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March 25, 2020 05:43 PM

Why politicians actively intervene in accounting regulation

Regulation, and especially a technical issue such as financial accounting, is often considered a matter for bureaucrats, not for politicians. In doing so, we tend to neglect that many accounting rules have real economic or social consequences. For example, accounting rules for stock option plans directly affect how companies compensate their management. Similarly, the accounting valuation of bank assets affects regulatory capital. Less restrictive requirements for loss recognition thus reduce the likelihood of bank bailouts.
 
In the paper “Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests”, we systematically reviewed public speeches by all 435 members of the U.S. House of Representatives – including television and radio interviews, press releases and speeches – resulting in a rich dataset of statements. We chose to focus on the USA because of the systematic access to the data on congress members’ financial connections. Based on this data we explain why high-ranked politicians were so interested in the supposedly very technical aspects of accounting, instead of leaving this topic to experts. We found that almost one-third of the politicians were actively involved in the nitty gritty details of accounting regulation. We also found that those politicians who intervened could be divided into two distinct groups, one motivated by ideological views on the economic or social consequences of the regulation and the other one driven by their connections to the industry and, ultimately, special interests. The first group intervenes infrequently – mostly when the topic is ‘hot’ – whereas the latter is consistently involved.
 
The two debates
We study two prominent accounting debates. The first debate concerned fair value accounting during the 2008-2009 financial crisis. It led to the relaxation of the FASB’s fair value accounting rules in April 2009. The second debate addressed the expensing of stock options that firms grant to their employees and happened in 2003-2004, around the FASB’s adoption of SFAS 123.
 
Method
First, we explored the content of politicians’ statements by means of textual analysis. We linked the political argument embedded in these statements to the politicians’ ideology and special interest connections. In the second step, we use the variation in timing of the political statements and thus the varying role of ideological views on potential economic consequences (bank bailouts and top-management compensation) at the time of these statements. Secondly, we use the cross-sectional variation in politicians’ ideological preferences regarding these economic consequences to disentangle the roles of ideology and special interest in a regression framework. 
 
Ideology vs. Special Interests
One distinct group of politicians is ideologically motivated and only intervenes in the political debate when the topic receives a fairly high level of public attention, especially in the media. As such, they focus mostly on the economic consequences of the regulation, such as bank bailouts or the restriction of potentially excessive management compensation. These politicians share a strong and homogeneous ideological view on these consequences. For example, we observe that very fiscally conservative Republicans, who strictly oppose government interventions and bank bailouts, are in favor of easing accounting rules that artificially increase banks' capital. Similarly, we see left-wing liberal democrats, who are committed to limiting management remuneration, arguing for the recognition of all stock option expenses thus making stock option plans less attractive for firms.
 
A second group of politicians is more continuously involved and exerts greater influence on the technical design of the regulations. Their public statements focus less on the economic consequences of regulation and more on technical factors such as the volatility of earnings per share, which relates to the relevance and predictability of profits. This focus makes them come across as being more objective, more factual, in their argumentation. However, we observed that precisely this group has strong links, for example through financial campaign contributions, to affected interest groups. This group of politicians usually takes position on regulations that are in line with economic interests of these groups. For example, those who receive campaign contributions from the financial industry are more likely to advocate accounting rules that help banks avoid loss statements in times of crisis in order to preserve their equity. 
 
Our research shows that economic interest groups in the USA are capable of influencing technical accounting regulation through politicians, thereby asserting their own economic interests. Even though much of what happens in Europe takes place behind closed doors, we do assume that such connections to industry can also be found here. The main lesson learned is that we should not view accounting standard-setting as being isolated from political influence and ideological views on its consequences. Instead we should approach accounting standard-setting as being subject to the same political forces that shape policymaking in other fields. 
 
Read the full article “Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests” by Jannis Bischof, Holger Daske and Christoph J. Sextroh in the Journal of Accounting Research. https://doi.org/10.1111/1475-679X.12300
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About Christoph J. Sextroh

Tilburg University
Assistant Professor

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