Essays in Financial Accounting Standard Setting

Abstract

This dissertation consists of three essays that explore the financial accounting standard setting process. In the first, I examine the extent to which the FASB's agenda determination is a function of the contemporaneous preferences of its primary constituents: auditors, preparers, and financial statement users. Using the FASB's consultation with the FASAC as a lens through which to view constituent preferences, I find evidence that from 1982 to 2001 influence on FASB agenda decisions is concentrated among "Big N" audit firms, whereas from 2002 to 2006 the preferences of financial constituents appear to be most significant. Across both periods, I find no evidence of significant preparers' influence in agenda formation, which is in contrast to their documented role in later stages of standard setting. The second essay, written with Karthik Ramanna and Sugata Roychowdhury, examines how tightening of the U.S. auditing oligopoly--from the Big 8 to the Big 4--has affected incentives of the Big N as manifested in their lobbying preferences on accounting standards. We find, as the oligopoly has tightened, that Big N auditors are more likely to express concerns about decreased "reliability" of FASB-proposed accounting standards (relative to an independent benchmark). Robust to controls for various alternative explanations, our results are consistent with Big N auditors facing greater political and litigation costs attributable to increased visibility from the tightening oligopoly and decreased competitive pressure to satisfy client preferences. The results are inconsistent with the claim that Big N auditors increasingly consider themselves "too big to fail" as the audit oligopoly tightens. The third essay, written with Karthik Ramanna, investigates the effect of standard setters in standard setting. We examine how certain professional and political characteristics of FASB members and SEC commissioners predict the accounting "reliability" and "relevance" of proposed standards. Notably, we find FASB members with backgrounds in financial services to be more likely to propose standards that decrease "reliability" and increase "relevance," partly due to their tendency to propose fair-value methods. We find opposite results for FASB members affiliated with the Democratic Party, although only when financial-services background is excluded as an independent variable.