Why (U.S.) politicians actively intervene in accounting regulation

Regulation, and especially a technical issue such as financial accounting, is often considered a matter for bureaucrats, not for politicians. In doing so, we tend to neglect that many accounting rules have real economic or social consequences. For example, accounting rules for stock option plans directly affect how companies compensate their management. Similarly, the accounting valuation of bank assets affects regulatory capital. Less restrictive requirements for loss recognition thus reduce the likelihood of bank bailouts.

Reviewing public statements

We systematically reviewed public speeches by all 435 members of the U.S. congress – including television and radio interviews, press releases and speeches – resulting in a rich dataset of statements. We chose to focus on the USA because of the systematic access to the data on congress members’ financial connections. Based on this data we explain why high-ranked politicians were so interested in the supposedly very technical aspects of accounting, instead of leaving this topic to experts. We found that those politicians that intervened could be divided into two distinct groups, one motivated by ideological views on the economic or social consequences of the regulation and the other one driven by their connections to the industry and, ultimately, special interests.

Ideology

One distinct group of politicians is ideologically motivated and only intervenes in the political debate when the topic receives a fairly high level of public attention, especially in the media. As such, they focus mostly on the economic consequences of the regulation, such as bank bailouts or the restriction of potentially excessive management compensation. These politicians share a strong and homogeneous ideological view on these consequences. For example, we observe that very fiscally conservative Republicans, who strictly oppose government interventions and bank bailouts, are in favor of easing accounting rules that artificially increase banks’ capital. Similarly, we see left-wing liberal democrats, who are committed to limiting management remuneration, arguing for the recognition of all stock option expenses thus making stock option plans less attractive for firms.

Links to industry

A second group of politicians is more continuously involved and exerts greater influence on the technical design of the regulations. They focus less on the economic consequences of regulation and more on technical factors such as the volatility of earnings per share, which relates to the relevance and predictability of profits. This focus makes them come across as being more objective, more factual, in their argumentation. However, we observed that precisely this group has strong links, for example through financial campaign contributions, to affected interest groups. This group of politicians usually takes position on regulations that are in line with economic interests of these groups. For example, those who receive campaign contributions from the financial industry are more likely to advocate accounting rules that help banks avoid loss statements in times of crisis in order to preserve their equity.