Global private governance: Lessons from a national model of setting standards in accounting

Law and Contemporary Problems

Volumn 68, Issue 3-4, 2005, Pages 225-262

  Mattli, Walter ^a   Büthe, Tim ^b  

^a ST JOHN S COLLEGE   (United Kingdom)

^b DUKE UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 29344462844     PISSN: 00239186     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (203)

1. See, e.g., Tim Büthe, Governance through Private Authority? Non-State Actors in World Politics, 58 J. Int'l Aff. 281 (2004);
2. Governance in a Global Economy: Political Authority in Transition (Miles Kahler & David A. Lake eds., 2003);
3. Transatlantic Governance in the Global Economy (Mark A. Pollack & Gregory C. Shaffer eds., 2001);
4. Anne-Marie Slaughter, A New World Order (2004). Although most of these studies focus on the increased demand for global governance, the supply of governance institutions must also be explained.
5. See Walter Mattli, The Logic of Regional Integration: Europe and Beyond (1999);
6. Douglass C. North, Structure and Change in Economic History (1981);
7. Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (1965).
8. For a discussion of internationalization or transnationalization versus "globalization," see David Held et al., Global Transformations: Politics, Economics and Culture (1999). For notational simplicity we will use "global" in this article even when social exchange or institutions may, strictly speaking, "only" be international or transnational.
9. Miles Kahler & David A. Lake, Globalization and Governance, in Governance in a Global Economy, supra note 1, at 7. We concur with Kahler and Lake that recognition of authority may be based on coercive power, but that "governance" connotes compliance as such as being voluntary.
10. For a discussion of alternative notions of "governance," see Governance Without Government: Order and Change in World Politics (James N. Rosenau & Ernst-Otto Czempiel eds., 1992).
11. Benedict Kingsbury, Nico Krisch, & Richard B. Stewart, The Emergence of Global Administrative Law, 68 L. & Contemp. Probs. 15 (summer/ Autumn 2005). "Disclosed reasons" may of course be merely rationalizations.
12. Many of these core principles of administrative law seem to be grounded in democratic theory. See, e.g., Robert A. Dahl, A Preface to Economic Democracy (1985).
13. Therefore, they might only be found in full in democracies. Yet, compare the distinction between participation-based and delegation-based notions of accountability in Ruth Grant & Robert O. Keohane, Accountability and Abuses of Power in World Politics, 99 Am. Pol. Sci. Rev. 29 (2005).
14. Kingsbury et al., supra note 3, at 34.
15. Virginia Haufler, A Public Role for the Private Sector: Industry Self-Regulation in a Global Economy 118 (2001).
16. For a broader discussion of issues of accountability in global governance, see Robert O. Keohane & Joseph S. Nye, Redefining Accountability for Global Governance, in Governance in a Global Economy, supra note 1, at 386-411.
17. Walter Mattli & Tim Büthe, Accountability in Accounting? The Politics of Private Rule-making in the Public Interest, 18 Governance 399 (July 2005);
18. Tim Büthe, The Dynamics of Principals and Agents: Institutional Change and Persistence in Setting U.S. Accounting Standards, Mimeo (Duke University, 2005).
19. For an analysis of other major private-sector regulatory institutional bodies, namely the International Organization of Standardization (ISO) and the International Electrotechnical Commission (IEC), see Walter Mattli & Tim Büthe, Setting International Standards: Technological Rationality or Primacy of Power?, 56 World Pol. 1 (2003).
20. For general discussions of the choice of various public, private, or hybrid governance arrangements, see Walter Mattli, Public and Private Governance in Setting International Standards, in Governance in a Global Economy, supra note 1, at 199-225;
21. Daniel Drezner, Who Rules? The Regulation of Globalization (2005) (unpublished manuscript on file with author).
22. For a concise discussion of the key reasons for having standards for financial reporting, see David Solomons, The Political Implications of Accounting and Accounting Standards Setting, 13 Acct. Bus. Res. 107 (1983).
23. IASB replaced an institutionally weaker predecessor hailing back to the early 1970s, the International Accounting Standards Committee (IASC).
24. Domestically, FASB accounting standards are binding based on the regulatory authority delegated to the SEC by Congress.
25. Parts II and III draw in large part on Mattli and Büthe, supra note 7.
26. For a recent review of the literature, see Jonathan Bendor et al., Theories of Delegation, 4 Ann. Rev. Pol. Sci. 235 (2001);
27. see also Darren Hawkins et al., Delegation under Anarchy: States, International Organizations, and Principal-Agent Theory (forthcoming 2006).
28. See Barry R. Weingast, Political Institutions: Rational Choice Perspectives, in A New Handbook of Political Science 167 (Robert E. Goodin & Hans-Dieter Klingemann eds., 1996).
