Open Access Open Access  Restricted Access Subscription or Fee Access

Integrating prediction markets into the due process of international accounting standard setting: A possible path to achieving legitimate accounting standards?

Karsten Eisenschmidt, Matthias Schmidt

Abstract


The authors present the idea of integrating prediction markets into the IASB’s due process of accounting standards development in order to assure the legitimacy of IFRS. They refer to the constitutional economics concept of hypothetical consent and further substantiate literature claims that the legitimacy of any regulation with a lack of governmental control should be linked to adequate processes of rule development. The authors argue that standard-setting procedures which integrate market solutions into the search process for legitimate standards outperform pure discourse solutions that dominate contemporary accounting regulation. The prediction market approach is of particular interest because it addresses the identified major legitimacy concerns regarding the IASB’s current due process. Compared to other market solutions, prediction markets could be integrated relatively easily into the current institutional setting of global accounting regulation. The authors therefore suggest a basic design of a due process for the IASB that utilises a prediction market. The main contributions of the article are as follows: (1) it expands literature on the legitimacy of global standard setting in accounting; (2) it offers a new market approach to international accounting regulation and (3) it generally furthers the theoretical foundation for proposing prediction markets for regulatory purposes. The authors finally provide arguments as to how a prediction market approach could (re-)align standard setting and academic accounting research.

Keywords


prediction markets; due process; standard setting; legitimacy

Full Text:

PDF

References


Arrow KJ ‘Social choice and individual values’ (London, 2nd edition , 1963)

Arrow KJ, R Forsythe, M Gorham, R Hahn, R Hanson, D Kahneman, JO Ledyard, S Levmore, R Litan, P Milgrom, FD Nelson, GR Neumann, M Ottaviani, CR Plott, TC Schelling, RJ Shiller, VL Smith, E Snowberg, S Sunder, CR Sunstein, PC Tetlock, PE Tetlock, HR Varian, J Wolfers, and E Zitzewitz (2007) Statement on Prediction Markets, working paper, AEI-Bookings Joint Center for Regulatory Studies, http://ssrn.com/abstract=984584.

Barth ME ‘Research, standard setting, and global financial reporting’ (2006) 1 Foundations and Trends in Accounting 2, pp. 71–165.

Barth ME ‘Global financial reporting: implications for U.S. academics’ (2008) 83 The Accounting Review 5, pp. 1159–1179.

Beaver WH ‘Financial Reporting: An Accounting Revolution’ (Upper Saddle River, 3rd edition, 1998)

Beisheim M and K Dingwert ‘Procedural Legitimacy and Private Transnational: Are the Good Ones Doing Better?’ (2008), SFB-Governance Working Paper Series, No. 14, Research Center (SFB) 700, Berlin, 2008.

Bell TW ‘Government Prediction Markets: Why, Who, and How’ (2011) 116 Penn State Law Review, pp. 403–436.

Bratton WW ‘Private standards, public governance. A new look at the financial accounting standard board’ (2007) 48 Boston College Law Review, pp. 5–53.

Brennan G and JM Buchanan ‘The reason of rules: Constitutional political economy’ (Indianapolis, 1985)

Buchanan JM ‘The limits of liberty: between anarchy und leviathan’ (Chiccago, 4th edition, 1989)

Buchanan JM and G Tullock ‘The calculus of consent: logical foundations of constitutional democracy’ (Michigan, 1962)

Büthe T and W Mattli ‘The New Global Rulers: The Privatization of Regulation in the World Economy’ (Princeton and Oxford, 2011)

Camerer C ‘Can asset markets be manipulated? A field experiment with racetrack betting’ (1998) 106 Journal of Political Economy 3, pp. 457–482.

Chen KY and CR Plott ‘Information aggregation mechanisms: concept, design and implementation for a sales forecasting problem’ (2002), Social Science Working paper 1131, California Institute of Technology

Choi S and A Guzman ‘National laws, international money: regulation in a global capital market’ (1997) 65 Fordham Law Review 5, pp. 1855–1908.

Cowgill B, J Wolfers and E Zitzewitz ‘Using prediction markets to track information flows: evidence from Google’ (2009), Working paper, http://www.bocowgill.com/GooglePredictionMarketPaper.pdf.

Demski J ‘The General Impossibility of Normative Accounting Standards’ (1973) 48 The Accounting Review 4, pp. 718–723.

Dye RA and S Sunder ‘Why Not Allow FASB and IASB to Compete in the U.S.?’ (2001) 15 Accounting Horizons 3, pp. 257–271.

