Description
Qualitative characteristics serve to operationalise the objective of financial reporting and
aim at shaping accounting discourses of standard-setters and their constituents. In the
recent revision of their conceptual frameworks, the IASB and FASB decided to replace
‘‘reliability’’, arguably one of the most important properties of accounting, with ‘‘representational
faithfulness’’. The aim of the present paper is to shed light on the boards’ decision
through a historical analysis of how reliability appeared in standard-setting and by tracing
its abandonment in detail.
‘‘Twisting words’’? A study of the construction and
reconstruction of reliability in ?nancial reporting
standard-setting
Carsten Erb
a
, Christoph Pelger
b,?
a
Department of Business Taxation, Heinrich Heine University Düsseldorf, Universitätsstraße 1, 40225 Düsseldorf, Germany
b
Department of Financial Accounting and Auditing (Treuhandseminar), University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany
a b s t r a c t
Qualitative characteristics serve to operationalise the objective of ?nancial reporting and
aim at shaping accounting discourses of standard-setters and their constituents. In the
recent revision of their conceptual frameworks, the IASB and FASB decided to replace
‘‘reliability’’, arguably one of the most important properties of accounting, with ‘‘represen-
tational faithfulness’’. The aim of the present paper is to shed light on the boards’ decision
through a historical analysis of how reliability appeared in standard-setting and by tracing
its abandonment in detail. Our study reveals that the standard-setters’ construction and
reconstruction of reliability attempted to undermine traditional practitioner understand-
ings along the lines of objectivity/veri?ability in order to extend the boundaries of appro-
priate ?nancial reporting in the direction of current/fair values. However, as the
introduction of more abstract concepts raised dif?culties in reconciling the new terminol-
ogy with everyday accounting practice, this turn created confusion among constituents and
board members. Our paper also contributes to further our understanding about decision-
making processes in standard-setting. In particular, we show how a group of board and
staff members was able to establish the replacement of reliability in spite of (and partly
taking advantage of) constituents’ concerns and widespread confusion about the terms.
Ó 2014 Elsevier Ltd. All rights reserved.
Introduction
In 2010, the IASB and FASB proclaimed in their revised
conceptual frameworks that the single objective of ?nan-
cial reporting is providing useful information for valuation
decisions of capital providers (OB 1
1
), which in their view
also encompasses stewardship concerns (OB 4).
2
Qualitative
characteristics serve to operationalise this objective by
introducing concepts which standard-setters can employ
as arguments in the development of new or revised stan-
dards. Young (1996) regards the conceptual framework as
a form of institutional thinking which limits both the de?ni-
tion of, and solutions to, accounting problems. Within this
institutional function of the framework, qualitative charac-
teristics de?ne the boundaries of what the standard-setters
deem ‘‘appropriate’’ ?nancial reporting. This is re?ected in
the recurrent use of qualitative characteristics in the framinghttp://dx.doi.org/10.1016/j.aos.2014.11.001
0361-3682/Ó 2014 Elsevier Ltd. All rights reserved.
?
Corresponding author. Tel.: +49 2214702723; fax: +49 2214705165.
E-mail addresses: [email protected] (C. Erb), [email protected].
de (C. Pelger).
1
References to the conceptual framework for ?nancial reporting (IASB,
2010) are abbreviated in the following way: OB refers to the ?rst chapter
(objectives), QC to the third chapter (qualitative characteristics) and BC to
the basis for conclusions. References to the Discussion Paper (IASB, 2006)
are abbreviated as DP, references to the Exposure Draft (IASB, 2008a) as ED.
References to the IASC (1989) framework, which was adopted by the IASB
in 2001, are abbreviated by F.
2
Stewardship had been a separate objective in the former IASC (1989)
framework and was also mentioned as a separate consideration in SFAC 1
(FASB, 1978) (cf. Zeff, 2013, p. 264).
Accounting, Organizations and Society 40 (2015) 13–40
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of accounting problems by standard-setters, practitioners
and academics. For instance, Bushman and Indjejikian
(1993), p. 765, observe that ‘‘[a]n issue of fundamental
importance to accountants concerns the qualities possessed
by, or that should be possessed by, accounting information.’’
In the standard-setters’ previous frameworks (SFAC 2
(FASB, 1980); IASC, 1989) one of the most important prop-
erties of ?nancial reporting has been the characteristic of
reliability. In particular, the trade-off between relevance
and reliability, established in SFAC 2.90 and F.45, has
shaped accounting discourses over the last decades
(Johnson, 2005). This is revealed by a mere look in account-
ing textbooks (e.g. Deegan & Unerman, 2011, p. 225 ff.), as
well as recent academic literature (e.g. Allen & Ramanna,
2013). However, when the IASB and FASB ?nished their
work on the ?rst part of the framework revision project
in September 2010,
3
which was concerned with the rewrit-
ing of the objective and qualitative characteristics of ?nan-
cial reporting, the term ‘‘reliability’’ had been dropped and
replaced by ‘‘representational faithfulness’’.
4
This decision
was motivated by the boards’ observation that the term
‘‘reliability’’ gave rise to misunderstandings as (at least
some) constituents perceived it to mean precision or exact-
ness of accounting information (DP BC 2.26), or placed too
much emphasis on single subcomponents – in particular
on veri?ability (IASB, 2005, par. 41). Although the boards
considered the move to representational faithfulness to be
a change in terms rather than in substance (BC 3.24), simply
re?ecting a better terminology of the boards’ understanding
(DP BC 2.27-28), the boards’ constituents were heavily
opposed to this alteration (IASB, 2007a, par. 56; IASB,
2008b, par. 51 f.). It is notable that this was not the only
issue in the 2010 framework revision which raised concerns.
The singular focus on valuation usefulness and the waiving
of a separate stewardship objective was met by a large resis-
tance (for critical positions, cf. Lennard, 2007; Whittington,
2008a; for an analysis of the boards’ decision-making on
stewardship cf. Pelger, 2013), while the elimination of con-
servatism was also intensely debated (cf. Barker &
McGeachin, 2013).
Motivated by the recent decision of the IASB and FASB
to replace reliability, this paper addresses the question of
how the construct of reliability ?rst emerged in accounting
standard-setting and why it vanished in the recent frame-
work overhaul.
5
This question is important not only with
regard to analysing the observed disputes between constitu-
ents and the boards, but also relates to general patterns in
recent ?nancial reporting reforms by the IASB and FASB
(Power, 2010; Whittington, 2008b) that apparently try to
shift the boundaries of appropriate ?nancial reporting
(Walton, 2006).
6
To address the outlined research question
we ?rstly analyse the way in which the construct of reliabil-
ity appeared and consider its precursors. This historical
study relies on the normative a priori US accounting litera-
ture that was published in particular during the 1960s and
1970s, before the ?rst written frameworks for ?nancial
reporting came into existence. Secondly, we thoroughly
scrutinise the way reliability was replaced by representa-
tional faithfulness in the framework revision project by the
IASB and FASB. For this purpose, we drew on all published
material from the due process and, furthermore, conducted
interviews with key actors who were involved in the deci-
sion-making as either board or staff members.
Our paper’s contribution to the literature is twofold.
First, we present a long-term case study of the develop-
ment of the idea of reliability in accounting literature
and standard-setting which adds to histories of conceptual
thinking in ?nancial reporting. These have so far mostly
emphasised the objective of ?nancial reporting (Murphy,
O’Connell, & Ó hÓgartaigh, 2013; Ravenscroft & Williams,
2009; Young, 2006) and only partly referred to qualitative
characteristics (Zeff, 2013). We follow Young (2006) in the
aim to reveal how taken-for-granted notions in standard-
setting (such as reliability) were constructed and how they
have been rede?ned by the accounting community,
attempting to contribute to a ‘‘sociology of accounting reli-
ability’’ (Power, 2010, p. 198). In this paper we show that
the construction and reconstruction of reliability followed
from the standard-setters’ aim to extend the boundaries of
appropriate ?nancial reporting by changing conceptual
language. Firstly, reliability was constructed in SFAC 2 as
a compromise between the traditional (evolutionary) prac-
titioner idea embodied in the concept of veri?ability and
more recent academic notions of faithful representation.
Secondly, as constituents continuously ignored the faithful
representation part of reliability and repeatedly used their
understanding along the lines of veri?ability to dismiss fair
value accounting, the standard-setters reconstructed reli-
ability to establish a single focus on faithful representation.
However, the standard-setters’ attempt to alter traditional
practical understandings by using ever higher levels of
abstraction led to very different views among constituents
and board members about what ‘‘faithful representation’’
means and what it implies. Hence, the standard-setters’
construction and reconstruction of ‘‘reliability’’ against tra-
ditional understandings of veri?ability by employing ever
higher (more academic) levels of abstraction appears to
be a permanently failing project.
Second, in contrast to the philosophical evaluations of
central principles embodied in conceptual frameworks
(Bayou, Reinstein, & Williams, 2011; Hines, 1991;
Macintosh, Shearer, Thornton, & Welker, 2000; McKernan,
2007; Shapiro, 1997) we provide empirical context by
meticulously tracing the boards’ deliberations on reliability
3
The framework project by the IASB & FASB, launched in 2004, was
initially split into eight phases, but only the ?rst phase has been ?nished. In
September 2012 the IASB decided to pursue the rest of the project as an
IASB-only project. The project comprehensively deals with the remaining
phases on elements, measurement, reporting entity and presentation and is
intended to be ?nished by autumn 2015 (cf. IASB, 2013, p. 14).
4
In the literature we found both terms, ‘‘faithful representation’’ and
‘‘representational faithfulness’’. While SFAC 2 uses the latter, the new SFAC
8 employs the ?rst term. Since we could not distinguish differences in
meaning in the examined publications, we use both terms interchangeably.
5
Fig. 1 in the appendix shows a timeline which gives an overview of
important contributions as well as surrounding events during the period of
our analysis.
6
Note that we do not argue in favour of any speci?c characteristic,
including reliability, but rather focus on tracing the development of the
construct of reliability in the standard-setting discourse.
14 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
and faithful representation, and by considering the re?ec-
tions of board members as gained frompersonal interviews.
Hence, by following the decision-making of the standard-
setting bodies regarding the qualitative characteristics of
their framework, this paper contributes to the scarce empir-
ical literature on actual processes of standard-setting in
accounting. More speci?cally, we reveal that some board
and staff members pressed the change towards faithful rep-
resentationto eliminate a major hindrance to the expansion
of fair value accounting. These actors’ ultimate success was
due to confusion amongst and indifference by other board
members as well as thestrongpositionof thestaff inpushing
the change. Indeed, the broad opposition by constituents
was in places exploited by proponents of the change based
on what they perceived as pervasive ‘‘wrong’’ understand-
ings of reliability among constituents. In this way the inten-
sive public consultation carried out by the boards
paradoxically served to decouple the standard-setters’
world from everyday accounting practice.
The paper proceeds as follows: In the following section
a literature review is provided, both with regard to qualita-
tive characteristics and standard-setting. Section ‘Data’
describes the material employed in our study. The next
section describes and re?ects on the construction of reli-
ability until the publication of SFAC 2. This is followed by
a section which highlights important developments in
the time after SFAC 2 until the framework revision project
was put on the agenda of IASB/FASB. After that, the next
section traces the abandonment of reliability and its
replacement by representational faithfulness, and the ?nal
section provides some conclusions.
Literature review
Qualitative characteristics
The historical part of our paper draws on literature from
the golden age of normative theorising in accounting
research. Before the advent of ?nancial accounting theory,
the predominant practitioner understanding was that
‘‘accounting is what accountants do’’ (Young, 2006,
p. 581). It was widely accepted that accounting was con-
cerned with the recording of economic transactions, the
(not theoretically supported) measurement of income
and the preparation of ?nancial reports adhering to estab-
lished accounting conventions such as conservatism and
consistency. The ?rst contributions in the accounting liter-
ature built on this stock of practical knowledge (Miller &
Power, 2013, p. 572 f.), as they were partly authored by
practitioners aiming at resolving practical accounting
problems or by researchers following an inductive
approach, i.e. rationalising existing practice (Lee, 2009, p.
143 f.). Due to a lack of resolution of practice problems,
researchers gradually tried to elevate the discussion to an
academic level (Lee, 2009, p. 140 f.). Interest in formulating
axiomatic principles of accounting arose around the mid-
dle of the 20th century and involved developing internally
consistent bodies of ?nancial accounting theory (FAT) with
the intention of deducing accounting standards based on a
theoretically sound underpinning. This process particularly
began after World War II, when accounting was confronted
by advances in other sciences, which triggered among
accounting scholars a perceived urgency to justify account-
ing theoretically, and to base it on scienti?c grounds
(Miller & Power, 2013, p. 574). This in?uence inaugurated
a ‘‘new academic spirit’’ which led to a ‘‘golden age of [nor-
mative] a priori accounting’’ in the 1950s and 1960s
(Mattessich, 2008, p. 182 ff.).
In the decades since the publication of the ?rst concep-
tual frameworks, accounting literature has repeatedly used
qualitative characteristics in analysing accounting stan-
dards. For instance, Allen and Ramanna (2013) classify
accounting standards published by the FASB with regard
to whether these standards increased or decreased rele-
vance and/or reliability. As qualitative characteristics are
(necessarily) abstract and vague notions, however, they
remain open to a broad range of different interpretations.
For example, accounting literature has repeatedly shown
in surveys and experiments that qualitative characteristics
have been used differently from their drafting in the
frameworks (e.g. Kadous, Koonce, & Thayer, 2012;
McCaslin & Stange, 1983) and that different understand-
ings even exist among members of standard-setting bodies
(Joyce, Libby, & Sunder, 1982), suggesting that the concepts
may simply be about ‘‘twisting words’’.
The boards’ recent decision to replace ‘‘reliability’’ with
‘‘representational faithfulness’’ has been the topic of some
literature. For instance, Power (2010) observes a shift in
the social construct of reliability from its transaction-
based, law-linked origins to an economics-based valuation
calculus in recent decades. He links this observation to the
rise of fair value accounting as a ‘‘motivating and quasi-
philosophical principle’’ (p. 197) of the IASB and FASB. In
this line of thought, dropping the term ‘‘reliability’’ is just
a logical consequence which re?ects a ‘‘reframing of reli-
ability, essentially collapsing reliability into relevance’’ (p.
200). Others, like Walton (2006), Whittington (2008b),
O’Brien (2009), have likewise related the shift towards rep-
resentational faithfulness to the increasing importance of
fair value accounting. Wüstemann (2011) identi?es the
abandonment of stewardship and the dominance of valua-
tion concerns in the objective of ?nancial reporting (cf.
Pelger, 2013; Whittington, 2008a; Whittington, 2008b) as
the major reason for the replacement and concludes that
‘‘the ambiguity of the faithful representation concept’’ (p.
6) as well as the opposition from large parts of constituents
to the new concept might lead to problems for future stan-
dard-setting. This sceptical attitude is shared by Kinserdal
(2011) who traces the rise of representational faithfulness
historically and links this development to notions of truth
in accounting.
Standard-setting
The second major part of this paper provides an in-
depth case study of (international) accounting standard-
setting. In recent years, literature on standard-setting has
substantially increased. This renewed interest primarily
relates to lobbying. Quantitative studies have analysed
the geographic origins (Jorissen, Lybaert, Orens, & van der
Tas, 2013) and composition (Jorissen, Lybaert, Orens, &
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 15
Van Der Tas, 2012) of constituents writing comment letters
to the IASB. In a more detailed study, Giner and Arce (2012)
provide an account of a speci?c due process, focussing on
the development of IFRS 2 on share-based payments. Their
approach centres on a content analysis of comment letters
submitted to three discussion documents. All studies
quoted are based on the theoretical cost-bene?t frame-
work introduced by Sutton (1984).
The political character of standard-setting (cf. Botzem &
Quack, 2009), however, cannot completely be captured by
analysing formal comment letter submissions. Thus, other
literature operates outside the quantitative domain and
attempts to shed light on the activities of accounting stan-
dard-setters through qualitative analysis. One example is
the study by Botzem (2012), who analyses the network
of organisations and individuals which dominated the
institutions during the ?rst decade of the IFRS Foundation
between 2001 and 2011. An interesting ?nding is that each
Big4 ?rm has more in?uence in the bodies of the IFRS
Foundation than the user group as a whole, despite the
prominence formally attributed to users in the objective
of ?nancial reporting (Botzem, 2012, p. 157). This corrobo-
rates the argument by Young (2006), who reveals that
accounting standard-setters have constructed a ?ctitious
user as their benchmark for consideration in standard-set-
ting which does not necessarily bear great resemblance to
real-world users. Other studies have focussed on the due
process, which standard-setters routinely pass through
when creating or substantially revising accounting stan-
dards (e.g. IFRS Foundation, 2013). The due process serves
as an instrument to strengthen standard-setters’ legiti-
macy (Botzem, 2012, p. 122; Richardson & Eberlein,
2011) as it is intended to enable constituents to convey
their positions to the boards and to eliminate arbitrariness
in the boards’ decision-making. Recent studies raise doubts
on whether the boards’ decision-making is as technical as
the due process requirements suggest. For example
Lagneau-Ymonet and Quack (2012) analyse changes in
IFRS standards for ?nancial instruments during the ?nan-
cial crisis, when, due to political pressures from the Euro-
pean Union the board omitted the due process (for a
depiction of the events in autumn 2008 also cf. André,
Cazavan-Jeny, Dick, Richard, & Walton, 2009). Pelger
(2013) addresses the abandonment of stewardship as a
separate objective of ?nancial reporting in the 2010 IASB
conceptual framework and reveals, for example, a major
in?uence of the staff and signi?cant changes in content
during late ‘‘hidden’’ phases of the due process. In a similar
vein, Young (2003) exposes ‘‘rhetorics’’ used in due pro-
cesses by the FASB.
More generally, questioning the naturalness of stan-
dard-setters’ allegedly technical and rational decision-
making has been the focus of several studies with regard
to the FASB. For example, Young (1994) raises the issue
of the way topics appear on the agenda of the FASB.
Ravenscroft and Williams (2009) show inconsistencies in
SFAS 123R and on this basis raise doubts about the appro-
priateness of the information metaphor for underlying
?nancial reporting standard-setting decisions. Young
(2014) also studies US rules for share-based compensation
but focuses on how the FASB attempted to maintain a tech-
nical approach to this issue, despite its highly political
character. The FASB’s puri?cation strategy is revealed by
focusing on the boundaries between the technical and
the political in hearings on this topic in the US Congress.
Our work is related to Young (2014) in that we also con-
centrate on a speci?c due process. However, our concern
is not with the divide between technical/political activities
but the constructed nature of qualitative characteristics in
?nancial reporting.
Data
For our historical study, we examined of?cial pro-
nouncements, studies and other publications by profes-
sional institutions (AICPA) and research committees
(AAA) in the US. We also carried out a thorough manual
search of accounting journals for articles and other contri-
butions concerning qualitative characteristics. The latter
task was independently performed by both authors. The
journals examined were Journal of Accountancy [1960–
1985],
7
Journal of Accounting Research [1963–1980]
8
and
The Accounting Review [1960–1980],
9
the leading profes-
sional and academic accounting journals during that time.
We also considered many other contributions in the form
of monographs or edited books that were referenced in the
papers and which dealt with qualitative characteristics. In
total, we identi?ed 36 relevant articles, seven monographs,
two contributions from a collected edition and one state-
ment from an institution formally in charge of standard-set-
ting (APB) (a list is provided in Table 1 in the appendix). This
literature forms the basis on which we trace the construc-
tion of reliability.
For our (interpretative) study of the framework revi-
sion, we employ the process-tracing method, speci?cally
the case-centred variant of process-tracing which focuses
on outcome explanation (Beach & Pedersen, 2013, p.
12).
10
The aim is ‘‘to account for particularly interesting out-
comes’’ (Beach & Pedersen, p. 18), such as the replacement of
reliability, seeking to identify the causal process leading to
the outcome with the help of empirical material. We used
all material from the boards’ due process which was publicly
available. This includes, all documents of?cially published
by the IASB & FASB (Discussion Paper, Exposure Draft,
Framework), all relevant staff agenda papers distributed in
advance of the board meetings, where reliability or related
7
The Journal of Accountancy was founded in 1905 as the monthly journal
of the American Institute of Accountants (AIA), which was renamed in 1957
to the American Institute of Certi?ed Public Accountants (AICPA).
8
The Journal of Accounting Research was founded in 1963 as a private
journal published by the University of Chicago. In the early days there was
also a strong in?uence on the journal from accounting researchers from the
London School of Economics which, however, ceased in 1974 (cf. Dyckman
& Zeff, 1984, pp. 261 f., 283).
9
The Accounting Review was founded in 1926 as the quarterly journal of
the American Association of University Instructors in Accounting, the
predecessor of the American Accounting Association (AAA).
10
This approach is termed ‘‘detailed narrative’’ by George and Bennett
(2005, p. 210), while Langley (1999, p. 695 ff.) refers to this as a narrative
strategy of sensemaking. Other variants of process-tracing are more
formally linked to theory-testing or theory-building. Cf. Beach and
Pedersen (2013), George and Bennett (2005, chap. 10); Vennesson (2008),
pp. 232–239.
16 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
qualitative characteristics were discussed, and board meet-
ing minutes, available in written form for the FASB and as
audio documents for IASB and joint IASB & FASB meetings
since 2007, which were used to follow the actual conversa-
tions of board members.
11
In addition to the publicly avail-
able resources, IStaR newsletters which provide detailed
reproductions of IASB (and joint IASB and FASB) meetings
were used to analyse board meetings. All comment letters
submitted to the Discussion Paper and to the Exposure Draft
were analysed. The list of all sources which refer to board
meetings or documents published by the boards is included
in Table 2 in the appendix. Finally, interviews were con-
ducted with Stephen Cooper, Philippe Danjou, Jan Engström,
Jim Leisenring, Sir David Tweedie and Geoffrey Whittington,
who served as IASB board members during the time of the
framework revision, as well as with a senior member of staff
(Wayne Upton, former Director of Research of the IASB;
Chairman of the IFRS Interpretations Committee), which
adds further context and detail to the process of the replace-
ment of reliability.
12
The construction of reliability
In this section we outline the origins of reliability and
trace its use in the US accounting literature until the pub-
lication of SFAC 2. The very beginnings of bookkeeping
practices in Mesopotamia many thousands of years ago
(e.g. Mattessich, 1987) show that accounting has its origins
as a mnemonic device to overcome the limitations of the
human brain (Basu & Waymire, 2006). Thus, accounting’s
primary function was to inform the accountants them-
selves and to provide them with a ‘‘diary’’ (Ijiri, 1983, p.
75) of past transactions. Accounting devices in the ?rst set-
tlements also enabled interaction and cooperation
between inhabitants and thereby signi?cantly contributed
to early forms of the division of labour (Basu & Waymire,
2006). Trade was facilitated by keeping accounts which
could be veri?ed by third parties. ‘‘[V]eri?able transaction
records are a necessary part of the foundations that lie
beneath the exchange-supporting institutions upon
which capitalist economies have been built’’ (Basu,
Kirk, & Waymire, 2009, p. 910). As accounting originated
as a depiction of former transactions and events, it was
in particular the ‘‘hardness’’ (Ijiri, 1975, p. 36) of its
information which rendered it a useful tool for business
purposes.
Accounting characteristics in the early literature
Related to the idea of the ‘‘hardness’’ of transaction
records, the notion of ‘‘reliable’’ or ‘‘dependable’’ informa-
tion was mentioned in early contributions to US account-
ing literature. For example Sanders, Hat?eld, and Moore
(1938), in their study ‘‘A Statement of Accounting Princi-
ples’’, seek to ‘‘set forth the principles and rules of account-
ing’’ (p. xvi). They identify a ‘‘general principle’’ of
accounting in that ‘‘a reliable historical record must be
made of all transactions of the business’’ (p. 113). Similarly,
the 1948 revision of the AAA’s ‘‘A Tentative Statement of
Accounting Principles’’ articulates the idea that the reader
of ?nancial statements should be able to obtain informa-
tion ‘‘on which he may rely with con?dence’’ (AAA, 1948,
p. 339) and that ‘‘?nancial statements [. . .] must supply
dependable information’’ (p. 344).
Arguably, the most in?uential text of the early period of
theory-building in accounting was the monograph of Paton
and Littleton (1940). They identi?ed veri?able, objective
evidence, ensuring the ‘‘dependability of the accounts’’
(pp. 7, 18) as a central concept of accounting practice.
Objective evidence according to their understanding is
de?ned as evidence ‘‘impersonal and external to the per-
son most concerned, in contrast with that person’s unsup-
ported opinion or desire’’ (p. 19). Although they concede
that objectivity allows for gradation, at least convincingly
objective evidence is regarded as indispensable. This ?rst
understanding may be characterised as following the
motto of accounting practice, ‘‘no entry without documen-
tation’’, which stresses the unity of accounting and book-
keeping. It is in line with the traditional understanding of
accounting as a means of reporting and recording past
transactions for which veri?able evidence is available
(Ijiri, 1975, p. 29 f.). This evidence-based convention of
objectivity, thus, re?ects the roots of bookkeeping.
The SEC, the responsible government entity for the reg-
ulation of US ?nancial reporting, delegated standard-set-
ting authority to the Committee on Accounting Procedure
(CAP), a committee of the AIA (AICPA), in 1939. Despite
the SEC’s favourable view on the Paton and Littleton mono-
graph, which resonated very well with the SEC’s preference
for historical cost accounting (Zeff, 2007), and its encour-
agement of conceptual thinking, the Committee chose to
focus on developing short-term solutions to accounting
problems (Zeff, 1972, p. 136 f.). This ‘‘case-by-case’’
approach adopted by the CAP was criticised, not solely by
the SEC but also by practitioners, which ultimately resulted
in an AICPA Special Committee Report in 1958 making two
recommendations: ?rst, to replace the CAP with the
Accounting Principles Board (APB) and, second, to put
more effort into research to develop general accounting
principles (Zeff, 1972, p. 169 ff.; Zeff, 2001).
The ?rst research study commissioned by the APB was
Moonitz (1961). He stresses that ‘‘changes in assets and
liabilities [. . .] should not be given formal recognition in
the accounts earlier than the point of time at which they
can be measured in objective terms’’ (p. 41) and deems
11
The transparency policy of the IASB (e.g. Richardson & Eberlein, 2011)
might drive real conversations out of the of?cial meetings, and the
recording of our interviews might inhibit interviewees from expressing
their real views. While we acknowledge this general limitation, we did not
get the impression from the audio documents and interview transcripts
that there was any apparent reticence on behalf of actors or attempts to
conceal their views.
12
The (semi-structured) interviews were conducted between April 2012
and March 2014 by one of the authors. All interviews were tape-recorded.
Their duration was between 58 and 157 min. During all interviews
signi?cant time was devoted to the topic of reliability, while other topics
of the framework and standard-setting more generally were also part of the
interviews. Note that all interviewees provided their individual views,
which do not necessarily re?ect the of?cial opinion of the IASB. We gained
explicit written permission from six interviewees to use their quotes, while
the seventh interviewee granted implicit written permission by acknowl-
edging receipt of the statements but not reacting to a deadline for
corrections.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 17
the availability of objective evidence a necessary prerequi-
site for admitting information to the accounts. ‘‘Objective’’,
for Moonitz, means unbiased and in particular allows for
‘‘veri?cation by an independent investigator’’ (p. 42).
While the objectivity requirement was typically associated
with historical cost measurement, Moonitz himself was at
least open to considerations of current values (p. 29). In a
further study prepared for the APB, Sprouse and Moonitz
(1962), p. 53, argue
‘‘that ideally all assets (and liabilities) should be recog-
nised, as well as all changes that can be objectively
determined. In addition to those changes which result
from explicit transactions with other entities, this study
recommends the recognition of price-level changes [. . .]
provided that the evidence is objectively determinable.’’
Despite their overt support for current values, the two
authors still maintain the salience of objective evidence.
Both studies were rejected outright by the APB because
‘‘they are too radically different from present generally
accepted accounting principles for acceptance at this time’’
(Anonymous, 1962, p. 10). Thus, the APB was largely disil-
lusioned about expecting help from research endeavours
and again, like its predecessor, focussed on the individual
topics of accounting practice (Zeff, 1972, pp. 177 f., 186).
The contributions mentioned in this section (similarly
Arnett, 1961; McFarland, 1961) concur that objectivity
implies unbiasedness, i.e. that either accounting data or
the required evidence is not tainted by the subjective
intent of the accountant, and in particular they all stress
the necessity of accounting data being veri?able through
evidence. Generally speaking the objectivity requirement
thus serves as a means of excluding subjectivity or the sub-
jective judgment of the accountant. Note that this argu-
ment is used to justify both historical cost (Paton &
Littleton, 1940)
13
and current value accounting (Sprouse &
Moonitz, 1962). Although none of the sources substantiates
the notion of evidence, various examples indicate that it
refers to invoices, cheques, receipts or observable market
prices. Apparently, the requirement of objectivity main-
tained by veri?ability through evidence is closely related
to the audit function as the quoted examples epitomise
the evidence typically consulted by auditors. Paton and
Littleton (1940), for instance, regard the emphasis placed
on the availability of veri?able evidence for recorded trans-
actions as ‘‘one of the important contributions made by pro-
fessional auditing’’ (p. 18). Similarly, Arnett’s (1961) (p. 65)
and Moonitz’s (1961) (p. 42) reference to veri?cation by
independent/competent investigators can be interpreted as
allusions to the auditability of accounting information. This
link is further corroborated by Mautz and Sharaf (1961). In
their book, the authors attempt to ‘‘outline the theory of
auditing’’ (p. 1) and posit eight ‘‘postulates of auditing’’.