29. See, e.g., Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (1985).
30. See generally Torbjörn Bergman et al., Parliamentary Democracy and the Chain of Delegation, 37 Eur. J. Pol. Res. 255, 255-429 (2000).
31. There is also, of course, an extensive literature on delegation within legislatures. E.g., Kenneth A. Shepsle & Barry Weingast, The Institutional Foundations of Committee Power, 81 Am. Pol. Sci. Rev. 86 (1988);
32. Kenneth A. Shepsle & Barry Weingast, Positive Theories of Congressional Institutions, 19 Leg. Stud. Q. 145 (1994).
33. E.g., Thomas H. Hammond & Jack H. Knott, Who Controls the Bureaucracy? Presidential Power, Congressional Dominance, Legal Constraints, and Bureaucratic Autonomy in a Model of Multi-Institutional Policy-Making, 12 J. L. Econ. Org. 119 (1996);
34. Mathew D. McCubbins et al., Administrative Procedures as Instruments of Political Control, 3 J. L. Econ. Org. 243 (1987);
35. see also Terry M. Moe, Control and Feedback in Economic Regulation: The Case of the NLRB, 79 Am. Pol. Sci. Rev. 1094 (1985).
36. E.g., John D. Huber & Charles R. Shipan, Deliberate Discretion? The Institutional Foundations of Bureaucratic Autonomy (2002);
37. Mark Pollack, Engines of European Integration: Delegation, Agency and Agenda-Setting in the European Union (2003);
38. Mark Thatcher & Alec Stone Sweet, Theory and Practice of Delegation to Non-Majoritarian Institutions, 25 W. Eur. Pol. 1 (2002).
39. E.g., Erica R. Gould, Money Talks: Supplementary Financiers and International Monetary Fund Conditionality, 57 Int'l Org. 551 (2003);
40. Daniel L. Nielson & Michael J. Tierney, Delegation to International Organizations: Agency Theory and World Bank Environmental Reform, 57 Int'l Org. 241 (2003).
41. See, e.g., Susan Strange, The Retreat of the State: The Diffusion of Power in the World Economy (1996);
42. Alfred C. Aman, Administrative Law for a New Century, in Globalization and Governance, 267, 272 (Aseem Prakash & Jeffrey A. Hart eds., 1999);
43. Private Authority and International Affairs (A. Claire Cutler et al. eds., 1999);
44. see also Büthe, supra note 1.
45. David Epstein & Sharyn O'Halloran, Delegating Powers: A Transaction Cost Politics Approach to Policy Making under Separate Powers 48 (1999).
46. James E. Alt & Alberto Alesina, Political Economy: An Overview, in A New Handbook of Political Science 645, 658 (Robert E. Goodin & Hans-Dieter Klingemann eds. 1996).
47. Epstein & O'Halloran, supra note 21, at 5, 196.
48. See, e.g., Haufler, supra note 6, at 3, 10, 20.
49. We will discuss this issue in more detail below.
50. Morris P. Fiorina, Legislative Choice of Regulatory Forms: Legal Process or Administrative Process?, 39 Pub. Choice 33, 46 (1982).
51. R,P(c) is the overall utility (net benefit) derived from regulatory governance by the political actor (public principal). This logic motivates delegation inter alia in politically charged contexts, in which regulatory activity may be more palatable for the regulated when carried out by an agent who is clearly separate from the principal, rather than being carried out directly by the principal.
52. Wolfgang C. Müller, Political Parties in Parliamentary Democracies: Making Delegation and Accountability Work, 37 Eur. J. Pol. Res. 309, 320 (2000).
53. We do not mean to make too much of this difference: in the real world, public regulatory agencies can get captured by those whom they are supposed to regulate. See George Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. Mgmt. Sci. 3 (1971).
54. And as Epstein and O'Halloran point out, legislators (as the public principals of the regulatory agencies) themselves may also be very receptive to special interest lobbying when making regulatory decisions. Epstein & O'Halloran, supra note 21, at 10;
55. see also Terry M. Moe, Political Institutions: The Neglected Side of the Story, 6 J. L. Econ. Org. 213 (1990).
