Legitimacy of Private Accounting Standard Setters: Literature Review and Suggestions for Future Research

Abstract

The purpose of this study is to critically synthesize extant research on the legitimacy of private accounting standard setters in order to inform future research opportunities. This study presupposes that legitimacy is an important issue for the survival of private accounting standard setters who face legitimacy claims from stakeholders and regulatory competition from other standard-setting bodies due to their lack of a democratic foundation. Findings show that the definition, typology, sources, and legitimacy characteristics that researchers use depend on the theoretical perspectives that they employ in their analysis. Simultaneously, they do have some common points despite the difference in their perspectives. Regarding legitimacy changes, prior studies suggest that moving from practical toward cultural legitimacy, the importance of due process, and the role of crises all affect these changes. The review also identifies future research directions as well as several challenges for legitimacy studies in accounting, namely defining an analytical framework, focus on the dynamic nature of legitimacy and output legitimacy, and the need for more empirical studies, among others.

Keywords:

• legitimacy
• private accounting standard setters
• institutional theory
• IASB

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Richardson (1987) defined the legitimation process as ‘an attempt to establish a semiotic relation between action and values’ (p. 342) and indicated accounting as a legitimating institution, that is, ‘a set of beliefs and techniques, to link actions and values, i.e. to make those actions legitimate’ (p. 341).

2 In institutional studies, there are three well-known anthologies: The new institutionalism in organizational analysis (Orange book: Powell & DiMaggio, 1991), The SAGE handbook of organizational institutionalism (Green book: Greenwood et al., 2008), and The SAGE handbook of organizational institutionalism (Green book, second edition: Greenwood et al., 2017).

3 The study of politics and international relations can provide insights into this study area (Best, 2007; Christiansen, 1998; Scharpf, 1999, 2006). For instance, discussing the legitimacy of the European Commission, Christiansen (1998) suggested that international organizations with complex institutional structures face legitimacy dilemmas caused by a ‘democracy deficit.’ Moreover, Best (2007) also noted dilemmas between democratic and expert-based legitimacies in international organizations such as the International Monetary Fund (IMF):

… democratic legitimacy can only be granted by the demos—the members of a particular, self-identified political community. It is their consent to the general legitimacy of a government that makes its actions legitimate—even if a substantial minority opposes specific policies. Expert-based legitimacy, on the other hand, is generally granted by a much smaller circle of individuals. (Best, 2007, p. 472)

In other words, these studies suggest a tension between legitimacy based on problem solving effectiveness by a small group of elite professionals and legitimacy based on democratic accountability (Scharpf, 1999).

4 Bromwich and Hopwood (1983) suggest two reasons that accounting standards are political: (1) the need to obtain consensus within and between standard setting bodies, accounting professions, and, in the broader sense, society at large; and (2) the role of accounting standards that may redistribute income and wealth between different social interests.

5 Referring to extant studies concerning the legitimacy of accounting standard-setting institutions, Richardson (2011, p. 110) showed the following gaps:

The literature in accounting dealing with standards competition has focused theoretically on second-order competition … but has ignored the first-order competition by which a competing standard-setter can gain sufficient resources and social support in order to create a rival set of standards. The evidence suggests that establishing this preliminary presence is a severe obstacle to creating alternative standards.

6 Institutional theorists have analyzed the typology of legitimacy (Aldrich & Fiol, 1994; Archibald, 2004; Bitektine, 2011; Deephouse & Suchman, 2008; Scott, 1995; Suchman, 1995) and classified legitimacy in some conceptual types. However, synthesizing the prior discussions of the typology of organizational legitimacy, Deephouse et al. (2017) suggest four criteria, namely regulatory, pragmatic, moral, and cultural-cognitive. These criteria refer to the appropriateness of an organization regarding regulative rules, constituents’ expectations of its performance, social values and norms, and cognitive models and/or belief systems, respectively.

7 Around the same time, the FASB and SEC both suggested desirable characteristics and legitimacy requirements of a global financial reporting standard setter. The FASB identified the following characteristics as the minimum necessary: (1) an independent decision-making body, (2) adequate due process, (3) adequate staff, (4) independent fundraising, and (5) independent oversight (FASB, 1999, p. 7). The FASB also suggested that high-quality financial reporting should provide decision-useful information to outside investors, creditors, and other stakeholders, while high-quality accounting standards should (1) be consistent with the guidance provided by an underlying conceptual framework, (2) avoid or minimize alternative accounting procedures, (3) be unambiguous and comprehensible, and (4) be capable of rigorous interpretation and application (FASB, 1999, pp. 5–6). The SEC stated that an effective high-quality standard setter would be characterized by (1) an independent decision-making body, (2) an active advisory function, (3) a sound due process, (4) an effective interpretive function, (5) independent oversight representing the public interest, and (6) adequate funding and staffing (SEC, 2000, Q. 13).

8 Similarly, Lee (2009), structural functionalist, perceived the role of the conceptual framework as ‘a tool of public accountants in their goal to achieve professional legitimacy as an occupational grouping’ (p. 156).

9 Orens et al. (2011) presented four patterns of lobbying methods categorized by formal/informal and direct/indirect distinctions; thus, these studies focus on the formal and direct lobbying method.

10 Durocher and Fortin (2010) combine moral and cognitive legitimacy with cultural legitimacy.

11 In so doing, Tamm Hallström (2004) presented the concept of ‘reference organizations,’ generally accepted ‘as being important and authoritative in their respective areas’ (p. 152) as legitimacy granting organizations. In the case of the IASC/IASB, the SEC, EU, IOSCO, and IFAC are such organizations.

12 Thus, in addition to the typologies of legitimacy, institutional theorists highlighted another problem of legitimacy management (Ashforth & Gibbs, 1990; Oliver, 1991; Suchman, 1995). They discussed legitimation strategies to gain, maintain, and repair legitimacy. However, to describe the dynamic nature of legitimacy in more detail, Deephouse et al. (2017) expanded this discussion and suggested five scenarios (gaining, maintaining, challenged by, responding, and institutional innovating).

13 In the review process, the trustees presented the concept of independence with accountability, that is, ‘to demonstrate their [the IASB] responsiveness to markets’ demands and therefore to “ensure confidence in the accountability of the organization”, without jeopardizing the fundamental independence of the process’ (Camfferman & Zeff, 2015, p. 444).

14 On the contrary, from the structural-functionalist perspective, Danjou and Walton (2012) argued that it is not at all obvious that the IASB lacks legitimacy and that there is substantial political and commercial support for the IASB as the world’s standards setter for financial markets.

15 This study is an attempt to do so. However, it will require further refinement.

16 For instance, investigating the legal background of accounting standard setting in Japan, Sanada (2018) suggested that four sets of accounting standards (Japanese GAAP, US GAAP, IFRS, and Japan’s Modified International Standards (JMIS)), which can be used for the consolidated financial statements of listed companies in Japan, are commonly formalized into the domestic legal system through ‘ex post endorsement by the public sector’ (p. 339) and, thus, the role of the state is still important in Japan’s accounting regulation system.