Esty D ‘Good Governance at the Supranational Scale: Globalizing Administrative Law’ (2006) 115 The Yale Law Journal, pp. 1490–1562.

Ewert R and A Wagenhofer ‘Using academic research for the post-implementation review of accounting standards: a note’ (2012) 48 Abacus 2, pp. 278–291.

Feltham GA and JA Ohlson ‘Valuation and Clean Surplus Accounting for Operating and Financial Activities’ (1995) 11 Contemporary Accounting Research 2, pp. 689–732.

Fischel DR ‘Organized exchanges and the regulation of dual class common stock’ (1987) 54 The University of Chicago Law Review 119, pp. 119–152.

Fülbier RU, JM Hitz, and T Sellhorn ‘Relevance of academic research and researchers’ role in the IASB’s financial reporting standard setting’ (2009) 45 Abacus 4, pp. 455–492.

Fülbier RU, and M Weller ‘Normative Rechnungslegungsforschung im Abseits? Einige wissenschaftstheoretische Anmerkungen’ (2008) 39 Journal of General Philosophy of Science 2, pp. 351–382.

Habermas J ‘Wahrheitstheorien’ in Fahrenbach H (ed) Wirklichkeit und Reflexion (1973), pp. 211–265.

Habermas J ‘Remarks on discourse ethics’ in Habermas J (ed) Justification and application (Cambridge, MA, 1993), pp. 19–111.

Habermas J ‘Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy’ (Cambridge, MA, 1996)

Hanson R ‘Shall We Vote on Values, But Bet on Beliefs?’ (2013) 21 The Journal of Political Philosophy 2, pp. 151–178.

Hayek FA ‘The use of knowledge in society’ (1935) 35 The American Economic Review 4, pp. 519–530.

Hayek FA ‘The Meaning of Competition’ in Hayek FA (ed) Individualism and Economic Order (1948), pp. 92–106.

Haw R ‘Prediction markets and law: a skeptical account’ (2009) 122 Harvard Law Review 4, pp. 1217–1238.

IFRS Foundation (2013), Due Process Handbook: approved by the Trustees January 2013; http://www.ifrs.org/DPOC/Documents/2013/Due-Process-Handbook-February-2013.pdf (downloaded 14.05.2013)

Johnson SB and D Solomons ‘Institutional Legitimacy and the FASB’ (1984) 3 Journal of Accounting and Public Policy 2, pp. 165–183.

Kerber W ‘Interjurisdictional competition within the European Union’ (2000) 23 Fordham International Law Journal 6, pp. 216–249.

Lacomb CA, JA Barnet and Q Pan ‘The imagination market’ (2007) 9 Information Systems Frontiers 2-3, pp. 245–256.

Larson RK ‘An Examination of Comment Letters to the IASC: Special Purpose Entities’ (2008) 20 Research in Accounting Regulations, pp. 27–46.

Larson RK and PJ Herz ‘A multi-issue/multi-period analysis of the geographic diversity of IASB comment letter participation’ (2013) 10 Accounting in Europe 1, pp. 99–151.

Leftwich R ‘Market Failure Fallacies and Accounting Information’ (1980) 55 Journal of Accounting and Economics, pp. 193–211.

Leuz C, L Hail and P Wysocki ‘Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part II): Political Factors and Future Scenarios for U.S. Accounting Standards’ (2010) 24 Accounting Horizons 3, pp. 567–588.

Luckner S, J Schröder, C Slamka, B Skiera, M Spann, C Weinhardt, A Geyer-Schulz and M Franke ‘Prediction markets, Fundamentals, Design and Applications’ (Wiesbaden, 2012)

Luthardt U and J Zimmermann ‘A European view on the legitimacy of accounting procedures: Towards a deliberative-accountability framework for analysis’ (2009) 21 Research in Accounting Regulation 2, pp. 79–88.

Mahoney PG ‘The exchange as regulator’ (1997) 83 Virginia Law Review 7, pp. 1453–1519.

Mattessich R ‘On the history of normative accounting theory: paradigm lost, paradigm regained?’ (1992) 2 Accounting, Business and Financial History 2, pp. 181–198.

McHugh P and AL Jackson ‘Prediction market accuracy: the impact of size, incentives, context and interpretation’ (2012) 6 The Journal of Prediction Markets 2, pp. 22–46.

Meisenbach RJ ‘Habermas’s Discourse Ethics and Principle of Universalization as a Moral Framework for Organizational Communication’ (2006) 20 Management Communication Quarterly 1, pp. 39–62.

Moizer P ‘Publishing in accounting journals: A fair game?’ (2009) 34 Accounting, Organizations and Society 2, pp. 285–304.