56. When any one group has privileged access, we would expect the regulatory activity to favor the interests of that group, regardless of whether this was the intention of the institutional arrangement or an unintentional by-product. See McCubbins et al., supra note 17, at 261;
57. see also Matthew D. McCubbins et al., Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies, 75 Va. L. Rev. 431 (1989);
58. Glen O. Robinson, Commentary on "Administrative Arrangements and the Political Control of Agencies": Political Uses of Structure and Process, 75 Va. L. Rev. 483 (1989). Note also that we do not argue that the involvement of non-governmental principals inherently diminishes the effectiveness or efficiency of regulation. Not all public policy decisions significantly affect everyone. If the private principals reflect without bias the balance of interests among those who have a stake in the regulatory matter, public and private benefits should coincide (though there might be less need for regulation under these circumstances). Moreover, with the right socio-political incentives, a high degree of independence seems to be quite possible: Highly institutionalized professional norms appear to provide effective incentives, for instance, for former senior partners in corporate law firms to become quite independent judges after appointment, or for national policy experts to largely disregard their own countries' policy preference after joining the European Commission bureaucracy. Finally, a full analysis of outcomes (rather than preferences) might require additional contextual information.
59. See http://www.wada-ama.org (last visited Apr. 10, 2005);
60. Kingsbury et al., supra note 3, at 46.
61. See supra text accompanying notes 23-24.
62. See Mark Blyth, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (2002);
63. Karl Polanyi, The Great Transformation: The Political and Economic Origins of our Time (1957);
64. John Gerard Ruggie, International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, in International Regimes 195 (Stephen D. Krasner ed., 1983);
65. Kathleen R. McNamara, Rational Fictions: Central Bank Independence and the Social Logic of Delegation, 25 W. Eur. Pol. 47 (2002).
66. See, e.g., Robert S. Erikson et al., The Macro Polity 325 (2002).
67. See, e.g., David Vogel, The Hare and the Tortoise Revisited: The New Politics of Consumer and Environmental Regulation in Europe, 33 Brit. J. Pol. Sci. 557 (2003).
68. See David Vogel, Fluctuating Fortunes: The Political Power of Business in America (1989).
69. See Paul Pierson, Politics in Times: History, Institutions, and Social Analysis (2004);
70. Büthe, supra note 7;
71. see also Kingsbury et al., supra note 3, at 35-40.
72. Substantial rather than merely cosmetic institutional or behavioral change in response to changes in the macro-climate, however, should not be expected to be automatic. As Wood and Waterman note, when signals from principals or the political environment conflict with the interests of a bureaucracy, "it is natural for bureaucracies to react slowly." Dan B. Wood & Richard W. Waterman, The Dynamics of Political-Bureaucratic Adaptation, 37 Am. J. Pol. Sci. 497 (1993). This expectation should apply to private as well as public bureaucracies. Regulatory agents may react to such changes in the political macro-climate in recognition that it changes their constraints, but we should expect to see far-reaching changes in the formal institutions or regularized behavior of regulatory agents only when public principals translate the change in the macro climate into specific incentives for agent adaptation.
73. See Roger Fisher et al., Getting to Yes: Negotiating Agreement without Giving In 56 (2d ed. 1991).
74. See infra text accompanying notes 56.
75. Barney Jopson, Key Performance Ratio Finds that Its Numbers May Be Up, Fin. Times, Feb. 1, 2005, at 16.
76. See infra Part IV.
77. See infra text accompanying notes 55-57, 92-95, 103.
78. Cf. Tim Büthe, Taking Temporality Seriously: Modeling History and the Use of Narratives as Evidence, 96 Am. Pol. Sci. Rev. 481 (2002).
79. William Z. Ripley, Main Street and Wall Street 198, 216, 162 (1927).
80. Accounting Series Release No.150 (Dec. 20, 1973) (reprinted in, for example, Douglas C. Michael, Legal Accounting: Principles and Applications 41-43 (1997)).
81. The institutional evolution of U.S. accounting standards-setting, which we examine in greater detail elsewhere, is beyond the scope of this article. See also Paul B. W. Miller et al., The FASB: The People, the Process, and the Politics 55-58 (4th ed. 1998).
82. A fourth institutional body, the Governmental Accounting Standards Board (GASB), was added in 1984. GASB sets standards of financial accounting and reporting for state and local governmental units.
83. Each of the five original sponsoring organizations of the new standard-setting structure nominated one or more of the nine trustees of the Foundation. Besides the AICPA, these organizations included the American Accounting Association (AAA), the professional organization of accounting educators; the Financial Executives Institute (FEI); the Financial Analysts Federation (FAF, now the Association for Investment Management and Research, or AIMR); and the National Association of Accountants (NAA, now the Institute of Management Accountants, IMA). In 1976, the Securities Industry Association (SIA) joined this group of sponsoring organizations. The latest additions are the National Association of State Auditors, Comptrollers and Treasurers as well as the Government Finance Officers Associations. The Foundation's original trustees were the heads of three large national public accounting firms, two regional accounting firms, an investment banker, an accounting professor, and two executives from large U.S. corporations. By the mid-1990s, the number of trustees had risen to sixteen. Trustees have tended to represent and promote the interests of their sponsors.