The ?rst postulate is that ‘‘?nancial statements and ?nancial
data are veri?able’’ (p. 42) because ‘‘unless ?nancial data are
veri?able, auditing has no reason for existence’’ (p. 43).
In this context it becomes apparent that evidence-based
objectivity as articulated in the early literature seems to
re?ect a living law of accounting. The concept of living
law proposes that social groups, such as professions, have
a pre-existing customary or moral ‘‘law’’ that governs
and regulates conduct within the group as well as the
behaviour of group members. Barden and Murphy (2010)
de?ne living law as ‘‘the set of those ways of acting that,
in a particular community, are admired and thought
appropriate to common types of situations’’ (p. 4) which
is to be distinguished from codi?ed positive or natural
law (Murphy, O’Connell, & Ó hÓgartaigh, 2013, p. 75 f.).
14
As outlined above, the requirement of objectivity through
veri?able evidence was intrinsic to accountants’ thinking
and goes back to the very roots of bookkeeping. Therefore,
even ‘‘before [it was] discovered to be common, [it was] in
fact common’’ (Murphy et al., 2013, p. 76).
The construction of reliability by accounting academia
In the literature of the following years we observe an
increasing academicisationof the debate on objectivity/ver-
i?ability, re?ecting the in?uence of other sciences on
accounting theory (Young, 2006) and the aspiration of
accounting researchers to gain status in US business schools
(Zeff, 1989, p. 169). These developments include ?rst a
rede?nition of objectivity from an evidence-based notion,
anchored in accounting and auditing practice, to a more
abstract consensus concept. This also involves the use of
analytical and statistical approaches in de?ning objectivity.
Second, explicit pronouncements about the objectives of
?nancial reporting with a focus on accounting’s usefulness,
in particular for investors and creditors, became domi-
nant,
15
questioning the central role of objectivity.
The ?rst development can be observed in Chambers
(1964), who suggests that rather than seeking objective evi-
dence, it is important in the ?rst instance to de?ne the
aspects for which evidence is sought. A shift can be noted
withChambers, as he adopts the consensus viewof objectiv-
ity using Popper’s de?nition of ‘‘intersubjective testability’’
and thus moves away from understanding objectivity as
based on evidence. Instead accounting information is
regarded as objective if multiple users assessing the same
issue come to similar conclusions. Relatedly, Ijiri and
Jaedicke (1966) see objectivity as ‘‘consensus among a given
group of observers or measurers’’ (p. 476). By re?ecting on
how consensus can be reached, they de?ne consensus as
depending onspeci?cs of the measurement process, namely
who carries out the measurement (i.e., experts or laymen),
properties of the measurement process (e.g. its complexity
13
Given the major impact of the Paton and Littleton monograph, which
was widely used in university accounting courses as well as read by
practitioners (Zeff, 2001, p. 147; Zeff, 2007, p. 51), the authors’ view on
objective evidence as a crucial characteristic of accounting had an effect on
several generations of US accountants. The cost principle, which was
justi?ed by reference to objectivity, remained the clear preference of the US
SEC at least until 1972 (Zeff, 2007).
14
For a fuller account of the concept of living law cf. Murphy et al. (2013)
who argue that stewardship/accountability constitutes a living law of
accounting.
15
While Paton and Littleton (1940) were not concerned with usefulness,
Moonitz (1961), p. 4, described a general notion of the usefulness of
accounting, albeit cautioning against any narrow interpretation with regard
to one speci?c group, e.g. investors.
18 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
or howwell its steps are de?ned) and, ultimately, properties
of the object which is measured. They suggest measuring
objectivity or ‘‘consensus’’ by using the variance of the out-
comes of different measurers measuring the same property
while using the same measurement process (p. 476). This
introduction of a statistical de?nition nicely illustrates the
ingress of statistical thinking into accounting theory at that
time. Other contributions similarly provide analytical
(mathematical) de?nitions of the concept (e.g. McDonald,
1967, p. 670 ff.; Ashton, 1977).
Vatter (1963), discussing Moonitz (1961), combines a
scienti?c view of accounting with a focus on usefulness.
His understanding of objectivity relates to an empirical (sci-
enti?c) de?nition, in that he does not consider objectivity as
a postulate in the choice of acceptable evidence but rather
sees it as an inherent quality of the measurement process
itself. In his viewobjectivity ‘‘must be maintained by [a pre-
determined and well de?ned measurement] methodology’’
(p. 190). Objectivity, however, cannot be used as a postulate
to, for example, ‘‘rule out the recognition of unrealized
gains’’ (p. 191). The latter decision, that is ‘‘to separate those
elements that are relevant to meeting the needs of those
who use reports’’ (p. 191) is a matter of what Vatter calls
‘‘doctrine’’, i.e. the rules of what tomeasure andhowtomea-
sure it, guided by the usefulness of the information to the
readers of a company’s reports. He therefore criticises Moo-
nitz’s approach and demands an empirical method guided
by the usefulness criterion: ‘‘In a measurement methodol-
ogy the test of principles is their usefulness in making pre-
dictions, not the degree to which they ?t hypotheses’’ (p.
196). This foreshadows the later turn in US accounting
research towards market-based studies.
A de?nite break with the predominant requirement of
objectivity, as well as objective evidence, can be found in
the work of Fertig (1966). He summarises that
‘‘the accountant ?nds himself between con?icting in?u-
ences: the need for veri?able evidence supporting the
measurement on the one hand, and the need to supply
useful accounting data to the ?nancial statement reader
on the other’’ (p. 142).
This observation leads him to conclude that the most
important criteria of accounting information are relevance
and objectivity. He criticises Paton and Littleton for not
allowing ‘‘data other than transaction data [for it is] not
suf?ciently veri?able to justify recognition in ?nancial
statements’’ (p. 141) and rather endorses the view held
‘‘by the majority of recent writers that progress in
accounting is made by admitting to the accounts data
having lesser degrees of objectivity (veri?ability) [. . .]
to improve the usefulness of accounting data to deci-
sion-makers’’ (p. 140).
Fertig concludes that the degree of objectivity required
crucially hinges on the purpose of accounting and there-
fore explicitly disparages the strong veri?ability require-
ment: ‘‘accountants must not defend current practice on
grounds of veri?ability of evidence’’, as in the light of rele-
vance considerations ‘‘veri?ability is a necessary but
clearly insuf?cient criterion for admitting accounting data
to the accounts’’ (p. 148).
In 1964, the AAA appointed a committee to devise an
‘‘appropriate conceptual framework for a coordinated
statement of accounting theory’’ (AAA, 1966, p. v) which
two years later resulted in ‘‘A Statement of Basic Account-
ing Theory’’ (commonly referred to by its acronym: ASO-
BAT). In the initial document (AAA, 1964), objectivity is
mentioned as one of the concepts for which further analy-
sis is required. Interestingly, objectivity is on the one hand
explicitly de?ned following a consensus view: ‘‘objectivity
is social consensus – an event or datum is objective when
there is no disagreement or variation in interpretation
among all the persons who view it’’ (AAA, 1964, p. 430).
On the other hand, the document poses the question of
‘‘how much evidence is required to support an objective
judgment?’’ This parallelism of evidence-based and con-
sensus-oriented understandings nicely illustrates the
ambiguity around the concept of objectivity at that time,
re?ecting both the traditional practice perspective as well
as the concept seen ‘‘through the eyes of academics’’.
ASOBAT was published in 1966 and by then the notion
of ‘‘objectivity’’ had been dropped. Instead ASOBAT articu-
lated ‘‘four basic standards [. . .] as providing criteria [. . .] in
evaluating potential accounting information’’ (p. 7): Veri?-
ability, freedom from bias, relevance and quanti?ability.
The de?nition of veri?ability combines the consensus view
with the evidence-based notion: at ?rst, it is stated that
veri?ability ‘‘requires that essentially similar measures or
conclusions would be reached’’ by multiple quali?ed per-
sons examining the same data (p. 7). The study further
details that veri?ability is ‘‘primarily concerned with the
availability and adequacy of evidence attesting to the
validity of the data being considered’’ (p. 10) and that ‘‘ver-
i?ability is a necessary attribute [. . .] to make possible a
reliance [on accounting information]’’ and also ‘‘in some
degree, to make possible the presentation of an indepen-
dent accountant’s opinion’’ (p. 10; emphasis added). Free-
dom from bias implies that ‘‘facts have been impartially
determined and reported’’ and is considered a separate
quality, as even accounting information with ‘‘high degrees
[. . .] of veri?ability [may] be biased in favor of some par-
ties’’ (p. 11). Despite dropping the term ‘‘objectivity’’, the
requirements of veri?ability and freedom from bias epito-
mise the de?nition of objectivity from the earlier litera-
ture. With reference to the relative gain in the
importance of usefulness unveiled in the literature above,
ASOBAT reveals a clear dominance of the relevance crite-
rion. Although the ‘‘process of judging accounting informa-
tion should involve a combined and simultaneous
consideration of all four standards’’ (p. 10),
‘‘[t]he standard of relevance is primary among the four
recommended standards. Although not suf?cient as a
sole criterion, it represents a necessary characteristic
for all accountinginformation. None of the other standards
has this position of primacy’’ (p. 9; emphasis added).
Thus, ASOBAT is an important step in that, ?rstly, the
term ‘‘objectivity’’ was replaced by other notions which
presumably kept its meaning and, secondly, due to the
clear exposition of a superiority of relevance.
We still ?nd a close proximity between the requirement
of veri?ability and auditing. In 1969 the AAA’s Executive
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 19
Committee installed a ‘‘Committee on Basic Auditing Con-
cepts’’ to ‘‘investigate the role and function of auditing’’
(AAA, 1973, p. 1). In 1973, the Committee published ‘‘A
Statement of Basic Auditing Concepts’’ (ASOBAC), wherein
it de?ned auditing as a ‘‘systematic process of objectively
obtaining and evaluating evidence regarding assertions
about economic actions and events [. . .]’’ (p. 2). It further-
more analysed previous literature as to its implications for
auditing. Referring to the qualitative characteristics named
in ASOBAT, ASOBAC states that auditing is (in the end)
‘‘most concerned with freedom from bias’’ but that veri?-
ability is equally important because ‘‘veri?ability is an
attribute that accounting information must possess before
it can be subject to audit investigation’’ (p. 3). It sees an
important link between veri?ability and auditing in ASO-
BAT’s statement that ‘‘some means [needs to] be available
to assure users with varied interests that the information is
dependable’’ which may ‘‘be met by the use of evidence
and procedures that can be veri?ed’’ (p. 10 in ASOBAT, p.
3 f. in ASOBAC). These pronouncements are reminders of
the traditional notion of veri?ability. However, ASOBAC
also explicitly points to usefulness in stating that ‘‘the
function of auditing is to assist the user in [. . .] evaluating
the quality of the information being communicated’’ (p. 9).
While it is the task of accounting to develop principles
which lead to useful reports, auditing takes these generally
accepted accounting principles as given and uses them to
assess the ‘‘degree of correspondence between that which
is being audited and established criteria’’ (p. 7). The latter
quotes reveal that notions of usefulness trickle down to
the discourse about the role of auditing which is not seen
simply as stating the correctness of the report, but in its
ability to assist user assessments.
Following the efforts of the AAA, the APB also developed
a framework of underlying accounting objectives (charac-
teristics) and assumptions in the second half of the
1960s.
16
Five years of deliberations resulted in the ?rst doc-
ument regarding this matter published by an institution for-
mally in charge of developing accounting standards, APB
Statement No. 4 (1970). While it was just a statement, not
an (mandatory) opinion, it was the ?rst of?cial pronounce-
ment acknowledging the primary role of the usefulness
objective and the importance of relevance (Staubus, 1972).
Veri?ability and neutrality, which in terms of de?nition lar-
gely resemble veri?ability and freedom from bias according
to ASOBAT (APB, 1970, par. 90–91),
17
are placed alongside
relevance, understandability, timeliness, comparability and
completeness as two of a total set of seven ‘‘qualitative
objectives’’. Like ASOBAT, APB Statement No. 4 emphasises
the major importance of relevance, being ‘‘the primary qual-
itative objective’’ (APB, 1970, par. 88). It is interesting to
note that while we ?nd veri?ability and neutrality drafted
as qualitative objectives taken from the previous literature,
APB Statement No. 4 contains a separate section on ‘‘Reli-
ability of Financial Statements’’. Here it is stated that gener-
ally the ‘‘achievement of qualitative objectives [. . .]
enhances the reliability of ?nancial statements’’ (par. 107),
but also – as an allusion to the audit function – that ‘‘users
of ?nancial statements look to the reports of independent
auditors to ascertain that the ?nancial statements have been
examined by independent experts’’ (par. 109). Again the ref-
erence to the interests of users with regard to the framing of
auditing activities is apparent.
According to our ?ndings, Ijiri and Jaedicke (1966) and
Snavely (1967) ?rst introduced the term ‘‘reliability’’ as
an individual characteristic. Snavely (1967), when devel-
oping his own systematisation of characteristics of ?nan-
cial reporting, saw reliability as a separate criterion
comprising the requirements of veri?ability and freedom
from bias. His de?nitions of both terms are based on the
respective de?nitions in ASOBAT (Snavely, 1967, p. 228).
Thus, his understanding of reliability can be regarded as
just a different name for the notion which previously was
labelled objectivity. In contrast, Ijiri and Jaedicke (1966)
developed a reliability notion that explicitly goes beyond
objectivity. They saw a further dimension of reliability in
the aspect of how well a measure serves as a predictor of
a quality of interest for the user (p. 478). This dimension,
in combination with their above-described understanding
of objectivity, forms their concept of reliability. As an illus-
tration, they employ the example of a barometer, which is
not only expected to measure the correct atmospheric
pressure (objectivity), but is also assessed by how well
its barometer reading is able (i.e., can be used) to predict
future weather (p. 478). Thus, reliability is de?ned with
respect to the interest of the user. To measure the latter
quality of reliability they suggest using the bias of an
accounting measure when depicting the correct outcome
(p. 481).
The report of the Trueblood Committee, published in
1973, was the ?rst pronouncement of a professional or
research association to mention reliability as a separate
qualitative characteristic of accounting information. It took
APB Statement No. 4 as a starting point (Zeff, 1972, p. 227
f.) and identi?ed seven qualitative characteristics that
information presented in ?nancial statements should pos-
sess ‘‘to satisfy users’ needs’’
18
(p. 57): relevance and mate-
riality, form and substance, reliability, freedom from bias,
comparability, consistency and understandability (AICPA,
1973, p. 57f.). Surprisingly, despite veri?ability being men-
tioned in all other publications up to that date as a major cri-
terion, the Trueblood Report did not include it. Reliability is
not clearly de?ned in abstract terms but treated as an intrin-
sic quality of information, i.e., ‘‘reliability varies with the
nature of the information’’ (p. 58). The further explanation
of the concept, however, indicates that reliability deals with
similar aspects which were subsumed under the heading of
veri?ability in the previous literature, i.e., the uncertainty in 16
The major motivations for this endeavour lay in challenges for the APB
arising from accounting scandals, widely debated in the ?nancial press, and
the rising criticism by the SEC concerning missing uniformity or at least
comparability of accounting practices (Zeff, 1972, pp. 186–192; Gore, 1992,
pp. 14–18).
17
It is noteworthy that the description of veri?ability in APB Statement
No. 4 does not feature any reference to evidence, but is described purely in
line with the academic consensus de?nition (par. 90).
18
The Trueblood report, which was commissioned by the AICPA, very
clearly articulates the user orientation in ?nancial reporting. This followed
the spirit of ASOBAT. One in?uential member of the AAA Committee that
drafted ASOBAT, George Sorter, Professor in Chicago, was the Research
Director of the Trueblood Committee (Zeff, 1999, p. 99).
20 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
information resulting from subjectivity and judgments in
accounting. It is also stated that
‘‘separating fact from interpretation and [. . .] disclosing
uncertainties and assumptions should increase the
value of ?nancial statements by indicating the inherent
differences in reliability to various pieces of informa-
tion’’ (p. 58).
Interestingly, this recommendation of merely disclosing
uncertainty does not exclude subjective information from
being reported, as would be the case if the former de?ni-
tion of veri?ability in a stricter sense was followed.
19
Summarising the literature before SFAC 2, the tradi-
tional notion of objectivity was partly rephrased from its
evidence basis to a consensus de?nition, a more academic
(and abstract) perspective. More signi?cantly, rooted in the
usefulness idea, concerns of relevance were rising in
importance, relegating the status of objectivity. The in?u-
ence of these ideas, however, went beyond the remit of
mere academic discussions in accounting journals and
study reports. Accounting practice had still not managed
to establish comparability in ?nancial reports, and incon-
sistent standards arising from the ‘‘dominant ?re-?ghting
approach’’ of the APB were made responsible for the ?exi-
ble and partly fraudulent use of accounting during the
1960s (Gore, 1992, pp. 14–18). Discussions among the rep-
resentatives of accounting ?rms led to the conclusion that
a user orientation, which had already been pronounced in
ASOBAT and APB Statement No. 4, might be a way towards
consistent practices (Gore, 1992, p. 21). Moreover, user ori-
entation was regarded as an opportunity to hinder inter-
vention by the SEC or the government in accounting
standard-setting. Indeed, the user of ?nancial reporting
was constructed by the accounting profession (Young,
2006) by relying on the ideas generated by academics
(Miller, 1974, p. 19 f.).
20
Prominent professionals, such as
Trueblood, partner at Touche, Ross & Co, seized the opportu-
nity that lay in such a view, noting that
‘‘it seems unlikely that basic concepts of accounting can
ever be developed without taking into consideration
developments in other ?elds such as the law, econom-
ics, mathematics, and the behavioural sciences’’
(Trueblood, 1966, p. 189).
In this way the (abstract) ideas of academic thinkers in
accounting, developed by recourse to other sciences, were
legitimised by the profession and were thus able to in?u-
ence the conceptual period of standard-setting in ?nancial
reporting that began in the 1970s. The higher abstraction
of their ideas was sought by standard-setters and the
upper reaches of accountants as a panacea to ?ght incon-
sistency of standards and practices. Note, however, that
these conceptual deliberations did not necessarily cause
actual accounting practice to change. Instead, what chan-
ged were the terms used in the discourses about account-
ing, with veri?ability being conceptualised academically
based on consensus, instead of evidence. The increasing
conceptual focus on relevance was markedly detached
from the practitioner understanding minted by actual
bookkeeping/accounting practice with its prevalent con-
vention of objectivity. This discrepancy is illustrated by
the reaction of ?nancial statement preparers to the
changes. Apparently, they did not feel very comfortable
with the new terminology (Armstrong, 1977; Burton,
1978), thus showing early signs of resistance against the
‘‘capture’’ of accounting practice by academics. The follow-
ing section shows how the debate in the literature was
re?ected in the conceptual framework of the FASB.
Reliability in SFAC 2
While SFAC 1 (1978) de?nes the objectives of (US)
?nancial reporting, SFAC 2 deals with qualitative charac-
teristics. According to SFAC 2.32, and simply repeating
the objective de?ned in SFAC 1, the most important quality
of information is its usefulness for capital providers in
making investment, credit and similar decisions. SFAC 2
then details further qualities that make information useful
(SFAC 2.1). Relevance and reliability are de?ned as the two
primary qualitative characteristics (SFAC 2.15). While the
antecedents of the framework stated a dominance of rele-
vance over other considerations, SFAC 2.42 sees both as
equally important as
‘‘information may possess both characteristics to vary-
ing degrees. It may be possible to trade relevance for
reliability or vice versa, though not to the point of dis-
pensing with one of them altogether.’’
Reliability is de?ned as ‘‘the quality of information that
assures that information is reasonably free from error and
bias and faithfully represents what it purports to repre-
sent’’ (SFAC 2, p. 6). According to SFAC 2.59 reliability is
achieved by guaranteeing that accounting information is
a faithful representation of what it purports to represent,
‘‘coupled with an assurance for the user, which comes
through veri?cation, that it has that representational qual-
ity.’’ Thus, representational faithfulness and veri?ability
are equally important components of reliability, supple-
mented by the related concept of neutrality (SFAC 2.62).
21
In line with earlier pronouncements (e.g. ASOBAT; APB
Statement No. 4), the components of veri?ability and neu-
trality are, thus, also included in the reliability notion of
SFAC 2. Veri?ability in SFAC 2 (p. 6) is de?ned as
‘‘the ability through consensus amongst measurers to
ensure that information represents what it purports to
represent or that the chosen method of measurement
has been used without error or bias.’’
19
Freedom from bias (‘‘which may be characterised as neutrality or
fairness’’) is altogether drafted similarly to the documents mentioned
above as ‘‘there should be no purposeful bias favoring any group’’ (p. 58).
20
Staubus (1972, p. 37), crediting academics’ previous works as having
enabled the progress in this document, asserts that ‘‘until the publication of
APB Statement No. 4, there has been precious little evidence that usefulness
has been a conscious objective of the profession.’’
21
Neutrality is de?ned as ‘‘absence in reported information of bias
intended to attain a predetermined result or to induce a particular mode of
behaviour’’ (SFAC 2, p. 6). It therefore loosely resembles the postulate in the
earlier literature of a general absence of bias. SFAC 2.91 also lists
conservatism as a component of reliability.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 21
This de?nition closely resembles the consensus
approach in de?ning objectivity by Ijiri and Jaedicke
(1966). Representational faithfulness and veri?ability
occupy the same level of importance within the hierarchy
of qualitative characteristics (SFAC 2, p. 13). SFAC 2.59
explicitly underlines the necessity of veri?ability by stating
its function to provide a ‘‘signi?cant degree of assurance
that accounting measures represent what they purport to
represent’’. This necessity of veri?ability also places the
reliability notion of SFAC 2 in line with the earlier pro-
nouncements and discussions in the literature. Following
the academic discourse, the requirement of evidence does
not form part of the veri?ability description in SFAC 2.
Faithful representation is de?ned in SFAC 2.63 as the
‘‘correspondence or agreement between a measure or
description and the phenomenon it purports to represent’’
with phenomena being ‘‘economic resources and obliga-
tions and the transactions and events that change [them]’’.
Staubus, who ?rst developed the notion of the user orien-
tation of ?nancial reporting in terms of a focus on future
cash ?ows from an investor’s perspective (cf. Staubus,
1999; Zeff, 2013, p. 22), was the only author in the articles
analysed who had previously mentioned a similar de?ni-
tion. He explicitly refers to reliability as permitting ‘‘users
of a datum [accounting information] con?dently to depend
on it as an accurate representation of the speci?c phenom-
enon it purports to represent’’ and also refers to a ‘‘close
‘correspondence’ between such information and ‘reality’’’
(Staubus, 1976, p. 277).
22
Based on the descriptions in SFAC 2 it is dif?cult to
operationalise the term ‘‘faithful representation’’. First, it
seems that faithful representation primarily pertains to
measurement problems (SFAC 2.65 f.), i.e. faithful repre-
sentation requires that an accounting measure correctly
measures the value to be measured, while bias, for exam-
ple, may lead to an over- or understatement of the ‘‘cor-
rect’’ measure. Second, however the de?nition in SFAC
2.63 contains a more abstract meaning of faithful represen-
tation in the sense of ‘‘correctly depicting economic real-
ity’’. Intuitively, according to the asset/liability view
which underlies the conceptual framework, the term ‘‘phe-
nomenon’’ may be interpreted as a resource that bears
future bene?ts or obligations (Bullen & Crook, 2005, p. 6).
In that sense, faithful representation would describe the
predictive ability of information with regard to future ben-
e?ts and obligations, similar to Ijiri and Jaedicke’s (1966)
idea of reliability. However, SFAC 2.60-62 explicitly rejects
this ‘‘effectiveness’’ interpretation of reliability. This shows
that SFAC 2 tries by all means to uphold a strict distinction
between questions of relevance and faithful representa-
tion. Which aspects/issues of economic reality are to be
depicted in ?nancial statements is considered solely a mat-
ter of relevance (Sterling, 1985, p. 30 f.; Solomons, 1986, p.
94 f.), while faithful representation – in SFAC 2’s diction –
exclusively deals with the quality of the depiction of the
(economic) phenomenon to be presented. SFAC 2.69 f. try
to illustrate this meaning with two examples: the aptness
of a spelling test as means of measuring one’s ability to
spell correctly and the aptness of a purchase price index
to express the purchasing power of one single individual.
These examples are initially reminiscent of the effective-
ness interpretation of reliability already explicitly
excluded from SFAC 2.61. In the context of SFAC 2’s corre-
spondence idea however, these examples are meant to
illustrate the aptness of a process to measure the attribute
previously chosen under considerations of relevance
(Solomons, 1986, p. 95).
23
From objectivity to reliability: some re?ections
In our analysis we have shown that the idea of reliabil-
ity according to SFAC 2 contains aspects of what was orig-
inally labelled ‘‘objectivity’’ in the discourse around
qualitative characteristics of accounting information.
Objectivity can therefore be regarded as a predecessor of
reliability in SFAC 2. However, the notion of objectivity
was subject to change even in the decades prior to SFAC
2. While objectivity of accounting data was a predominant
requirement historically, this was gradually weakened due
to the increasing importance of the concept of ‘‘relevance’’
of accounting data, or usefulness considerations more gen-
erally. This development mirrors a shift in the underlying
accounting objective. Historically, accountability was
accounting’s original purpose or ‘‘root metaphor‘‘ (Ijiri,
1975; Murphy et al., 2013). With the rise of the corporation
and its ?nancing being increasingly dominated by capital
markets, the role of accounting changed. Regulation in
the US, from the 1930s, was a further impetus to the
increasing importance of the user of ?nancial statements
in terms of investors and other capital providers
(Macintosh, 1999). The accountability notion was to some
extent replaced by an information metaphor in the 1960s
and 1970s (Ravenscroft & Williams, 2009; Young, 2006).
While pursuance of an accountability purpose meant that
?nancial statements gave factual and veri?able accounts
of (the outcomes of) past transactions, under the new
information usefulness regime the proposed role of
accounting data was to provide input to economic decision
models allowing investors to assess future cash ?ows
(Ravenscroft & Williams, 2009, p. 773 f.). The rise of an
explicit objective of ‘‘decision usefulness’’ factually
required the de?nition of attributes which make ?nancial
information useful (AAA, 1977, p. 16). Considerations of
relevance – the concept which ‘‘grew out of, and is depen-
dent upon, the decision-usefulness objective’’ (AAA, 1977,
p. 16) – were thus granted increasing importance in frame-
works and other contributions dealing with the qualitative
characteristics of accounting information.
22
Note that Staubus (1970) explicitly built on the reliability de?nition of
Ijiri and Jaedicke (1966).
23
It remains questionable whether the postulated difference between
relevance and faithful representation can always be maintained (cf. also
Wüstemann, 2011). The description of faithful representation in SFAC 2
already indicated that a strict division between relevance and faithful
representation is impossible. SFAC 2.80 for instance admits that a lack of
completeness (a sub-characteristic of faithful representation) may also
reduce the relevance of the information. SFAC 2.71 acknowledges that the
question of whether information is representationally faithful depends on
the context for which it was designed, i.e., the context it is used in and the
users addressed.
22 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
It is interesting that SFAC 2 avoids the term ‘‘objectiv-
ity’’. One explanation might be that in light of rising useful-
ness concerns, the classical construct of objectivity, as
shaped in particular by Paton and Littleton (1940), was
no longer seen as an appropriate quality of ?nancial
reporting. Our historical tracing at least suggests that
objectivity was regarded as one of a multitude of charac-
teristics, while the superiority of this property had no
longer been suggested since the early 1960s. A further
explanation might be found in the background of a thread
of literature that (at least partly) deals with the philosoph-
ical implications of the notion of objectivity (e.g. Burke,
1964; Wagner, 1965; Wojdak, 1970). Wojdak (1970), for
example, tries to develop his understanding of objectivity
in accounting from a dictionary de?nition of objectivity
as ‘‘having a separate independent existence, i.e., indepen-
dence from the human consciousness’’ (p. 88). This think-
ing about objectivity invokes various philosophical
problems because it explores the nature of the relationship
between depictions in ?nancial reporting data and the
object, or more pointedly the ‘‘reality’’ they are supposed
to depict. SFAC 2.158 hints at such a reason for the demise
of objectivity.
24
It explicitly justi?es using ‘‘veri?ability’’
instead of ‘‘objectivity’’ because of objectivity’s various
meanings and philosophical implications. This may already
have been the reason for dropping the term in ASOBAT,
which Sterling (1967) commends ‘‘for avoiding this quag-
mire [. . .as objectivity. . .] has gone through several reversals
in philosophy and is highly confused’’ (p. 100). However,
note that the initial use of the term, for example by Paton
and Littleton (1940), was very pragmatic and probably not
associated with philosophical dif?culties by practitioners,
but seen as an indigenous component of an accountant’s
work. It was not until academia took up the term ‘‘objectiv-
ity’’ in the debates about FAT in the 1960s that alternative
interpretations were raised which ultimately fostered the
term’s dismissal in SFAC 2.
