Chapter 17 competition among pressure groups over the determination of UK pension fund accounting rules

Pension management, auditors, and accounting standard setting bodies are predicted to apply political pressure in order to aff ect the fi nal form of government regulation of the account

17.3 Competition among Pressure Groups for

17.5 E mpirical Tests 41017.5.1 Results—Adoption Period 1996–1997 41117.5.2 Results—Retention Period 2002–2003 411

This ch a pter a na l yzes co mpet iti on a mong p ressure g roups f or

political i nfl uence o ver t he de velopment o f acco unting r ules a nd examines i ts i mplications f or u nderstanding t he f orm a nd co ntent o f legally en forceable r egulations t hat g overn fi nancial r eporting b y U K pension fund managers Pension management, auditors, and accounting standard setting bodies are predicted to apply political pressure in order

to aff ect the fi nal form of government regulation of the accountability of pension f unds Th ese pressure f unctions, i n t urn, a re applied to sec ure political infl uence over the form and content of fi nancial reporting that is incorporated into government legislation in two separate reporting peri-ods We discriminate between private interest and public interest explana-tions for the determination of fi nancial reporting rules Consistent with a private interest perspective, the audit profession and pension management exert most pressure in the adoption period Consistent with a public inter-est perspective, the accounting standard setter applies most pressure in the retention period

Keywords: Pressures, pressure groups, accounting rules.

JEL Classifi cations: G2, L3, M4.

17.1 INTRODUCTION

Th e t raditional “ public i nterest” v iew o f t he g overnment r egulation o f business organizations is based on the assumption that the government’s objective is to maximize social welfare Such activities are justifi ed in order to overcome the apparent failure of free markets to deal with prob-lems of consumer detriment arising externally, economies of scale, imper-fect i nformation, a nd i nadequate ma rkets for r isky outcomes, a nd a lso because of the problem of the maldistribution of wealth

However, an alternative “public choice” view of the government regulation

of business organizations questions the assumption that business tions regulation is inherently diff erent from other markets It suggests instead that politicians and regulators seek to maximize and secure their own wel-fare through imposing taxes and conferring subsidies Under this view, the

organiza-government regulation is only justifi ed to the extent that it reduces or nates costs associated with observed market failure and the delivery of these services Th is view leads to claims that the fi nancial regulation incurs costs that are primarily borne by consumers and taxpayers, which probably exceed the benefi ts they receive and that regulation favors the politically powerful.

elimi-In common with other types of not-for-profi t organizations, pension funds hold monies in trust that are relevant to various constituencies, whose values and interests may confl ict with one another (Hofstede, 1981) An important issue in this political process is the role of pressure groups in exerting con-trol over the fl ow of fi nancial information about the current pension fund management’s performance in order to secure the accountability of a pension fund t o it s c onstituents Th ese pre ssure g roups c omprise pr ivate i nterests, such as the U.K audit profession, as well as pension management, comprising pension industry associations and pension professionals (i.e., actuaries and administrators) We posit that the United Kingdom’s nominated pension fund accounting standard setting body (the Pension Research Accounting Group

or PRAG) developed competing views as to how a pens ion fund’s position and performance is to be r eported and measured Th e pressure groups are assumed to face both political and economic incentives to infl uence govern-ment regulatory agencies that can determine the form of pension fund fi nan-cial reports that is formally enacted by the government pension legislation.*Economy-oriented li terature e xamining t he im pact o f a ccounting regulation ha s pa id much attention to ex amining t he economic conse-quences of new accounting rules (e.g., Benston, 1969) or incentives fac-ing corporate managers to engage in lobbying activities (e.g., Watts and Zimmerman, 1978) Other social science–oriented research focuses more broadly on analyzing how the internal dynamics of standard setting bodies have antecedents in a broader social and economic environment (Burchell

et al., 1980) Yet elements of both these research traditions must be bined t o u nderstand t he b roader po litical p rocesses su rrounding t he development of pension accounting rules

com-Analyzing co mpetition a mong m ultiple p ressure gr oups o ver t he determination of U.K pension accounting rules provides two new major