84. Each member has to sever all connections with prior employers and to divest him- or herself of all investments or other financial arrangements that might create conflicts of interest.
85. Financial Accounting Foundation, Bylaws, chpt. A, art. II-A, section 2 (1973). The members of the first Board included the president of AICPA and three senior accountants from Haskins & Sells (now part of Deloitte & Touche), Price Waterhouse, and Peat, Marwick, Mitchell & Co. The other three members were a former chief of the office of Accounting and Finance of the Federal Power Commission, a comptroller of Exxon Corporation, and an accounting professor. The current board consists of five accountants (including one with past positions in investment banking and as a business school professor of accounting), one former comptroller of a major oil corporation, and one accounting professor. See http://www.fasb.org/facts/bd_members_staff.shtml.shtml (last visited Aug. 26, 2004).
86. Stephen Mezias & Seungwa Chung, The Process and Participation at FASB: A Study of the Comment Period (1989);
87. Miller et al., supra note 46, at 59.
88. Other changes included changing the voting rule for adoption of FASB standards from a supermajority of at least 5-2 to a simple majority of 4-3 (requirements for passing proposals changed several times over the last three decades; see note 70 and accompanying text below), placing a limit on annual contributions from any given firm, doubling the technical staff, and consolidating the staff in a single Research and Technical Activities Division.
89. See infra text accompanying notes 84-90.
90. See Miller et al., supra note 46, at 43.
91. FASAC was originally comprised in 1973 of some twenty experts from the fields of finance, accounting, industry, education, banking, and the legal profession. By the 1990s, FASAC counted about thirty members, about half of which were representatives of "preparers" (that is, publicly listed companies). See http://www.fasb.org/fasac/ fasacmem.shtml (last visited Apr. 10, 2005).
92. See Kingsbury et al., supra note 3, at 3.
93. The accounting standards-setting process is legislative in that it "establishes authoritative rules consistent with a legislative mandate; it is judicial because it interprets its own rules." Don Kirk in Robert van Riper, Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process 178 (1994).
94. Donald Kirk, Address at the Business Council, FASB Viewpoint at 2 (Nov. 9, 1979);
95. see also Miller et al., supra note 46, at 16.
96. Miller et al., supra note 46;
97. Laurence Minard, Lower the Red Flag?, Forbes, June 12, 1978, at 95;
98. Paulette R. Tandy and Nancy L. Wilburn, Constituent Participation in Standard-Setting: The FASB's First 100 Statements, 6 Acct. Horizons 47, 47 (June 1992).
99. Miller et al., supra note 46;
100. Van Riper, supra note 55;
101. Randy Howard, Kudos for the FASB, 169 J of Accountancy (May 1990) at 15.
102. This risk was noted early on. See, e.g., Stephen A. Zeff, The Rise of "Economic Consequences," 146 J. Acct. 60 n.25 (1978).
103. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, Title 1, §109 (codified as amended in scattered sections of 15 U.S.C.).
104. Several private-sector players interviewed have expressed concern that the new funding structure may move FASB closer to government and make it more susceptible to political interference.
105. Van Riper, supra note 55, at 169;
106. see also Wayne Baliga et al., News Report: Closer FAF Involvement Urged in FASB Standard-Setting, 167 J. of Accountancy 18 (June 1989);
107. Robert G. Walker and Peter Robinson, A Critical Assessment of the Literature on Political Activity and Accounting Regulation, 7 Research in Acct. Reg. 3, 28, 37 n.5 (1993).
108. Miller et al., supra note 46.
109. Miller et al., supra note 46, at 67;
110. Zeff, supra note 59, at 57, 60.
111. Timothy G. Sutton, Lobbying of Accounting Standard-Setting Bodies in the U.K. and the U.S.A.: A Downsian Analysis, 9 Acct. Org. and Soc'y 81, 85 (1984);
112. Stephen Mezias & Seungwha Chung, The Process and Participation at FASB: A Study of the Comment Period (1989),
113. Clarence Sampson, The "Process" in Due Process: A Behind-the-Scenes Look at Standards Setting, FASB Viewpoint, at 4-6 (Oct. 14, 1991);
114. Tandy & Wilburn, supra note 57, at 51;
115. see also Walter & Robinson's excellent critique of this literature, supra note 62.
116. Van Riper, supra note 55, at 32.
117. The name of the Board member was Arthur Northrop. Miller, Redding, and Bahnson sum up the episode as follows: "Northrop's reappointment was not supported by the Financial Executives Institute because he had gravely disappointed leaders of the preparer constituency by not always taking positions on the issues that they expected, despite the fact that he had spent more than 40 years with IBM. This decision is significant because it shows that the trustees were again willing to use their appointment powers to try to shape the outcome of the Board's process to meet their own needs." Miller et al., supra note 46, at 183.
