms in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Accounting (as opposed to auditing) standards are promulgated by the Financial Accounting Standards Board (FASB) and help define what information must be revealed in audited financial reports of public corporations. The FASB is operated by the Financial Accounting Foundation, a nonprofit corporation organized by the American Institute of Certified Public Accountants (AICPA) and cosponsored by five other private interest groups. The Securities and Exchange Commission (SEC) has generally recognized and endorsed the determinations of the FASB and predecessor organizations. The process by which accounting rules are established has recurrently been and is now the object of intense public scrutiny. In its recent staff report (1976),' the Senate Government Operations Subcommittee on Reports, AccountThis paper reports the results of two statistical tests for association between the positions taken by the Financial Accounting Standards Board (FASB) and individual accounting firms with regard to accounting standards and the positions expressed by the interest groups with which each deals. We find a positive, although statistically insignificant, association between client preferences and the likelihood that an auditor will support a rule. The likelihood of FASB support for a rule is found to vary directly and significantly with the strength of FASB sponsoring-organization and accounting-firm preferences.