* Rue a nd Tosh (1987) a rgue t hat t he p ension a ccounting s uff ers f rom t he u nit pro blem, whereby the selection of t he scope or p erspective from which to appl y measurement and recognition c onventions i s pro blematic Th e u nit pro blem i s f undamentally re levant to discriminating a mong a lternative p erspectives a bout t he n ature a nd s cope of p ension commitments b ecause t hey t end to a dopt e ither a n i ndividual or a ggregate p erspective (Klumpes, 2001).

insights into the existing literature that seeks to examine political ity a nd acco unting r egulation Fir st, in t he co ntext o f U K p ension accounting, industry-specifi c government legislation (Pensions Act 1995 and Dis closure Regula tions), ra ther t han co rporate s ecurities la w, s ets out annual reporting requirements for p ension funds Furthermore, the United Kingdom’s Accounting Standard B oard (ASB) although formally setting generally accepted accounting principles (GAAP) for U.K pension funds delegates the power to set a st atement of the recommended prac-tice (SORP) to the PRAG, an industry-based association Th us, PRAG, as industry standard setter, is also a pressure group that competes with other narrow industry groups in o rder to attain ultimate government endorse-ment of t heir accounting r ule-making process S econd, ma nagerial dis-cretion o ver acco unting p olicy c hoices a nd dis closure decisio ns ca n b e eff ective sources of pressure, which empowers those subject to accounting rules to exert political infl uence over their legal enforceability.

activ-Th is chapter analyzes how powerful special-interest groups that lobby accounting rule-making bodies can translate their expenditures into political infl uence over government-sanctioned, and thus legally enforceable, account-ing regulation It applies a m odel of competition among multiple pressure groups originally developed by Becker (1983) to analyze the sources of political pressures A primary source of these pressures is the economic and political accountability processes by which these groups attempt to develop competing accounting standards in an attempt to secure their political credibility Th ese standards in turn codifi ed diff erent interpretations over the nature and own-ership of the pension fund surplus among the various pressure groups.*

We predict that auditors, pension management, and accounting ing bodies all had incentives to infl uence both the adoption and the retention

rule-mak-of the U.K pension fund disclosure regulations Consistent with a private interest perspective, the audit profession and the pension management are posited to apply the most pressure over accounting regulation in the adoption period Consistent with the public interest perspective, we predict that PRAG

is most infl uential in the retention period Th e sample comprises 54 paired U.K pension schemes voluntarily producing accounting reports in the periods 1996–1997 and 2002–2003 Our fi ndings are consistent with our pre-dictions in the adoption period only; the accounting standard setting body (PRAG) appeared to exert most infl uence in the retention period

match-* Empirical studies of accounting policy choice and lobbying behavior typically do not address the bro ader p olicy qu estion of w hether s uch b ehavior a ctually i nfl uences t he subs equent course of accounting rule development.

Th e rest of this chapter is organized as follows Section 17.2 provides the theoretical background to the study Section 17.3 briefl y outlines the main pressure g roups Section 17.4 d iscusses va rious fac tors t hat a ff ect the propensity to apply pressure for political i nfl uence over accounting rules Section 17.5 describes t he sample a nd develops empirical proxies for attempts by groups to exert political pressure and their success in gar-nering political infl uence over pension plan fi nancial reporting rule-mak-ing activity Section 17.6 presents the statistical procedures and primary results Section 17.7 concludes this chapter.

17.2 THEORETICAL AND INSTITUTIONAL BACKGROUND

Th is section briefl y gives an overview of the theoretical and institutional background underlying the subsequent analysis of the development of pen-sion fund reporting rules in the United Kingdom Section 17.2.1 reviews prior research, Section 17.2.2 outlines and justifi es the institutional setting used to analyze competition among pressure groups, and Section 17.2.3

introduces the theoretical antecedents

17.2.1 Prior Research

Two apparently contradictory research paradigms have sought to explain the political processes underlying the development of accounting regula-tion Th ese in turn motivated empirical researchers to develop a nd test competing explanations for the determination of accounting rules Each of these paradigms assumes that the process of accounting standard setting

is subject to a single, dominating pressure group

For ex ample, Watts a nd Z immerman (1978) (WZ h ereaft er) assume that corporate managers are self-interested and that their own lobbying behavior is primarily motivated by self-interest Th eir study stimulated

a large body o f literature that examined the factors aff ecting the choice

of accounting methods in corporations (e.g., Hagerman and Zmijewski, 1979; Bowen et al., 1981), municipalities (Zimmerman, 1977), and public sector pension funds (Stone et al., 1987) Accounting is viewed by WZ as

a product of rational decision makers and as a m echanism for ling potential confl icts of interest between principals (e.g., pension plan participants) and their agents (i.e., pension scheme managers) WZ r ely

control-on an underlying eccontrol-onomic theory of regulaticontrol-on, which assumes that politicians a nd regulators attempt to ma ximize t heir own sel f-interest

