GAAP as a Symbol of Legitimacy: New York State’s Decision to Adopt Generally Accepted Accounting Principles
31 Pages Posted: 28 Jul 2008 Last revised: 6 Dec 2018
Date Written: July 28, 2008
Accounting choice decisions have generally been justified in several ways: implicit costs-benefit analysis on the part of the managers, perceived investor reaction in terms of stock price, and/or managerial incentives for improving management compensation. We believe that a sociological approach to accounting rule choice complements the extant approaches in the governmental accounting literature. In particular, we argue that the New York's decision to adopt Generally Accepted Accounting Principles (GAAP) was an attempt to regain legitimacy for the state's financial management practices. Challenges to the state's financial management practices, led by the state controller, contributed to the confusion and concern in the municipal securities market. The confusion resulted in a lowered credit rating for New York. To restore the credit rating, a symbol of legitimacy in financial management practices was needed.
It is debatable whether GAAP was the solution for state's financial management problem. Indeed, there is strong evidence that GAAP did not solve the state's financial management problems. After the adoption of GAAP in 1981 the state's General Fund accumulated deficit grew from $2.1 billion in 1982 to $3.1 billion in 1990. The Review Panel of the Commission on Economy and Efficiency in Government expressed doubts as to whether GAAP would solve the state's financial management problems. Yet, the Review Panel agreed that GAAP would restore the shattered confidence in the financial reporting practices of the state. New York needed a symbol of legitimacy that could be easily recognized by the public. In the realm of financial reporting, "GAAP" is the recognized symbol of legitimacy.
Unlike the natural history model of Rowan (1982), "where isomorphism occurs in ideal sequences," the GAAP decision of New York was slow, time consuming, and muddled with politics. New York's decision to adopt GAAP involved the participation of both the executive and the legislative branches of government; the state comptroller did not have the political power to adopt GAAP alone despite his constitutional authority to do so.
The evidence indicates that the role of the professional elites was an important factor in accelerating the mimetic and coercive isomorphic processes that were creating institutional; pressures for New York to adopt GAAP. Various elements of the institutional environment (the nation/state, the professions, resource providers and the public) used powerful representatives to create institutional pressures for adopting GAAP. The comptroller's staff used the power of societal professional expectations to create political pressure for the state adopting GAAP. The comptroller used the political power over the budgeting and accounting processes to create political pressure for and against the legal adoption of GAAP. The governor used the political power to oppose the legal adoption of GAAP. The legislature used political power to create pressure for GAAP adoption as a means of gaining political power over the budgetary process. The credit markets used the political power-based on their control of financial resources necessary for the state to carry out its primary functions-to create political pressure for GAAP adoption. While professional elites were active in the political debates related to the state adopting GAAP, the arguments put forth were on both sides of the GAAP issue. The eloquent debates of the professional elites were used by various interests to increase political pressure by virtue of the professionals' position in the society and the accounting profession. In smmary, the evidence presented in this case suggests that powerful actors pursuing their own interests -political and economic- contributed to the sociological process of coercive isomorphism.
Institutional theory offers the strongest theoretical base for expanding our understanding of accounting choice in the public sector. The theoretical perspectives identified for the study-except the technical-rational perspective-provide insights that are useful in understanding the accounting choice in the public sector, but none is adequate alone in explaining the complex motives, conditions, processes, and constraints that influence accounting choice. Economic consequence theory, political science theory on power and politics, and institutional theory should be viewed as complementary rather than competing theories. The general framework of institutional theory provides a vehicle in which these complementary perspectives can be integrated.
We believe that accounting researchers have an excellent opportunity to move the institutional theory forward because of our knowledge of the accounting institutions. How economic incentives and political incentives affect the process of institutionalization of professionally endorsed accounting practices is an important research question that can be addressed within the framework of institutional theory.
Keywords: Institutional Theory, GAAP, State Government, Governmental Accounting, Public Finance, Political Economy, Nonprofit Management, Regulation, Economic Sociology, Accounting History, Public Administration, Organizational Behavior, Organizational Change, Economic History, Institutional Economics
JEL Classification: G18, G38, C93, E11, H10, H11, L30, L51, M10, M4, M40, M41, M49, P16
Suggested Citation: Suggested Citation