118. Ten years later, after the Enron debacle, FASB felt that the time was right for resuscitating its stock options project, resulting in the December 16, 2004 revision of the U.S. accounting standard for "Share-Based Payments" (Statement 123(R)), available at http:// www.fasb.org/news/nr121604_ebc.shtml (last visited Apr. 10, 2005), which requires the expensing of stock options. This time, business was less unanimous in opposing the project. Nevertheless, IT firms in particular have mounted a strong lobbying campaign against the project. As a result, the House of Representatives passed in July 2004 the Stock Options Accounting Reform Act (H.R. 3574) that would override the standardsetter by limiting options expensing to the five most highly paid executives. The Senate referred the bill to the Committee on Banking Housing, and Urban Affairs, where it "died" when the committee did not take any action before the 108th Congress ended. H.R. Res. 3574, 108th Cong. (2004). However, upon heavy lobbying of the SEC by opponents of expensing, with support from a bipartisan group of members of Congress, FASB agreed to a six- to twelve-months delay before issuers of financial statements have to comply with the new standard. The political battle over stock option expensing in the United States may therefore be expected to continue for most of 2005.
119. See Floyd Norris, Audit Board Delays Rule on Options As Expenses, N.Y. Times, Oct. 14, 2004, at C1; "Share-Based Payments" (Statement 123(R)) (last visited Apr. 10, 2005), which requires the expensing of stock options. This time, business was less unanimous in opposing the project. Nevertheless, IT firms in particular have mounted a strong lobbying campaign against the project. As a result, the House of Representatives passed in July 2004 the Stock Options Accounting Reform Act (H.R. 3574) that would override the standardsetter by limiting options expensing to the five most highly paid executives. The Senate referred the bill to the Committee on Banking Housing, and Urban Affairs, where it "died" when the committee did not take any action before the 108th Congress ended. H.R. Res. 3574, 108th Cong. (2004). However, upon heavy lobbying of the SEC by opponents of expensing, with support from a bipartisan group of members of Congress, FASB agreed to a six- to twelve-months delay before issuers of financial statements have to comply with the new standard. The political battle over stock option expensing in the United States may therefore be expected to continue for most of 2005
120. Gary Rivlin, Senators Lobby S.E.C. Chief to Delay New Options Rule, N.Y. Times, Oct. 8, 2004, at C3;
121. Gary Rivlin, Regulators Adopt Tighter Rules on Accounting for Stock options, New York Times, Dec. 17, 2004, at C5.
122. Not-for-attribution interviews with two former FASB officials, July 29, 2004 and August 3, 2004.
123. The rule had been changed in 1977 from supermajority to simple majority. See supra note 52.
124. The supermajority requirement had been recommended by the 1972 Wheat Committee, which was the origin of the new institutional arrangement for accounting standard-setting, on grounds that it would reduce the likelihood of controversial rulings which may not enjoy wide support. The change to simple majority in 1977 was justified in terms of speeding up the process of establishing standards and creating less scope for compromising on the substance of a standard. See Financial Accounting Foundation, The Structure of Establishing Financial Accounting Standards 8 (Jan 26, 1989);
125. News Report. FASB "Supermajority" Voting Stirs Controversy, 169 J. of Accountancy at 13 (April 1990);
126. News Report: Supermajority Approved for New FASB Standards 170 J. of Accountancy at 18 (August 1990). Revealingly, in the wake of the Enron scandal of 2001 the FAF decided to move back to simple majority, after FASB had come under heavy criticism for being slow to act and failing to adopt rules that would have tightened the criteria for keeping so-called special purpose entities off corporate financial statements.
127. Van Riper, supra note 55, at 144. Van Riper worked for the FASB from 1973 to 1991.
128. Interviews with current and former SEC staff.
129. For example, in 1997, the SEC chief accountant earned $123,000 while Board members or FASB's director of research and technical activities earned $345,000. The salaries of the SEC Chief Accountant's professional staff ranged from $47,180 to $99,250, whereas FASB project managers earned between $80,000 and $125,000. Miller et al., supra note 46, at 158.
130. Miller et al., supra note 46, at 158.
131. Interviews at SEC and FASB.
132. FASB staff may of course also learn of enforcement and implementation problems directly from interactions with its constituents.
133. Walter Schuetze, Reflections of a Former Member of the FASB 7 (1978).
134. See, e.g., Anne M. Khademian, The Sec and Capital Market Regulation 35 (1992);
135. The Economic Regulation of Business and Industry: a Legislative History of U.S. Regulatory Agencies 2679 (Bernard Schwartz ed., 1973);
136. Barry Weingast, The Congressional-Bureaucratic System: A Principal Agent Perspective (with Applications to the SEC), 44 Pub. Choice 147, 160 (1984).