Th is assumption provides both a theoretical basis for analyzing corporate managers’ discretion over accounting policy choices and enables positive

accounting theory (PAT) researchers to adopt an agency theory of the

fi rm to develop theories of accounting practice (WZ, 1986)

Th e economic theory of regulation upon which WZ based their analysis had been developed by an earlier generation of economists (Stigler, 1971; Pelzman, 19 76) Th is theory depicted corporate managers as essentially driving r egulatory p rocesses; t he po tential i nfl uence o f o ther p ressure groups in shaping accounting rule development tended to be ignored Politicians a re a ssumed merely to respond only to t he pressures of t he corporate management interest group who are seeking to secure political infl uence over attempts to regulate their accounting practices However,

WZ (1986, p 112) acknowledge that this assumption is limited and that there is a need for further theory to model explicitly competition among interest groups for political infl uence

An a lternative soc ial sc ience a pproach t o u nderstanding t he po litics surrounding acco unting r ule-making p rocesses su ggests t hat po liti-cians u ltimately choose accounting a nd auditing st andards a nd d isclo-sure requirements that favor the politically powerful (e.g., Benston, 1969; Walker, 1987) Th is literature employs case studies to explore the regula-tory space occupied by pressure groups in infl uencing the standard setting process (Hancher and Moran, 1980; Young, 1994) It emphasizes the role

of public policy in “correcting” market failures

Th is public interest perspective recognizes the complexity of the mation of agendas and of standard setting, particularly by examining the situation of the standard setting body and its social and historical contexts (Burchell et al., 1980; Hopwood, 1983) Viewing accounting standard set-ting as a political process, with its sensitivity to environmental pressures and the pursuit of legitimacy aff ords important insights into the behavior

for-of such pressure groups (Fogarty, 1998) Th is characterization for-of ing regulation also places standard setting activities within the broader political arena (Hope and Gray, 1982; Cooper and Sherer, 1984; Hussein and Ketz, 1991; Fogarty et al., 1994) Th e setting of agendas for standard setting committees is evidenced in t he lobbying activities of interested parties (Sutton, 1984; Gorton, 1991)

account-Th ese disparate economic and social science views about the nature of the accounting standard setting process can be reconciled by recognizing that each perspective assumes that a single powerful pressure group eff ec-tively determines the political processes that underlie the development of accounting rules An alternative, more sophisticated perspective instead views legally enforceable accounting rules as being ultimately determined

as outcomes of competition for po litical i nfl uence a mong a n umber o f infl uential pressure groups Because all of these groups are experienced

in political lobbying, the determination of accounting rules is therefore ultimately determined by their relative success or otherwise in their abil-ity to both garner economic pressure and eff ectively convey their views to gatekeepers, in order to ultimately secure political infl uence over the pen-sion reporting rule-making process.*

17.2.2 Overview of Institutional Setting

Prior to the 1990s, pension funds were not required by either statutory law or professional accounting standards to prepare formal accounts In

1997, t he PRAG prepared a r evised SORP, wh ich legally required U.K pension funds to report their net assets at market value—in contrast to the situation facing U.K shareholders Eff orts made to develop standard-ized rules for pension fi nancial reporting of the ownership rights (i.e., to resolve disputes over their entitlement to the pension plan’s net surplus or defi cits) therefore potentially impact the economic and political interests

of a wide and diff use range of pressure groups analyzed by Becker (1983); for example, pensioners, corporate sponsors, corporate accounting rule-making bodies, and employees.† Analyzing competition among pressure groups can t herefore provide useful insights into t his issue because (1) alternative, v alue-relevant d isclosure a nd/or me asurement c hoices a re available; (2) these choices can in turn aff ect a pressure group’s propensity

to apply political infl uence; (3) the structure of the pension accounting standard setting process and incentives for producing pressure in order

to obtain political infl uence are interdependent; and (4) political infl uence over the determination of accounting standards can be empirically prox-ied by political infl uence and pressure functions as modeled by Becker.‡Industry pressure groups and accounting rule-making bodies have developed s ubstantially d iff ering i nterpretations abo ut h ow pens ion assets and/or liabilities should be m easured, and t he extent of fi nancial

