Institutional Theory and Accounting Rule Choice: An Analysis of the Four U.S. State Governments' Decisions to Adopt Generally Accepted Accounting Principles
33 Pages Posted: 28 Jul 2008 Last revised: 31 Dec 2018
Date Written: July 28, 2008
We develop institutional theory to explain how institutional pressures exerted on four US state governments influenced the decisions of these governments to adopt or resist the use of Generally Accepted Accounting Principles (GAAP) for external financial reporting. We identify resource dependency as a potent form of coercive institutional pressure that was associated with early GAAP adoption. We also identify three factors that may lead to initial resistance to institutional pressure for change. First, if accounting bureaucrats are not active in professional associations that promote GAAP adoption, they may miss the educational process (indoctrination) that we believe is important to early adoption of GAAP. Second. organizational imprinting may impede GAAP adoption. Third, powerful interests may impede GAAP if the proposed GAAP legislation is expected to alter existing power relationships. We found that key accounting bureaucrats in New York and Michigan used "compromise" as an initial strategic response to institutional pressures to adopt GAAP. Ohio's key accounting bureaucrat adopted a "defy" strategy, although the political leadership endorsed an "acquiesce" strategy. While Delaware initially employed a "manipulate" strategy with some success, Delaware did not adopt GAAP for external reporting until a political entrepreneur for GAAP emerged in the early 1990s. Our study suggests that all strategic responses to resist institutional pressures for GAAP adoption will ultimately fail because of the potency of the institutional pressures that result from the well organized professional accounting and governmental institutional fields.
The main contributions of this study are the elaboration of the sources of institutional patterns that affect the choice of accounting practices in the cases of the four state governments, and the identification of the conditions under which resource dependency has its greatest influence as an effective coercive institutional pressure for changing accounting rule choices in the public sector. This study also demonstrates that the power with which institutional pressures can influence organizational practices can vary over time, given the particular set of actors in place and their initial strategic responses to institutional pressures for change. Our case evidence demonstrates that there can be significant variation in the presence and effect of institutional pressures over time based on constantly changing endogenous and exogenous factors including cognitive beliefs of the organizational decision makers.
A clear understanding of the historical background in which accounting rule choice occurs and longitudinal data are needed before one can rigorously test test propositions that can be derived from this study. This study also contributes to the institutional theory by showing how organizational structures and practices became institutionalized over time in four specific cases.
Keywords: Financial Accounting, Institutional Theory, Institutional Economics, Political Institutions, Resource Dependency, Strategy, Governments, Governance, GAAP, FASB, GASB, SEC, GAO, Organizational Theory, Organizational Change, Public Finance, Public Administration, Public Choice, Political Economy, USA
JEL Classification: C93, E11, G18,G28, G38, H10, H11, H74, L30, L51, M40, M41, M49, P16, Z10.
Suggested Citation: Suggested Citation