137. Miller et al., supra note 46, at 102.
138. Van Riper, supra note 55, at 170 (emphasis added);
139. see also Dale Gerboth, Research, Intuition, and Politics in Accounting Inquiry, 48 Acct. Rev. 475 (1973).
140. Press Release, Office of Representative Edward Markey (Apr. 7, 1993) as quoted in Van Riper, supra note 55, at 155.
141. The Sarbanes-Oxley Act restricted the kinds and amounts of non-audit work that can be done by the accountants who work as auditors for a given firm. Sarbanes-Oxley Act § 210 and Regulation SX, 17 C.F.R. § 210 (2002), as updated by SEC Release No. 33-8183 (May 6, 2003);
142. (current version available at http://www.sec.gov/divisions/corpfin/forms/ regsx.htm (last visited Apr. 10, 2005)).
143. Mark Stevens, The Accounting Wars (1985);
144. Mark Stevens, The Big Eight (1981);
145. Mark Stevens, & Carol Bloom Stevens, The Big Six: The Selling Out of the America's Top Accounting Firms (1991).
146. Joseph Stiglitz, The Roaring Nineties: A New History of the World's Most Prosperous Decade 115, 241 (2003).
147. John Plender, Too Many Watchdogs Barking, Fin. Times, Jan. 24, 2005, at 16.
148. This assessment was not limited to the Enron Board's investigative report by William C. Powers et al (Report of Investigation by the Special Investigative Committee of the Board of Derictors of Enron Corp. (2002) available at http://news.findlaw.com/hdocs/docs/enron/sicreport/ (last visited Apr. 10, 2005)).
149. The Special Investigative Committee acknowledged false accounting (Powers et al., at 58, 198f), but blamed FASB standards for "little guidance" and "no clear answers" on how to treat special purpose entities in the company's financial statements (Id. at 37, 180).
150. The assessment was shared by later, outside observers. E.g., Howard Schilit, As Bad as It Gets, Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports 259 (2nd ed. 2002);
151. Ian P. Dewing & Peter O. Russell, Accounting, Auditing and Corporate Governance of European Listed Countries: EU Policy Developments Before and After Enron, 42 J. Common. Mkt. Stud. 289, 301 (2004).
152. Robert Herdman, Address delivered at the Schmalenbach Institute for Business Administration, Cologne, Germany, (Apr. 18, 2002), available at http://www.sec.gov/news/speech/spch554.htm (last visited Apr. 10, 2005) (emphasis added).
153. Herdman reiterated the main points in congressional testimony. Are Current Financial Accounting Standards Protecting Investors? Hearing Before the Subcomm. on Commerce, Trade, and Consumer Protection of the House Comm. on Energy and Commerce, 107th Cong. 2nd Session (2002) (testimony of Robert Herdman), available at http://www.sec.gov/news/ testimony/021402tsrkh.htm (last visited Apr. 10, 2005).
154. A similar arrangement exists in Britain, where the Financial Reporting Council, responsible for setting and enforcing accounting rules, draws its corporate funding from a levy applied by the Financial Services Authority, the main financial regulator.
155. Robert Herz, Address to the American Institute of Certified Public Accountants, (Dec. 12, 2003) (on file with authors).
156. See, inter alia, the Jan. 21, 2005, report on the increasing corporate pushback against post-Enron accounting and corporate governance regulation, at http://marketplace.publicradio.org/shows/2005/01/21/ PM20050121l.html;
157. and the publications discussed in Samuel Brittan, The Rising Spectre of Intrusive Regulation, Fin. Times, Feb. 18, 2005, at 13.
158. See http://www.iasb.org;
159. see also Kristina Tamm Hallström, Organizing International Standardization (2004);
160. Hennie van Greuning & Marius Koen, International Financial Reporting Standards: A Practical Guide (rev. 2004).
161. On international accounting standards see Barry Epstien & Abbas Ali Mirza, IFRS 2005: Interpretation and Application of International Accounting and Financial Reporting Standards (2005);
162. Clare Roberts, International Financial Reporting: A Comparative Approach (2005).
163. The foundation is a not-for-profit corporation registered in Delaware.
164. These organizations include the International Association of Financial Executives Institutes, the International Council of Investment Association, and the International Association for Accounting Education and Research.
165. The national standard-setters are FASB, the British Accounting Standards Board (ASB), the Canadian Accounting Standards Board (AcSB), the Australian Accounting Standards Board (AASB), the French Conseil Nationale de la Comptabilité (CNC), the German Accounting Standards Committee (DRSC), and the Accounting Standards Board of Japan (ASBJ).