Ohlson JA ‘Earnings, Book Values, and Dividends in Security Valuation’ (1995) 11 Contemporary Accounting Research 2, pp. 661–687.

Posner RA ‘Economic Analysis of Law’ (New York, 8th edition, 2011)

Rawls J ‘A Theory of Justice’ (Cambridge, 1971)

Rhode PW and KS Strumpf ‘Manipulation in political stock markets: a field experiment and a century of observational data’ (2008) Working paper: University of North Carolina.

Riahi-Belkaoui A ‘Accounting Theory’ (London, 4th edition, 2000)

Richardson AJ ‘Due Process and Standard-setting: An Analysis of Due Process in Three Canadian Accounting and Auditing Standard-setting Bodies’ (2008) 81 Journal of Business Ethics 3, pp. 679–696.

Richardson AJ and B Eberlein ‘Legitimating Transnational Standard-Setting: The Case of the International Accounting Standards Board’ (2011) 98 Journal of Business Ethics 2, pp. 217–245.

Romano R ‘Empowering investors: a market approach to securities regulation’ (1998) 107 The Yale Law Journal, pp. 2359–2430.

Scherer AG and G Palazzo ‘Toward a Political Conception of Corporate Responsibility: Business and Society seen from a Habermasian Perspective’ (2007) 32 Academy of Management Review 4, pp. 1096–1120.

Schmidt M ‘On the legitimacy of accounting standard setting by privatly organised institutions in Germany and Europe’ (2002) 54 Schmalenbachs Business Review 2, pp. 171–193.

Scott DJ and WS Upton ‘The Role of Cost benefits Considerations in the FASB’s Standard-Setting Process’ in Benefits, Costs and Consequences of Financial Accounting Standards, Special Report, Financial Accounting Standards Board of the Financial Accounting Foundation (Norwalk, 1991), pp. 1–19.

Servan-Schreiber E, J Wolfers, DM Pennock and B Galebach ‘Prediction markets: does money matter?’ (2004) 14 Electronic markets 3, pp. 243–251.

Skiera B and M Spann ‘Using prediction markets in new product development’ in LV Williams (ed) Prediction Markets: Theory and application (New York, 2011), pp. 75–86.

Sunder S ‘Political Economy of Accounting Standards’ (1988) 7 Journal of Accounting Literature, pp. 31–41.

Sunder S ‘Regulatory competition among accounting standards within and across international boundaries’ (2002) 21 Journal of Accounting and Public Policy 3, pp. 219–234.

Sunstein CR ‘Group Judgments: Deliberation, Statistical Means, and Information Markets’, John M. Olin Law & Economics Working Paper No. 219 / Public Law and Legal Theory Working Paper No. 72, University of Chicago, 2004.

Sunstein CR ‘Deliberating groups versus prediction markets (or Hayek’s challenge to Habermas)’, John M. Olin Law & Economics Working Paper No. 321, University of Chicago, 2007.

Sunstein CR ‘Neither Hayek nor Habermas’ (2008) 134 Public Choice 1-2, pp. 87–95.

Vanberg V and W Kerber ‘Institutional Competition among Jurisdictions: An Evolutionary Approach’ (1994) 5 Constitutional Political Economy 2, pp. 193–219.

Watts RL ‘Corporate financial statements: Product of the market and political processes’ (1977) 2 Australian Journal of Management 1, pp. 53–75.

Watts RL and JL Zimmerman ‘Towards a Positive Theory of the Determination of Accounting Standards’ (1978) 53 The Accounting Review 1, pp. 112–134.

Weetman P, E Davie and W Collins ‘Lobbying on accounting issues: preparer/user imbalance in the case of the operating and financial review’ (1996) 9 Accounting, Auditing and Accountability Journal 1, pp. 59–76.

Weingast BR and WJ Marshall ‘The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets’ (1988) 96 Journal of Political Economy 1, pp. 132–163.

Wolfers J and E Zitzewitz ‘Prediction Markets’ (2004) 18 Journal of Economic Perspectives 2, pp. 107–126.

Wolfers J and E Zitzewitz ‘Prediction Markets in Theory and Practice’, NBER Working Paper Series, Working Paper 12083, Cambridge, 2006.

Wolfers J and E Zitzewitz ‘Interpreting Prediction Market Prices as Probabilities’, NBER Working Paper Series, Working Paper 12200, Cambridge, 2006a.




DOI: http://dx.doi.org/10.5750/jpm.v11i2.1401

Refbacks

  • There are currently no refbacks.