Considering the avoidance of objectivity, it is remark-
able that a construct which might be equally problematical
regarding its philosophical interpretations, ‘‘faithful repre-
sentation’’, was introduced. In using the word ‘‘correspon-
dence’’ SFAC 2.63 assumes a correspondence-relationship
between the object that is to be depicted in ?nancial state-
ments and the actual depiction. This underlying assump-
tion follows a correspondence idea of truth, i.e., true are
statements that correspond to facts independent from or
outside of the subject. According to this understanding,
depictions, descriptions and measures in ?nancial account-
ing correspond to a reality external to, and independent of,
the accountant (Solomons, 1978, p. 72; Chua, 1986, p. 606;
Tinker, 1991, p. 297 f.; Hines, 1991, p. 315 f.), which is to be
captured in accounting. This view was, for example, pro-
moted by Solomons who sees accounting’s task as present-
ing an external economic reality and illustrates this idea
with the use of analogies such as the depiction of a section
of land on a map (Solomons, 1986, p. 245) or the undis-
torted conveyance of ideas by means of a telephone
(Solomons, 1991, p. 288). Sterling (1985, pp. 24, 60 f.) also
describes the numerical and verbal depictions in ?nancial
statements as symbols (noumena) that represent ‘‘real’’
phenomena outside of the accountant. Such metaphors
and wordings in the description of SFAC 2 again provoke
debate around the philosophical nature of the relationship
between ?nancial accounting information and its objects.
This can also be observed in a more recent strand of critical
interpretive literature. These contributions in general chal-
lenge the interpretation of a correspondence between a
reality (of ?rm value, transactions, etc.) and the depictions
in ?nancial reports for lacking an appropriate consider-
ation of the socially constructed nature of accounting
information and the actual interplay between accountant,
user, accounting standards and the objects of accounting
(Alexander & Archer, 2003; Lee, 2006a, 2006b;
Macintosh, 2003, 2006, 2009; Macintosh et al., 2000;
Mattessich, 2003, 2009; McGoun, 1997; McKernan, 2007;
Williams, 2006).
The exact manner in which faithful representation is
drafted in SFAC 2, however, re?ects a pragmatic implemen-
tation of the concept (Kinserdal, 2011). SFAC 2.63 restricts
the correspondence idea by employing the formulation
‘‘purports to represent’’ and the dilution ‘‘or agreement’’
(Kinserdal, 2011, p. 13). For example, it requires a user
who is reasonably informed (SFAC 2.40, 41, 64), i.e., some-
one who knows the rules underlying the preparation of
accounts and who therefore also knows the limitations
and degree of depiction of ‘‘economic reality’’ that are pos-
sible in accounting. Nor does SFAC 2.72 require certainty or
precision, and completeness is limited ‘‘within the bounds
of what is material and feasible’’ (SFAC 2.79). Furthermore,
SFAC 2.65 f. allows for different degrees of representational
faithfulness. These limitations underline the model charac-
ter of ?nancial statements, i.e., ?nancial statements deliver
only an abstract image of ‘‘economic reality’’ (SFAC 2.76;
Solomons, 1978, p. 70 f.).
The origin of the concept of faithful representation can
be traced back to the in?uence of David Solomons, who
drafted SFAC 2 for the FASB (Gore, 1992, p. 111 f.; Zeff,
2013, p. 78). Solomons, as Kinserdal (2011, p. 17) puts it,
‘‘borrows ideas and wording from Sterling, but used the
concept [. . .] in a fairly pragmatic way.’’ Sterling, consider-
ing himself an ‘‘empiricist’’ (Sterling, 1988), was led by the
idea that accounting should abstain from its conventions
and become based on (empirical) ‘‘laws’’. Kinserdal
(2011, p. 11 f.) traces faithful representation back to Ster-
ling’s concept of ‘‘verity’’, i.e. ‘‘conformance with reality’’,
which understands economic reality as consisting of eco-
nomic phenomena with (real-world) empirical referents.
It seems that Sterling was driven by the in?uence of the
empirical sciences on the ?eld of accounting to become
‘‘scienti?c’’ or ‘‘a real science’’, which suggests that the
concept of faithful representation originally stems from
the natural sciences (Kinserdal, 2011, p. 12; also
Wüstemann, 2011). It is noteworthy that the single author
we identi?ed who introduced a concept of faithful repre-
sentation in the literature on qualitative characteristics
before SFAC 2 (Staubus, 1976), was appointed as Director
24
APB Statement No. 4 in the description of veri?ability already
emphasises that ‘‘measurement cannot be completely free from subjective
opinions and judgment [since] the process of measuring [. . .] must use
human agents and human reasoning and therefore is not founded solely on
an ‘objective reality’’’ (par. 90).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 23
of Technical Activities at the FASB in 1976 (Anonymous,
1976, p. 26). Staubus worked on the framework project
and brought Solomons to the FASB (Gore, 1992, p. 112).
Thus, it was possibly his idea in combination with Ster-
ling’s thoughts that in?uenced Solomons, who developed
and ‘‘coined’’ (Zeff, 1999, p. 109) the term ‘‘faithful
representation’’.
25
The introduction of faithful representation can be
linked to the increasing in?uence and promotion of current
value accounting at the time of SFAC 2’s development.
While models of income determination in the wake of
the development of theoretical bodies of FAT were
grounded in the practice of historical cost accounting, i.e.
cost-measurement and amortisation through allocation to
the periods of the asset’s useful life, starting around the
1960s, prominent accounting scholars such as Sterling
(1970) and Chambers (1967) began promoting the use of
current value based income models. Regardless of differ-
ences in the details of their propositions, their common
notion was that ‘‘?nancial reporting information prepared
under existing reporting rules is meaningless’’ (Ball &
Brown, 2014, p. 3). Current value accounting models were
compatible with an accountability metaphor as they
merely shifted management’s accountability from the cre-
ation of transaction-based pro?t to market value
(Ravenscroft & Williams, 2009, p. 773). However current
values resonated particularly well with the rising informa-
tion metaphor in accounting, as indicated by their favour-
able consideration in ASOBAT and the Trueblood Report
(AAA, 1977, p. 13; Zeff, 1999, pp. 97, 100).
26
In the course
of these developments, historical cost accounting practice
was also criticised for its subjectivity, for example in requir-
ing judgments for determining an asset’s useful life as a
basis for cost allocation. Market values in the arguments of
their proponents not only seemed to ?t the decision pro-
cesses of valuation oriented users, they also were objecti?ed
through the market values of assets. While proponents of
current value rooted their argument in its superior objectiv-
ity (Georgiou & Jack, 2011, p. 316; also cf. Parker, 1975), they
were aware that the term ‘‘objectivity’’ had traditionally
been used to promote historical cost:
‘‘I suspect that objectivity to accountants is nothing
more than an emotional response to suggestions for
other (non-cost) valuation schemes and we would do
well to abandon the term’’ (Sterling, 1967, p. 101).
In Sterling’s view, market values, in accordance with the
science-based idea of a faithful representation of external
empirical referents, allow the measurement of economic
phenomena relevant to users of ?nancial statements.
It can thus be concluded for the ?rst part of our anal-
ysis that introducing the concept of reliability in the draft-
ing of SFAC 2 constituted a compromise between the
traditional idea of objectivity re?ected in the characteris-
tic of veri?ability, deeply entrenched in accounting prac-
tice but rede?ned as the academics’ consensus concept,
and more recent academic considerations regarding the
faithful representation of economic phenomena as part
of economic decision models with a focus on valuation
decisions by users. This compromise was necessary
because, in particular, preparers of ?nancial accounts
were opposed to any strong move away from established
practices and towards current value accounting. Gore
(1992), for example, describes the efforts by Mautz, an
opponent of current values, who actively stirred discon-
tent among practitioners as he anticipated that the FASB
would move in this direction. Burton (1978) reports that
in a meeting of FASB members with practitioners in
1978, it became clear that preparers were strongly
opposed to current values in ?nancial statements, but
wanted to maintain the character of ?nancial statements
as being based on objective, veri?able evidence. These
positions by preparers were re?ected in SFAC 2, both in
veri?ability being taken up as one core component of reli-
ability and by reliability’s equal standing with rele-
vance.
27
All in all, reliability thus aligned the new,
academically developed theoretical construct of faithful
representation with (the consensus-based version of) exist-
ing practice notions of veri?ability.
Developments prior to the framework revision
After the publication of SFAC 2 in 1980 the FASB contin-
ued with its work on the conceptual framework (Gore,
1992). The concept statement on measurement (SFAC 5),
published in 1985, proved to be the most contested aspect
and the FASB was not able to agree on a preferred mea-
surement approach, but eventually just listed different
concepts (Zeff, 1999, p. 114). Again this was a compromise
due to the strong opposition of preparers against current
values (Zeff, 1999, pp. 115, 117, 123). Thus, it can be noted
that the efforts by prominent academics, cited above, to
revolutionise accounting by altering measurements in the
direction of current values were eventually unsuccessful
in the 1980s (e.g. Solomons, 1986, p. xiii), despite the intro-
duction of faithful representation in SFAC 2. It was only
during the 1990s that fair value measurement became
more popular in standard-setting, particularly based on
the work of G4+1, a collaboration of the standard-setters
from the US, UK, Canada, Australia, New Zealand and the
IASC (Street, 2005). Fair value was initially adopted not
on the basis of academic theories, but because of pragmatic
concerns by standard-setters about ?nancial derivatives,
which have very small or no historical costs (Georgiou &
Jack, 2011, p. 317). This was the impetus which later led
G4+1 to adopt a long-term vision of fair value measure-
ment in other ?elds of ?nancial reporting (Street, 2005).
In fact, when the IASB started work in 2001, its policy
25
Note that Sterling, Staubus and Solomons were all academics. Sterling
and Staubus were both founding members of an elite organisation of
researchers in 1974, the Accounting Researchers International Association
(ARIA; cf. Edwards, Dean, Clarke, & Wolnizer, 2013). David Solomons joined
this organisation in 1975.
26
Note that some of the Big8 auditing ?rms also promoted current values
in their publications (Zeff, 1986, p. 134), thereby contributing to the
alignment of academic ideas with professional notions (e.g. Miller, 1974, p.
19 f.).
27
The Discussion Memorandum issued in 1976 at least indicated the
dominance of relevance considerations for stating ‘‘usefulness [. . .] should
therefore be judged in terms of its relevance for investors’ and creditors’
decisions’’ without mentioning reliability (FASB, 1976, p. 153).
24 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
was to consider fair value in each standard it approached
to create or revise (Georgiou & Jack, 2011, p. 318; also
Walton, 2006, p. 337), establishing fair value as a term per-
petually linked to IFRS and contributing to the IASB’s iden-
tity-building (Power, 2010, p. 207).
28
For example, Walton
(2004, p. 9) quotes an IASB board member referring to fair
value as ‘‘a ‘meta rule’ for ?nancial reporting.’’
Regarding the actual use of reliability in the standard-
setting process, mixed views can be found. In the 1980s
several studies questioned the usefulness of qualitative
terms, as they revealed diverse understandings, even
among board members (Joyce et al., 1982). However, the
terms ‘‘relevance’’ and ‘‘reliability’’ and their trade-off
became omnipresent in accounting discourses. The consis-
tent application of these characteristics in standard-setting
projects was presented as the ‘‘of?cial’’ policy of the FASB
(e.g. Johnson, 2005). For instance, Young (2014, p. 728)
quotes a FASB member attesting that weighing concerns
about relevance and reliability were a ‘‘key element’’ of
every standard-setting project. That conceptual arguments
seem to be a point of reference in standard-setting debates
is also revealed by Walton (2009), who analyses in detail
the IASB’s board meetings in 2002 and 2003, and shows
that the term ‘‘reliability’’ occurred as one of the most fre-
quent phrases (p. 50).
29
Nonetheless, some of our intervie-
wees hinted at the selective use of the terms: ‘‘We are all
guilty of cherry-picking’’ (Cooper, interview). Others noted
their infrequent use:
‘‘The qualitative characteristics have always been kind
of an enigma to me. They ought to be very powerful
in conditioning how we think about things. I have often
been frustrated that we don’t fall back on them as often
as we should. I think our understanding of them would
improve if we considered them more often.’’ (Upton,
interview).
30
Focusing on the veri?ability aspect, practitioners, in
particular preparers, frequently used reliability concerns
to oppose fair values (e.g. for ?nancial instruments
Chisnall, 2001; Walton, 2004, p. 6). This re?ects the tradi-
tional understanding of veri?ability which was already
perceived by Solomons (1986), who noted that veri?ability
‘‘is often referred to as though it were a synonym for reli-
ability’’ (p. 90). However, taking into consideration the
other component of reliability, faithful representation, jus-
ti?es board members’ view that
‘‘reliability wasn’t simply about the dispersion around
the mean, but reliable information is information you
can rely on to faithfully portray the economic phenom-
enon that it’s supposedly portraying’’ (Cooper,
interview).
Solomons (1986, p. 92) mentions the example of
accounting for construction contracts. In his view, the per-
centage-of-completion method provides a more relevant
and faithful representation than the completed-contract
method, while it is also less veri?able. Thus,
‘‘those who emphasize objectivity [or veri?ability] con-
centrate on agreement about the measurement of
accounting inputs and pay too little attention to
whether the chosen input produced the desired output.’’
Upton (interview) illustrates the different understand-
ings by remembering
‘‘Katherine Schipper once saying that some people
believe that if you can vouch it to an invoice that
gives it the quality of reliability which is an audit
notion. That transferred over to people who said, well,
if I can look up a fair value in the Wall Street Journal
then it is reliable. That wasn’t really what it was sup-
posed to mean. It had to do with reasonable people
who confronted with the same information developed
the same kind of number, which still goes into the
veri?ability aspect. People use it to think of how
robust the measurement is. For fair values of untrad-
ed equities, palm oil plantations or vineyards and
things like that they do not see that level of robust-
ness that makes them con?dent that the number pro-
duced is reliable.’’
In light of the standard-setters’ pursuance of fair value
accounting, it became increasingly obvious ‘‘that the stan-
dard-setter’s notion of reliability is somewhat different
from that of the wider constituency of accountants’’
(Walton, 2006, p. 340).
31
As a result, due to the persistent
use of reliability by constituents in accordance with their
traditional understanding, while ignoring the faithful repre-
sentation aspect, there emerged a widespread opinion
among staff and board members that this understanding of
reliability did not ?t the boards’ focus on fair value
accounting:
‘‘We all thought we had to get rid of reliability because
nobody knew what it meant. There was a widespread
view among both staff and board members that we
had to do something with the word reliable, that it just
was not getting the job done.’’ (Upton, interview).
32
28
Note that G4+1 had an enduring in?uence on the work of the IASB, as
four G4+1 members became members of the IASB (Leisenring, McGregor,
O’Malley, Tweedie). Moreover, Ken Spencer, chairman of G4+1 between
1998 and 1999, was one of the initial trustees of the IASC Foundation, and
in 2000 chaired the nominating committee for the selection of the ?rst
cohort of IASB members (Camfferman & Zeff, 2007, p. 497).
29
In 1989, the IASC created a conceptual framework which was very close
to the role model of the US framework (Camfferman & Zeff, 2007, pp. 256–
262). The IASC document was inherited by the IASB in 2001.
30
Statements by two other interviewees with regard to the general
usefulness of the framework corroborate broad and selective recourse: ‘‘The
framework is important due to the avenue or direction it provides for the
boards and others. But how exactly you put the words – like this or that – I
don’t think it makes a big difference.’’ (Engström, interview). ‘‘My impres-
sion was that when people were really passionate about things, they either
ignored the framework or misinterpreted it.’’ (Whittington, interview).
31
Indeed, Walton (2006, p. 340) quotes Stig Enevoldsen, audit partner
and former chairman of the IASC and of EFRAG TEG: ‘‘Although ‘reliability’
has always been described in the Frameworks as something that is more
complex than the dictionary de?nition of ‘reliability’, that is not how most
commentators have tended to use the term; in their view the term is about
how ‘soft’ and subjective the information is.’’
32
‘‘Reliability was one of the areas in which clari?cation was necessary in
the conceptual framework revision. Because it has been misunderstood,
misapplied and misdiscussed.’’ (Leisenring, interview).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 25
It is against this background that the project to revise
the conceptual framework started in 2004. The next sec-
tion depicts in detail the corresponding due process.
The reconstruction of reliability
In 2002, the IASB and FASB formalised their joint work
in the Norwalk Agreement, which stressed their desire to
create a common set of accounting standards (IASB,
2002). Apart from the individual standard-setting projects,
the boards in 2004 decided to place the development of a
joint conceptual framework on their convergence agenda
(IASB, 2004). It was decided to take the project on in eight
phases, and that qualitative characteristics (as well as the
objective of ?nancial reporting) would become part of
the ?rst phase (Phase A).
Initial deliberations on reliability
In its ?rst deliberations the staff took perceived differ-
ences in the understandings of the reliability concept
amongst constituents as well as members of the boards
(IASB, 2005, par. 13, 41) as a reason to suggest a clari?ca-
tion of the terminology (FASB, 2005, par. 10). The staff
compared the (former) frameworks of the IASB and FASB,
while also taking into account the frameworks established
by the UK ASB and the Australian standard setter AASB. All
of these conceptual documents included the qualitative
characteristic of reliability. However, the staff found a mul-
titude of (slightly different) subcomponents of reliability
which were seen to be partly responsible for the alleged
confusion about the notion (IASB, 2005, par. 13). The staff
interpreted reliability, as drafted in the former frame-
works, as an umbrella term for a multitude of different
subcomponents without a unifying underlying concept
(IASB, 2005, par. 44). In line with our depiction in the pre-
vious section, in the staff’s perception constituents referred
to reliability mostly to mean veri?ability, while the idea of
representational faithfulness was typically neglected (IASB,
2005, par. 41). On the basis of this initial analysis, the staff
proceeded to categorise individual components of the
characteristic of reliability:
Faithful representation, which had formed part of all
the examined frameworks, was regarded as the central
component shaping the actual meaning of reliability.
The staff therefore suggested retaining ‘‘faithful repre-
sentation’’ which should comprise completeness as well
as – albeit not stressed as a separate subcomponent –
the idea of substance over form (IASB, 2005, par. 22).
The staff also advised keeping ‘‘veri?ability’’ as it consti-
tuted the (only) means for users to assure them of the
information’s representational faithfulness as well as
its freedom from error, completeness and neutrality.
The de?nition suggested for ‘‘veri?ability’’ was congru-
ent with SFAC 2’s consensus de?nition (IASB, 2005, par.
25, 28).
The staff also recommended keeping ‘‘neutrality’’, i.e.
‘‘the absence in reported information of bias intended
to attain a predetermined result or to induce a particu-
lar mode of behaviour’’ (IASB, 2005, par. 29). However,
due to their incompatibility with the concept of neutral-
ity, the staff, in contrast to the previous frameworks,
suggested dropping the concepts of conservatism and
prudence (IASB, 2005, par. 31).
Three options were presented to organise the character-
istics deemed important (IASB, 2005, par. 42):
(1) Keep ‘‘reliability’’ as an umbrella term, supple-
mented by further descriptions to clarify its
meaning,
(2) ?nd a more suitable umbrella term, or
(3) assign equal importance to the identi?ed
characteristics.
Discarding (1) as being unachievable and (3) for placing
too much emphasis on each single quality, the staff recom-
mended a new umbrella term, namely ‘‘representational
faithfulness’’. The staff’s main argument was that ‘‘faithful
representation’’ constituted a ‘‘better umbrella term’’ as it
allegedly comprised all other desirable qualities (IASB,
2005, par. 45).
Comparing the staff’s suggestion with the drafting in
SFAC 2, the substitution of reliability implies a subordina-
tion of veri?ability under faithful representation. While
according to SFAC 2 both properties were equally impor-
tant, the staff’s proposal identi?es veri?ability as a sub-
component of faithful representation. However, it still
remains an indispensable consideration because it has
the status of a necessary requirement for faithful represen-
tation: ‘‘How can representations be faithful [. . .] unless
the measures and descriptions are veri?able [. . .]?’’ (IASB,
2005, par. 45).
The staff recommendation was discussed in the board
meetings on 17 May (IASB) and 25 May (FASB) 2005. Among
the FASB members there was a broad consensus withregard
to the replacement of ‘‘reliability’’ by ‘‘faithful representa-
tion’’. None of the members questioned the replacement
itself or the reshuf?ingof reliability’s previous sub-qualities,
in particular ‘‘veri?ability’’ now being a sub-quality of
‘‘faithful representation’’. However, some members made
additional comments. Schipper, for example, worried that
misunderstandings about reliability may simply be trans-
ferred to the new term (FASB, 2005, par. 14). With regard
to the relationship between reliability and relevance, three
participants (Schipper, Seidman, Leisenring (IASB)) pro-
posed a hierarchical approach, i.e. to think of relevance ?rst
and then to consider the representational faithfulness of the
information. This perspective breaks withthe trade-off rela-
tionshipof both characteristics in SFAC 2.42 and reinstates a
predominance of the relevance criterion, as already
intended by ASOBAT and APB Statement No. 4. In this con-
text, Leslie Seidman’s comment that the change from reli-
ability to faithful representation may
‘‘elevate the discussion to a point other than just
defaulting to veri?ability or reliability [and allow to
consider] which alternative is most relevant and repre-
sents most faithfully the accounting objective’’ (FASB,
2005, p. 7)
26 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
creates the impression that the replacement serves a pur-
pose beyond mere clari?cation of the terms, in particular
relegating veri?ability concerns. Moreover, problems of
understanding representational faithfulness come to the
fore in remarks by two FASB members that the actual con-
?ict lies in determining ‘‘what the phenomenon being rep-
resented is’’ (FASB, 2005, p. 6 f.). Consequently, even
amongst board members faithful representation does not
necessarily seem to be a concept less ambiguous than reli-
ability which somehow a priori undermines the staff’s plan
to clarify reliability’s meaning.
More doubt about whether ‘‘faithful representation’’ was
truly a less ambiguous termwith which to replace ‘‘reliabil-
ity’’ was raised in the IASB’s discussion in May 2005. Here,
several comments indicated that some board members
seemed to have problems in ?rmly grasping the meaning
of the concept. For example, O’Malley stated her
‘‘concerns with the notion that accounting measures
must re?ect economic phenomena in order to be repre-
sentationally faithful. What they needed to be was a
faithful representation of what they are.’’
She added the example of depreciation, explaining that
‘‘the book value did not represent the economic value of
the asset’’ (IStaR, 2005, p. 24) and illustrated further that
‘‘it was not right to say that if you had paid 100 euros
for a building, its cost was a faithful representation of
the value of the asset’’ (p. 25).
Mary Barth was concerned that
‘‘the Board members were not reading para 16 [pertain-
ing to the description of the term economic phenome-
non] in the same way and that there was not an
agreement of what representationally faithful meant’’
(p. 25).
The confusion around ‘‘faithful representation’’ ?nally
becomes obvious in Geoffrey Whittington’s concluding
remark that
‘‘he had thought he understood the issues before, but
did not any longer. However he was comforted by the
thought that the rest of the Board did not understand
either’’ (p. 25).
In particular, two different understandings of ‘‘faithful
representation’’ were identi?ed:
‘‘In the old framework, representational faithfulness
was one part of reliability and was de?ned as things
representing what they purport to represent. For exam-
ple, if I get a historical cost ?gure I expect it to be the
historical cost and nothing else. Now that would be rep-
resentationally faithful. But I think that the people
advocating representational faithfulness are not stop-
ping there. They are being intellectually dishonest when
they say that representational faithfulness and reliabil-
ity are the same thing, because in fact reliability has
other implications as well. [. . .] It is when faithful repre-
sentation is expressed in terms of representing an eco-
nomic phenomenon that I get worried, because the idea
of an economic phenomenon is not well thought out. If
you mean ‘the ultimate truth’ then you are sort of in fair
value and the idea that there is some objective eco-
nomic truth out there.’’ (Whittington, interview).
The two interpretations were also observed by staff
members:
‘‘The correspondence de?nition of representational
faithfulness from SFAC 2 does not tell me that historical
cost is a bad measure for of?ce furniture. It just says:
Does the measure represent the thing that it’s supposed
to represent? I just need to ?nd an invoice for this desk.
I think it goes beyond that, though. I think it ties back to
the decision usefulness notion that you say: this is an
economic resource. Which depiction of this resource is
most useful for allocation decisions? Some might say
it’s always fair value, others wouldn’t agree.’’ (Upton,
interview).
By the same token, the IASB meeting provides clear evi-
dence that the reliability/faithful representation–discus-
sion was associated with the con?ict of fair value vs.
historical cost. Faithful representation was, at least by
some board members, seen as capable of being used to jus-
tify increasing reliance upon fair value as a measurement
basis (also cf. Whittington, 2008b). For example, in
response to O’Malley’s comment above, McGregor
explained that the way to present an asset in the accounts
was actually related to relevance and asked whether it was
‘‘useful to represent a building that was worth 1 m euros at
the amount he paid for it?’’ (IStaR, 2005, p. 25). This remark
triggered responses from O’Malley and Leisenring, caution-
ing that the requirement of faithful representation may be
read in terms of justifying a full fair value model with the
market price being the only faithful representation.
‘‘There is at least a body of fair value advocates who ask
‘how can something be a faithful representation, if it is
not the current value’. I think that is just incorrect. They
are not reading the notion properly. If I disclose that my
property, plant and equipment is at historical cost,
amortised at the depreciation life that I have disclosed
in my footnotes, that is representationally faithful of
the historical cost model.’’ (Leisenring, interview)
In the Discussion Paper, published in July 2006, ‘‘reli-
ability’’ was replaced by ‘‘faithful representation’’ leading
to the statement that ‘‘information must be a faithful rep-
resentation of the real-world economic phenomena that it
purports to represent’’, which required it to be veri?able,
neutral and complete (DP QC 16). The Discussion Paper
contained an Alternative View (AV) on veri?ability which
was included on behalf of Geoffrey Whittington. In the
DP, veri?ability was drafted in a similar way to SFAC 2 as
comprising direct or indirect veri?ability (DP QC 23). Whit-
tington in AV 2.1 demanded a stricter de?nition of veri?-
ability wherein it requires a consensus between various
observers being based on reliable evidence. AV 2.2 also
requested more restrictive requirements concerning indi-
rect veri?ability. In the AV, the traditional practitioner
notion of objectivity, as outlined in section ‘Accounting
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 27
characteristics in the early literature’, was brought into the
framework revision discourse and an emphasis was put on
the evidence part of the veri?ability concept.
The ‘‘new’’ description of faithful representation in the
DP has some inconsistencies, which are indicative of the
multiple understandings of faithful representation men-
tioned in the interview statements by Whittington, Upton
and Leisenring and mirror the confusion expressed earlier
in the discussion on the IASB. DP QC 18 gives the example
of a stamping machine as a real-world economic phenom-
enon which may be faithfully represented in various ways,
for example by a photograph of the machine. Two sen-
tences later, however, the machine’s costs are labelled a
real-world phenomenon to be depicted, accompanied by
the statement that ‘‘how best to depict the machine as it
currently exists in the real world is the role of faithful rep-
resentation’’ (DP QC 18). Then it is stated that
‘‘reporting [a three year old] machine at an amount
based on what it would cost to replace it in its current
condition (replacement cost) might provide an even
better [instead of reporting it at (amortised) historical
cost] representation of the machine as it now exists in
the real world’’ (DP QC 18).
33
The drafting here mixes at least two interpretations and
does not explicitly pronounce one meaning of the concept.
On the one hand, the machine’s original costs are only one
property of the machine and calling for the costs’ faithful
representation narrows down the scope of ‘‘faithful repre-
sentation’’ to questions of measurement, i.e. correctly mea-
suring the quality chosen (‘‘what it purports to be’’).
Postulating on the other hand that faithful representation’s
task is to correctly depict the machine as it now exists in
the real world presupposes that there is one way of faith-
fully depicting the machine in the ?nancial statement,
which revolves around the second interpretation, men-
tioned above, of correctly depicting the underlying eco-
nomic phenomena, with their central property being the
ability to generate future economic bene?ts. This second
interpretation is more in line with Sterling and others’ idea
of depicting real world economic phenomena advocating
the use of current value measurement.
Responses to the Discussion Paper
The version proposed by the IASB & FASB in the Discus-
sion Paper faced harsh criticism by constituents. In our
analysis of the 179 comment letters which were submitted
in response to the DP we identi?ed that 138 (77.1%)
referred to faithful representation or one of its compo-
nents. It was often dif?cult to exactly categorise the com-
ment letters into categories of rejection or approval of
the DP. Therefore, we split the analysis with regard to dif-
ferent dimensions: 77 comment letters (55.8% of the latter)
rejected the idea that faithful representation should be a
primary qualitative characteristic (this includes rejection
of the replacement of reliability). On the other hand, 24
(17.4%) approved of this move. The drafting of veri?ability
and its role as a subcomponent of faithful representation
was criticised in 67 (48.6%) comment letters. When com-
bining criticism aimed at faithful representation as a pri-
mary qualitative characteristic and its subcomponents,
we found approval in only eight (5.8%) comments for the
entire concept of faithful representation as drafted in the
DP.
