Market and Political/Regulatory Perspectives on the Recent Accounting Scandals

Authors

  • RAY BALL

    1. The University of Chicago Booth School of Business. Helpful comments were gratefully received from Sudipta Basu, John Coates, Ron Dye, Bob Jensen, Clive Lennox, Steve Orpurt, Sam Peltzman, Sarah Zechman, participants at the 2008 Journal of Accounting Research Conference, and especially Christian Leuz (the editor). Financial support from the University of Chicago, Graduate School of Business also is gratefully acknowledged.
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ABSTRACT

Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What caused the scandalous behavior? Why was there such a rash of accounting scandals at one time? Who killed Arthur Andersen—the Securities and Exchange Commission, or the market? Did fraudulent accounting kill Enron, or just keep it alive for too long? What is the social cost of financial reporting fraud? Does the United States in fact operate a “principles-based” or a “rules-based” accounting system? Was there market failure? Or was there regulatory failure? Or both? Was the Sarbanes-Oxley Act a political and regulatory overreaction? Does the United States follow an ineffective regulatory model?

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