166. IASB is currently undergoing a review of its governance structure.
167. See http://www.iosco.org (last visited Apr. 10, 2005). Under the agreement, IOSCO was allowed to monitor the IASC standard-setting process as a non-voting observer at both steering committee and Board meetings.
168. Press Release, IOSCO, IOSCO Announces Completion of Its Assessment of the Accounting Standards Issued by the International Accounting Standards Committee (IASC) (May 2000) at http://www.iosco.org/news/pdf/ IOSCONEWS26.pdf (on file with authors). Agreement on matters of international standards in IOSCO is far from guaranteed.
169. See David A. Singer, Capital Rules: The Domestic Politics of International Regulatory Harmonization, 58 Int'l Org. 531, 546 (2004).
170. Singapore Ministerial Declaration, WTO, § 17 (1996). The IFAC develops auditing standards only.
171. Joel Trachtman, A Sectoral Analysis of Disciplines on Domestic Regulation and International Standard-Setting in Financial Services (2002), Mimeo.
172. See also World Trade Organization Supports IASC Standards, Management Accounting: Magazine for Chartered Management Accountants, at 3 (Feb. 2, 1997).
173. Declaration of G-7 Finance Ministers and Central Bank Governors, G-7 (Oct. 30, 1998);
174. see also Final Report to the G-7 Heads of State and Government on Promoting Financial Stability, G-7, (June 21, 1997);
175. Strengthening the Architecture of the Global Financial System: Report of the G-7 Finance Ministers to G-7 Heads of State or Government for Their Meeting in Birmingham, May 1998, G-7 (May 15, 1998).
176. See The World Bank, Financial Accounting, Reporting and Auditing Handbook (1995);
177. Report of the Management Director to the Interim Committee on Progress in Strengthening the Architecture of the International Financial System, IMF (Apr. 26, 1999);
178. James Wolfensohn, Address to the World Congress of Accountants, Paris, France (Oct. 26, 1997);
179. Report to G-7 Finance Ministers and Central Bank Governors on International Accounting Standards, Basle Committee on Banking Supervision (Apr. 2000);
180. Issues Paper of the Task Force on Implementation of Standards, Financial Stability Forum (Mar. 25-26, 2000). The World Bank now includes the use of IASs/IFRSs as a condition of its loan agreements.
181. The EU has adopted regulations requiring listed companies to prepare consolidated accounts in accordance with IASs starting in 2005. See infra note 112 and accompanying text.
182. Andrew Hill & Andrew Parker, Standard-Setters Are Targeting Stock Options Again, Fin. Times, Nov. 11, 2002, at 21.
183. Sara York Kenny and Robert L. Larson, The Development of International Accounting Standards: An Analysis of Constituent Participation in Standard-Setting, 30 Int'l J. of Acct. 283 (1995);
184. Robert K. Larson, Corporate Lobbying in the International Accounting Standards Committee, 8 J. Int'l Fin. Mgmt. & Acct. 175 (Autumn 1997).
185. See, e.g., Beth A. Simmons, The International Politics of Harmonization: The Case of Capital Market Regulation, 55 Int'l Org. 589, 592 (2001).
186. The concentration is partly due to the history of the accountancy profession, which in the United Kingdom dates back to 1854 (when the Society of Accountants was founded) and in the United States to 1887 (when the American Institute of Accountants was established), whereas for instance the German profession dates only from 1932, and the French from 1942. According to Stewart Hamilton, the United States counted in the early 1990s over 260,000 certified public accountants and the UK some 100,000 chartered members of accountancy bodies (Stewart Hamilton, Accountants Gather Round Different Standards, Fin. Times, Mar. 20, 1998, at 12). The corresponding figures for France and Germany, according to Hamilton, were 11,000 and 5,000 respectively - though these figures seem to exaggerate the skew of the distribution of accounting expertise by not considering that the various functions of accountants in the United States are fulfilled by several different professions in some other countries (such as Wirtschaftsprüfer, Steuerberater, and tax lawyers in the German context). There is no doubt, however, that the distribution of financial reporting standards expertise is skewed.
187. Christopher Nobes & Robert Parker, Comparative International Accounting 15 (5th ed. 1998).
188. Inevitably, differences in philosophies and general principles underlying accounting standards lead to fundamental substantive differences in the treatment of many economic activities (such as mergers, pensions, leases, and changes in the value of financial instruments). Consider the following example: Income taxes in Germany are based primarily on externally reported accounting profit, so there are strong legal and economic pressures to report income and asset values conservatively. Consequently, German accounting standards allow management considerable flexibility in determining the appropriate allowance for all possible losses. Specifically, transfers to and from reserves need not even be disclosed. Thus if a firm wants to report an increase in income it can charge some expenses against reserves instead of against income without having to disclose such charges in the financial statements. Such practices are expressly prohibited in the United States and United Kingdom where reserves can be set aside for identifiable probable losses but where transfers to and from reserves must be disclosed in the financial statements.