* Klumpes (1994a) reports that these liabilities were excluded from the balance sheet tion requirements of competing industry-developed standards, which were sanctioned by government regulations for the annual preparation of membership fi nancial reports.

recogni-† Becker (1983, p 371) claims that this model unifi es the view that regulation (e.g., accounting standard setting) activities correct market failures with the alternative view that they favor the politically powerful: both are produced by the competition for political infl uence.

‡ Becker’s (1983) model has been applied to model political game plays between various sure groups that seek to exert political infl uence over the outcome of congressional reviews

pres-of U.S business organizations regulation (Krosner and Stratmann, 1996).

disclosures provided to members (Klumpes, 1994a) Table 17.1 su rizes the positions of the two pressure groups on U.K pension plan fi nan-cial reporting, which are briefl y explained in more detail in the rest of this section.

mma-Th e ownership of pension funds in the United Kingdom is governed

by the unique agency relationships between trustees and delegated fessional ma nagement t hat a re responsible for e ssential ad ministration and investment functions Consistent with prior research, it is assumed that sponsoring fi rm shareholders own both pension assets and liabilities (e.g., Landsman, 1986), and hence their interests are also assumed to be compatible with those of pension management.*

pro-* Th e role of t he employer sponsor in U.K pension fund accounting standards is somewhat ambiguous, since fi rm cash fl ows are not directly aff ected by pension fund fi nancial report- ing For DBPPs, employer sponsors face incentives that are both compatible (i.e., provide retirement income insurance) and incompatible (i.e., confl ict over the ownership of surplus/ defi cit) with that of their employees.

TABLE 17.1 Alternative Financial Reporting Standards Available

to U.K Pension Funds

Financial Reporting

by Pension Plans (Revised SORP 1)

Recommended Guidelines (IRG)

Industry-Issuing authority Pensions Research

Accounting Group Accounting Standards Committee Form of standard Revised statement of

recommended practice Statement of recommended practice (1986) Issue date 1996, revised 2002 1986

Eff ective date Reporting periods ending

on or aft er April 6, 1997 Reporting periods ending aft er April 1997 Assumed concept of

pension fund net

surplus

Spin-off or termination value of assets (market value

of assets) but going concern valuation of liabilities (discounted using an actuarial determined rate of interest)

Going concern valuation (actuarial value of assets less the actuarial value of liabilities, determined in accordance with actuarial estimates of the long run return on assets) Relevant pressure

group Pension fund trustees Employer sponsorsFinancial reports to be

produced Fund accountNet assets statement Statement of net assetsStatement of changes in net

assets available to pay benefi ts

Revenue account

Th ese relationships are economically signifi cant since pension funds in aggregate hold more equities than do individual investors in many interna-tional fi nancial markets (Davis, 1995) and involve a number of participants For example, pension fund trustees pay managerial expenses and fees for the delegated administration and investment services provided to pension funds by pension professionals, such a s actuaries and auditors (Klumpes and McCrae, 1999) Another important interested party is pension manage-ment whose main concern is managing the vast assets under their control and whom a re a ssumed to be sel f-interested a gents whose a im i s va lue-maximizing their fee income derived from operating the pension fund.

Th is institutional setting bears on the analysis of the determination of sion fund fi nancial reporting rules because auditors, pension management, and PRAG may signifi cantly infl uence a del egated pension fund manager’s attitude toward the political visibility in adopting or retaining certain pension fund fi nancial d isclosures Pension ma nagement fi rst d eveloped i ndustry-recommended guidelines (IRG) for annual reporting to participants in 1986 (Klumpes, 1994b) Unlike the SORP subsequently developed by PRAG, IRG constituted “best practice” reporting standards and were not enforceable.However, a ft er t he Ma xwell pens ion sch eme f raud wa s d iscovered

pen-in 1991, t he adequacy of t he ex istpen-ing, sel f-regulated reportpen-ing a ments aff ecting U.K pension funds was criticized in public enquiries into the fi nancial accountability of pension fund managers to participants (Klumpes, 1994a) Th ese i nquiries proposed t hat f ully audited fi nancial statements be included in annual participant reports (Klumpes, 1993)

rrange-In the United Kingdom, the original SORP 1 (pension scheme accounts), issued in 1986, asserted that pension fund assets and liabilities are subjective actuarial estimates that were beyond the scope of the scheme’s accounts Subsequently, PRAG sought to update the SORP to improve the usefulness and intelligibility of the annual report by incorporating robust, externally credible market valuations of pension fund assets (but not their liabilities)

