Discussion of policy models in accounting: A critical commentary

Professor Buckley’s paper is an attempt to explain why the U.S. accounting profession has adopted the so-called “constitutional” approach for evaluating and selecting financial accounting and reporting policies. Today, according to the author, this approach is the one followed by the Financial Accounting Standards Board. It is embodied in the Board’s publications relating to the conceptual framework project (e.g. FASB Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises”, November 1978). Buckley argues that the two major competitors to the constitutional view the “common law” or “legal” approach and the “scientific” or “empirical” approach may not adequately protect the interests of the public accounting profession. He concludes that the constitutional approach has been “a rational, reasonable, and probably necessary choice”, but that certain reforms are needed if the approach is to continue to be effective. Reforms are needed that will broaden the constituency and increase the responsiveness of standard setters to all those organizations and individuals to whom they are accountable and responsible. The paper refers to both standards for accounting and financial reporting and standards or rules to regulate auditing and other services provided by public accountants. While the policy-making processes of the FASB and the AICPA have much in common, and, sometimes may be the same thing (see, for example, FASB Exposure Draft, “Specialized Accounting and Reporting Principles and Practices in AICPA Industry Accounting Guides, Industry Audit Guides, and Statements of Position”, 1 June, 1979), I shall concentrate my remarks on the standard-setting process for financial accounting and reporting. There are several reasons for this. First, the bulk of the paper is devoted to that topic. Second, I have just recently returned from a one-year appointment with the FASB as academic fellow and research specialist. Third, one project on which I acted as consultant while at the FASB was the Board’s project on criteria for selecting and evaluating financial accounting and reporting policies. This project is intended to be the second major “block” in the Board’s conceptual framework. Certain material in this document ties in with Professor Buckley’s remarks. This leads me to my first point. Professor Buckley is to be congratulated for identifying the need to evaluate the present accounting policy model, and to develop a more rigorous understanding of that model as it relates to certain alternative approaches or views toward policy formation. Analysis of the kind embodied in this paper has an important role to play in the standard-setting process. I agree with the author that the FASB’s approach as reflected in the Statement on the objectives of financial reporting and the forthcoming proposed Statement on selecting and evaluating financial accounting and reporting policies is basically constitutional in its orientation. But it is well to note that Buckley’s “words of caution”, which emanate from his analysts, are addressed in these conceptual framework documents especially the Exposure Draft on selecting and evaluating financial accounting and reporting policies. The Exposure Draft should be published in August 1979 with a comment period of 3-4 months. I will explain more of this later. The remainder of my remarks are divided into two sections. One examines aspects of the methodology used to “test” the principal hypothesis. The other is a commentary on some of the more normative portions of the paper. How does Professor Buckley demonstrate that