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- Title
User Primacy, Positive Accounting Theory, and Nonaudit Services: Evidence from the SEC's Independence Hearings.
- Authors
Thornton, John M.
- Abstract
An analysis of the testimony given before the Securities and Exchange Commission (SEC) on auditors' independence requirements indicates that users of financial statements generally favored increased restrictions on the scope of nonaudit services provided by external auditors to their audit clients, while corporate management and public accounting (professional service) firms providing nonaudit services did not. Moreover, users of the financial statements generally favored the more extensive ban on nonaudit services over the SEC's proposed list of proscriptions. The principle of user primacy, a principle that has been espoused by regulatory and accounting standard-setting bodies, holds that the interests of the users of financial reports take precedence over the interests of the report preparers. However, the SEC's final ruling on auditor independence requirements was more closely aligned with the position taken by the preparers. An analysis of the arguments presented in the transcripts and the regulations promulgated suggests that positive accounting theory predicated on instrumental economic and political power better explains the SEC's behavior than do considerations relative to the public interest reflected in the principle of user primacy. Positive accounting theory provides the theoretical model for the empirical research supporting nonregulation of nonaudit services and represents a theoretical model that explains the actions of the SEC as reflected in the final ruling on auditor independence requirements. Further, while positive accounting theory represents the underlying dogma upon which rhetorical arguments against increased regulation are grounded, the arguments themselves are framed and justified using the rhetoric of user primacy, which suggests either a naïve belief in the ultimate generalized good of the neoclassical assumption of instrumental, self-interested behavior (ethical egoism), or a juxtaposition of incompatible theoretical frameworks. The discussion and analysis suggests, and subsequent events seem to confirm, the incompatibility of the two perspectives and, thus, the inability of positive accounting theory-based arguments to provide adequate grounds for acting in the public interest. The principle of user primacy affords legitimate grounds for evaluating regulatory alternatives and should provide the theoretical and empirical basis upon which to evaluate regulatory proposals. "[A]ccounting policy choices can never be neutral. There is someone who is granted his preference, and someone who is not. The ethical question is what morality should guide the policymaking process" (AAA 1977, 24). The user primacy principle, which states that the interests of users of financial statements take priority over the interests of preparers of financial statements, is a normative solution to accounting policy making (Gaa 1986). Positive accounting theory, grounded in ethical egoism, is a competing theory that claims the most powerful group's preferences will receive priority in the policy-making process (Watts and Zimmerman 1978). In June 2000, the SEC (2000a) issued, Proposed Rule S7-13-00: Revision of the Commission.s Auditor Independence Requirements (hereafter the Proposed Rule), to modernize the auditor independence requirements. The most contentious issue in the Proposed Rule was whether to proscribe certain or all nonaudit services that external auditors could provide to their audit clients. The SEC.s (2000f), Final Rule S7-13-00: Revision of the Commission's Auditor Independence Requirements (hereafter the Final Rule), mirrored the AICPA's extant requirements, with a few minor exceptions. The purpose of this paper is to examine testimony given over four days of SEC Independence Hearings (2000b, 2000c, 2000d, 2000e (hereafter the Hearings)), to determine if the user primacy principle or positive accounting theory appeared to guide the changes implemented in the Final Rule. The paper summarizes more than...
- Subjects
AUDITING standards; UNITED States. Securities &; Exchange Commission; AUDITORS; FINANCIAL statements; AUDIT departments; AUDITING; ACCOUNTING laws
- Publication
Accounting & the Public Interest, 2003, Vol 3, p36
- ISSN
1530-9320
- Publication type
Article
- DOI
10.2308/api.2003.3.1.36