An examination of international accounting standard-setting due process and the implications for legitimacy

Abstract

This paper explores the due process of accounting standard-setting by focusing on relative levels of stakeholder and jurisdictional influence. We draw on legitimacy theory to explain our findings and ask what implications any bias might have for the IASB. This study extends the standard-setting literature in three ways. First, we create a weighted coding system to analyse the content of comment letters. Second, we test for differences in the acceptance rate of comments made by stakeholders and by jurisdictions. Third, we analyse IASB discussion documentation that sheds light on the decision-making process. Previous studies have focused on whether outcome-oriented proposals are 'influential' (persuasive) by focusing on success rates measured as proposed changes being accepted. We widen this definition to include whether constituents' views are discussed. We find that accounting firms appear to have significantly less influence than other stakeholders. We also find that the IASB reacts less favourably to UK proposals but comments from the US are more likely to be discussed. A lack of fairness (real or perceived) could jeopardise perceptions of the procedural legitimacy of the due process and ultimately impair the IASB's cognitive legitimacy. Fogarty's (1994) review of the FASB standard-setting process identified a series of constraints, opportunities and dilemmas. The question of whether certain stakeholder groups hold greater levels of (relative) influence has been the subject of much work and researchers have studied this phenomenon in both domestic and international contexts (e.g. McEnroe, 1991, 1998; Kwok and Sharp, 2005; Cortese, Irvine and Kaidonis, 2010). Almost invariably, influence and legitimacy are considered together (Hussein and Ketz, 1991;McEnroe, 1993;Tutticci, Dunstan and Holmes, 1994;Suchman, 1995;Larson, 2002;Chua and Taylor, 2008;Burlaud and Colasse, 2011;Danjou and Walton, 2012). This paper reviews the IASB's standard-setting due process in relation to the complex and This study is motivated, at least in part, by criticisms of, and challenges to, the IASB's procedural legitimacy (e.g. Larson and Herz, 2013;Burlaud and Colasse, 2011; Kwok and Sharp, 2005). This is an important issue within an accounting standard-setting context. Procedural legitimacy is a type of moral legitimacy which can be created (lost), maintained, and built (impaired) according to levels of perceived independence and impartiality (Suchman, 1995). Suchman (1995) distinguishes legitimacy into three primary forms: pragmatic, moral and cognitive.

The Challenge of Setting Standards for a Worldwide Constituency: Research Implications from the IASB’s Early History

“…While acknowledging that Bamber and McMeeking (2016) show that the potential of quantitative comment letter analysis to understand the IASB's interactions with different jurisdictions has not been exhausted yet, we suggest that it is necessary to make more use of other sources. It is true that, for the IASB's early years, sources are not as abundant as they are at present.…”

Accountability in an Independent Regulatory Setting: The Use of Impact Assessment in the Regulation of Financial Reporting in the UK

“…However, there has been limited investigation of the extent to which such procedural norms are operationalized by regulatory agencies and in the regulatory process. Related research has, however, provided insights into arrangements to demonstrate the ''due process'' in accounting and auditing standard setting (Baskerville and Newby 2002;Richardson 2008;Bamber and McMeeking 2016), the political consequences of the power dynamics underlying those arrangements (Kwok and Sharp 2005;Crawford et al 2014), the nature of stakeholder participation and its influence on regulatory decision-making (Durocher et al 2007;Hoffmann and Zulch 2014).…”

Executive Remuneration: Achieving Accountability through Disclosure

“…Members of Professional and Representative Bodies are likely to view themselves as authorities on issues relating to executive remuneration (Bamber & McMeeking, 2016). They will typically be involved in some form of advisory capacity on remuneration for industry and see themselves as having a role to play in the Inquiry.…”

“…While firms may decide not to engage in lobbying (Friedman & Heinle, 2016), in developing a lobbying position they can be expected to consider implications of any proposed changes to remuneration regulation for both the firm and themselves personally (Chung, 1999;Francis, 1987;Zeff, 2002). As stewards, management consider the costs to the firm arising from increased regulation and/or increased disclosure requirements (Bamber & McMeeking, 2016). They can also be expected to argue that disclosure of executive remuneration contract details may lead to loss of competitive advantage through disclosure of commercially sensitive information (Chung, 1999;Verrecchia, 2001).…”

“…The views of firms who lobbied the PC Inquiry are of particular interest to researchers and standard setters, as prior research would suggest that industry lobbyists are generally powerful and persuasive (Königsgruber, 2010;Mathur & Singh, 2011;Zeff, 2002), while other research suggests that industry lobbyists appear to exert power over legislation that pertains to disclosure issues (Bamber & McMeeking, 2016;Currie, Robinson & Walker, 1987;Drutman, 2010;McLeay, Ordelheide, & Young, 2000;Watts & Zimmerman, 1978).…”