Reviewed by Robert J. Bricker Case Western Reserve University
In this book, George Staubus (Professor Emeritus, University of California at Berkeley) sets out to explore the influences of firm characteristics and economic environments on the devel¬opment of the firm’s accounting and financial reporting. The book is written as an essay that logically attempts to link theo¬retical concepts with firm accounting. It is, by the author’s ad¬mission, “soft” in the sense that it relies neither on a structured, empirical set of data or results nor on a single, unified model or theory. Instead, the author describes 18 theoretical concepts, narratively discusses the influences that these concepts could be expected to have on a firm’s accounting and financial reporting, and derives a set of 72 propositions.
Economic Influences is reminiscent of classical, income theorist literature. Typical of that literature, it uses a rich set of basic concepts, narrative and classically deductive arguments relating these concepts to accounting, and a set of derived propositions. Chapter 7, which returns the reader to the perennial issue of cost versus market valuation of assets and liabilities, reinforces this impression.
Staubus’ general approach is to identify an “influence” in the form of a concept or idea. He then discusses related litera¬ture broadening and defining the scope of the concept. In doing so, he is quite eclectic in drawing from the literatures of other fields. Despite the title, this book actually recognizes influences derived from a variety of disciplines other than economics. In this regard, Staubus is noticeably influenced by the works of Chandler and Williamson. Despite numerous references to Chandler, Staubus’ arguments are more logical than historical. Surprisingly, there are few references to agency literature (either in economics or accounting) and particularly to positive ac¬counting literature or modern organizational theory. Following discussion of the literature related to each concep t, Staubus dis¬cusses its application to the development of accounting in firms. He concludes each section with a set of propositions about each concept/influence.
Chapter 1 consists of a review of “The Nature of The Firm” in which Staubus summarizes several pertinent theories and models, including most of the classic ones (Coase, Jensen and Meckling, Williamson, and Alchian and Demsetz, among others), followed by his own synthesized view of the nature of the firm. This is followed by a set of nine propositions of the influences of firm characteristics on the development of firm accounting that Staubus argues emerges from his synthesis.
Chapter 2 lists and discusses the “Tier I Influences,” six concepts that are “psychological and economic.” He argues that these tierone influences underlie other influences on firm accounting, which he discusses in later chapters. They are bounded rationality, selfinterested behavior, firm uniqueness, externalities, information losses, and economies of scale. Staubus considers each one in turn and the influence of each on firm accounting. Additional propositions are identified for each concept. For example, two propositions related to bounded rationality are developed: “Bounded rationality has led to the development of accounting systems that augment the limited capacity of the human mind. . . . [and] Bounded rationality has led to the use of a materiality screen to keep the quantity of financial data reported to users within bounds” [p. 25].
Chapter 3 contains a discussion of “Tier II Influences” which are derived from the first two chapters. The three tiertwo influences are cost of information (accounting is not costless), asset uniqueness (each firm has a unique set of assets), and performance evaluation and incentive plans. A fourth tiertwo influence, conflicts of interests, is addressed in Chapter 4. Again, in Chapter 3, each concept is discussed and a set of 39 proposi¬tions is developed related to these concepts.
Chapter 4, conflicts of interests, points out that the phenom¬enon of opportunistic behavior by firm constituents is not a 20th century discovery by one individual, but was generally rec¬ognized by owners, managers, lenders, and lawmakers over a long period of accounting history. Twenty propositions related to conflicts of interests are presented. Staubus links the issue of conflicts of interests to the earlier concept of selfinterested be¬havior and to basic contractual relationships involving labor, management, and owners. He argues for a tendency towards biased financial reporting based upon “the general desire of in¬dividuals to make a favorable impression on others” and identi¬fies ego and selfinterest as the bases for this desire [p. 69]. Staubus explains management of earnings from the perspectives of “liberal reporting” and “smoothing” [p. 70], This chapter also discusses conservatism, about which Staubus writes “the moti¬vations for conservative financial reporting are complex and ex¬tend beyond selfbias by reporters. Perhaps conservatism is an innate human tendency that is not always offset by the bias towards reporting one’s own performance in a favorable light” [p. 73]. Staubus concludes the chapter with the assertion that “the prevalence of conflicts of interests among firm constituents has been a major influence shaping the development of account¬ing in firms. The view here is that insufficient attention has been paid in the accounting literature …” [p. 77].
Chapters 5 and 6 address four “Tier III” influences — firm size, vertical integration, diversification, and form of organization. Firm size focuses on economics and diseconomies of scale, about which Staubus writes, “To the extent that developments in accounting have mitigated such general constraints as bounded rationality, opportunism, information losses, control loss, and incentive dilution, it may have pushed out the upper bound on firm size, and thus brought economics of scale within reach” [p. 90],
Chapter 7 stands apart from the remainder of the book and gives away the author’s interest in income theory. Staubus writes, “[The previous chapters] have not, however, specifically addressed the most persistent controversy in that accounting: Should the originally recorded, transactionbased prices of as¬sets and liabilities be updated for reporting in a set of financial statements” [p. 119]?
Tn the concluding chapter, Staubus turns back to his original theme to bring closure to the relationships between firm characteristics and economic conditions on the development of accounting within firms. Staubus summarizes the points of earlier chapters, identifies some matters not addressed, but chooses not to attempt to provide some overarching perspective of the influences on the development of firm accounting.
This book makes worthwhile reading for those tolerant of the richness and breadth of its themes. It is not tightly organized around any central theories or models, and Staubus is quite willing to draw in materials from a variety of sources and fields. The overall effect is rather like a lecture that covers much ground, with no one particular theme and with numerous di¬gressions, but nevertheless has interesting insights and ideas. In the final reckoning then, what Staubus has provided is an essay of his thoughts on how accounting develops in firms. These thoughts raise some interesting questions for the reader. While this may not be quite what Staubus intended, all in all it is a pretty good thing to accomplish.