189. Leonardo Martinez, Private Expertise and Global Economic Governance: The Case of International Accounting Standards, 54-56 (2001) (unpublished M.Phil thesis, Oxford University).
190. Lee H. Radebaugh et al., Foreign Exchange Listings: A Case Study of Daimler-Benz, 6 J. Int'l Fin. Mgmt Acct. 158 (1995). Not only were other German and European business leaders incensed by Daimler-Benz's willingness to adopt U.S. GAAP, they were also troubled by its acceptance of the requirement to publish quarterly results; few Germans understood the American fixation on earnings per share as a performance measure.
191. In 1990, foreign companies raised $8 billion in the United States; by 1998 the number had shot up to $170 billion. Franck Bancel & Usha Mittoo, European Managerial Perceptions of the Net Benefits of Foreign Stock Listings, 7 Eur. Fin. Mgmt. 213 (2001).
192. The nationality of IASB members should matter, given the difference in approaches to accounting as well as the empirical finding that substantive accounting standards preferences tend to be very similar among firms from the same countries but differ among firms from different countries, with firms from Anglo-Saxon countries often showing similar preference; see Robert K. Larson and Karen L. Brown, Lobbying of the International Accounting Standards Committee: The Case of Construction Contracts, 14 Advances in Int'l Acct. 62 (2001).
193. David Tweedie, former head of the British Accounting Standards Board was appointed as chairman when IASB was formed in 2001; the vice chairman of the new Board was Thomas Jones, a British national who formerly had been chief financial officer of Citicorp. The Board included two accountants with long-time experience at FASB: Anthony Cope and James Leisenring (a former FASB vice chairman, who was the official liaison Board member to FASB). The other liaison members to their respective national organizations were Tricia O'Malley, former chairwoman of the Canadian Accounting Standards Board and KPMG partner; Hans-Georg Bruns of Germany, an official of Daimler Chrysler; Gilbert Gélard, a French partner of KPMG and former IASC Board member; Warren McGregor, a former chief executive of the Australian Standards Board (also liaison to New Zealand); Geoffrey Whittington, an accounting professor at Cambridge University; and Tatsumi Yamada, a partner at the Japanese affiliate of Price Waterhouse Coopers. The remaining full-time Board members were Robert Garnett, a South African and an executive of the minerals giant Anglo American, and Harry Schmid, a Swiss executive of Nestle. The two part-time members were Mary Barth, a Stanford University professor and former partner of Arthur Andersen, and Robert Herz, a partner at Price Waterhouse Cooper in New York. Some of these individuals have in the meantime been replaced, but the Anglo-Saxon group remains dominant. Anglo-Saxon dominance also has a long tradition in IASB's predecessor, the IASC, where even the few participating developing countries were almost all former British colonies or protectorates. See Kenny and Larson, supra note 104;
194. Robert K. Larson and Sara York Kenny, Research Note: Developing Countries' Involvement in the IASC's Standard-Setting Process, 11 sup. 1 Advances in Int'l Acct. 17 (1998).
195. Council Regulation 1606/2002, art. 3,2002 O.J. (L 243).
196. For this purpose the Commission promoted the creation of a review body named the European Financial Reporting Advisory Group, incorporating expert users, accountancy professionals, and regulators.
197. On Nov. 19, 2004, the European Commission endorsed "95%" of IAS 39 subject to IASB review of the "current fun fair value option." After extensive consultation with the EU Commission, IASB published an amended version of IAS 39 on June 16, 2005, which was endorsed by the EU's Accounting Regulatory Committee, but formal adoption by the EU has yet to take place. The current position of the Commission toward IASs/IFRSs is available at http://europa.eu.int/comm/ internalr_market/accounting/ias_en.htm (last visited Aug. 10, 2005).
198. See Dewing and Russell, supra note 86.
199. Andrew Parker, IASB to Improve Consultation Procedures, Fin. Times, Mar. 24, 2004, at 29.
200. See International Accounting Standards Committee Foundation, Review of the Constitution: Proposals for Change (2004).
201. It also is a function of the principals' monitoring capabilities, which, however, again turns on the distribution of technical expertise.
202. In addition, suppliers of governance may here, as always, be motivated by a quest for power, and private sector providers of governance also seem motivated by the opportunity to keep government regulation at bay. See Tandy and Wilburn, supra note 57, at 48.
203. Minimizing government involvement appears to be particularly important to the business community in the liberal market economy of the United States. See Tim Büthe, The Political Sources of Business Confidence (2002; unpublished Ph.D. dissertation, Columbia University).