The Ideological Homogenization of the FASB Open Access

Chakravarthy, Jivas Sreenathan (2014)

Permanent URL: https://etd.library.emory.edu/concern/etds/5m60qs05s?locale=en
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Abstract

When the Financial Accounting Standards Board's (FASB) conceptual framework (CF) was initially developed, contemporaneous observers believed the CF incorporated conflicting elements and that it only slightly favored the asset-and-liability (A&L) view of accounting. Now, however, the FASB has made it clear that the CF endorses the A&L view. It is likely that a number of factors, operating together, have contributed to the movement to the A&L view. I contribute to the literature by exploring a novel explanation in path dependence. Specifically, I consider whether the completion of the primary stage of the CF in 1985 stimulated U.S. accounting standard-setting institutions along a path dependent process, driven by reinforcement around early interpretations of the framework.

I develop and test hypotheses based on this theory. I empirically demonstrate that, relative to members selected in the pre-CF period, members selected in the post-CF period take voting positions that are (i) less like their constituent sponsoring organizations and (ii) more like one another; and that these shifts are related to standards favoring the A&L view. Using an analysis of comment letters I find that, relative to a control group, FASB members selected in the post-CF period express a stronger ex ante preference for A&L standards. This pattern of evidence makes it appear "as if," in the post-CF period, the Financial Accounting Foundation systematically selects FASB members whose views are in-line with the A&L view. Finally, I demonstrate a significant reduction in voting dissent among post-CF members but an increase in members dissenting because standards do not go far enough to advance the A&L view. This suggests that the FASB has become ideologically homogeneous with respect to the A&L view of accounting. I conclude by exploring the setting and discussing some consequences of these changes for standard-setting.

The empirical results presented in this study are consistent with path dependence. However, since the data are also consistent with alternative explanations that I cannot reject, further work will be necessary to confirm whether path dependence has had a meaningful impact on U.S. standard-setting institutions in the post-CF period.

Table of Contents

Page

I. Introduction

1

II. Background and Theory Development

8

III. Hypotheses

13

IV. Empirical Design

18

V. Results

28

VI. Discussion and Conclusion

39

References

44

Appendix 1: Links between frequently-used concepts

48

Appendix 2: Relationship between the FASB, FAF, sponsoring organizations, and standard-setting constituent groups

49

Appendix 3: Excerpts from comment letters to SFAC 3 that reference the A&L view or the R&E view

52

Appendix 4: Detail on categorization of comment letters

58

Appendix 5: Partition of population into combinations of FASB members

62

Appendix 6: Detail on categorization of FASB members' dissenting arguments

64

Appendix 7: Text of dissenting arguments identified as post-CF "inside dissent"

67

Figure 1: Positions of FASB members and sponsoring organizations on a Statement

72

Figure 2: Illustration of inside dissent and outside dissent

73

Figure 3: FASB dissent, constituent dissent, and Statement type for matched sample

74

Table 1: FASB Statements of Financial Accounting Concepts

76

Table 2: Variable detail: Definitions, construction, and availability

77

Table 3: Summary of FASB voting data by member, chairperson, and voting requirement

80

Table 4: Descriptive statistics for Statement-level variables

84

Table 5: Analysis of FASB and constituent positions in the pre- and post-CF periods

86

Table 6: Effect of Statement type on Representativeness pre- and post-CF

89

Table 7: Effect of Statement type on FASB dissent pre- and post-CF

91

Table 8: Analysis of comment letter signatories selected onto the FASB pre- and post-CF

93

Table 9: List of dissenting argument types on fair value Statements

95

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