Watts-and-Zimmerman-1978-towards-a-positive-theory

TowardsaPositiveTheoryoftheDeterminationofAccountingStandardsAuthor(s):RossL.WattsandJeroldL.ZimmermanSource:TheAccountingReview,Vol.53,No.1(Jan.,1978),pp.112-134Publishedby:AmericanAccountingAssociationStableURL::25/11/201023:05YouruseoftheJSTORarchiveindicatesyouracceptanceofJSTOR'sTermsandConditionsofUse,availableat://=aaasoc.EachcopyofanypartofaJSTORtransmissionmustcontainthesamecopyrightnoticethatappearsonthescreenorprintedpageofsuchtransmission.JSTORisanot-for-profitservicethathelpsscholars,researchers,andstudentsdiscover,use,andbuilduponawiderangeofcontentinatrusteddigitalarchive.Weuseinformationtechnologyandtoolstoincreaseproductivityandfacilitatenewformsofscholarship.FormoreinformationaboutJSTOR,[e-mail]ationiscollaboratingwithJSTORtodigitize,preserveandextendaccesstoTheAccountingReview.:Thisarticleprovidesthebeginningsofapositivetheoryofaccountingbyexploringthosefactorsinfluencingmanagement'sattitudesonaccountingstandardswhicharelikelytoaffectcorporatelobbyingonaccountingstandards.Certainfactorsareexpectedtoaffectafirm'scashflowsandinturnareaffectedbyaccountingstandards.Thesefactorsaretaxes,regulation,managementcompensationplans,bookkeepingcosts,andpoliticalcosts,andtheyarecombinedintoamodelwhichpredictsthatlargefirmswhichexperiencereducedearningsduetochangedaccountingstandardsfavorthechange.Allotherfirmsopposethechangeiftheadditionalbookkeepingcostsjustifythecostoflobbying.ThispredictionwastestedusingthecorporatesubmissionstotheFASB'sDiscussionMemorandumonGeneralPriceLevelAdjustments.Theempiricalresultsareconsistentwiththetheory.ACCOUNTINGstandardsintheUnitedStateshaveresultedfromacom-plexinteractionamongnumerouspartiesincludingagenciesoftheFederalgovernment(notablytheSecuritiesandExchangeCommissionandTreasuryDepartment),stateregulatorycommis-sions,publicaccountants,quasi-publicaccountingstandard-settingboards(theCommitteeonAccountingProcedures(CAP),theAccountingPrinciplesBoard(APB),andtheFinancialAccountingStandardsBoard(FASB)),andcor-poratemanagements.Thesepartieshave,inthepast,andcontinuetoexpendre-sourcestoinfluencethesettingofac-countingstandards.Moonitz[1974],Horngren[1973]and[1976],Armstrong[1976]andZeff[1972]documentthesometimesintensepressureexertedontheprivateaccountingstandard-set-tingbodies(i.e.,CAP,APB,FASB).Thesepressureshaveledtoseveralre-organizationsofthestandard-settingboards.Ultimately,weseektodevelopaposi-tivetheoryofthedeterminationofac-countingstandards.'Suchatheorywillhelpustounderstandbetterthesourceofthepressuresdrivingtheaccountingstandard-settingprocess,theeffectsofvariousaccountingstandardsondifferentgroupsofindividualsandtheallocationofresources,andwhyvariousgroupsarewillingtoexpendresourcestryingtoaffectthestandard-settingprocess.ThisunderstandingisnecessarytodetermineifprescriptionsfromnormativetheoriesWewishtothankmembersoftheFinanceWorkshopattheUniversityofRochester,membersoftheAccount-ingSeminarattheUniversityofMichiganand,inpar-ticular,GeorgeBenston,KenGaver,NicholasGonedes,MichaelJensen,KeithLeffler,MartinGeisel,CliffSmithandananonymousrefereefortheirhelpfulsuggestions.'SeeJensen[1976]andHorngren[1976].RossL.WattsandJeroldL.Zimmer-manareAssistantProfessorsofAccount-ingattheUniversityofRochester.112WattsandZimmerman113(e.g.,currentcashequivalents)arefeasi-ble.Watts[1974]and[1977]hasstartedtodevelopsuchatheory.Thispaperex-pandsonthisinitialworkbyfocusingonthecostsandbenefitsgeneratedbyac-countingstandardswhichaccruetomanagements,therebycontributingtoourunderstandingoftheincentivesofmanagementtoopposeorsupportvari-ousstandards.Management,webelieve,playsacentralroleinthedeterminationofstandards.Moonitzsupportsthisview:Managementiscentraltoanydiscussionoffinancialreporting,whetheratthestatutoryorregulatorylevel,oratthelevelofoffi-cialpronouncementsofaccountingbodies.[Moonitz,1974,p.64]Hence,itseemsappropriatethatapre-conditionofapositivetheoryofstan-dard-settingisunderstandingmanage-ment'sincentives.Thenextsectionintroducesthosefac-tors(e.g.,tax,regulatory,politicalcon-siderations)whicheconomictheoryleadsustobelievearetheunderlyingdetermin-antsaffectingmanagements'welfareand,thereby,theirdecisiontoconsumere-sourcestryingtoaffectthestandard-settingprocess.Next,amodelispre-sentedincorporatingthesefactors.ThepredictionsofthismodelarethentestedusingthepositionstakenbycorporationsregardingtheFASB