34
In the letters, it was often mentioned that faithful rep-
resentation, compared to reliability, constituted a ‘‘softer’’
concept (e.g. Norwegian Accounting Standards Board,
HSBC Holdings plc, EFRAG).
35
Reliability was predominantly
associated with characteristics such as veri?ability (Bundes-
verband Deutscher Banken, KPMG, AstaZeneca plc), depend-
ability/trustworthiness/certainty (BNP Paribas, International
Banking Federation) and putting restrictions on the ‘‘soft-
ness’’ of information (e.g. Dutch Accounting Standards
Board, American Accounting Association). In particular, reli-
ability, in many cases was associated solely with veri?abil-
ity: ‘‘Reliability of measurement represents the extent to
which measurement yields the same results when per-
formed by different quali?ed parties and is closely associ-
ated with veri?ability’’ (KPMG, p. 5). The range of views in
the comment letters on the one hand supported the staff’s
argument of a variety of at least partly differing understand-
ings of reliability as drafted in SFAC 2/IASC (1989). However,
the examples mentioned above also highlight that ?nancial
accounting practitioners’ understanding of reliability dif-
fered from the boards’ (and staff members’) opinions and
was closely associated with the traditional understanding
of veri?ability. Along these lines, many respondents
demanded a stricter version of veri?ability, including the
demand for reliable evidence. Several comments were sup-
portive of Whittington’s Alternative View (IASB, 2007a,
par. 60 f., e.g. Ernst & Young, US Government Accountability
Of?ce). These comments often mentioned that veri?ability
alone (without reliability) was too narrow, i.e., reliability
asks for qualities beyond veri?ability: ‘‘where veri?ability
is linked to the ability to verify either the data or the method
whereby an estimate has been derived, then reliability is
directly linked to whether an estimate is reliable and robust’’
(Dansk Industri, p. 7). By the same token, the close connec-
tion with auditing is explicitly mentioned in some com-
ments. For instance, FEE demanded that ‘‘the implication
of this ‘downgrade’ [of reliability] for the auditability of
?nancial information should be considered’’ (p. 3) and also
cautioned against ‘‘the risk of putting more emphasis on rel-
evance than on reliability and the consequences for the aud-
itability of information to prefer predictive value of ?gures
rather than historical value’’ (p. 4). The IAASB stated in its
comment letter that ‘‘‘veri?ability’ is a desirable qualitative
characteristic and, in general, auditors would be especially
inclined to approve of it (assuming it also means that the
information is auditable)’’ (p. 2). Moreover, the AICPA’s PCPS
33
Note that this statement is in clear contradiction with Leisenring’s
interview comment above. As Leisenring approved the DP, this again
indicates the confusion around the concept of faithful representation even
amongst in?uential IASB members.
34
This ?nding is congruent with the staff’s analysis which reveals a
favourable rate of about 5% (IASB, 2007a, par. 56).
35
Comment letters on the DP may be found on the website of the IASB:http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Frame-
work/DPJul06/Comment-Letters/Pages/Comment-letters.aspx.
28 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
(p. 5) and Deloitte (p. 5) demanded a consideration of the
auditability of accounting data within the standard-setting
process. Interestingly, though, a number of commentators
argued that veri?ability should not be a component of faith-
ful representation as information may faithfully represent
what it purports to represent without being veri?able. Ver-
i?ability therefore may exclude relevant data from the
accounts (IASB, 2007a, par. 62; e.g. Securities Industry and
Financial Markets Association, Goldman Sachs & Co). Alto-
gether, these two views reveal different understandings of
the importance of veri?ability: while the former argument
is in line with the traditional understanding of a crucial role
of veri?ability, the second view clearly sees veri?ability as a
barrier in the attempt to enhance the relevance of ?nancial
statements.
Redeliberations
The comment letter analysis was presented to each
board in separate meetings in February 2007. In both
meetings there was relatively little discussion on the dis-
agreement of constituents regarding the replacement of
reliability. Nevertheless, some comments indicate that
the board members were aware of the confusion that faith-
ful representation invoked among constituents. Trott
(FASB member) noted that ‘‘many respondents seemed to
understand faithful representation to mean something dif-
ferent than the Boards’ de?nition’’ (FASB, 2007a, par. 21).
In summarising the view of constituents, an FASB staff
member noted: ‘‘faithful representation [in the constitu-
ents’ view] sounds arcane, like something a standard-set-
ter would say’’ (IASB, 2007b). In this regard, IASB
member Tatsumi Yamada also conceded that the expres-
sion ‘‘real world economic phenomena’’ was dif?cult to
understand (IStaR, 2007a, p. 11).
Redeliberations were continued in separate meetings in
April and May 2007. The staff, due to the many comments
that de?ned reliability differently from the boards’
approach, saw the comment letters as an af?rmation of
its recommendation to replace ‘‘reliability’’ (IASB, 2007c,
par. 13). While the FASB, without further discussion, fol-
lowed the staff suggestion, some comments in the IASB
meeting re?ected disappointment that constituents would
not just accept and adopt the boards’ concept of faithful
representation. Jim Leisenring concluded that ‘‘too many
people saw faithful representation as a lead into fair value,
a back door way to fair value’’ (IStaR, 2007b, p. 13). Tricia
O’Malley conceded that this impression may have been
supported by the choice of fair value examples in the Dis-
cussion Paper. Mary Barth added that other literature often
talked about current cost being a faithful representation
(IStaR, 2007b, p. 13). Tricia O’Malley noted the ongoing
prevalence of reliability in the comment letters and that
‘‘the varied and incorrect uses of the term ‘reliability’ were
so entrenched that the board could explain the issue for-
ever and people still would revert to their original under-
standing’’ (IStaR, 2007b, p. 13). Although this suggested a
somewhat useless endeavour to rede?ne reliability, John
Smith, on the other hand, remarked that ‘‘if they had
started with the wrong view of reliability they were losing
something that they never had in the ?rst place’’ (IStaR,
2007b, p. 13).
Although not acting on the constituents’ preference to
keep ‘‘reliability’’, the staff chose to follow the suggestion
of a few comment letters regarding the positioning of ‘‘ver-
i?ability’’. The argument was that faithful representation
did not require veri?ability. Thus, the staff recommended
putting veri?ability in the position of a separate qualitative
characteristic (IASB, 2007c, par. 18). Arguing that including
veri?ability as an equally important characteristic along-
side relevance and faithful representation (fundamental
characteristics) would place too much emphasis on the
term, the staff further suggested simply granting it the sta-
tus of an enhancing qualitative characteristic (IASB, 2007c,
par. 22). The FASB agreed to separate veri?ability from
faithful representation and to position it as an enhancing
qualitative characteristic (FASB, 2007b, par. 15, 28). In
the IASB meeting, some members (Barth, Gélard, O’Malley)
explicitly agreed with the staff (IStaR, 2007b, p. 14), for
example Gilbert Gélard noted that ‘‘there was too much
emphasis on veri?ability as a lot of information was not
veri?able’’ (IStaR, 2007b, p. 14). This may be interpreted
as a deliberate turn away from veri?ability as one of the
evolutionary central hallmarks of ?nancial accounting.
However, one further comment by Hans-Georg Bruns also
illustrates the arbitrariness of the entire theorisation about
qualitative characteristics: ‘‘21 members and a lot of staff
were of the opinion that it [veri?ability] is a component
[of faithful representation] and now it is an enhancement’’
(IASB, 2007d).
In the Exposure Draft, ‘‘faithful representation’’ was
drafted without veri?ability, which was instead included
as an enhancing qualitative characteristic (ED QC15/20/
21). Enhancing qualitative characteristics may improve
the usefulness of information, however, as opposed to
the fundamental qualitative characteristics, are not consti-
tutive for achieving decision usefulness (ED QC25/26).
Faithful representation in the version of the ED – alongside
neutrality and completeness – now also comprised the
quality of ‘‘freedom from material error’’. Freedom from
error was drafted considerably more weakly than veri?-
ability in terms of keeping subjectivity away from the
accounts, since it only required that ‘‘an estimate must
be based on the appropriate inputs, and each input must
re?ect the best available information’’. It explicitly allowed
uncertain information to be representationally faithful as
long as the degree of uncertainty was disclosed (ED QC11).
Comment letters to the ED
The comment letters to the ED still expressed the con-
stituents’ negative attitude towards the changes made con-
cerning reliability. From the 127 comment letters on the
ED,
36
110 (86.6%) commented on faithful representation or
36
The ED received a total of 142 responses. In our analysis, however, we
excluded seven comment letters that corresponded to those of the Tax
Justice Network and The Revenue Watch Institute. We also excluded all but
one of nine comment letters that were apparently part of an exercise by a
class at Woodbury University and which each addressed only one aspect of
the ED. The exception pertained to faithful representation.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 29
one of its components. Still, 52 (47.3% of the latter) respon-
dents rejected the proposal that faithful representation
should be a fundamental qualitative characteristic. Many
criticised the change from reliability as not suf?ciently jus-
ti?ed since, despite the staff’s intention only to make a
change in wording, they saw a difference in meaning. Reli-
ability, according to these commentators, was the broader
notion (e.g. BNP Paribas, Investment Management Associa-
tion)
37
and they demanded that information could be
‘‘depended upon’’ (IASB, 2008b, par. 51 f.), which again is
reminiscent of the traditional understanding of accounting
information as being veri?able. The criticism raised in the
comment letters was very similar to that of the ?rst com-
ment letter period, which is not surprising as the boards
had declined to make fundamental changes to the DP. Again
constituents saw reliability – different from faithful repre-
sentation – as pertaining to the uncertainty of information
(e.g. Holcim Group Support, Conseil National de la Comptab-
ilité), especially in the context of estimates or judgments
(e.g. Basel Committee on Banking Supervision, Committee
of European Banking Supervisors): ‘‘reliability incorporates
a ?avor of the uncertainty (‘softness’) involved in a piece
of information [. . .] [which] is not true of ‘faithful represen-
tation’’’ (EFRAG, p. 11). Some comments pointed at dif?cul-
ties in distinguishing between faithful representation and
relevance (e.g. Accounting Standards Board of Japan, Volks-
wagen AG, EFRAG). The AAA even asserted that ‘‘faithful rep-
resentation [. . .] is an enhancing qualitative characteristic of
relevant information’’ (American Accounting Association, p.
12).
About 41% of all comments pertaining to veri?ability
(37 comment letters) criticised either the concept as
de?ned in the ED, or its positioning as an enhancing qual-
itative characteristic. Some constituents demanded that it
should be elevated to the level of fundamental qualitative
characteristics (e.g. ICAEW, Confederation of British
Industry):
‘‘veri?ability as a component of reliability has func-
tioned to minimise diversity and bias of accounting ?g-
ures as resultant measures and it has helped to ensure
investors’ con?dence [. . .]. [D]iversity and bias of
accounting ?gures would increase [in case of demotion]
and, thus [. . .] diminish the decision usefulness of
accounting information’’ (Accounting Standards Board
of Japan, p. 12).
The Discussion Paper’s AV again found some external
support (e.g. Basel Committee on Banking Supervision,
Hundred Group of Finance Directors), although it had been
completely ignored by the boards in the ?rst round of rede-
liberations. In general, many comment letters regarded the
changes, in particular the renaming of ‘‘reliability’’, to
increase the relative importance of the relevance criterion,
possibly leading to a (further) increase in fair value mea-
surement (e.g. Norwegian Accounting Standards Board,
FEE): ‘‘The trend [in recent years] has been toward a
greater use of fair value, estimates, projections and subjec-
tive intent to develop and quantify historical ?nancial
data’’ (NY State Society of CPAs, p. 5).
Final decisions
The results of the comment letter analysis were pre-
sented to both boards during a joint meeting in December
2008. Further redeliberations took place in separate meet-
ings at the beginning of 2009. In the FASB meeting, the
board con?rmed the changes, i.e. to replace ‘‘reliability’’
with ‘‘faithful representation’’ and to relegate ‘‘veri?abil-
ity’’ to one of the enhancing qualitative characteristics. In
an additional meeting in April 2009, the FASB ?nally man-
dated the staff with the drafting of the ?nal framework
section for qualitative characteristics.
The IASB meeting in January 2009, on the other hand,
revealed some unease with the replacement of reliability
and again indicated confusion about the change. First,
Stephen Cooper raised the question whether ‘‘the previous
understanding of reliability [is] the same as what we now
have as faithful representation.’’ While IASB staff member
Lian replied that ‘‘I think it is broadly the same’’, Warren
McGregor elaborated:
‘‘The one area which might cause us to think it is
slightly different is [veri?ability]. In some people’s mind
[. . .veri?ability. . .] gives a particular meaning to reli-
ability that certainly wasn’t one that I had in mind.
[. . .] The concerns that we had with the interpretations
of reliability that had to do with precision and accuracy
[were] in part derived from I think the inclusion of ver-
i?ability and [. . .as a consequence. . .] some people took
a narrower view of it than we intended’’ (IASB, 2009).
Cooper agreed that ‘‘in practice people took the nar-
rower view’’, yet he remarked that
‘‘people are still going to use the word reliability; we
are likely to around this table and other people certainly
will. It is a very common word in language. If we omit
reliability completely [. . .], then we are still going to
have that problem in communicating with people:
‘Well, what do you actually mean by reliability? Are
you talking about precision or are you talking about
faithful representation which is [. . .] what we think is
reliability?’’’ (IASB, 2009; emphasis added).
Wei-Guo Zhang added that reliability was still perva-
sive in the actual standards (IStaR, 2009, p. 14). Prabhakar
Kalavacherla challenged the elimination of reliability:
‘‘I don’t know whether we can take away the word reli-
ability completely. [. . .] I grew up with reliability as a
very important tenet [. . .], so I don’t know whether I
am ready to give up the word reliability that easily’’
(IASB, 2009).
These statements show that not all board members
seemed to be satis?ed with the turn to faithful representa-
tion and the elimination of ‘‘reliability’’. Others, however,
very clearly articulated the need for a change. For example,
IASB staff member Peter Clark noted:
37
Comment letters on the ED may be found on the website of the IASB:http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Frame-
work/EDMay08/Comment-Letters/Pages/Comment-letters-2008.aspx. For
the staff’s analysis of comment letters cf. IASB (2008b).
30 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
‘‘I think the problem with reliability is that people just
don’t use it the way it is used in the existing framework
and no amounts of explanation we provide is going to
change that. They are not reading the existing de?ni-
tion, why on earth would they read the new one. [. . .]
Whenever people talk about reliability in comment let-
ters they clearly mean things like veri?ability or preci-
sion. [. . .] I think it is urgent to change [the word], I
think it’s the most urgent thing we actually have to do
probably’’ (IASB, 2009; emphasis added).
Mary Barth agreed and Tatsumi Yamada also supported
the change. Kalavacherla, however, once more objected
that
‘‘taking out reliability completely from the literature
would not be so good. [Perhaps] we can say that faithful
representation encompasses reliability [. . .]. That way it
would be a healthy medium’’ (IASB, 2009).
His comment was rebutted by Warren McGregor:
‘‘[Reliability] has been misused so many times and, in
fact, to be quite frank it is a touchstone for those who
have concerns about ?nancial reporting including
things that are estimates, particularly if that estimate
starts with ‘F’; because, [in their view] it’s not reliable;
if there isn’t an observable price, how can you possibly
have a reliable number. And it is an absolute nonsense
[. . .]. The sooner we make this change, get people used
to the new terminology, explain what it means, drive
on, the world will be a better place, trust me’’ (IASB,
2009).
This statement again clearly signi?es the perceived role
of reliability as a hindrance towards fair values. Robert
Garnett’s comment, however, highlights the inef?cacy of
such conceptual attempts, as he already anticipated that
constituents would not accept the new term/concept:
‘‘To the extent that we didn’t manage to communicate
what reliability meant before, I think we are going to
have the same problem. People are going to use the
words and use the words in the sense they want to
describe them [. . .]. Just be prepared that if we go back
to the standard level, people will ?ght all the time’’
(IASB, 2009).
At the end of the IASB meeting, there was no formal vote
on this issue. The ?nal framework document suggests anon-
ymous support for the change to faithful representation.
Discussion
In this section we have followed the IASB’s & FASB’s
deliberations during the framework revision in detail, in
which the boards reconstructed the concept of accounting
reliability. While SFAC 2 re?ected a ?rst step away from
traditional practice notions of evidence-based veri?ability,
in the framework revision this move was more pro-
nounced. We have shown that the turn towards ‘‘faithful
representation’’ was linked to the importance fair value
accounting had gained in standard-setting:
‘‘Others read the word [reliability] and then looked at
what the board was doing and said, wait a second, that
number is not reliable. Why are you putting that num-
ber in the ?nancial statement? By the board changing
the word it was trying to avoid that sort of common
misunderstanding.’’ (Cooper, interview).
The replacement thus conceptually extends the bound-
aries of appropriate ?nancial reporting as it moves away
from veri?ability towards assessments of allegedly user-
demanded future bene?ts:
‘‘If we put reliability ?rst, then forget fair value for
many situations where you do not have a liquid market.
For the Board at that time, which was more into the
direction of fair value, reliability was a stumbling block
on the road to pushing fair value for ?nancial instru-
ments. That’s why representational faithfulness
replaced it. That was on purpose. I do not object to this
objective as it is aligned with the concept of using
?nancial information for making economic decisions.’’
(Danjou, interview).
Along these lines, note the course of events leading to
the demotion of veri?ability to becoming merely an
optional requirement. While the staff initially suggested
placing veri?ability as part of faithful representation, it
later adopted the reasoning employed in a small number
of comment letters to the DP – which was apparently also
held by some of the board members – that veri?ability
does not constitute a component of faithful representation,
as something may be a faithful representation of the
underlying economic phenomenon, albeit not being veri?-
able. The requirement of veri?ability was suspected to
exclude non-veri?able ‘‘forward-looking estimates that
are important in providing relevant ?nancial information
[. . .and] excluding those estimates would make ?nancial
reports much less useful’’ (BC3.36). In fact, this quote
exactly captures the function of veri?ability in its original
understanding. In particular, veri?ability problematised
the choice of fair value measurement in cases where esti-
mations were necessary (Barth, 2007, p. 11). Thus, this
change basically disentangled the two former subcompo-
nents of reliability in SFAC 2, leading to a minor role for
veri?ability:
‘‘In the newframework there is no trade-off between rel-
evance and faithful representation which are two differ-
ent ways to describe the same objective of providing
useful information. The trade-off still exists between
faithful representation and reliability but in the new
framework relevance and faithful representation are the
fundamental characteristics and reliability [veri?ability]
is only an enhancing characteristic.’’ (Danjou, interview).
The move away from the trade-off notion in SFAC 2 is
remarkable, as the boards now refrain from clearly sepa-
rating the concepts of relevance and faithful representa-
tion. This justi?es Power’s (2010, p. 200) observation of a
collapse of reliability into relevance.
All in all, this is suggestive of an increasing turn towards
fair value measurement, as has been indicated in the litera-
ture (O’Brien, 2009; Power, 2010; Walton, 2006;
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 31
Whittington, 2008b). ZhangandAndrew(2014) suggest that
the renaming of reliability can be seen together with the
framework’s focus oninvestors as primaryusers andthe sin-
gle objective of valuation usefulness de?ned in OB2 as
examples of an ongoing ?nancialisation and neoliberalisa-
tionof accounting(cf. also Power, 2010).
38
This development
might also be linked to the concept of sociology of worth as
outlined by Annisette and Richardson (2011). In this context
it might be proof of a move from an industrial order, where
transaction-based records were predominant, to a market
order, where markets or ?ctions of markets determine perfor-
mance. Our evidence is broadly consistent with such theories
of recent developments in ?nancial reporting.
Young (2006) ?nds that with regard to the objective of
?nancial accounting, the FASB and others continuously
tried to construct and enforce a limited idea of a hypothet-
ical, idealised rational economic decision maker as the user
of ?nancial statements. If, as is suggested in the reasoning
of Barth (2007), (hypothetically constructed) fair values
faithfully represent future cash ?ows from elements of
?nancial statements, the changes with regard to reliability
may be interpreted as only one further step to transform-
ing ?nancial statements into direct inputs to rational eco-
nomic decision models used by this ?ctitious
(constructed) user. Along these lines, Mary Barth’s claim
that ‘‘?nancial reporting is not about bookkeeping, it is
about providing information to outside providers of capi-
tal’’ (Barth, 2008, p. 1164) moves ?nancial reporting away
from its historical core to the information of capital mar-
kets. The conceptualisation of faithful representation by
Barth (2007) follows the intellectual spirit of Sterling and
his contemporaries, with corresponding arguments for a
turn to current/fair values and the necessary rede?nition
of reliability. While US accounting research has largely
refrained from debating qualitative characteristics and pri-
marily engaged in positivistic empirical work at least since
the 1980s (e.g. Oler, Oler, & Skousen, 2010), the academic
understanding of the role of accounting and its major prop-
erties developed by Staubus, Sterling and others was
adopted, or rather taken-for-granted, in most market-
based accounting studies. This is, for example, re?ected
in the summary of quantitative studies on reliability by
Maines and Wahlen (2006) where they characterise this
quality as corresponding to ‘‘the idea of representational
faithfulness in the FASB conceptual framework’’ (p. 403).
The presence of two in?uential academic members on
the boards, who promoted this line of reasoning during
the time of the framework revision (Barth and Schipper),
and the ongoing rise of the logic of ?nancial economics
in ?nancial reporting standard-setting more generally
(Miller & Power, 2013, p. 590 f.) might explain why the
concept was successfully rede?ned. In contrast to the
efforts in the 1970s before SFAC 2 (cf. section ‘From objec-
tivity to reliability: some re?ections’), this time there was
no compromise about the understanding of reliability
reached (or even attempted) with accounting practice.
As repeatedly shown, constituents mainly associated
reliability with notions of veri?ability, which indicates that
the original idea of the veri?ability of accounting informa-
tion is so entrenched in practice and accountants’ thinking
that it might remainpart of their understandingof basic nec-
essary qualities of accounting information irrespective of
how‘‘?nancial accounting theory’’ or a framework renames
or rede?nes the normative qualities supposedly underlying
its standards. What board members (e.g. Schipper in FASB,
2005) qualifyas a ‘‘misunderstanding’’ of the concept of reli-
abilityis actuallythemeaningassociatedwithreliableinfor-
mation in accounting practice. Thus, a mere rewording
might not be able to disentangling this connection. Re?ect-
ingonconstituent reactions toDPandED, numerous constit-
uents reacted negatively to the boards’ proposals because
they were opposed to fair value accounting. However, many
responses also suggest the constituents’ dif?culties in
understanding the ‘‘academic’’ reasoning of the boards
when de?ning ‘‘faithful representation’’. Accounting practi-
tioners felt unable to reconcile this idea with their everyday
use of the term ‘‘reliability’’. Gilbert Gélard’s comment sug-
gests that it was a deliberate decision to raise the level of
abstraction to avoid the misuses of the term ‘‘reliability’’
springing from the ambiguities of common language:
‘‘[This is about the difference between] plain English
and technical English. Faithful representation certainly
seems technical. Reliability is plain English. We have
to say that in this case plain English is not good enough’’
(IASB, 2009).
At this point it is worth mentioning the important role of
the staff (for the importance of the staff, also cf. Botzem &
Quack, 2009; Pelger, 2013). Interviewees repeatedly noted
that the FASB’s staff played a dominant role, particularly at
thebeginningof theproject (Johnson, 2005), mainlybecause
of the larger resources that the FASB could devote to the
framework revision. First, in the initial agenda papers, the
staff prepared the proposition to replace reliability. This
was actively supported by some board members and then,
despite the constituents’ repeated concerns, was carried
through the entire framework project to eventually turn
up in the ?nal version. Second, the relegation of veri?ability
in the ED was proposed by the staff and simply rubber-
stamped by the boards – although they had before accepted
its placement as a subcomponent of faithful representation
in the DP. Third, in the ?nal IASB meeting on reliability in
2009the unease expressedby some boardmembers, Cooper
and particularly Kalavacherla, was muted by comments of
proponents of the change (Barth, McGregor) and ultimately
ignored by the staff. Even though vice-chairman Jones,
chairing the January 2009 IASB session, noted that there
‘‘seems to be a pretty divided view’’ (IASB, 2009) on the
replacement no vote was carried out.
39
Indeed, there were
no formal votes during the due process which factually gave
38
While differences in the treatment of stewardship and reliability during
the framework revision are observable, for example where the boards
carried out in-depth consultations with constituents about stewardship
(Pelger, 2013), no such effort was made with regard to reliability; in the end
traditional concepts were abandoned in the 2010 framework. This decision
was made by the same small group of board members and suited the mood
of the time, as outlined by Whittington (2008b).
39
At the beginning of this particular meeting, Jones noted his intention to
avoid any votes because the board was three votes down due to the absence
of Leisenring, Tweedie and Smith.
32 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
the staff control over the ?nal outcome. The quotes above
illustrate that some board members pursued a clear agenda
to install faithful representation and get rid of the notions of
‘‘reliability’’ and ‘‘veri?ability’’. Our ?ndings suggest that the
staff’s views, supported and possibly shaped by these board
members, were so dominant because other board members
struggled with the term and concept of ‘‘faithful representa-
tion’’ or were simply disinterested. It is particularly notewor-
thy that despite the extensive (formal) consultation activities
carriedout by the boards and the staff during nearly ?ve years
of due process, inthe endthe developedconcept appears tobe
further decoupled fromthe world of accounting practice. Par-
adoxically, the strong opposition by constituents was taken
up by staff and some board members to reaf?rm their obser-
vation of a pervasive ‘‘wrong’’ understanding of reliability
among constituents:
‘‘Based on the comments that we received from respon-
dents, the staff continues to think that we should
replace the term as many respondents continue to
interpret reliability differently from how we de?ne it
in either the IASB or FASB conceptual framework’’ (Lian
(IASB staff), IASB, 2009).
Moreover, proponents repeatedly referred to the pres-
ence of multiple understandings of reliability to demote
opposition to the change. For instance, Mary Barth noted:
‘‘It is not just that people only think of it as veri?ability.
It was clear from the comment letters on the Discussion
Paper that people use the word differently. Everybody
seems to have a clear idea what reliability means to
them, and it’s not the same as what it means to different
people, so it has to go’’ (IASB, 2009).
However, as perceived by Whittington (interview):
‘‘The IASB’s argument when abolishing ‘reliability’ was:
there is no common notion so it doesn’t exist. But there
is also no common notion of what an economic phe-
nomenon is. There is also no common notion of what
a representation is or of what faithful means.’’
Altogether, this puts the argument that a speci?c term
is misunderstood and therefore needs to be changed, in
place of a mere rhetoric to justify the boards’ wish to
change it. In other words, independent of which umbrella
term was chosen by the boards, confusion about its mean-
ing, or different interpretations, were likely to persist.
In contrast to what might be expected from our argu-
ment, since the publication of the conceptual framework
in 2010, the IASB and FASB have not moved further in
the direction of fair value accounting:
‘‘Recent experience with the IASB’s standard-setting
activity under the new framework has shown that they
have not got the way I feared they would [i.e. increase
the use of fair value measurement].’’ (Whittington,
interview).
Instead, it seems that they have accepted the existence
of a mixed measurement model (IASB, 2013, par. 6.14).
While this might well be due to the controversial debates
on the role of fair value accounting in the ?nancial crisis
(e.g. Laux & Leuz, 2009), it might also hint at a pragmatic
use of the concept of faithful representation. Along these
lines Geoffrey Whittington (interview) noted that
‘‘I am not sure whether the change from reliability to
representational faithfulness in the new framework will
actually in?uence future standard-setting. Standard-
setters are pragmatic people. They form their consensus
on what they mean by faithful representation in every-
day language. They don’t think like philosophers, they
don’t analyse words.’’
Leisenring (interview) noted:
‘‘Reliability always meant to me essentially what we
now mean by representational faithfulness. If the de?-
nition of reliability had been applied properly (it never
meant precision), I doubt there will be any changes
from what we have done.’’
As described above, the change was important to sev-
eral board and staff members because of reliability’s per-
ceived role as a hindrance to fair values, but the early
board meetings already revealed different understandings
of the term ‘‘faithful representation’’, not all interpreting
it as promoting fair values:
‘‘There is no reason something must be at some current
value to be representationally faithful. I think some
people are afraid that it might mean fair value and other
people want it to mean it.’’ (Leisenring, interview).
This statement suggests that the implications of the
faithful representation concept are inherently controver-
sial, with the effect that even though some actors intended
to replace reliability in order to pave the way for fair val-
ues, others would not follow that reasoning.
Moreover, several board members did not seem to be
particularly prone to de?ning and positioning respective
qualities:
‘‘In my opinion it is twisting words. Whether this should
come before this or after that, if this is a subset of this or
not, I really don’t care. With reliability there was much
discussion of a misunderstanding of the term. As I recall
it no one objected to this criticism of reliability. I liked
bothviews onreliabilityandI can’t remember I hadmuch
opinion on these characteristics. I was quite confused by
the arrangements of characteristics. Youcan’t take a ?ght
on everything. It was at that time a very academic
approach to these things.’’ (Engström, interview).