An exposure draft (ED) of the revised SORP was published by PRAG in September 1995 Following an invitation for further comment on a range

of issues, the fi nal version of the revised SORP was published in September

1996 Th e revised SORP was subsequently mandated by U.K government legislation under the Pension Disclosure Regulations of 1997 While the SORP was further amended to include reference to ongoing developments

in the U.K GAAP during 2002, long-term pension liabilities were still not incorporated into t he fi nancial st atements of pension plans; de spite t he U.K GAAP requiring this for employer sponsors’ fi nancial statements

U.K pensions legislation now requires that the board of trustees ble for managing pension funds comprises equal representation by both their employee (to whom auditors, who must comply with accounting standards, are ultimately accountable) and employer pressure groups (to whom pension management, who may seek to voluntarily comply with IRG, are accountable)

responsi-Th ese institutional features are important for a number of reasons First, the form and the content of fi nancial statements can have a ma terial and non- cosmetic eff ect on how these interests are represented, that is, how the pension fund net surplus or defi cit is measured Second, diff ering views can also criti-cally aff ect the employer sponsors’ funding and asset allocation policy Th ir d, there was a o ne-time, nonreversible voluntary switch available to adopt the competing accounting standards during an extended transitional period.*17.2.3 Theoretical Antecedents

Th e a nalytical f ramework em ployed i n t his cha pter r elies o n B ecker’s (1983) t heory of competition a mong pressure groups for political infl u-ence Th is theory seeks to reconcile the opposing views that the govern-ment corrects market failure with the view that they favor the politically powerful Instead, it is assumed that both are produced by the competi-tion for political favors C onsequently, a nalyzing t he cost s a nd benefi ts

of fi nancial s ervices re gulation d iff ers subst antially f rom t hat o f p rior researchers Furthermore, this view ignores the extrinsic or intrinsic ben-efi ts of regulation and the endogeneity of a r ange of socially infl uenced costs and benefi ts that can signifi cantly vary among groups

Consistent with the U.K government’s notion of a stakeholder society, this chapter assumes instead that relevant costs and benefi ts are not objec-tively determined but are subject to infl uence by multiple pressure groups that compete for taxes and subsidies that arise from any politically deter-mined regulatory system Th us, understanding the nature and dynamics

of this political equilibrium is necessary in order to approximate the nitude and the incidence of a wider range of socially infl uenced costs and benefi ts associated with any regulatory change Th is insight is based on the economic theory of regulation (Becker, 1983), which recognizes that any regulatory change is subject to a po litical process in which some groups (e.g., intermediaries) receive benefi ts that are eff ectively paid for by costs imposed on other groups (e.g., investors) Politicians and rule-makers are

mag-* Standards for pension fund fi nancial reporting were subsequently mandated by government regulation (Pension Act, 1995) pension laws.

assumed to t ransmit t hese competing interests in t heir policy tions over the optimal form of regulation.

delibera-Becker’s ( 1983) m odel a ssumes t hat co mpetition a mong p ressure groups determines the equilibrium structure of taxes, subsidies, and other political favors Groups are assumed to compete for political infl uence by spending time, energy, and money on the production of political pressure

In analyzing the incentives facing each interest group to expend resources

to apply political pressure, it is assumed that each interest group consists

of identical members, and that the utility of each person is measured by full income, which in turn can be added t o measure aggregate income

