Why do politicians intervene in accounting regulation? The role of ideology and special interests

Political economy explains the behavior of politicians by regulatory capture and by ideology. Politicians frequently intervene in the regulation of financial accounting. Prior evidence from the accounting literature shows that regulatory capture by special interests explains these interventions. Politicians tend to view accounting regulation as a technical issue where ideological views play a minor role. However, many accounting rules directly lead to economic or social consequences, such as income distribution or private-sector subsidies. The perception of these consequences varies with a politician’s ideology. Therefore, if accounting rules produce those consequences, ideology plausibly spills over and also explains a politician’s stance on the technical accounting issue, beyond special interest pressure. We use two prominent political debates about fair value accounting during the financial crisis and the expensing of employee stock options to disentangle the role of ideology from special interest pressure. In both debates, ideology explains politicians’ involvement at exactly those points when the debate focuses on the economic consequences of accounting regulation (i.e., bank bail-outs and top-management compensation). Once the debates focus on more technical issues, political connections to special interests remain the most dominant force.