40
The (former) chairman of the IASB also noted that the
consequences of de?ning speci?c characteristics for stan-
dard-setting decisions should not be exaggerated:
40
The comment by Engström hints at possible dif?culties that non-native
English-speaking board members might experience when confronted with
abstract constructs such as ‘‘faithful representation’’. More generally a bias
in board meetings towards dominant Anglo-American members was
identi?ed by Walton (2009). He revealed that in 2002 and 2003 North
American board members accounted for 50% of the time of all board
member contributions (if Anglo-Saxon countries are de?ned more broadly
the number increases to over 80%) (p. 48).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 33
‘‘Frankly, qualitative characteristics, I couldn’t care less.
The number of times they shuf?ed them backwards and
forwards, it was ‘deckchairs on the Titanic’-stuff. Who
cares if this is there or there? But they argued and argued
and frankly I just thought as long as you have them
described, that is suf?cient. I lost interest because I felt
it was saying: it’s gonna be relevant, it’s gonna depict
what’s there, what youcall true-and-fair andthat encom-
passes substance over form and all sorts of things. If the
measures are totally unreliable, not understandable,
not timely, then they are of no use. How do you rank
them? We got round and round and round and I didn’t
care. It wasn’t affecting one little bit of what I do about
the standards. In standard-setting you never compare
thesecharacteristics bysayingthis oneis bigger thanthat
one. It does not work that way.’’ (Tweedie, interview)
As the statements by Engström and Tweedie indicate,
the ‘‘very academic approach’’ to qualitative characteris-
tics, and the level of abstraction in debates were not appre-
ciated by some board members. Given that even board
members struggled with these terms and doubted their
usefulness, it only appears fair to ask about the extent to
which this might be the case for constituents. The level
of abstraction per se, thus, raises doubts about whether
the concept (regardless of its name) can be useful for sys-
tematising discourses about accounting issues. For
instance, about two years after the publication of the
revised framework Cooper (interview) noted that still
‘‘[w]e use the word [reliability] a lot because it is easier
to say than representationally faithful, so people have
reverted back to it. The word, the phrase representa-
tional faithfulness is a very cumbersome word.’’
We predict that constituents will continue to use the
term ‘‘reliability’’ (in their understanding as veri?ability)
in future standard-setting consultations. This is also corrob-
orated by the terminology of auditing standards, which still
(even those updated after 2010) refer to reliability (e.g.
Auditing Standards Board, 2012, par. 14, refers to the rele-
vance and reliability of auditing evidence). Hence, the board
has so far been unsuccessful to convey its idea of faithful
representationto accounting practice. Inthe end, the debate
on reliability to some extent indicates an exhaustion of the
conceptual project in ?nancial reporting in that endless
debates about the ‘‘proper’’ de?nition of concepts, by
recourse to ever more abstract ideas, do not necessarily gen-
erateclear andoperable (‘‘useful’’) tools for standard-setting
Conclusion
In this paper we have traced the development of the
concept of reliability in ?nancial accounting standard set-
ting. We ?nd that traditional notions of objectivity and
veri?ability, which were evolutionarily linked to account-
ing practice, were subject to change even before the issu-
ance of SFAC 2. With a focus on accounting practice,
early accounting theorists, most prominently Paton and
Littleton (1940), stated the prevalence of the convention
of objectivity, as essentially accounting based on evidence.
In the 1960s this notion was further developed in academic
approaches to accounting. First, academics were in?uenced
by and introduced perspectives from the natural sciences
into the accounting discourse which reshaped the concep-
tual de?nition of objectivity/veri?ability towards a more
abstract ‘‘consensus by different observers’’. Second, the
advent of the decision usefulness orientation in account-
ing, also developed by academics, led to the promotion of
the concept of relevance and reduced the relative impor-
tance of veri?ability (e.g. ASOBAT, APB Statement No. 4).
In this setting, reliability was basically constructed in SFAC
2 as a compromise between traditional practice notions of
veri?ability and the academic concept of faithful represen-
tation. The latter concept served the purpose of giving the
FASB the opportunity to move away from traditions of
accounting in order to introduce current value accounting.
In the 1990s reliability was regularly employed by scep-
tics to demote the merits of fair value accounting, referring
to the traditional notionof objectivity/veri?ability. The joint
framework revision gave the IASB and FASB the chance to
replace ‘‘reliability’’ with ‘‘faithful representation’’, a con-
cept entailingfewer limitations onthe useof fair values. This
academic construct, however, was more detached from
practitioners’ thinking, which was responsible for the large
opposition to renaming ‘‘reliability’’. The material effect of
the replacement, however, remains unclear, given diverse
views on the meaning and relevance of qualitative charac-
teristics even among board members. This diversity might
be rooted in the very abstract character of the framework,
raisinggeneral questions about the usefulness of conceptual
activities by standard-setters. In this regard, it is striking
that during the framework revision the boards basically
re-used the conceptual terminology that had already been
introduced to the standard-setters’ discourses in the 1960s
and 1970s. While the boards deliberately did not want to
revolutionise their conceptual frameworks (Bullen &
Crook, 2005, p. 3), this approachmight have limitedthe staff
andboardthinkingtotraditional conceptual ideas, unable to
escape the long-lived con?icts about accounting measure-
ment. Nonetheless, there might very well be alternatives
for approaching the concepts. For example, reliability might
also be framed in a context of uncertainty and risk (e.g. cf.
Power, 2007) which might lead to further re?ections on
the appropriateness of single-point values in ?nancial state-
ments, in particular in a context of level three fair value esti-
mates.
41
While this is just one possibility for rethinking
reliability, developing newlines of thinking about conceptual
terms more generally might also be a very interesting area for
future academic research.
Our study has largely focused on the academic and stan-
dard-setting discourse on reliability and how the term was
reconstructed by a small circle of actors from these ?elds.
We have not, however, scrutinisedin detail how‘‘the practi-
tioner consensus about reliability’’ (Power, 2004, p. 777) has
changed. While the references in our study suggest a fairly
consistent use of the veri?ability notion we suspect that
the discourse in practice is more complex. Auditors have,
for instance, adapted to the increasing use of fair values in
41
Indeed, the IASB’s DP 2013/1 suggests that the IASB is aware of the
importance of uncertainty in its de?nition of assets and liabilities (IASB,
2013, par. 2.17–2.36).
34 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
accounting standards by developing their own guidelines
(ISA 540 (IAASB, 2008)). Exploring the interaction between
auditing and ?nancial reporting standards with respect to
reliability, for example in light of litigation concerns, might
be a future area for research. According to the ?ndings of
Smith-Lacroix, Durocher, and Gendron (2012) auditors in
the ?eld seem to encounter dif?culties in reconciling their
traditional understanding of reliability and auditing values
with a fair value regime (also cf. Humphrey, Loft, & Woods,
2009, p. 818 f.). One reaction might be to outsource certain
parts of the audit to valuation experts (Power, 2010;
Smith-Lacroix et al., 2012). Apart from the practical reper-
cussions of fair value, research into how accounting con-
cepts develop and are contested in practice (e.g. cf. Edgley,
2014, on materiality) might further enrich our understand-
ing of ?nancial reporting.
Acknowledgements
We would like to thank Joni Young (Editor), two anon-
ymous reviewers, Richard Barker, Guido Förster, Christoph
Kuhner, Ronita Ram (EAA discussant), Thomas Schildbach,
Brian Singleton-Green, Tomo Suzuki, Robert Ullmann, Ste-
phen Zeff and participants at the EAA Conference in Paris
2013, the VHB P?ngsttagung in Würzburg 2013, the 6th
International Workshop on Accounting and Regulation in
Siena 2013, the 9th EUFIN Workshop in Valencia 2013,
the 50th Annual Meeting of the British Accounting and
Finance Association in London and the members of the
Academic Panel of the Financial Reporting Council for help-
ful comments and suggestions. All errors remain the sole
responsibility of the authors. We express particular grati-
tude to Peter Walton for granting access to relevant vol-
umes of the IStaR newsletter and to all interviewees for
sharing their time and insights. Carsten Erb gratefully
acknowledges ?nancial support provided by the Konrad
Henkel Foundation. The research in this paper bene?ted
from a research stay by Christoph Pelger at Saïd Business
School, University of Oxford.
Appendix
See Tables 1, 2 and Fig. 1.
Table 1
Contributions considered in the analysis of the origins of ‘‘reliability’’.
Author Year Source
American Accounting Association (1936) The Accounting Review, 11 (1)
Paton, W.A. & Littleton, A.C. (1940) Monograph
American Accounting Association (1941) The Accounting Review, 16 (1)
American Accounting Association (1948) The Accounting Review, 23 (4)
American Accounting Association (1957) The Accounting Review, 32 (1)
Arnett, H.E. (1961) Journal of Accountancy, 111 (5)
Mautz, R.K. & Sharaf, H.A. (1961) Monograph (study)
McFarland, W.B. (1961) Journal of Accountancy, 112 (3)
Moonitz, M. (1961) Monograph (study)
Anonymous (1963) Journal of Accountancy, 115 (1)
Bierman, H. (1963) The Accounting Review, 38 (3)
Chambers, R.J. (1963) Journal of Accounting Research, 1 (1)
Vatter, W.J. (1963) Journal of Accounting Research, 1 (2)
American Accounting Association (1964) The Accounting Review, 39 (2)
Burke, E.J. (1964) The Accounting Review, 39 (4)
Chambers, R.J. (1964) The Accounting Review, 39 (2)
Gordon, M.J. (1964) The Accounting Review, 39 (2)
Cowan, T.K. (1965) The Accounting Review, 40 (4)
Chambers, R.J. (1965) Journal of Accounting Research, 3 (1)
Wagner, J.W. (1965) The Accounting Review, 40 (3)
American Accounting Association (1966) ASOBAT (monograph; study)
Anton, H.R. (1966) Collected edition (Jaedicke, Ijiri & Nielsen (eds.))
Fertig, P.E. (1966) Collected edition (Jaedicke, Ijiri & Nielsen (eds.))
Ijiri, Y. & Jaedicke, R.K. (1966) The Accounting Review, 41 (4)
Arnett, H.E. (1967) The Accounting Review, 42 (2)
McDonald, D.L. (1967) The Accounting Review, 42 (4)
Snavely, H.J. (1967) The Accounting Review, 42 (2)
Sterling, R.R. (1967) Journal of Accounting Research, 5 (1)
Brief, R.P. & Owen, J. (1969) Journal of Accounting Research, 7 (1)
APB (1970) Statement No. 4
Staubus, G.J. (1970) Abacus, 6 (2)
Wojdak, J.F. (1970) The Accounting Review, 45 (1)
Schattke, R.W. (1972) The Accounting Review, 47 (2)
Staubus, G.J. (1972) Journal of Accountancy, 133 (2)
AICPA (1973) Trueblood Report (monograph; study)
American Accounting Association (1973) ASOBAC (monograph; study)
Langenderfer, H.Q. (1973) Journal of Accountancy, 136 (1)
Parker, J.E. (1975) The Accounting Review, 50 (3)
FASB (1976) Discussion Memorandum (monograph; study)
Staubus, G.J. (1976) Accounting and Business Research, 6 (24)
American Accounting Association (1977) Statement on Accounting Theory and Theory Acceptance (monograph; study)
(continued on next page)
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 35
Table 2
Documents considered in the due process analysis.
Time period Board Document Origin/reference
Stage 1 (before DP) IASB Agenda paper 7 (17 May 2005) IASB (2005)
IASB IStaR Newsletter (17 May 2005) IStaR (2005)
FASB Board meeting minutes (25 May 2005) FASB (2005)
IASB Agenda paper 6 (22 June 2005) IASB website
FASB Board meeting minutes (22 June 2005) FASB website
IASB Agenda paper 7A (20 July 2005) IASB website
IASB IStaR Newsletter (20 July 2005) Peter Walton
FASB Board meeting minutes (27 July 2005) FASB website
IASB Agenda paper 15B (22 September 2005) IASB website
IASB IStaR Newsletter (22 September 2005) Peter Walton
FASB Board meeting minutes (21 September 2005) FASB website
IASB Agenda paper 8 (19 Oktober 2005) IASB website
IASB Agenda paper 8A (19 Oktober 2005) IASB website
IASB IStaR Newsletter (19 Oktober 2005) Peter Walton
IASB/FASB Agenda paper 6 (25 Oktober 2005) IASB website
IASB/FASB Agenda paper 6A (25 Oktober 2005) IASB website
IASB/FASB Board meeting minutes (25 Oktober 2005) FASB website
IASB/FASB IStaR Newsletter (25 Oktober 2005) Peter Walton
IASB Agenda paper 2 (13 December 2005) IASB website
FASB Board meeting minutes (14 December 2005) FASB website
IASB/FASB Discussion Paper IASB (2006); DP
IASB/FASB Comment letters IASB website
Stage 2 (before ED) IASB Agenda paper 3A (20 February 2007) IASB (2007a)
IASB Audio tape board meeting (20 February 2007) IASB (2007b)
IASB IStaR Newsletter (20 February 2007) IStaR (2007a)
FASB Board meeting minutes (28 February 2007) FASB (2007a)
IASB Agenda paper 5 (18 April 2007) IASB (2007c)
IASB Audio tape board meeting (18 April 2007) IASB (2007d)
IASB IStaR Newsletter (18 April 2007) IStaR (2007b)
FASB Board meeting minutes (2 May 2007) FASB (2007b)
IASB Agenda paper 3 (20 February 2008) IASB website
IASB Audio tape board meeting (20 February 2008) IASB website
IASB IStaR Newsletter (20 February 2008) Peter Walton
FASB Board meeting minutes (20 February 2008) FASB website
IASB/FASB Exposure Draft IASB (2008a); ED
IASB/FASB Comment letters IASB website
Stage 3 (after ED) IASB Agenda paper 2A (16 December 2008) IASB (2008b)
IASB Audio tape board meeting (16 December 2008) IASB website
IASB IStaR Newsletter (16 December 2008) Peter Walton
IASB Agenda paper 5 (20 January 2009) IASB website
IASB Audio tape board meeting (20 January 2009) IASB (2009)
IASB IStaR Newsletter (20 January 2009) IStaR (2009)
FASB Board meeting minutes (14 January 2009) FASB website
IASB Agenda paper 14A (19 March 2009) IASB website
IASB Audio tape board meeting (19 March 2009) IASB website
IASB IStaR Newsletter (19 March 2009) Peter Walton
FASB Board meeting minutes (2 April 2009) FASB website
IASB Agenda paper 10B (15 September 2009) IASB website
IASB Audio tape board meeting (15 September 2009) IASB website
IASB IStaR Newsletter (15 September 2009) Peter Walton
IASB Agenda paper 6 (17 May 2010) IASB website
Table 1 (continued)
Author Year Source
Ashton, R.H. (1977) The Accounting Review, 52 (3)
De?iese, P.L. (1977) Journal of Accountancy, 144 (1)
Burton, J.C. (1978) Journal of Accountancy, 145 (1)
Solomons, D. (1978) Journal of Accountancy, 146 (5)
Horngren, C.T. (1981) Journal of Accountancy, 151 (4)
Pacter, P.A. (1983) Journal of Accountancy, 156 (1)
Miller, P.B.W. (1985) Journal of Accountancy, 159 (3)
36 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
1930
1970
2010
(1934) Creation of SEC
(1973) Foundation FASB and IASC
(1939 – 1959) CAP
(1959 – 1973) APB
Paton & Littleton (1940)
(2002) Norwalk Agreement
(2005 - 2010) Framework revision
SFAC 8 / IASB Framework (2010)
(2001) IASB (replacing IASC)
Moonitz (1961)
ASOBAT (1966)
APB Statement No. 4 (1970)
Trueblood Report (1973)
FASB Discussion Memorandum (1976)
SFAC 1 (1978)
SFAC 2 (1980)
IASC Framework (1989)
(1992 – 2001) G4+1
Fig. 1. Timeline of major events and contributions.
Table 2 (continued)
Time period Board Document Origin/reference
IASB Audio tape board meeting (17 May 2010) IASB website
IASB IStaR Newsletter (17 May 2010) Peter Walton
FASB Board meeting minutes (17 May 2010) FASB website
FASB/IASB Framework for ?nancial reporting IASB website
IASB Feedback statement IASB website
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 37
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doc_569341976.pdf
Qualitative characteristics serve to operationalise the objective of financial reporting and
aim at shaping accounting discourses of standard-setters and their constituents. In the
recent revision of their conceptual frameworks, the IASB and FASB decided to replace
‘‘reliability’’, arguably one of the most important properties of accounting, with ‘‘representational
faithfulness’’. The aim of the present paper is to shed light on the boards’ decision
through a historical analysis of how reliability appeared in standard-setting and by tracing
its abandonment in detail.
‘‘Twisting words’’? A study of the construction and
reconstruction of reliability in ?nancial reporting
standard-setting
Carsten Erb
a
, Christoph Pelger
b,?
a
Department of Business Taxation, Heinrich Heine University Düsseldorf, Universitätsstraße 1, 40225 Düsseldorf, Germany
b
Department of Financial Accounting and Auditing (Treuhandseminar), University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany
a b s t r a c t
Qualitative characteristics serve to operationalise the objective of ?nancial reporting and
aim at shaping accounting discourses of standard-setters and their constituents. In the
recent revision of their conceptual frameworks, the IASB and FASB decided to replace
‘‘reliability’’, arguably one of the most important properties of accounting, with ‘‘represen-
tational faithfulness’’. The aim of the present paper is to shed light on the boards’ decision
through a historical analysis of how reliability appeared in standard-setting and by tracing
its abandonment in detail. Our study reveals that the standard-setters’ construction and
reconstruction of reliability attempted to undermine traditional practitioner understand-
ings along the lines of objectivity/veri?ability in order to extend the boundaries of appro-
priate ?nancial reporting in the direction of current/fair values. However, as the
introduction of more abstract concepts raised dif?culties in reconciling the new terminol-
ogy with everyday accounting practice, this turn created confusion among constituents and
board members. Our paper also contributes to further our understanding about decision-
making processes in standard-setting. In particular, we show how a group of board and
staff members was able to establish the replacement of reliability in spite of (and partly
taking advantage of) constituents’ concerns and widespread confusion about the terms.
Ó 2014 Elsevier Ltd. All rights reserved.
Introduction
In 2010, the IASB and FASB proclaimed in their revised
conceptual frameworks that the single objective of ?nan-
cial reporting is providing useful information for valuation
decisions of capital providers (OB 1
1
), which in their view
also encompasses stewardship concerns (OB 4).
2
Qualitative
characteristics serve to operationalise this objective by
introducing concepts which standard-setters can employ
as arguments in the development of new or revised stan-
dards. Young (1996) regards the conceptual framework as
a form of institutional thinking which limits both the de?ni-
tion of, and solutions to, accounting problems. Within this
institutional function of the framework, qualitative charac-
teristics de?ne the boundaries of what the standard-setters
deem ‘‘appropriate’’ ?nancial reporting. This is re?ected in
the recurrent use of qualitative characteristics in the framinghttp://dx.doi.org/10.1016/j.aos.2014.11.001
0361-3682/Ó 2014 Elsevier Ltd. All rights reserved.
?
Corresponding author. Tel.: +49 2214702723; fax: +49 2214705165.
E-mail addresses: [email protected] (C. Erb), [email protected].
de (C. Pelger).
1
References to the conceptual framework for ?nancial reporting (IASB,
2010) are abbreviated in the following way: OB refers to the ?rst chapter
(objectives), QC to the third chapter (qualitative characteristics) and BC to
the basis for conclusions. References to the Discussion Paper (IASB, 2006)
are abbreviated as DP, references to the Exposure Draft (IASB, 2008a) as ED.
References to the IASC (1989) framework, which was adopted by the IASB
in 2001, are abbreviated by F.
2
Stewardship had been a separate objective in the former IASC (1989)
framework and was also mentioned as a separate consideration in SFAC 1
(FASB, 1978) (cf. Zeff, 2013, p. 264).
Accounting, Organizations and Society 40 (2015) 13–40
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
of accounting problems by standard-setters, practitioners
and academics. For instance, Bushman and Indjejikian
(1993), p. 765, observe that ‘‘[a]n issue of fundamental
importance to accountants concerns the qualities possessed
by, or that should be possessed by, accounting information.’’
In the standard-setters’ previous frameworks (SFAC 2
(FASB, 1980); IASC, 1989) one of the most important prop-
erties of ?nancial reporting has been the characteristic of
reliability. In particular, the trade-off between relevance
and reliability, established in SFAC 2.90 and F.45, has
shaped accounting discourses over the last decades
(Johnson, 2005). This is revealed by a mere look in account-
ing textbooks (e.g. Deegan & Unerman, 2011, p. 225 ff.), as
well as recent academic literature (e.g. Allen & Ramanna,
2013). However, when the IASB and FASB ?nished their
work on the ?rst part of the framework revision project
in September 2010,
3
which was concerned with the rewrit-
ing of the objective and qualitative characteristics of ?nan-
cial reporting, the term ‘‘reliability’’ had been dropped and
replaced by ‘‘representational faithfulness’’.
4
This decision
was motivated by the boards’ observation that the term
‘‘reliability’’ gave rise to misunderstandings as (at least
some) constituents perceived it to mean precision or exact-
ness of accounting information (DP BC 2.26), or placed too
much emphasis on single subcomponents – in particular
on veri?ability (IASB, 2005, par. 41). Although the boards
considered the move to representational faithfulness to be
a change in terms rather than in substance (BC 3.24), simply
re?ecting a better terminology of the boards’ understanding
(DP BC 2.27-28), the boards’ constituents were heavily
opposed to this alteration (IASB, 2007a, par. 56; IASB,
2008b, par. 51 f.). It is notable that this was not the only
issue in the 2010 framework revision which raised concerns.
The singular focus on valuation usefulness and the waiving
of a separate stewardship objective was met by a large resis-
tance (for critical positions, cf. Lennard, 2007; Whittington,
2008a; for an analysis of the boards’ decision-making on
stewardship cf. Pelger, 2013), while the elimination of con-
servatism was also intensely debated (cf. Barker &
McGeachin, 2013).
Motivated by the recent decision of the IASB and FASB
to replace reliability, this paper addresses the question of
how the construct of reliability ?rst emerged in accounting
standard-setting and why it vanished in the recent frame-
work overhaul.
5
This question is important not only with
regard to analysing the observed disputes between constitu-
ents and the boards, but also relates to general patterns in
recent ?nancial reporting reforms by the IASB and FASB
(Power, 2010; Whittington, 2008b) that apparently try to
shift the boundaries of appropriate ?nancial reporting
(Walton, 2006).
6
To address the outlined research question
we ?rstly analyse the way in which the construct of reliabil-
ity appeared and consider its precursors. This historical
study relies on the normative a priori US accounting litera-
ture that was published in particular during the 1960s and
1970s, before the ?rst written frameworks for ?nancial
reporting came into existence. Secondly, we thoroughly
scrutinise the way reliability was replaced by representa-
tional faithfulness in the framework revision project by the
IASB and FASB. For this purpose, we drew on all published
material from the due process and, furthermore, conducted
interviews with key actors who were involved in the deci-
sion-making as either board or staff members.
Our paper’s contribution to the literature is twofold.
First, we present a long-term case study of the develop-
ment of the idea of reliability in accounting literature
and standard-setting which adds to histories of conceptual
thinking in ?nancial reporting. These have so far mostly
emphasised the objective of ?nancial reporting (Murphy,
O’Connell, & Ó hÓgartaigh, 2013; Ravenscroft & Williams,
2009; Young, 2006) and only partly referred to qualitative
characteristics (Zeff, 2013). We follow Young (2006) in the
aim to reveal how taken-for-granted notions in standard-
setting (such as reliability) were constructed and how they
have been rede?ned by the accounting community,
attempting to contribute to a ‘‘sociology of accounting reli-
ability’’ (Power, 2010, p. 198). In this paper we show that
the construction and reconstruction of reliability followed
from the standard-setters’ aim to extend the boundaries of
appropriate ?nancial reporting by changing conceptual
language. Firstly, reliability was constructed in SFAC 2 as
a compromise between the traditional (evolutionary) prac-
titioner idea embodied in the concept of veri?ability and
more recent academic notions of faithful representation.
Secondly, as constituents continuously ignored the faithful
representation part of reliability and repeatedly used their
understanding along the lines of veri?ability to dismiss fair
value accounting, the standard-setters reconstructed reli-
ability to establish a single focus on faithful representation.
However, the standard-setters’ attempt to alter traditional
practical understandings by using ever higher levels of
abstraction led to very different views among constituents
and board members about what ‘‘faithful representation’’
means and what it implies. Hence, the standard-setters’
construction and reconstruction of ‘‘reliability’’ against tra-
ditional understandings of veri?ability by employing ever
higher (more academic) levels of abstraction appears to
be a permanently failing project.
Second, in contrast to the philosophical evaluations of
central principles embodied in conceptual frameworks
(Bayou, Reinstein, & Williams, 2011; Hines, 1991;
Macintosh, Shearer, Thornton, & Welker, 2000; McKernan,
2007; Shapiro, 1997) we provide empirical context by
meticulously tracing the boards’ deliberations on reliability
3
The framework project by the IASB & FASB, launched in 2004, was
initially split into eight phases, but only the ?rst phase has been ?nished. In
September 2012 the IASB decided to pursue the rest of the project as an
IASB-only project. The project comprehensively deals with the remaining
phases on elements, measurement, reporting entity and presentation and is
intended to be ?nished by autumn 2015 (cf. IASB, 2013, p. 14).
4
In the literature we found both terms, ‘‘faithful representation’’ and
‘‘representational faithfulness’’. While SFAC 2 uses the latter, the new SFAC
8 employs the ?rst term. Since we could not distinguish differences in
meaning in the examined publications, we use both terms interchangeably.
5
Fig. 1 in the appendix shows a timeline which gives an overview of
important contributions as well as surrounding events during the period of
our analysis.
6
Note that we do not argue in favour of any speci?c characteristic,
including reliability, but rather focus on tracing the development of the
construct of reliability in the standard-setting discourse.
14 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
and faithful representation, and by considering the re?ec-
tions of board members as gained frompersonal interviews.
Hence, by following the decision-making of the standard-
setting bodies regarding the qualitative characteristics of
their framework, this paper contributes to the scarce empir-
ical literature on actual processes of standard-setting in
accounting. More speci?cally, we reveal that some board
and staff members pressed the change towards faithful rep-
resentationto eliminate a major hindrance to the expansion
of fair value accounting. These actors’ ultimate success was
due to confusion amongst and indifference by other board
members as well as thestrongpositionof thestaff inpushing
the change. Indeed, the broad opposition by constituents
was in places exploited by proponents of the change based
on what they perceived as pervasive ‘‘wrong’’ understand-
ings of reliability among constituents. In this way the inten-
sive public consultation carried out by the boards
paradoxically served to decouple the standard-setters’
world from everyday accounting practice.
The paper proceeds as follows: In the following section
a literature review is provided, both with regard to qualita-
tive characteristics and standard-setting. Section ‘Data’
describes the material employed in our study. The next
section describes and re?ects on the construction of reli-
ability until the publication of SFAC 2. This is followed by
a section which highlights important developments in
the time after SFAC 2 until the framework revision project
was put on the agenda of IASB/FASB. After that, the next
section traces the abandonment of reliability and its
replacement by representational faithfulness, and the ?nal
section provides some conclusions.
Literature review
Qualitative characteristics
The historical part of our paper draws on literature from
the golden age of normative theorising in accounting
research. Before the advent of ?nancial accounting theory,
the predominant practitioner understanding was that
‘‘accounting is what accountants do’’ (Young, 2006,
p. 581). It was widely accepted that accounting was con-
cerned with the recording of economic transactions, the
(not theoretically supported) measurement of income
and the preparation of ?nancial reports adhering to estab-
lished accounting conventions such as conservatism and
consistency. The ?rst contributions in the accounting liter-
ature built on this stock of practical knowledge (Miller &
Power, 2013, p. 572 f.), as they were partly authored by
practitioners aiming at resolving practical accounting
problems or by researchers following an inductive
approach, i.e. rationalising existing practice (Lee, 2009, p.
143 f.). Due to a lack of resolution of practice problems,
researchers gradually tried to elevate the discussion to an
academic level (Lee, 2009, p. 140 f.). Interest in formulating
axiomatic principles of accounting arose around the mid-
dle of the 20th century and involved developing internally
consistent bodies of ?nancial accounting theory (FAT) with
the intention of deducing accounting standards based on a
theoretically sound underpinning. This process particularly
began after World War II, when accounting was confronted
by advances in other sciences, which triggered among
accounting scholars a perceived urgency to justify account-
ing theoretically, and to base it on scienti?c grounds
(Miller & Power, 2013, p. 574). This in?uence inaugurated
a ‘‘new academic spirit’’ which led to a ‘‘golden age of [nor-
mative] a priori accounting’’ in the 1950s and 1960s
(Mattessich, 2008, p. 182 ff.).
In the decades since the publication of the ?rst concep-
tual frameworks, accounting literature has repeatedly used
qualitative characteristics in analysing accounting stan-
dards. For instance, Allen and Ramanna (2013) classify
accounting standards published by the FASB with regard
to whether these standards increased or decreased rele-
vance and/or reliability. As qualitative characteristics are
(necessarily) abstract and vague notions, however, they
remain open to a broad range of different interpretations.
For example, accounting literature has repeatedly shown
in surveys and experiments that qualitative characteristics
have been used differently from their drafting in the
frameworks (e.g. Kadous, Koonce, & Thayer, 2012;
McCaslin & Stange, 1983) and that different understand-
ings even exist among members of standard-setting bodies
(Joyce, Libby, & Sunder, 1982), suggesting that the concepts
may simply be about ‘‘twisting words’’.