Th is assumption is reasonable since the eff ect on household income of ative prices of fi nancial services commonly available to the U.K public are the same to all consumers All political activities that raise the income of a group are considered a subsidy (or benefi t) to that group, and all activities that lower incomes are considered a tax (or cost)

rel-Becker (1983) does not attempt to model how the activities of pressure groups are translated into political infl uence, but instead deals with “infl u-ence functions” that relate subsidies and taxes to the pressures exerted by all

groups Formally, revenue raised from taxes on the ith group is determined from the infl uence function that depends on the pressure (p) exerted by the taxed groups (q), the subsidized groups (v-q), and other variables (x):

R ti is a vector of the taxes paid by the ni members

F i determines the deadweight loss from taxes

p1, …, pq are pressures exerted by the q-taxed groups

p q+1, …, pv are pressures exerted by the v-q subsidized groups

x are other determinants of infl uence

Rt can be considered as the monetary equivalent of welfare loss of an vidual member of the taxed group, which can alternatively be defi ned in

indi-terms of willingness to pay F(Rt) may be defi ned as the tax revenue ated per member of the taxed group

gener-Similarly, the subsidy available to the jth group is determined from the

following infl uence function:

R sj is the vector of subsidies to the nj members

G j determines the deadweight loss of the subsidy

Rs can be considered as the monetary equivalent of the welfare gain of an individual member of t he subsidized g roup, wh ich c an a lternatively be

defi ned in terms of willingness to pay or accept G(Rs) may be defi ned as the government expenses made per member of the subsidized group.Government budgetary constraints are assumed to equate the relation-ship between total taxes a nd subsidies: t hus t he total a mount raised by taxes is f ully spent on t he total a mount available for subsidies (Becker,

Under t hese a ssumptions, pressure i s ex erted only u ntil t he benefi ts from lower taxes or higher subsidies are no larger than the cost of produc-ing additional pressure Becker (1983) also shows that the pressure exerted tends to be greater for more effi cient groups (i.e., those that can control “free riders”), and by subsidized groups whose benefi ts are fi nanced by a small tax on m any p ersons Th is i mplies t hat re latively sm all, we ll- organized groups are more likely to successfully secure subsidies (e.g., fi nancial intermediaries) than are relatively large or relatively diff use groups

17.3 COMPETITION AMONG PRESSURE GROUPS

FOR POLITICAL INFLUENCE

Th is sec tion i dentifi es va rious fac tors a ff ecting t he p ressure f unctions o f competing i nterest g roups, wh ich en ter a s po tential so urces o f po litical infl uence over the determination of pension fund fi nancial reporting Th ese endogenous relationships are in turn posited to infl uence a del egated pen-sion fund manager’s discretion over disclosures contained in pension fund reports It is posited that private interest groups (auditors, delegated manage-ment) primarily applied pressure during the adoption of the new SORP (i.e., 1996–1997); while the public interest group (PRAG) primarily applied pres-sure during the subsequent retention of the revised SORP (i.e., 2002–2003).17.3.1 Auditors

Conceptually, the propensity of the U.K audit profession to apply cal pressure is assumed to be related to their self-interest in maximizing their audit and nonaudit fees Th is in turn is posited depending on their incentives to infl uence t he pension f und t rustees’ propensity to d iscre-tion over the fi nancial statements of the pension fund about the extent of

politi-pension commitments (PASi) Th is in turn aff ects the value-relevance of

information disclosed, whether revealed in the fi nancial statements of the employer and/or the sponsored pension fund

Auditors’ propensity to apply political pressure is assumed to be ated with the complexity of the audit, as proxied by the level of administra-

associ-tive costs incurred by the pension fund (COSTi) Another factor aff ecting

the i ncentives fac ing pens ion ma nagement t o a pply po litical p ressure relates to investment risk Th e reputation of pension management is par-ticularly sensitive to the fund’s ability to meet specifi ed investment perfor-mance targets In addition, there is a political risk that the pension fund invests i ts f unds i nappropriately, l eading t o dema nds f or g reater a udit scrutiny Pr ior r esearch ( Amir a nd B enarttzi, 1 998) dem onstrates t hat the investment strategy is regarded as value-relevant to users of pension funds because it gives an indication of the professional management abili-ties of pension management, and is thus a further source of risk to audi-

tors (INVRISKi) Conceptually, the formulation of auditors’ propensity to

apply pressure over pension fund fi nancial reporting rules is

Th is equation states that the level of audit fees (FEEi) can be a so urce of

pressure on the determination of accounting rules, since these may aff ect

the form and the content of fi nancial statements Th e level of these fees

is p redicted t o be a ssociated w ith t he ad ministration a nd i nvestment expenses i ncurred by t he pens ion f und, pens ion accounting st andards, and the investment-related risk of the pension scheme

