Resolving Financial Reporting Problems: An Institutional Analysis of the Process

Abstract

Address correspondence to the first author. The authors gratefully acknowledge the financial support of the Financial Executives Research Foundation, the research assistance of Shel Myers and Dongyoub Shin, and the cooperation of Jon Bender, Paul DiMaggio, John Richter, Gerald Salancik, Dick Scott, Paul Simpson, and several staff members of the FASB. Comments from Steve Barley, Jon Chillingerian, Roger Dunbar, Jane Dutton, Theresa Lant, John Meyer, John Mezias, Frances Milliken, Linda Pike, and three anonymous reviewers on earlier drafts were quite helpful to us. The paper was also improved as the result of comments by seminar participants at Princeton University, the Wharton School, and Yale University. We also want to give credit to the superb editorial assistance of Christine Oliver. We take full responsibility for all remaining errors, problems, ambiguities, and confusion. We examine the decision process of a public policy task force that plays a role in establishing financial reporting standards to determine what affects the kinds of decisions made. The task force is charged with resolving emerging problems in the design of rules that govern the reporting of information provided to the public by firms that sell securities in U.S. markets. Drawing on traditions of garbage can and institutional theory, we model this decision process as an organized anarchy embedded in an institutional context. The garbage can process gives shape to and is simultaneously shaped by the larger institutional context of accounting. As a result, some aspects of the decision process are associated with disorder and make the resolution of financial reporting problems less likely; others are associated with order and make the resolution of financial reporting problems more likely. We propose specific hypotheses to test these conjectures and examine actual decisions by the task force as our empirical context. The results generally support our model of the process by which financial reporting problems are resolved. The research stands as a case study of how garbage can and institutional forces intersect to bring about change in the institutional environment of accounting.'