The boards’ recent decision to replace ‘‘reliability’’ with
‘‘representational faithfulness’’ has been the topic of some
literature. For instance, Power (2010) observes a shift in
the social construct of reliability from its transaction-
based, law-linked origins to an economics-based valuation
calculus in recent decades. He links this observation to the
rise of fair value accounting as a ‘‘motivating and quasi-
philosophical principle’’ (p. 197) of the IASB and FASB. In
this line of thought, dropping the term ‘‘reliability’’ is just
a logical consequence which re?ects a ‘‘reframing of reli-
ability, essentially collapsing reliability into relevance’’ (p.
200). Others, like Walton (2006), Whittington (2008b),
O’Brien (2009), have likewise related the shift towards rep-
resentational faithfulness to the increasing importance of
fair value accounting. Wüstemann (2011) identi?es the
abandonment of stewardship and the dominance of valua-
tion concerns in the objective of ?nancial reporting (cf.
Pelger, 2013; Whittington, 2008a; Whittington, 2008b) as
the major reason for the replacement and concludes that
‘‘the ambiguity of the faithful representation concept’’ (p.
6) as well as the opposition from large parts of constituents
to the new concept might lead to problems for future stan-
dard-setting. This sceptical attitude is shared by Kinserdal
(2011) who traces the rise of representational faithfulness
historically and links this development to notions of truth
in accounting.
Standard-setting
The second major part of this paper provides an in-
depth case study of (international) accounting standard-
setting. In recent years, literature on standard-setting has
substantially increased. This renewed interest primarily
relates to lobbying. Quantitative studies have analysed
the geographic origins (Jorissen, Lybaert, Orens, & van der
Tas, 2013) and composition (Jorissen, Lybaert, Orens, &
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 15
Van Der Tas, 2012) of constituents writing comment letters
to the IASB. In a more detailed study, Giner and Arce (2012)
provide an account of a speci?c due process, focussing on
the development of IFRS 2 on share-based payments. Their
approach centres on a content analysis of comment letters
submitted to three discussion documents. All studies
quoted are based on the theoretical cost-bene?t frame-
work introduced by Sutton (1984).
The political character of standard-setting (cf. Botzem &
Quack, 2009), however, cannot completely be captured by
analysing formal comment letter submissions. Thus, other
literature operates outside the quantitative domain and
attempts to shed light on the activities of accounting stan-
dard-setters through qualitative analysis. One example is
the study by Botzem (2012), who analyses the network
of organisations and individuals which dominated the
institutions during the ?rst decade of the IFRS Foundation
between 2001 and 2011. An interesting ?nding is that each
Big4 ?rm has more in?uence in the bodies of the IFRS
Foundation than the user group as a whole, despite the
prominence formally attributed to users in the objective
of ?nancial reporting (Botzem, 2012, p. 157). This corrobo-
rates the argument by Young (2006), who reveals that
accounting standard-setters have constructed a ?ctitious
user as their benchmark for consideration in standard-set-
ting which does not necessarily bear great resemblance to
real-world users. Other studies have focussed on the due
process, which standard-setters routinely pass through
when creating or substantially revising accounting stan-
dards (e.g. IFRS Foundation, 2013). The due process serves
as an instrument to strengthen standard-setters’ legiti-
macy (Botzem, 2012, p. 122; Richardson & Eberlein,
2011) as it is intended to enable constituents to convey
their positions to the boards and to eliminate arbitrariness
in the boards’ decision-making. Recent studies raise doubts
on whether the boards’ decision-making is as technical as
the due process requirements suggest. For example
Lagneau-Ymonet and Quack (2012) analyse changes in
IFRS standards for ?nancial instruments during the ?nan-
cial crisis, when, due to political pressures from the Euro-
pean Union the board omitted the due process (for a
depiction of the events in autumn 2008 also cf. André,
Cazavan-Jeny, Dick, Richard, & Walton, 2009). Pelger
(2013) addresses the abandonment of stewardship as a
separate objective of ?nancial reporting in the 2010 IASB
conceptual framework and reveals, for example, a major
in?uence of the staff and signi?cant changes in content
during late ‘‘hidden’’ phases of the due process. In a similar
vein, Young (2003) exposes ‘‘rhetorics’’ used in due pro-
cesses by the FASB.
More generally, questioning the naturalness of stan-
dard-setters’ allegedly technical and rational decision-
making has been the focus of several studies with regard
to the FASB. For example, Young (1994) raises the issue
of the way topics appear on the agenda of the FASB.
Ravenscroft and Williams (2009) show inconsistencies in
SFAS 123R and on this basis raise doubts about the appro-
priateness of the information metaphor for underlying
?nancial reporting standard-setting decisions. Young
(2014) also studies US rules for share-based compensation
but focuses on how the FASB attempted to maintain a tech-
nical approach to this issue, despite its highly political
character. The FASB’s puri?cation strategy is revealed by
focusing on the boundaries between the technical and
the political in hearings on this topic in the US Congress.
Our work is related to Young (2014) in that we also con-
centrate on a speci?c due process. However, our concern
is not with the divide between technical/political activities
but the constructed nature of qualitative characteristics in
?nancial reporting.
Data
For our historical study, we examined of?cial pro-
nouncements, studies and other publications by profes-
sional institutions (AICPA) and research committees
(AAA) in the US. We also carried out a thorough manual
search of accounting journals for articles and other contri-
butions concerning qualitative characteristics. The latter
task was independently performed by both authors. The
journals examined were Journal of Accountancy [1960–
1985],
7
Journal of Accounting Research [1963–1980]
8
and
The Accounting Review [1960–1980],
9
the leading profes-
sional and academic accounting journals during that time.
We also considered many other contributions in the form
of monographs or edited books that were referenced in the
papers and which dealt with qualitative characteristics. In
total, we identi?ed 36 relevant articles, seven monographs,
two contributions from a collected edition and one state-
ment from an institution formally in charge of standard-set-
ting (APB) (a list is provided in Table 1 in the appendix). This
literature forms the basis on which we trace the construc-
tion of reliability.
For our (interpretative) study of the framework revi-
sion, we employ the process-tracing method, speci?cally
the case-centred variant of process-tracing which focuses
on outcome explanation (Beach & Pedersen, 2013, p.
12).
10
The aim is ‘‘to account for particularly interesting out-
comes’’ (Beach & Pedersen, p. 18), such as the replacement of
reliability, seeking to identify the causal process leading to
the outcome with the help of empirical material. We used
all material from the boards’ due process which was publicly
available. This includes, all documents of?cially published
by the IASB & FASB (Discussion Paper, Exposure Draft,
Framework), all relevant staff agenda papers distributed in
advance of the board meetings, where reliability or related
7
The Journal of Accountancy was founded in 1905 as the monthly journal
of the American Institute of Accountants (AIA), which was renamed in 1957
to the American Institute of Certi?ed Public Accountants (AICPA).
8
The Journal of Accounting Research was founded in 1963 as a private
journal published by the University of Chicago. In the early days there was
also a strong in?uence on the journal from accounting researchers from the
London School of Economics which, however, ceased in 1974 (cf. Dyckman
& Zeff, 1984, pp. 261 f., 283).
9
The Accounting Review was founded in 1926 as the quarterly journal of
the American Association of University Instructors in Accounting, the
predecessor of the American Accounting Association (AAA).
10
This approach is termed ‘‘detailed narrative’’ by George and Bennett
(2005, p. 210), while Langley (1999, p. 695 ff.) refers to this as a narrative
strategy of sensemaking. Other variants of process-tracing are more
formally linked to theory-testing or theory-building. Cf. Beach and
Pedersen (2013), George and Bennett (2005, chap. 10); Vennesson (2008),
pp. 232–239.
16 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
qualitative characteristics were discussed, and board meet-
ing minutes, available in written form for the FASB and as
audio documents for IASB and joint IASB & FASB meetings
since 2007, which were used to follow the actual conversa-
tions of board members.
11
In addition to the publicly avail-
able resources, IStaR newsletters which provide detailed
reproductions of IASB (and joint IASB and FASB) meetings
were used to analyse board meetings. All comment letters
submitted to the Discussion Paper and to the Exposure Draft
were analysed. The list of all sources which refer to board
meetings or documents published by the boards is included
in Table 2 in the appendix. Finally, interviews were con-
ducted with Stephen Cooper, Philippe Danjou, Jan Engström,
Jim Leisenring, Sir David Tweedie and Geoffrey Whittington,
who served as IASB board members during the time of the
framework revision, as well as with a senior member of staff
(Wayne Upton, former Director of Research of the IASB;
Chairman of the IFRS Interpretations Committee), which
adds further context and detail to the process of the replace-
ment of reliability.
12
The construction of reliability
In this section we outline the origins of reliability and
trace its use in the US accounting literature until the pub-
lication of SFAC 2. The very beginnings of bookkeeping
practices in Mesopotamia many thousands of years ago
(e.g. Mattessich, 1987) show that accounting has its origins
as a mnemonic device to overcome the limitations of the
human brain (Basu & Waymire, 2006). Thus, accounting’s
primary function was to inform the accountants them-
selves and to provide them with a ‘‘diary’’ (Ijiri, 1983, p.
75) of past transactions. Accounting devices in the ?rst set-
tlements also enabled interaction and cooperation
between inhabitants and thereby signi?cantly contributed
to early forms of the division of labour (Basu & Waymire,
2006). Trade was facilitated by keeping accounts which
could be veri?ed by third parties. ‘‘[V]eri?able transaction
records are a necessary part of the foundations that lie
beneath the exchange-supporting institutions upon
which capitalist economies have been built’’ (Basu,
Kirk, & Waymire, 2009, p. 910). As accounting originated
as a depiction of former transactions and events, it was
in particular the ‘‘hardness’’ (Ijiri, 1975, p. 36) of its
information which rendered it a useful tool for business
purposes.
Accounting characteristics in the early literature
Related to the idea of the ‘‘hardness’’ of transaction
records, the notion of ‘‘reliable’’ or ‘‘dependable’’ informa-
tion was mentioned in early contributions to US account-
ing literature. For example Sanders, Hat?eld, and Moore
(1938), in their study ‘‘A Statement of Accounting Princi-
ples’’, seek to ‘‘set forth the principles and rules of account-
ing’’ (p. xvi). They identify a ‘‘general principle’’ of
accounting in that ‘‘a reliable historical record must be
made of all transactions of the business’’ (p. 113). Similarly,
the 1948 revision of the AAA’s ‘‘A Tentative Statement of
Accounting Principles’’ articulates the idea that the reader
of ?nancial statements should be able to obtain informa-
tion ‘‘on which he may rely with con?dence’’ (AAA, 1948,
p. 339) and that ‘‘?nancial statements [. . .] must supply
dependable information’’ (p. 344).
Arguably, the most in?uential text of the early period of
theory-building in accounting was the monograph of Paton
and Littleton (1940). They identi?ed veri?able, objective
evidence, ensuring the ‘‘dependability of the accounts’’
(pp. 7, 18) as a central concept of accounting practice.
Objective evidence according to their understanding is
de?ned as evidence ‘‘impersonal and external to the per-
son most concerned, in contrast with that person’s unsup-
ported opinion or desire’’ (p. 19). Although they concede
that objectivity allows for gradation, at least convincingly
objective evidence is regarded as indispensable. This ?rst
understanding may be characterised as following the
motto of accounting practice, ‘‘no entry without documen-
tation’’, which stresses the unity of accounting and book-
keeping. It is in line with the traditional understanding of
accounting as a means of reporting and recording past
transactions for which veri?able evidence is available
(Ijiri, 1975, p. 29 f.). This evidence-based convention of
objectivity, thus, re?ects the roots of bookkeeping.
The SEC, the responsible government entity for the reg-
ulation of US ?nancial reporting, delegated standard-set-
ting authority to the Committee on Accounting Procedure
(CAP), a committee of the AIA (AICPA), in 1939. Despite
the SEC’s favourable view on the Paton and Littleton mono-
graph, which resonated very well with the SEC’s preference
for historical cost accounting (Zeff, 2007), and its encour-
agement of conceptual thinking, the Committee chose to
focus on developing short-term solutions to accounting
problems (Zeff, 1972, p. 136 f.). This ‘‘case-by-case’’
approach adopted by the CAP was criticised, not solely by
the SEC but also by practitioners, which ultimately resulted
in an AICPA Special Committee Report in 1958 making two
recommendations: ?rst, to replace the CAP with the
Accounting Principles Board (APB) and, second, to put
more effort into research to develop general accounting
principles (Zeff, 1972, p. 169 ff.; Zeff, 2001).
The ?rst research study commissioned by the APB was
Moonitz (1961). He stresses that ‘‘changes in assets and
liabilities [. . .] should not be given formal recognition in
the accounts earlier than the point of time at which they
can be measured in objective terms’’ (p. 41) and deems
11
The transparency policy of the IASB (e.g. Richardson & Eberlein, 2011)
might drive real conversations out of the of?cial meetings, and the
recording of our interviews might inhibit interviewees from expressing
their real views. While we acknowledge this general limitation, we did not
get the impression from the audio documents and interview transcripts
that there was any apparent reticence on behalf of actors or attempts to
conceal their views.
12
The (semi-structured) interviews were conducted between April 2012
and March 2014 by one of the authors. All interviews were tape-recorded.
Their duration was between 58 and 157 min. During all interviews
signi?cant time was devoted to the topic of reliability, while other topics
of the framework and standard-setting more generally were also part of the
interviews. Note that all interviewees provided their individual views,
which do not necessarily re?ect the of?cial opinion of the IASB. We gained
explicit written permission from six interviewees to use their quotes, while
the seventh interviewee granted implicit written permission by acknowl-
edging receipt of the statements but not reacting to a deadline for
corrections.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 17
the availability of objective evidence a necessary prerequi-
site for admitting information to the accounts. ‘‘Objective’’,
for Moonitz, means unbiased and in particular allows for
‘‘veri?cation by an independent investigator’’ (p. 42).
While the objectivity requirement was typically associated
with historical cost measurement, Moonitz himself was at
least open to considerations of current values (p. 29). In a
further study prepared for the APB, Sprouse and Moonitz
(1962), p. 53, argue
‘‘that ideally all assets (and liabilities) should be recog-
nised, as well as all changes that can be objectively
determined. In addition to those changes which result
from explicit transactions with other entities, this study
recommends the recognition of price-level changes [. . .]
provided that the evidence is objectively determinable.’’
Despite their overt support for current values, the two
authors still maintain the salience of objective evidence.
Both studies were rejected outright by the APB because
‘‘they are too radically different from present generally
accepted accounting principles for acceptance at this time’’
(Anonymous, 1962, p. 10). Thus, the APB was largely disil-
lusioned about expecting help from research endeavours
and again, like its predecessor, focussed on the individual
topics of accounting practice (Zeff, 1972, pp. 177 f., 186).
The contributions mentioned in this section (similarly
Arnett, 1961; McFarland, 1961) concur that objectivity
implies unbiasedness, i.e. that either accounting data or
the required evidence is not tainted by the subjective
intent of the accountant, and in particular they all stress
the necessity of accounting data being veri?able through
evidence. Generally speaking the objectivity requirement
thus serves as a means of excluding subjectivity or the sub-
jective judgment of the accountant. Note that this argu-
ment is used to justify both historical cost (Paton &
Littleton, 1940)
13
and current value accounting (Sprouse &
Moonitz, 1962). Although none of the sources substantiates
the notion of evidence, various examples indicate that it
refers to invoices, cheques, receipts or observable market
prices. Apparently, the requirement of objectivity main-
tained by veri?ability through evidence is closely related
to the audit function as the quoted examples epitomise
the evidence typically consulted by auditors. Paton and
Littleton (1940), for instance, regard the emphasis placed
on the availability of veri?able evidence for recorded trans-
actions as ‘‘one of the important contributions made by pro-
fessional auditing’’ (p. 18). Similarly, Arnett’s (1961) (p. 65)
and Moonitz’s (1961) (p. 42) reference to veri?cation by
independent/competent investigators can be interpreted as
allusions to the auditability of accounting information. This
link is further corroborated by Mautz and Sharaf (1961). In
their book, the authors attempt to ‘‘outline the theory of
auditing’’ (p. 1) and posit eight ‘‘postulates of auditing’’.
The ?rst postulate is that ‘‘?nancial statements and ?nancial
data are veri?able’’ (p. 42) because ‘‘unless ?nancial data are
veri?able, auditing has no reason for existence’’ (p. 43).
In this context it becomes apparent that evidence-based
objectivity as articulated in the early literature seems to
re?ect a living law of accounting. The concept of living
law proposes that social groups, such as professions, have
a pre-existing customary or moral ‘‘law’’ that governs
and regulates conduct within the group as well as the
behaviour of group members. Barden and Murphy (2010)
de?ne living law as ‘‘the set of those ways of acting that,
in a particular community, are admired and thought
appropriate to common types of situations’’ (p. 4) which
is to be distinguished from codi?ed positive or natural
law (Murphy, O’Connell, & Ó hÓgartaigh, 2013, p. 75 f.).
14
As outlined above, the requirement of objectivity through
veri?able evidence was intrinsic to accountants’ thinking
and goes back to the very roots of bookkeeping. Therefore,
even ‘‘before [it was] discovered to be common, [it was] in
fact common’’ (Murphy et al., 2013, p. 76).
The construction of reliability by accounting academia
In the literature of the following years we observe an
increasing academicisationof the debate on objectivity/ver-
i?ability, re?ecting the in?uence of other sciences on
accounting theory (Young, 2006) and the aspiration of
accounting researchers to gain status in US business schools
(Zeff, 1989, p. 169). These developments include ?rst a
rede?nition of objectivity from an evidence-based notion,
anchored in accounting and auditing practice, to a more
abstract consensus concept. This also involves the use of
analytical and statistical approaches in de?ning objectivity.
Second, explicit pronouncements about the objectives of
?nancial reporting with a focus on accounting’s usefulness,
in particular for investors and creditors, became domi-
nant,
15
questioning the central role of objectivity.
The ?rst development can be observed in Chambers
(1964), who suggests that rather than seeking objective evi-
dence, it is important in the ?rst instance to de?ne the
aspects for which evidence is sought. A shift can be noted
withChambers, as he adopts the consensus viewof objectiv-
ity using Popper’s de?nition of ‘‘intersubjective testability’’
and thus moves away from understanding objectivity as
based on evidence. Instead accounting information is
regarded as objective if multiple users assessing the same
issue come to similar conclusions. Relatedly, Ijiri and
Jaedicke (1966) see objectivity as ‘‘consensus among a given
group of observers or measurers’’ (p. 476). By re?ecting on
how consensus can be reached, they de?ne consensus as
depending onspeci?cs of the measurement process, namely
who carries out the measurement (i.e., experts or laymen),
properties of the measurement process (e.g. its complexity
13
Given the major impact of the Paton and Littleton monograph, which
was widely used in university accounting courses as well as read by
practitioners (Zeff, 2001, p. 147; Zeff, 2007, p. 51), the authors’ view on
objective evidence as a crucial characteristic of accounting had an effect on
several generations of US accountants. The cost principle, which was
justi?ed by reference to objectivity, remained the clear preference of the US
SEC at least until 1972 (Zeff, 2007).
14
For a fuller account of the concept of living law cf. Murphy et al. (2013)
who argue that stewardship/accountability constitutes a living law of
accounting.
15
While Paton and Littleton (1940) were not concerned with usefulness,
Moonitz (1961), p. 4, described a general notion of the usefulness of
accounting, albeit cautioning against any narrow interpretation with regard
to one speci?c group, e.g. investors.
18 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
or howwell its steps are de?ned) and, ultimately, properties
of the object which is measured. They suggest measuring
objectivity or ‘‘consensus’’ by using the variance of the out-
comes of different measurers measuring the same property
while using the same measurement process (p. 476). This
introduction of a statistical de?nition nicely illustrates the
ingress of statistical thinking into accounting theory at that
time. Other contributions similarly provide analytical
(mathematical) de?nitions of the concept (e.g. McDonald,
1967, p. 670 ff.; Ashton, 1977).
Vatter (1963), discussing Moonitz (1961), combines a
scienti?c view of accounting with a focus on usefulness.
His understanding of objectivity relates to an empirical (sci-
enti?c) de?nition, in that he does not consider objectivity as
a postulate in the choice of acceptable evidence but rather
sees it as an inherent quality of the measurement process
itself. In his viewobjectivity ‘‘must be maintained by [a pre-
determined and well de?ned measurement] methodology’’
(p. 190). Objectivity, however, cannot be used as a postulate
to, for example, ‘‘rule out the recognition of unrealized
gains’’ (p. 191). The latter decision, that is ‘‘to separate those
elements that are relevant to meeting the needs of those
who use reports’’ (p. 191) is a matter of what Vatter calls
‘‘doctrine’’, i.e. the rules of what tomeasure andhowtomea-
sure it, guided by the usefulness of the information to the
readers of a company’s reports. He therefore criticises Moo-
nitz’s approach and demands an empirical method guided
by the usefulness criterion: ‘‘In a measurement methodol-
ogy the test of principles is their usefulness in making pre-
dictions, not the degree to which they ?t hypotheses’’ (p.
196). This foreshadows the later turn in US accounting
research towards market-based studies.
A de?nite break with the predominant requirement of
objectivity, as well as objective evidence, can be found in
the work of Fertig (1966). He summarises that
‘‘the accountant ?nds himself between con?icting in?u-
ences: the need for veri?able evidence supporting the
measurement on the one hand, and the need to supply
useful accounting data to the ?nancial statement reader
on the other’’ (p. 142).
This observation leads him to conclude that the most
important criteria of accounting information are relevance
and objectivity. He criticises Paton and Littleton for not
allowing ‘‘data other than transaction data [for it is] not
suf?ciently veri?able to justify recognition in ?nancial
statements’’ (p. 141) and rather endorses the view held
‘‘by the majority of recent writers that progress in
accounting is made by admitting to the accounts data
having lesser degrees of objectivity (veri?ability) [. . .]
to improve the usefulness of accounting data to deci-
sion-makers’’ (p. 140).
Fertig concludes that the degree of objectivity required
crucially hinges on the purpose of accounting and there-
fore explicitly disparages the strong veri?ability require-
ment: ‘‘accountants must not defend current practice on
grounds of veri?ability of evidence’’, as in the light of rele-
vance considerations ‘‘veri?ability is a necessary but
clearly insuf?cient criterion for admitting accounting data
to the accounts’’ (p. 148).
In 1964, the AAA appointed a committee to devise an
‘‘appropriate conceptual framework for a coordinated
statement of accounting theory’’ (AAA, 1966, p. v) which
two years later resulted in ‘‘A Statement of Basic Account-
ing Theory’’ (commonly referred to by its acronym: ASO-
BAT). In the initial document (AAA, 1964), objectivity is
mentioned as one of the concepts for which further analy-
sis is required. Interestingly, objectivity is on the one hand
explicitly de?ned following a consensus view: ‘‘objectivity
is social consensus – an event or datum is objective when
there is no disagreement or variation in interpretation
among all the persons who view it’’ (AAA, 1964, p. 430).
On the other hand, the document poses the question of
‘‘how much evidence is required to support an objective
judgment?’’ This parallelism of evidence-based and con-
sensus-oriented understandings nicely illustrates the
ambiguity around the concept of objectivity at that time,
re?ecting both the traditional practice perspective as well
as the concept seen ‘‘through the eyes of academics’’.
ASOBAT was published in 1966 and by then the notion
of ‘‘objectivity’’ had been dropped. Instead ASOBAT articu-
lated ‘‘four basic standards [. . .] as providing criteria [. . .] in
evaluating potential accounting information’’ (p. 7): Veri?-
ability, freedom from bias, relevance and quanti?ability.
The de?nition of veri?ability combines the consensus view
with the evidence-based notion: at ?rst, it is stated that
veri?ability ‘‘requires that essentially similar measures or
conclusions would be reached’’ by multiple quali?ed per-
sons examining the same data (p. 7). The study further
details that veri?ability is ‘‘primarily concerned with the
availability and adequacy of evidence attesting to the
validity of the data being considered’’ (p. 10) and that ‘‘ver-
i?ability is a necessary attribute [. . .] to make possible a
reliance [on accounting information]’’ and also ‘‘in some
degree, to make possible the presentation of an indepen-
dent accountant’s opinion’’ (p. 10; emphasis added). Free-
dom from bias implies that ‘‘facts have been impartially
determined and reported’’ and is considered a separate
quality, as even accounting information with ‘‘high degrees
[. . .] of veri?ability [may] be biased in favor of some par-
ties’’ (p. 11). Despite dropping the term ‘‘objectivity’’, the
requirements of veri?ability and freedom from bias epito-
mise the de?nition of objectivity from the earlier litera-
ture. With reference to the relative gain in the
importance of usefulness unveiled in the literature above,
ASOBAT reveals a clear dominance of the relevance crite-
rion. Although the ‘‘process of judging accounting informa-
tion should involve a combined and simultaneous
consideration of all four standards’’ (p. 10),
‘‘[t]he standard of relevance is primary among the four
recommended standards. Although not suf?cient as a
sole criterion, it represents a necessary characteristic
for all accountinginformation. None of the other standards
has this position of primacy’’ (p. 9; emphasis added).
Thus, ASOBAT is an important step in that, ?rstly, the
term ‘‘objectivity’’ was replaced by other notions which
presumably kept its meaning and, secondly, due to the
clear exposition of a superiority of relevance.
We still ?nd a close proximity between the requirement
of veri?ability and auditing. In 1969 the AAA’s Executive
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 19
Committee installed a ‘‘Committee on Basic Auditing Con-
cepts’’ to ‘‘investigate the role and function of auditing’’
(AAA, 1973, p. 1). In 1973, the Committee published ‘‘A
Statement of Basic Auditing Concepts’’ (ASOBAC), wherein
it de?ned auditing as a ‘‘systematic process of objectively
obtaining and evaluating evidence regarding assertions
about economic actions and events [. . .]’’ (p. 2). It further-
more analysed previous literature as to its implications for
auditing. Referring to the qualitative characteristics named
in ASOBAT, ASOBAC states that auditing is (in the end)
‘‘most concerned with freedom from bias’’ but that veri?-
ability is equally important because ‘‘veri?ability is an
attribute that accounting information must possess before
it can be subject to audit investigation’’ (p. 3). It sees an
important link between veri?ability and auditing in ASO-
BAT’s statement that ‘‘some means [needs to] be available
to assure users with varied interests that the information is
dependable’’ which may ‘‘be met by the use of evidence
and procedures that can be veri?ed’’ (p. 10 in ASOBAT, p.
3 f. in ASOBAC). These pronouncements are reminders of
the traditional notion of veri?ability. However, ASOBAC
also explicitly points to usefulness in stating that ‘‘the
function of auditing is to assist the user in [. . .] evaluating
the quality of the information being communicated’’ (p. 9).
While it is the task of accounting to develop principles
which lead to useful reports, auditing takes these generally
accepted accounting principles as given and uses them to
assess the ‘‘degree of correspondence between that which
is being audited and established criteria’’ (p. 7). The latter
quotes reveal that notions of usefulness trickle down to
the discourse about the role of auditing which is not seen
simply as stating the correctness of the report, but in its
ability to assist user assessments.
Following the efforts of the AAA, the APB also developed
a framework of underlying accounting objectives (charac-
teristics) and assumptions in the second half of the
1960s.
16
Five years of deliberations resulted in the ?rst doc-
ument regarding this matter published by an institution for-
mally in charge of developing accounting standards, APB
Statement No. 4 (1970). While it was just a statement, not
an (mandatory) opinion, it was the ?rst of?cial pronounce-
ment acknowledging the primary role of the usefulness
objective and the importance of relevance (Staubus, 1972).
Veri?ability and neutrality, which in terms of de?nition lar-
gely resemble veri?ability and freedom from bias according
to ASOBAT (APB, 1970, par. 90–91),
17
are placed alongside
relevance, understandability, timeliness, comparability and
completeness as two of a total set of seven ‘‘qualitative
objectives’’. Like ASOBAT, APB Statement No. 4 emphasises
the major importance of relevance, being ‘‘the primary qual-
itative objective’’ (APB, 1970, par. 88). It is interesting to
note that while we ?nd veri?ability and neutrality drafted
as qualitative objectives taken from the previous literature,
APB Statement No. 4 contains a separate section on ‘‘Reli-
ability of Financial Statements’’. Here it is stated that gener-
ally the ‘‘achievement of qualitative objectives [. . .]
enhances the reliability of ?nancial statements’’ (par. 107),
but also – as an allusion to the audit function – that ‘‘users
of ?nancial statements look to the reports of independent
auditors to ascertain that the ?nancial statements have been
examined by independent experts’’ (par. 109). Again the ref-
erence to the interests of users with regard to the framing of
auditing activities is apparent.
According to our ?ndings, Ijiri and Jaedicke (1966) and
Snavely (1967) ?rst introduced the term ‘‘reliability’’ as
an individual characteristic. Snavely (1967), when devel-
oping his own systematisation of characteristics of ?nan-
cial reporting, saw reliability as a separate criterion
comprising the requirements of veri?ability and freedom
from bias. His de?nitions of both terms are based on the
respective de?nitions in ASOBAT (Snavely, 1967, p. 228).