17.3.2 Pension Management

Th e p ropensity o f pens ion ma nagement t o a pply po litical p ressure i s assumed to be pos itively correlated with the value of management costs (administration a nd i nvestment) t hey cha rge t o t he ma rginal pens ion

fund as a proportion of its operating pension fund assets (COSTi) Th ese

costs are calculated as a per iodic fraction of total invested funds under management and can signifi cantly reduce the net assets available to pay members’ benefi ts (Klumpes and McCrae, 1999)

Th e pressure exerted by pension management is posited to be mitigated

by the auditor’s political pressure exerted on the audit, nonaudit, and

actu-arial fees involved in preparing the pension fund’s fi nancial reports (FEEi)

Pension management also exerts political pressure on the government lator through their ability to infl uence the form and the content of fi nancial

regu-information that is provided in the actuarial investigation report (DISCLi)

Th e revised SORP proposed detailed fi nancial statements; whereas, sion management argued that such detailed information would only serve

pen-to confuse and mislead employee participants (Klumpes, 1994a)

Another factor aff ecting the pressure exerted by pension management

on t he g overnment r egulator i s t he ma turity r isk o f t he pens ion f und Klumpes and McCrae (1999) found that the age of pension fund members

is the primary agency-cost characteristic of pension funds that aff ects fund solvency Th is is because the age profi le of the membership structure of the pension plan aff ects the longevity risk of the plan, as refl ected by the periodic net cash infl ow or outfl ow (of contribution revenue less benefi t

expenditure) each year (MATRISKi) Bodie et al (1987) found maturity risk

signifi cantly aff ected the funding strategy of U.S pension funds Solvency

is also posited to aff ect the propensity of pension management to generate political pressure through demanding a greater level of accountability by pension funds to their members about the resulting net surplus or defi cit.Conceptually, this formulation of the sources aff ecting pressure applied

by pension management to aff ect a government regulatory agency’s tude to accounting standards can be summarized as follows:

Th is equation states that pension management discretion over tration costs, as a p ressure function that potentially infl uences the form

adminis-of government pension fi nancial reporting rules, is in turn related to the fees paid to auditors and actuaries, fi nancial reporting-related disclosure practices of pension plans, and the liability risk or maturity of the pension scheme members

17.3.3 Accounting Standard Setting Body

Th e pressure applied by auditors and pension management is predicted

to be a n important factor aff ecting government accounting rules in the adoption period, when rule-making was in the adoption stage of develop-ment and subject to regulatory capture, as predicted by the private inter-est perspective Subsequent to the introduction of new rules, accounting standard setting bodies, empowered to issue standards or statements of practice that are intended to codify GAAP practice, are likely to become more institutionalized and thus are predicted to be more concerned with correcting identifi ed market failures in accounting practice, as is predicted

by the public interest perspective

Th e s ituation i n t he U nited K ingdom f or pens ion acco unting r making is relevant to t his analysis, since t he PRAG was empowered by the ASB specifi cally to issue (and revise) a SO RP for fi nancial reporting

ule-by pension funds Th e rules contained in the SORP are legally enforced via the pension disclosure regulations PRAG, which is made up of actu-aries, auditors, and accountants in practice, has considerable discretion over the determination of accounting standards for fi nancial reporting by U.K pension funds Th e ASB regarded pension fund fi nancial reporting

as being beyond its remit of promulgating the U.K GAAP and thus felt more inclined to leave pension fund reporting within the domain of less legally enforceable recommended industry practice Indeed, when PRAG issued a further revised SORP (PRAG, 2002), they did so without issuing

an ED, which did not appear to comply with ASB’s own code of practice (ASB, 2000, para 9)

Any public policy change has major resource and survival implications for regulatory agencies charged with implementing the policies (Wilson, 1974) Given a sc arcity of public fi nances to fund their activities, regula-tory agencies must rely on a combination of political favor and continu-ing industry support and endorsement to survive and prosper as eff ective political organizations Th e economic theory of regulation has tradition-ally ignored regulatory agencies being a distinct pressure group vis-á-vis