Thus, his understanding of reliability can be regarded as
just a different name for the notion which previously was
labelled objectivity. In contrast, Ijiri and Jaedicke (1966)
developed a reliability notion that explicitly goes beyond
objectivity. They saw a further dimension of reliability in
the aspect of how well a measure serves as a predictor of
a quality of interest for the user (p. 478). This dimension,
in combination with their above-described understanding
of objectivity, forms their concept of reliability. As an illus-
tration, they employ the example of a barometer, which is
not only expected to measure the correct atmospheric
pressure (objectivity), but is also assessed by how well
its barometer reading is able (i.e., can be used) to predict
future weather (p. 478). Thus, reliability is de?ned with
respect to the interest of the user. To measure the latter
quality of reliability they suggest using the bias of an
accounting measure when depicting the correct outcome
(p. 481).
The report of the Trueblood Committee, published in
1973, was the ?rst pronouncement of a professional or
research association to mention reliability as a separate
qualitative characteristic of accounting information. It took
APB Statement No. 4 as a starting point (Zeff, 1972, p. 227
f.) and identi?ed seven qualitative characteristics that
information presented in ?nancial statements should pos-
sess ‘‘to satisfy users’ needs’’
18
(p. 57): relevance and mate-
riality, form and substance, reliability, freedom from bias,
comparability, consistency and understandability (AICPA,
1973, p. 57f.). Surprisingly, despite veri?ability being men-
tioned in all other publications up to that date as a major cri-
terion, the Trueblood Report did not include it. Reliability is
not clearly de?ned in abstract terms but treated as an intrin-
sic quality of information, i.e., ‘‘reliability varies with the
nature of the information’’ (p. 58). The further explanation
of the concept, however, indicates that reliability deals with
similar aspects which were subsumed under the heading of
veri?ability in the previous literature, i.e., the uncertainty in 16
The major motivations for this endeavour lay in challenges for the APB
arising from accounting scandals, widely debated in the ?nancial press, and
the rising criticism by the SEC concerning missing uniformity or at least
comparability of accounting practices (Zeff, 1972, pp. 186–192; Gore, 1992,
pp. 14–18).
17
It is noteworthy that the description of veri?ability in APB Statement
No. 4 does not feature any reference to evidence, but is described purely in
line with the academic consensus de?nition (par. 90).
18
The Trueblood report, which was commissioned by the AICPA, very
clearly articulates the user orientation in ?nancial reporting. This followed
the spirit of ASOBAT. One in?uential member of the AAA Committee that
drafted ASOBAT, George Sorter, Professor in Chicago, was the Research
Director of the Trueblood Committee (Zeff, 1999, p. 99).
20 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
information resulting from subjectivity and judgments in
accounting. It is also stated that
‘‘separating fact from interpretation and [. . .] disclosing
uncertainties and assumptions should increase the
value of ?nancial statements by indicating the inherent
differences in reliability to various pieces of informa-
tion’’ (p. 58).
Interestingly, this recommendation of merely disclosing
uncertainty does not exclude subjective information from
being reported, as would be the case if the former de?ni-
tion of veri?ability in a stricter sense was followed.
19
Summarising the literature before SFAC 2, the tradi-
tional notion of objectivity was partly rephrased from its
evidence basis to a consensus de?nition, a more academic
(and abstract) perspective. More signi?cantly, rooted in the
usefulness idea, concerns of relevance were rising in
importance, relegating the status of objectivity. The in?u-
ence of these ideas, however, went beyond the remit of
mere academic discussions in accounting journals and
study reports. Accounting practice had still not managed
to establish comparability in ?nancial reports, and incon-
sistent standards arising from the ‘‘dominant ?re-?ghting
approach’’ of the APB were made responsible for the ?exi-
ble and partly fraudulent use of accounting during the
1960s (Gore, 1992, pp. 14–18). Discussions among the rep-
resentatives of accounting ?rms led to the conclusion that
a user orientation, which had already been pronounced in
ASOBAT and APB Statement No. 4, might be a way towards
consistent practices (Gore, 1992, p. 21). Moreover, user ori-
entation was regarded as an opportunity to hinder inter-
vention by the SEC or the government in accounting
standard-setting. Indeed, the user of ?nancial reporting
was constructed by the accounting profession (Young,
2006) by relying on the ideas generated by academics
(Miller, 1974, p. 19 f.).
20
Prominent professionals, such as
Trueblood, partner at Touche, Ross & Co, seized the opportu-
nity that lay in such a view, noting that
‘‘it seems unlikely that basic concepts of accounting can
ever be developed without taking into consideration
developments in other ?elds such as the law, econom-
ics, mathematics, and the behavioural sciences’’
(Trueblood, 1966, p. 189).
In this way the (abstract) ideas of academic thinkers in
accounting, developed by recourse to other sciences, were
legitimised by the profession and were thus able to in?u-
ence the conceptual period of standard-setting in ?nancial
reporting that began in the 1970s. The higher abstraction
of their ideas was sought by standard-setters and the
upper reaches of accountants as a panacea to ?ght incon-
sistency of standards and practices. Note, however, that
these conceptual deliberations did not necessarily cause
actual accounting practice to change. Instead, what chan-
ged were the terms used in the discourses about account-
ing, with veri?ability being conceptualised academically
based on consensus, instead of evidence. The increasing
conceptual focus on relevance was markedly detached
from the practitioner understanding minted by actual
bookkeeping/accounting practice with its prevalent con-
vention of objectivity. This discrepancy is illustrated by
the reaction of ?nancial statement preparers to the
changes. Apparently, they did not feel very comfortable
with the new terminology (Armstrong, 1977; Burton,
1978), thus showing early signs of resistance against the
‘‘capture’’ of accounting practice by academics. The follow-
ing section shows how the debate in the literature was
re?ected in the conceptual framework of the FASB.
Reliability in SFAC 2
While SFAC 1 (1978) de?nes the objectives of (US)
?nancial reporting, SFAC 2 deals with qualitative charac-
teristics. According to SFAC 2.32, and simply repeating
the objective de?ned in SFAC 1, the most important quality
of information is its usefulness for capital providers in
making investment, credit and similar decisions. SFAC 2
then details further qualities that make information useful
(SFAC 2.1). Relevance and reliability are de?ned as the two
primary qualitative characteristics (SFAC 2.15). While the
antecedents of the framework stated a dominance of rele-
vance over other considerations, SFAC 2.42 sees both as
equally important as
‘‘information may possess both characteristics to vary-
ing degrees. It may be possible to trade relevance for
reliability or vice versa, though not to the point of dis-
pensing with one of them altogether.’’
Reliability is de?ned as ‘‘the quality of information that
assures that information is reasonably free from error and
bias and faithfully represents what it purports to repre-
sent’’ (SFAC 2, p. 6). According to SFAC 2.59 reliability is
achieved by guaranteeing that accounting information is
a faithful representation of what it purports to represent,
‘‘coupled with an assurance for the user, which comes
through veri?cation, that it has that representational qual-
ity.’’ Thus, representational faithfulness and veri?ability
are equally important components of reliability, supple-
mented by the related concept of neutrality (SFAC 2.62).
21
In line with earlier pronouncements (e.g. ASOBAT; APB
Statement No. 4), the components of veri?ability and neu-
trality are, thus, also included in the reliability notion of
SFAC 2. Veri?ability in SFAC 2 (p. 6) is de?ned as
‘‘the ability through consensus amongst measurers to
ensure that information represents what it purports to
represent or that the chosen method of measurement
has been used without error or bias.’’
19
Freedom from bias (‘‘which may be characterised as neutrality or
fairness’’) is altogether drafted similarly to the documents mentioned
above as ‘‘there should be no purposeful bias favoring any group’’ (p. 58).
20
Staubus (1972, p. 37), crediting academics’ previous works as having
enabled the progress in this document, asserts that ‘‘until the publication of
APB Statement No. 4, there has been precious little evidence that usefulness
has been a conscious objective of the profession.’’
21
Neutrality is de?ned as ‘‘absence in reported information of bias
intended to attain a predetermined result or to induce a particular mode of
behaviour’’ (SFAC 2, p. 6). It therefore loosely resembles the postulate in the
earlier literature of a general absence of bias. SFAC 2.91 also lists
conservatism as a component of reliability.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 21
This de?nition closely resembles the consensus
approach in de?ning objectivity by Ijiri and Jaedicke
(1966). Representational faithfulness and veri?ability
occupy the same level of importance within the hierarchy
of qualitative characteristics (SFAC 2, p. 13). SFAC 2.59
explicitly underlines the necessity of veri?ability by stating
its function to provide a ‘‘signi?cant degree of assurance
that accounting measures represent what they purport to
represent’’. This necessity of veri?ability also places the
reliability notion of SFAC 2 in line with the earlier pro-
nouncements and discussions in the literature. Following
the academic discourse, the requirement of evidence does
not form part of the veri?ability description in SFAC 2.
Faithful representation is de?ned in SFAC 2.63 as the
‘‘correspondence or agreement between a measure or
description and the phenomenon it purports to represent’’
with phenomena being ‘‘economic resources and obliga-
tions and the transactions and events that change [them]’’.
Staubus, who ?rst developed the notion of the user orien-
tation of ?nancial reporting in terms of a focus on future
cash ?ows from an investor’s perspective (cf. Staubus,
1999; Zeff, 2013, p. 22), was the only author in the articles
analysed who had previously mentioned a similar de?ni-
tion. He explicitly refers to reliability as permitting ‘‘users
of a datum [accounting information] con?dently to depend
on it as an accurate representation of the speci?c phenom-
enon it purports to represent’’ and also refers to a ‘‘close
‘correspondence’ between such information and ‘reality’’’
(Staubus, 1976, p. 277).
22
Based on the descriptions in SFAC 2 it is dif?cult to
operationalise the term ‘‘faithful representation’’. First, it
seems that faithful representation primarily pertains to
measurement problems (SFAC 2.65 f.), i.e. faithful repre-
sentation requires that an accounting measure correctly
measures the value to be measured, while bias, for exam-
ple, may lead to an over- or understatement of the ‘‘cor-
rect’’ measure. Second, however the de?nition in SFAC
2.63 contains a more abstract meaning of faithful represen-
tation in the sense of ‘‘correctly depicting economic real-
ity’’. Intuitively, according to the asset/liability view
which underlies the conceptual framework, the term ‘‘phe-
nomenon’’ may be interpreted as a resource that bears
future bene?ts or obligations (Bullen & Crook, 2005, p. 6).
In that sense, faithful representation would describe the
predictive ability of information with regard to future ben-
e?ts and obligations, similar to Ijiri and Jaedicke’s (1966)
idea of reliability. However, SFAC 2.60-62 explicitly rejects
this ‘‘effectiveness’’ interpretation of reliability. This shows
that SFAC 2 tries by all means to uphold a strict distinction
between questions of relevance and faithful representa-
tion. Which aspects/issues of economic reality are to be
depicted in ?nancial statements is considered solely a mat-
ter of relevance (Sterling, 1985, p. 30 f.; Solomons, 1986, p.
94 f.), while faithful representation – in SFAC 2’s diction –
exclusively deals with the quality of the depiction of the
(economic) phenomenon to be presented. SFAC 2.69 f. try
to illustrate this meaning with two examples: the aptness
of a spelling test as means of measuring one’s ability to
spell correctly and the aptness of a purchase price index
to express the purchasing power of one single individual.
These examples are initially reminiscent of the effective-
ness interpretation of reliability already explicitly
excluded from SFAC 2.61. In the context of SFAC 2’s corre-
spondence idea however, these examples are meant to
illustrate the aptness of a process to measure the attribute
previously chosen under considerations of relevance
(Solomons, 1986, p. 95).
23
From objectivity to reliability: some re?ections
In our analysis we have shown that the idea of reliabil-
ity according to SFAC 2 contains aspects of what was orig-
inally labelled ‘‘objectivity’’ in the discourse around
qualitative characteristics of accounting information.
Objectivity can therefore be regarded as a predecessor of
reliability in SFAC 2. However, the notion of objectivity
was subject to change even in the decades prior to SFAC
2. While objectivity of accounting data was a predominant
requirement historically, this was gradually weakened due
to the increasing importance of the concept of ‘‘relevance’’
of accounting data, or usefulness considerations more gen-
erally. This development mirrors a shift in the underlying
accounting objective. Historically, accountability was
accounting’s original purpose or ‘‘root metaphor‘‘ (Ijiri,
1975; Murphy et al., 2013). With the rise of the corporation
and its ?nancing being increasingly dominated by capital
markets, the role of accounting changed. Regulation in
the US, from the 1930s, was a further impetus to the
increasing importance of the user of ?nancial statements
in terms of investors and other capital providers
(Macintosh, 1999). The accountability notion was to some
extent replaced by an information metaphor in the 1960s
and 1970s (Ravenscroft & Williams, 2009; Young, 2006).
While pursuance of an accountability purpose meant that
?nancial statements gave factual and veri?able accounts
of (the outcomes of) past transactions, under the new
information usefulness regime the proposed role of
accounting data was to provide input to economic decision
models allowing investors to assess future cash ?ows
(Ravenscroft & Williams, 2009, p. 773 f.). The rise of an
explicit objective of ‘‘decision usefulness’’ factually
required the de?nition of attributes which make ?nancial
information useful (AAA, 1977, p. 16). Considerations of
relevance – the concept which ‘‘grew out of, and is depen-
dent upon, the decision-usefulness objective’’ (AAA, 1977,
p. 16) – were thus granted increasing importance in frame-
works and other contributions dealing with the qualitative
characteristics of accounting information.
22
Note that Staubus (1970) explicitly built on the reliability de?nition of
Ijiri and Jaedicke (1966).
23
It remains questionable whether the postulated difference between
relevance and faithful representation can always be maintained (cf. also
Wüstemann, 2011). The description of faithful representation in SFAC 2
already indicated that a strict division between relevance and faithful
representation is impossible. SFAC 2.80 for instance admits that a lack of
completeness (a sub-characteristic of faithful representation) may also
reduce the relevance of the information. SFAC 2.71 acknowledges that the
question of whether information is representationally faithful depends on
the context for which it was designed, i.e., the context it is used in and the
users addressed.
22 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
It is interesting that SFAC 2 avoids the term ‘‘objectiv-
ity’’. One explanation might be that in light of rising useful-
ness concerns, the classical construct of objectivity, as
shaped in particular by Paton and Littleton (1940), was
no longer seen as an appropriate quality of ?nancial
reporting. Our historical tracing at least suggests that
objectivity was regarded as one of a multitude of charac-
teristics, while the superiority of this property had no
longer been suggested since the early 1960s. A further
explanation might be found in the background of a thread
of literature that (at least partly) deals with the philosoph-
ical implications of the notion of objectivity (e.g. Burke,
1964; Wagner, 1965; Wojdak, 1970). Wojdak (1970), for
example, tries to develop his understanding of objectivity
in accounting from a dictionary de?nition of objectivity
as ‘‘having a separate independent existence, i.e., indepen-
dence from the human consciousness’’ (p. 88). This think-
ing about objectivity invokes various philosophical
problems because it explores the nature of the relationship
between depictions in ?nancial reporting data and the
object, or more pointedly the ‘‘reality’’ they are supposed
to depict. SFAC 2.158 hints at such a reason for the demise
of objectivity.
24
It explicitly justi?es using ‘‘veri?ability’’
instead of ‘‘objectivity’’ because of objectivity’s various
meanings and philosophical implications. This may already
have been the reason for dropping the term in ASOBAT,
which Sterling (1967) commends ‘‘for avoiding this quag-
mire [. . .as objectivity. . .] has gone through several reversals
in philosophy and is highly confused’’ (p. 100). However,
note that the initial use of the term, for example by Paton
and Littleton (1940), was very pragmatic and probably not
associated with philosophical dif?culties by practitioners,
but seen as an indigenous component of an accountant’s
work. It was not until academia took up the term ‘‘objectiv-
ity’’ in the debates about FAT in the 1960s that alternative
interpretations were raised which ultimately fostered the
term’s dismissal in SFAC 2.
Considering the avoidance of objectivity, it is remark-
able that a construct which might be equally problematical
regarding its philosophical interpretations, ‘‘faithful repre-
sentation’’, was introduced. In using the word ‘‘correspon-
dence’’ SFAC 2.63 assumes a correspondence-relationship
between the object that is to be depicted in ?nancial state-
ments and the actual depiction. This underlying assump-
tion follows a correspondence idea of truth, i.e., true are
statements that correspond to facts independent from or
outside of the subject. According to this understanding,
depictions, descriptions and measures in ?nancial account-
ing correspond to a reality external to, and independent of,
the accountant (Solomons, 1978, p. 72; Chua, 1986, p. 606;
Tinker, 1991, p. 297 f.; Hines, 1991, p. 315 f.), which is to be
captured in accounting. This view was, for example, pro-
moted by Solomons who sees accounting’s task as present-
ing an external economic reality and illustrates this idea
with the use of analogies such as the depiction of a section
of land on a map (Solomons, 1986, p. 245) or the undis-
torted conveyance of ideas by means of a telephone
(Solomons, 1991, p. 288). Sterling (1985, pp. 24, 60 f.) also
describes the numerical and verbal depictions in ?nancial
statements as symbols (noumena) that represent ‘‘real’’
phenomena outside of the accountant. Such metaphors
and wordings in the description of SFAC 2 again provoke
debate around the philosophical nature of the relationship
between ?nancial accounting information and its objects.
This can also be observed in a more recent strand of critical
interpretive literature. These contributions in general chal-
lenge the interpretation of a correspondence between a
reality (of ?rm value, transactions, etc.) and the depictions
in ?nancial reports for lacking an appropriate consider-
ation of the socially constructed nature of accounting
information and the actual interplay between accountant,
user, accounting standards and the objects of accounting
(Alexander & Archer, 2003; Lee, 2006a, 2006b;
Macintosh, 2003, 2006, 2009; Macintosh et al., 2000;
Mattessich, 2003, 2009; McGoun, 1997; McKernan, 2007;
Williams, 2006).
The exact manner in which faithful representation is
drafted in SFAC 2, however, re?ects a pragmatic implemen-
tation of the concept (Kinserdal, 2011). SFAC 2.63 restricts
the correspondence idea by employing the formulation
‘‘purports to represent’’ and the dilution ‘‘or agreement’’
(Kinserdal, 2011, p. 13). For example, it requires a user
who is reasonably informed (SFAC 2.40, 41, 64), i.e., some-
one who knows the rules underlying the preparation of
accounts and who therefore also knows the limitations
and degree of depiction of ‘‘economic reality’’ that are pos-
sible in accounting. Nor does SFAC 2.72 require certainty or
precision, and completeness is limited ‘‘within the bounds
of what is material and feasible’’ (SFAC 2.79). Furthermore,
SFAC 2.65 f. allows for different degrees of representational
faithfulness. These limitations underline the model charac-
ter of ?nancial statements, i.e., ?nancial statements deliver
only an abstract image of ‘‘economic reality’’ (SFAC 2.76;
Solomons, 1978, p. 70 f.).
The origin of the concept of faithful representation can
be traced back to the in?uence of David Solomons, who
drafted SFAC 2 for the FASB (Gore, 1992, p. 111 f.; Zeff,
2013, p. 78). Solomons, as Kinserdal (2011, p. 17) puts it,
‘‘borrows ideas and wording from Sterling, but used the
concept [. . .] in a fairly pragmatic way.’’ Sterling, consider-
ing himself an ‘‘empiricist’’ (Sterling, 1988), was led by the
idea that accounting should abstain from its conventions
and become based on (empirical) ‘‘laws’’. Kinserdal
(2011, p. 11 f.) traces faithful representation back to Ster-
ling’s concept of ‘‘verity’’, i.e. ‘‘conformance with reality’’,
which understands economic reality as consisting of eco-
nomic phenomena with (real-world) empirical referents.
It seems that Sterling was driven by the in?uence of the
empirical sciences on the ?eld of accounting to become
‘‘scienti?c’’ or ‘‘a real science’’, which suggests that the
concept of faithful representation originally stems from
the natural sciences (Kinserdal, 2011, p. 12; also
Wüstemann, 2011). It is noteworthy that the single author
we identi?ed who introduced a concept of faithful repre-
sentation in the literature on qualitative characteristics
before SFAC 2 (Staubus, 1976), was appointed as Director
24
APB Statement No. 4 in the description of veri?ability already
emphasises that ‘‘measurement cannot be completely free from subjective
opinions and judgment [since] the process of measuring [. . .] must use
human agents and human reasoning and therefore is not founded solely on
an ‘objective reality’’’ (par. 90).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 23
of Technical Activities at the FASB in 1976 (Anonymous,
1976, p. 26). Staubus worked on the framework project
and brought Solomons to the FASB (Gore, 1992, p. 112).
Thus, it was possibly his idea in combination with Ster-
ling’s thoughts that in?uenced Solomons, who developed
and ‘‘coined’’ (Zeff, 1999, p. 109) the term ‘‘faithful
representation’’.
25
The introduction of faithful representation can be
linked to the increasing in?uence and promotion of current
value accounting at the time of SFAC 2’s development.
While models of income determination in the wake of
the development of theoretical bodies of FAT were
grounded in the practice of historical cost accounting, i.e.
cost-measurement and amortisation through allocation to
the periods of the asset’s useful life, starting around the
1960s, prominent accounting scholars such as Sterling
(1970) and Chambers (1967) began promoting the use of
current value based income models. Regardless of differ-
ences in the details of their propositions, their common
notion was that ‘‘?nancial reporting information prepared
under existing reporting rules is meaningless’’ (Ball &
Brown, 2014, p. 3). Current value accounting models were
compatible with an accountability metaphor as they
merely shifted management’s accountability from the cre-
ation of transaction-based pro?t to market value
(Ravenscroft & Williams, 2009, p. 773). However current
values resonated particularly well with the rising informa-
tion metaphor in accounting, as indicated by their favour-
able consideration in ASOBAT and the Trueblood Report
(AAA, 1977, p. 13; Zeff, 1999, pp. 97, 100).
26
In the course
of these developments, historical cost accounting practice
was also criticised for its subjectivity, for example in requir-
ing judgments for determining an asset’s useful life as a
basis for cost allocation. Market values in the arguments of
their proponents not only seemed to ?t the decision pro-
cesses of valuation oriented users, they also were objecti?ed
through the market values of assets. While proponents of
current value rooted their argument in its superior objectiv-
ity (Georgiou & Jack, 2011, p. 316; also cf. Parker, 1975), they
were aware that the term ‘‘objectivity’’ had traditionally
been used to promote historical cost:
‘‘I suspect that objectivity to accountants is nothing
more than an emotional response to suggestions for
other (non-cost) valuation schemes and we would do
well to abandon the term’’ (Sterling, 1967, p. 101).
In Sterling’s view, market values, in accordance with the
science-based idea of a faithful representation of external
empirical referents, allow the measurement of economic
phenomena relevant to users of ?nancial statements.
It can thus be concluded for the ?rst part of our anal-
ysis that introducing the concept of reliability in the draft-
ing of SFAC 2 constituted a compromise between the
traditional idea of objectivity re?ected in the characteris-
tic of veri?ability, deeply entrenched in accounting prac-
tice but rede?ned as the academics’ consensus concept,
and more recent academic considerations regarding the
faithful representation of economic phenomena as part
of economic decision models with a focus on valuation
decisions by users. This compromise was necessary
because, in particular, preparers of ?nancial accounts
were opposed to any strong move away from established
practices and towards current value accounting. Gore
(1992), for example, describes the efforts by Mautz, an
opponent of current values, who actively stirred discon-
tent among practitioners as he anticipated that the FASB
would move in this direction. Burton (1978) reports that
in a meeting of FASB members with practitioners in
1978, it became clear that preparers were strongly
opposed to current values in ?nancial statements, but
wanted to maintain the character of ?nancial statements
as being based on objective, veri?able evidence. These
positions by preparers were re?ected in SFAC 2, both in
veri?ability being taken up as one core component of reli-
ability and by reliability’s equal standing with rele-
vance.
27
All in all, reliability thus aligned the new,
academically developed theoretical construct of faithful
representation with (the consensus-based version of) exist-
ing practice notions of veri?ability.
Developments prior to the framework revision
After the publication of SFAC 2 in 1980 the FASB contin-
ued with its work on the conceptual framework (Gore,
1992). The concept statement on measurement (SFAC 5),
published in 1985, proved to be the most contested aspect
and the FASB was not able to agree on a preferred mea-
surement approach, but eventually just listed different
concepts (Zeff, 1999, p. 114). Again this was a compromise
due to the strong opposition of preparers against current
values (Zeff, 1999, pp. 115, 117, 123). Thus, it can be noted
that the efforts by prominent academics, cited above, to
revolutionise accounting by altering measurements in the
direction of current values were eventually unsuccessful
in the 1980s (e.g. Solomons, 1986, p. xiii), despite the intro-
duction of faithful representation in SFAC 2. It was only
during the 1990s that fair value measurement became
more popular in standard-setting, particularly based on
the work of G4+1, a collaboration of the standard-setters
from the US, UK, Canada, Australia, New Zealand and the
IASC (Street, 2005). Fair value was initially adopted not
on the basis of academic theories, but because of pragmatic
concerns by standard-setters about ?nancial derivatives,
which have very small or no historical costs (Georgiou &
Jack, 2011, p. 317). This was the impetus which later led
G4+1 to adopt a long-term vision of fair value measure-
ment in other ?elds of ?nancial reporting (Street, 2005).
In fact, when the IASB started work in 2001, its policy
25
Note that Sterling, Staubus and Solomons were all academics. Sterling
and Staubus were both founding members of an elite organisation of
researchers in 1974, the Accounting Researchers International Association
(ARIA; cf. Edwards, Dean, Clarke, & Wolnizer, 2013). David Solomons joined
this organisation in 1975.
26
Note that some of the Big8 auditing ?rms also promoted current values
in their publications (Zeff, 1986, p. 134), thereby contributing to the
alignment of academic ideas with professional notions (e.g. Miller, 1974, p.
19 f.).
27
The Discussion Memorandum issued in 1976 at least indicated the
dominance of relevance considerations for stating ‘‘usefulness [. . .] should
therefore be judged in terms of its relevance for investors’ and creditors’
decisions’’ without mentioning reliability (FASB, 1976, p. 153).
24 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
was to consider fair value in each standard it approached
to create or revise (Georgiou & Jack, 2011, p. 318; also
Walton, 2006, p. 337), establishing fair value as a term per-
petually linked to IFRS and contributing to the IASB’s iden-
tity-building (Power, 2010, p. 207).
28
For example, Walton
(2004, p. 9) quotes an IASB board member referring to fair
value as ‘‘a ‘meta rule’ for ?nancial reporting.’’
Regarding the actual use of reliability in the standard-
setting process, mixed views can be found. In the 1980s
several studies questioned the usefulness of qualitative
terms, as they revealed diverse understandings, even
among board members (Joyce et al., 1982). However, the
terms ‘‘relevance’’ and ‘‘reliability’’ and their trade-off
became omnipresent in accounting discourses. The consis-
tent application of these characteristics in standard-setting
projects was presented as the ‘‘of?cial’’ policy of the FASB
(e.g. Johnson, 2005). For instance, Young (2014, p. 728)
quotes a FASB member attesting that weighing concerns
about relevance and reliability were a ‘‘key element’’ of
every standard-setting project. That conceptual arguments
seem to be a point of reference in standard-setting debates
is also revealed by Walton (2009), who analyses in detail
the IASB’s board meetings in 2002 and 2003, and shows
that the term ‘‘reliability’’ occurred as one of the most fre-
quent phrases (p. 50).
29
Nonetheless, some of our intervie-
wees hinted at the selective use of the terms: ‘‘We are all
guilty of cherry-picking’’ (Cooper, interview). Others noted
their infrequent use:
‘‘The qualitative characteristics have always been kind
of an enigma to me. They ought to be very powerful
in conditioning how we think about things. I have often
been frustrated that we don’t fall back on them as often
as we should. I think our understanding of them would
improve if we considered them more often.’’ (Upton,
interview).
30
Focusing on the veri?ability aspect, practitioners, in
particular preparers, frequently used reliability concerns
to oppose fair values (e.g. for ?nancial instruments
Chisnall, 2001; Walton, 2004, p. 6). This re?ects the tradi-
tional understanding of veri?ability which was already
perceived by Solomons (1986), who noted that veri?ability
‘‘is often referred to as though it were a synonym for reli-
ability’’ (p. 90). However, taking into consideration the
other component of reliability, faithful representation, jus-
ti?es board members’ view that
‘‘reliability wasn’t simply about the dispersion around
the mean, but reliable information is information you
can rely on to faithfully portray the economic phenom-
enon that it’s supposedly portraying’’ (Cooper,
interview).
Solomons (1986, p. 92) mentions the example of
accounting for construction contracts. In his view, the per-
centage-of-completion method provides a more relevant
and faithful representation than the completed-contract
method, while it is also less veri?able. Thus,
‘‘those who emphasize objectivity [or veri?ability] con-
centrate on agreement about the measurement of
accounting inputs and pay too little attention to
whether the chosen input produced the desired output.’’
Upton (interview) illustrates the different understand-
ings by remembering
‘‘Katherine Schipper once saying that some people
believe that if you can vouch it to an invoice that
gives it the quality of reliability which is an audit
notion. That transferred over to people who said, well,
if I can look up a fair value in the Wall Street Journal
then it is reliable. That wasn’t really what it was sup-
posed to mean. It had to do with reasonable people
who confronted with the same information developed
the same kind of number, which still goes into the
veri?ability aspect. People use it to think of how
robust the measurement is. For fair values of untrad-
ed equities, palm oil plantations or vineyards and
things like that they do not see that level of robust-
ness that makes them con?dent that the number pro-
duced is reliable.’’
In light of the standard-setters’ pursuance of fair value
accounting, it became increasingly obvious ‘‘that the stan-
dard-setter’s notion of reliability is somewhat different
from that of the wider constituency of accountants’’
(Walton, 2006, p. 340).
31
As a result, due to the persistent
use of reliability by constituents in accordance with their
traditional understanding, while ignoring the faithful repre-
sentation aspect, there emerged a widespread opinion
among staff and board members that this understanding of
reliability did not ?t the boards’ focus on fair value
accounting:
‘‘We all thought we had to get rid of reliability because
nobody knew what it meant. There was a widespread
view among both staff and board members that we
had to do something with the word reliable, that it just
was not getting the job done.’’ (Upton, interview).
32
28
Note that G4+1 had an enduring in?uence on the work of the IASB, as
four G4+1 members became members of the IASB (Leisenring, McGregor,
O’Malley, Tweedie). Moreover, Ken Spencer, chairman of G4+1 between
1998 and 1999, was one of the initial trustees of the IASC Foundation, and
in 2000 chaired the nominating committee for the selection of the ?rst
cohort of IASB members (Camfferman & Zeff, 2007, p. 497).
29
In 1989, the IASC created a conceptual framework which was very close
to the role model of the US framework (Camfferman & Zeff, 2007, pp. 256–
262). The IASC document was inherited by the IASB in 2001.
30
Statements by two other interviewees with regard to the general
usefulness of the framework corroborate broad and selective recourse: ‘‘The
framework is important due to the avenue or direction it provides for the
boards and others. But how exactly you put the words – like this or that – I
don’t think it makes a big difference.’’ (Engström, interview). ‘‘My impres-
sion was that when people were really passionate about things, they either
ignored the framework or misinterpreted it.’’ (Whittington, interview).
31
Indeed, Walton (2006, p. 340) quotes Stig Enevoldsen, audit partner
and former chairman of the IASC and of EFRAG TEG: ‘‘Although ‘reliability’
has always been described in the Frameworks as something that is more
complex than the dictionary de?nition of ‘reliability’, that is not how most
commentators have tended to use the term; in their view the term is about
how ‘soft’ and subjective the information is.’’
32
‘‘Reliability was one of the areas in which clari?cation was necessary in
the conceptual framework revision. Because it has been misunderstood,
misapplied and misdiscussed.’’ (Leisenring, interview).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 25
It is against this background that the project to revise
the conceptual framework started in 2004. The next sec-
tion depicts in detail the corresponding due process.
The reconstruction of reliability
In 2002, the IASB and FASB formalised their joint work
in the Norwalk Agreement, which stressed their desire to
create a common set of accounting standards (IASB,
2002). Apart from the individual standard-setting projects,
the boards in 2004 decided to place the development of a
joint conceptual framework on their convergence agenda
(IASB, 2004). It was decided to take the project on in eight
phases, and that qualitative characteristics (as well as the
objective of ?nancial reporting) would become part of
the ?rst phase (Phase A).
Initial deliberations on reliability
In its ?rst deliberations the staff took perceived differ-
ences in the understandings of the reliability concept
amongst constituents as well as members of the boards
(IASB, 2005, par. 13, 41) as a reason to suggest a clari?ca-
tion of the terminology (FASB, 2005, par. 10). The staff
compared the (former) frameworks of the IASB and FASB,
while also taking into account the frameworks established
by the UK ASB and the Australian standard setter AASB. All
of these conceptual documents included the qualitative
characteristic of reliability. However, the staff found a mul-
titude of (slightly different) subcomponents of reliability
which were seen to be partly responsible for the alleged
confusion about the notion (IASB, 2005, par. 13). The staff
interpreted reliability, as drafted in the former frame-
works, as an umbrella term for a multitude of different
subcomponents without a unifying underlying concept
(IASB, 2005, par. 44). In line with our depiction in the pre-
vious section, in the staff’s perception constituents referred
to reliability mostly to mean veri?ability, while the idea of
representational faithfulness was typically neglected (IASB,
2005, par. 41). On the basis of this initial analysis, the staff
proceeded to categorise individual components of the
characteristic of reliability:
Faithful representation, which had formed part of all
the examined frameworks, was regarded as the central
component shaping the actual meaning of reliability.
The staff therefore suggested retaining ‘‘faithful repre-
sentation’’ which should comprise completeness as well
as – albeit not stressed as a separate subcomponent –
the idea of substance over form (IASB, 2005, par. 22).
The staff also advised keeping ‘‘veri?ability’’ as it consti-
tuted the (only) means for users to assure them of the
information’s representational faithfulness as well as
its freedom from error, completeness and neutrality.
The de?nition suggested for ‘‘veri?ability’’ was congru-
ent with SFAC 2’s consensus de?nition (IASB, 2005, par.
25, 28).
The staff also recommended keeping ‘‘neutrality’’, i.e.
‘‘the absence in reported information of bias intended
to attain a predetermined result or to induce a particu-
lar mode of behaviour’’ (IASB, 2005, par. 29). However,
due to their incompatibility with the concept of neutral-
ity, the staff, in contrast to the previous frameworks,
suggested dropping the concepts of conservatism and
prudence (IASB, 2005, par. 31).
Three options were presented to organise the character-
istics deemed important (IASB, 2005, par. 42):
(1) Keep ‘‘reliability’’ as an umbrella term, supple-
mented by further descriptions to clarify its
meaning,
(2) ?nd a more suitable umbrella term, or
(3) assign equal importance to the identi?ed
characteristics.
Discarding (1) as being unachievable and (3) for placing
too much emphasis on each single quality, the staff recom-
mended a new umbrella term, namely ‘‘representational
faithfulness’’. The staff’s main argument was that ‘‘faithful
representation’’ constituted a ‘‘better umbrella term’’ as it
allegedly comprised all other desirable qualities (IASB,
2005, par. 45).
Comparing the staff’s suggestion with the drafting in
SFAC 2, the substitution of reliability implies a subordina-
tion of veri?ability under faithful representation. While
according to SFAC 2 both properties were equally impor-
tant, the staff’s proposal identi?es veri?ability as a sub-
component of faithful representation. However, it still
remains an indispensable consideration because it has
the status of a necessary requirement for faithful represen-
tation: ‘‘How can representations be faithful [. . .] unless
the measures and descriptions are veri?able [. . .]?’’ (IASB,
2005, par. 45).
The staff recommendation was discussed in the board
meetings on 17 May (IASB) and 25 May (FASB) 2005. Among
the FASB members there was a broad consensus withregard
to the replacement of ‘‘reliability’’ by ‘‘faithful representa-
tion’’. None of the members questioned the replacement
itself or the reshuf?ingof reliability’s previous sub-qualities,
in particular ‘‘veri?ability’’ now being a sub-quality of
‘‘faithful representation’’. However, some members made
additional comments. Schipper, for example, worried that
misunderstandings about reliability may simply be trans-
ferred to the new term (FASB, 2005, par. 14). With regard
to the relationship between reliability and relevance, three
participants (Schipper, Seidman, Leisenring (IASB)) pro-
posed a hierarchical approach, i.e. to think of relevance ?rst
and then to consider the representational faithfulness of the
information. This perspective breaks withthe trade-off rela-
tionshipof both characteristics in SFAC 2.42 and reinstates a
predominance of the relevance criterion, as already
intended by ASOBAT and APB Statement No. 4. In this con-
text, Leslie Seidman’s comment that the change from reli-
ability to faithful representation may
‘‘elevate the discussion to a point other than just
defaulting to veri?ability or reliability [and allow to
consider] which alternative is most relevant and repre-
sents most faithfully the accounting objective’’ (FASB,
2005, p. 7)
26 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
creates the impression that the replacement serves a pur-
pose beyond mere clari?cation of the terms, in particular
relegating veri?ability concerns. Moreover, problems of
understanding representational faithfulness come to the
fore in remarks by two FASB members that the actual con-
?ict lies in determining ‘‘what the phenomenon being rep-
resented is’’ (FASB, 2005, p. 6 f.). Consequently, even
amongst board members faithful representation does not
necessarily seem to be a concept less ambiguous than reli-
ability which somehow a priori undermines the staff’s plan
to clarify reliability’s meaning.
More doubt about whether ‘‘faithful representation’’ was
truly a less ambiguous termwith which to replace ‘‘reliabil-
ity’’ was raised in the IASB’s discussion in May 2005. Here,
several comments indicated that some board members
seemed to have problems in ?rmly grasping the meaning
of the concept. For example, O’Malley stated her
‘‘concerns with the notion that accounting measures
must re?ect economic phenomena in order to be repre-
sentationally faithful. What they needed to be was a
faithful representation of what they are.’’
She added the example of depreciation, explaining that
‘‘the book value did not represent the economic value of
the asset’’ (IStaR, 2005, p. 24) and illustrated further that
‘‘it was not right to say that if you had paid 100 euros
for a building, its cost was a faithful representation of
the value of the asset’’ (p. 25).
Mary Barth was concerned that
‘‘the Board members were not reading para 16 [pertain-
ing to the description of the term economic phenome-
non] in the same way and that there was not an
agreement of what representationally faithful meant’’
(p. 25).
The confusion around ‘‘faithful representation’’ ?nally
becomes obvious in Geoffrey Whittington’s concluding
remark that
‘‘he had thought he understood the issues before, but
did not any longer. However he was comforted by the
thought that the rest of the Board did not understand
either’’ (p. 25).
In particular, two different understandings of ‘‘faithful
representation’’ were identi?ed:
‘‘In the old framework, representational faithfulness
was one part of reliability and was de?ned as things
representing what they purport to represent. For exam-
ple, if I get a historical cost ?gure I expect it to be the
historical cost and nothing else. Now that would be rep-
resentationally faithful. But I think that the people
advocating representational faithfulness are not stop-
ping there. They are being intellectually dishonest when
they say that representational faithfulness and reliabil-
ity are the same thing, because in fact reliability has
other implications as well. [. . .] It is when faithful repre-
sentation is expressed in terms of representing an eco-
nomic phenomenon that I get worried, because the idea
of an economic phenomenon is not well thought out. If
you mean ‘the ultimate truth’ then you are sort of in fair
value and the idea that there is some objective eco-
nomic truth out there.’’ (Whittington, interview).
The two interpretations were also observed by staff
members:
‘‘The correspondence de?nition of representational
faithfulness from SFAC 2 does not tell me that historical
cost is a bad measure for of?ce furniture. It just says:
Does the measure represent the thing that it’s supposed
to represent? I just need to ?nd an invoice for this desk.
I think it goes beyond that, though. I think it ties back to
the decision usefulness notion that you say: this is an
economic resource. Which depiction of this resource is
most useful for allocation decisions? Some might say
it’s always fair value, others wouldn’t agree.’’ (Upton,
interview).
By the same token, the IASB meeting provides clear evi-
dence that the reliability/faithful representation–discus-
sion was associated with the con?ict of fair value vs.
historical cost. Faithful representation was, at least by
some board members, seen as capable of being used to jus-
tify increasing reliance upon fair value as a measurement
basis (also cf. Whittington, 2008b). For example, in
response to O’Malley’s comment above, McGregor
explained that the way to present an asset in the accounts
was actually related to relevance and asked whether it was
‘‘useful to represent a building that was worth 1 m euros at
the amount he paid for it?’’ (IStaR, 2005, p. 25). This remark
triggered responses from O’Malley and Leisenring, caution-
ing that the requirement of faithful representation may be
read in terms of justifying a full fair value model with the
market price being the only faithful representation.
‘‘There is at least a body of fair value advocates who ask
‘how can something be a faithful representation, if it is
not the current value’. I think that is just incorrect. They
are not reading the notion properly. If I disclose that my
property, plant and equipment is at historical cost,
amortised at the depreciation life that I have disclosed
in my footnotes, that is representationally faithful of
the historical cost model.’’ (Leisenring, interview)
In the Discussion Paper, published in July 2006, ‘‘reli-
ability’’ was replaced by ‘‘faithful representation’’ leading
to the statement that ‘‘information must be a faithful rep-
resentation of the real-world economic phenomena that it
purports to represent’’, which required it to be veri?able,
neutral and complete (DP QC 16). The Discussion Paper
contained an Alternative View (AV) on veri?ability which
was included on behalf of Geoffrey Whittington. In the
DP, veri?ability was drafted in a similar way to SFAC 2 as
comprising direct or indirect veri?ability (DP QC 23). Whit-
tington in AV 2.1 demanded a stricter de?nition of veri?-
ability wherein it requires a consensus between various
observers being based on reliable evidence. AV 2.2 also
requested more restrictive requirements concerning indi-
rect veri?ability. In the AV, the traditional practitioner
notion of objectivity, as outlined in section ‘Accounting
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 27
characteristics in the early literature’, was brought into the
framework revision discourse and an emphasis was put on
the evidence part of the veri?ability concept.
The ‘‘new’’ description of faithful representation in the
DP has some inconsistencies, which are indicative of the
multiple understandings of faithful representation men-
tioned in the interview statements by Whittington, Upton
and Leisenring and mirror the confusion expressed earlier
in the discussion on the IASB. DP QC 18 gives the example
of a stamping machine as a real-world economic phenom-
enon which may be faithfully represented in various ways,
for example by a photograph of the machine. Two sen-
tences later, however, the machine’s costs are labelled a
real-world phenomenon to be depicted, accompanied by
the statement that ‘‘how best to depict the machine as it
currently exists in the real world is the role of faithful rep-
resentation’’ (DP QC 18). Then it is stated that
‘‘reporting [a three year old] machine at an amount
based on what it would cost to replace it in its current
condition (replacement cost) might provide an even
better [instead of reporting it at (amortised) historical
cost] representation of the machine as it now exists in
the real world’’ (DP QC 18).
33
The drafting here mixes at least two interpretations and
does not explicitly pronounce one meaning of the concept.
On the one hand, the machine’s original costs are only one
property of the machine and calling for the costs’ faithful
representation narrows down the scope of ‘‘faithful repre-
sentation’’ to questions of measurement, i.e. correctly mea-
suring the quality chosen (‘‘what it purports to be’’).
Postulating on the other hand that faithful representation’s
task is to correctly depict the machine as it now exists in
the real world presupposes that there is one way of faith-
fully depicting the machine in the ?nancial statement,
which revolves around the second interpretation, men-
tioned above, of correctly depicting the underlying eco-
nomic phenomena, with their central property being the
ability to generate future economic bene?ts. This second
interpretation is more in line with Sterling and others’ idea
of depicting real world economic phenomena advocating
the use of current value measurement.
Responses to the Discussion Paper
The version proposed by the IASB & FASB in the Discus-
sion Paper faced harsh criticism by constituents. In our
analysis of the 179 comment letters which were submitted
in response to the DP we identi?ed that 138 (77.1%)
referred to faithful representation or one of its compo-
nents. It was often dif?cult to exactly categorise the com-
ment letters into categories of rejection or approval of
the DP. Therefore, we split the analysis with regard to dif-
ferent dimensions: 77 comment letters (55.8% of the latter)
rejected the idea that faithful representation should be a
primary qualitative characteristic (this includes rejection
of the replacement of reliability). On the other hand, 24
(17.4%) approved of this move. The drafting of veri?ability
and its role as a subcomponent of faithful representation
was criticised in 67 (48.6%) comment letters. When com-
bining criticism aimed at faithful representation as a pri-
mary qualitative characteristic and its subcomponents,
we found approval in only eight (5.8%) comments for the
entire concept of faithful representation as drafted in the
DP.
34
In the letters, it was often mentioned that faithful rep-
resentation, compared to reliability, constituted a ‘‘softer’’
concept (e.g. Norwegian Accounting Standards Board,
HSBC Holdings plc, EFRAG).
35
Reliability was predominantly
associated with characteristics such as veri?ability (Bundes-
verband Deutscher Banken, KPMG, AstaZeneca plc), depend-
ability/trustworthiness/certainty (BNP Paribas, International
Banking Federation) and putting restrictions on the ‘‘soft-
ness’’ of information (e.g. Dutch Accounting Standards
Board, American Accounting Association). In particular, reli-
ability, in many cases was associated solely with veri?abil-
ity: ‘‘Reliability of measurement represents the extent to
which measurement yields the same results when per-
formed by different quali?ed parties and is closely associ-
ated with veri?ability’’ (KPMG, p. 5). The range of views in
the comment letters on the one hand supported the staff’s
argument of a variety of at least partly differing understand-
ings of reliability as drafted in SFAC 2/IASC (1989). However,
the examples mentioned above also highlight that ?nancial
accounting practitioners’ understanding of reliability dif-
fered from the boards’ (and staff members’) opinions and
was closely associated with the traditional understanding
of veri?ability. Along these lines, many respondents
demanded a stricter version of veri?ability, including the
demand for reliable evidence. Several comments were sup-
portive of Whittington’s Alternative View (IASB, 2007a,
par. 60 f., e.g. Ernst & Young, US Government Accountability
Of?ce). These comments often mentioned that veri?ability
alone (without reliability) was too narrow, i.e., reliability
asks for qualities beyond veri?ability: ‘‘where veri?ability
is linked to the ability to verify either the data or the method
whereby an estimate has been derived, then reliability is
directly linked to whether an estimate is reliable and robust’’
(Dansk Industri, p. 7). By the same token, the close connec-
tion with auditing is explicitly mentioned in some com-
ments. For instance, FEE demanded that ‘‘the implication
of this ‘downgrade’ [of reliability] for the auditability of
?nancial information should be considered’’ (p. 3) and also
cautioned against ‘‘the risk of putting more emphasis on rel-
evance than on reliability and the consequences for the aud-
itability of information to prefer predictive value of ?gures
rather than historical value’’ (p. 4). The IAASB stated in its
comment letter that ‘‘‘veri?ability’ is a desirable qualitative
characteristic and, in general, auditors would be especially
inclined to approve of it (assuming it also means that the
information is auditable)’’ (p. 2). Moreover, the AICPA’s PCPS
33
Note that this statement is in clear contradiction with Leisenring’s
interview comment above. As Leisenring approved the DP, this again
indicates the confusion around the concept of faithful representation even
amongst in?uential IASB members.
34
This ?nding is congruent with the staff’s analysis which reveals a
favourable rate of about 5% (IASB, 2007a, par. 56).
35
Comment letters on the DP may be found on the website of the IASB:http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Frame-
work/DPJul06/Comment-Letters/Pages/Comment-letters.aspx.
28 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
(p. 5) and Deloitte (p. 5) demanded a consideration of the
auditability of accounting data within the standard-setting
process. Interestingly, though, a number of commentators
argued that veri?ability should not be a component of faith-
ful representation as information may faithfully represent
what it purports to represent without being veri?able. Ver-
i?ability therefore may exclude relevant data from the
accounts (IASB, 2007a, par. 62; e.g. Securities Industry and
Financial Markets Association, Goldman Sachs & Co). Alto-
gether, these two views reveal different understandings of
the importance of veri?ability: while the former argument
is in line with the traditional understanding of a crucial role
of veri?ability, the second view clearly sees veri?ability as a
barrier in the attempt to enhance the relevance of ?nancial
statements.
Redeliberations
The comment letter analysis was presented to each
board in separate meetings in February 2007. In both
meetings there was relatively little discussion on the dis-
agreement of constituents regarding the replacement of
reliability. Nevertheless, some comments indicate that
the board members were aware of the confusion that faith-
ful representation invoked among constituents. Trott
(FASB member) noted that ‘‘many respondents seemed to
understand faithful representation to mean something dif-
ferent than the Boards’ de?nition’’ (FASB, 2007a, par. 21).
In summarising the view of constituents, an FASB staff
member noted: ‘‘faithful representation [in the constitu-
ents’ view] sounds arcane, like something a standard-set-
ter would say’’ (IASB, 2007b). In this regard, IASB
member Tatsumi Yamada also conceded that the expres-
sion ‘‘real world economic phenomena’’ was dif?cult to
understand (IStaR, 2007a, p. 11).
Redeliberations were continued in separate meetings in
April and May 2007. The staff, due to the many comments
that de?ned reliability differently from the boards’
approach, saw the comment letters as an af?rmation of
its recommendation to replace ‘‘reliability’’ (IASB, 2007c,
par. 13). While the FASB, without further discussion, fol-
lowed the staff suggestion, some comments in the IASB
meeting re?ected disappointment that constituents would
not just accept and adopt the boards’ concept of faithful
representation. Jim Leisenring concluded that ‘‘too many
people saw faithful representation as a lead into fair value,
a back door way to fair value’’ (IStaR, 2007b, p. 13). Tricia
O’Malley conceded that this impression may have been
supported by the choice of fair value examples in the Dis-
cussion Paper. Mary Barth added that other literature often
talked about current cost being a faithful representation
(IStaR, 2007b, p. 13). Tricia O’Malley noted the ongoing
prevalence of reliability in the comment letters and that
‘‘the varied and incorrect uses of the term ‘reliability’ were
so entrenched that the board could explain the issue for-
ever and people still would revert to their original under-
standing’’ (IStaR, 2007b, p. 13). Although this suggested a
somewhat useless endeavour to rede?ne reliability, John
Smith, on the other hand, remarked that ‘‘if they had
started with the wrong view of reliability they were losing
something that they never had in the ?rst place’’ (IStaR,
2007b, p. 13).
Although not acting on the constituents’ preference to
keep ‘‘reliability’’, the staff chose to follow the suggestion
of a few comment letters regarding the positioning of ‘‘ver-
i?ability’’. The argument was that faithful representation
did not require veri?ability. Thus, the staff recommended
putting veri?ability in the position of a separate qualitative
characteristic (IASB, 2007c, par. 18). Arguing that including
veri?ability as an equally important characteristic along-
side relevance and faithful representation (fundamental
characteristics) would place too much emphasis on the
term, the staff further suggested simply granting it the sta-
tus of an enhancing qualitative characteristic (IASB, 2007c,
par. 22). The FASB agreed to separate veri?ability from
faithful representation and to position it as an enhancing
qualitative characteristic (FASB, 2007b, par. 15, 28). In
the IASB meeting, some members (Barth, Gélard, O’Malley)
explicitly agreed with the staff (IStaR, 2007b, p. 14), for
example Gilbert Gélard noted that ‘‘there was too much
emphasis on veri?ability as a lot of information was not
veri?able’’ (IStaR, 2007b, p. 14). This may be interpreted
as a deliberate turn away from veri?ability as one of the
evolutionary central hallmarks of ?nancial accounting.
However, one further comment by Hans-Georg Bruns also
illustrates the arbitrariness of the entire theorisation about
qualitative characteristics: ‘‘21 members and a lot of staff
were of the opinion that it [veri?ability] is a component
[of faithful representation] and now it is an enhancement’’
(IASB, 2007d).
In the Exposure Draft, ‘‘faithful representation’’ was
drafted without veri?ability, which was instead included
as an enhancing qualitative characteristic (ED QC15/20/
21). Enhancing qualitative characteristics may improve
the usefulness of information, however, as opposed to
the fundamental qualitative characteristics, are not consti-
tutive for achieving decision usefulness (ED QC25/26).
Faithful representation in the version of the ED – alongside
neutrality and completeness – now also comprised the
quality of ‘‘freedom from material error’’. Freedom from
error was drafted considerably more weakly than veri?-
ability in terms of keeping subjectivity away from the
accounts, since it only required that ‘‘an estimate must
be based on the appropriate inputs, and each input must
re?ect the best available information’’. It explicitly allowed
uncertain information to be representationally faithful as
long as the degree of uncertainty was disclosed (ED QC11).
Comment letters to the ED
The comment letters to the ED still expressed the con-
stituents’ negative attitude towards the changes made con-
cerning reliability. From the 127 comment letters on the
ED,
36
110 (86.6%) commented on faithful representation or
36
The ED received a total of 142 responses. In our analysis, however, we
excluded seven comment letters that corresponded to those of the Tax
Justice Network and The Revenue Watch Institute. We also excluded all but
one of nine comment letters that were apparently part of an exercise by a
class at Woodbury University and which each addressed only one aspect of
the ED. The exception pertained to faithful representation.
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 29
one of its components. Still, 52 (47.3% of the latter) respon-
dents rejected the proposal that faithful representation
should be a fundamental qualitative characteristic. Many
criticised the change from reliability as not suf?ciently jus-
ti?ed since, despite the staff’s intention only to make a
change in wording, they saw a difference in meaning. Reli-
ability, according to these commentators, was the broader
notion (e.g. BNP Paribas, Investment Management Associa-
tion)
37
and they demanded that information could be
‘‘depended upon’’ (IASB, 2008b, par. 51 f.), which again is
reminiscent of the traditional understanding of accounting
information as being veri?able. The criticism raised in the
comment letters was very similar to that of the ?rst com-
ment letter period, which is not surprising as the boards
had declined to make fundamental changes to the DP. Again
constituents saw reliability – different from faithful repre-
sentation – as pertaining to the uncertainty of information
(e.g. Holcim Group Support, Conseil National de la Comptab-
ilité), especially in the context of estimates or judgments
(e.g. Basel Committee on Banking Supervision, Committee
of European Banking Supervisors): ‘‘reliability incorporates
a ?avor of the uncertainty (‘softness’) involved in a piece
of information [. . .] [which] is not true of ‘faithful represen-
tation’’’ (EFRAG, p. 11). Some comments pointed at dif?cul-
ties in distinguishing between faithful representation and
relevance (e.g. Accounting Standards Board of Japan, Volks-
wagen AG, EFRAG). The AAA even asserted that ‘‘faithful rep-
resentation [. . .] is an enhancing qualitative characteristic of
relevant information’’ (American Accounting Association, p.
12).
About 41% of all comments pertaining to veri?ability
(37 comment letters) criticised either the concept as
de?ned in the ED, or its positioning as an enhancing qual-
itative characteristic. Some constituents demanded that it
should be elevated to the level of fundamental qualitative
characteristics (e.g. ICAEW, Confederation of British
Industry):
‘‘veri?ability as a component of reliability has func-
tioned to minimise diversity and bias of accounting ?g-
ures as resultant measures and it has helped to ensure
investors’ con?dence [. . .]. [D]iversity and bias of
accounting ?gures would increase [in case of demotion]
and, thus [. . .] diminish the decision usefulness of
accounting information’’ (Accounting Standards Board
of Japan, p. 12).
The Discussion Paper’s AV again found some external
support (e.g. Basel Committee on Banking Supervision,
Hundred Group of Finance Directors), although it had been
completely ignored by the boards in the ?rst round of rede-
liberations. In general, many comment letters regarded the
changes, in particular the renaming of ‘‘reliability’’, to
increase the relative importance of the relevance criterion,
possibly leading to a (further) increase in fair value mea-
surement (e.g. Norwegian Accounting Standards Board,
FEE): ‘‘The trend [in recent years] has been toward a
greater use of fair value, estimates, projections and subjec-
tive intent to develop and quantify historical ?nancial
data’’ (NY State Society of CPAs, p. 5).
Final decisions
The results of the comment letter analysis were pre-
sented to both boards during a joint meeting in December
2008. Further redeliberations took place in separate meet-
ings at the beginning of 2009. In the FASB meeting, the
board con?rmed the changes, i.e. to replace ‘‘reliability’’
with ‘‘faithful representation’’ and to relegate ‘‘veri?abil-
ity’’ to one of the enhancing qualitative characteristics. In
an additional meeting in April 2009, the FASB ?nally man-
dated the staff with the drafting of the ?nal framework
section for qualitative characteristics.
The IASB meeting in January 2009, on the other hand,
revealed some unease with the replacement of reliability
and again indicated confusion about the change. First,
Stephen Cooper raised the question whether ‘‘the previous
understanding of reliability [is] the same as what we now
have as faithful representation.’’ While IASB staff member
Lian replied that ‘‘I think it is broadly the same’’, Warren
McGregor elaborated:
‘‘The one area which might cause us to think it is
slightly different is [veri?ability]. In some people’s mind
[. . .veri?ability. . .] gives a particular meaning to reli-
ability that certainly wasn’t one that I had in mind.
[. . .] The concerns that we had with the interpretations
of reliability that had to do with precision and accuracy
[were] in part derived from I think the inclusion of ver-
i?ability and [. . .as a consequence. . .] some people took
a narrower view of it than we intended’’ (IASB, 2009).
Cooper agreed that ‘‘in practice people took the nar-
rower view’’, yet he remarked that
‘‘people are still going to use the word reliability; we
are likely to around this table and other people certainly
will. It is a very common word in language. If we omit
reliability completely [. . .], then we are still going to
have that problem in communicating with people:
‘Well, what do you actually mean by reliability? Are
you talking about precision or are you talking about
faithful representation which is [. . .] what we think is
reliability?’’’ (IASB, 2009; emphasis added).
Wei-Guo Zhang added that reliability was still perva-
sive in the actual standards (IStaR, 2009, p. 14). Prabhakar
Kalavacherla challenged the elimination of reliability:
‘‘I don’t know whether we can take away the word reli-
ability completely. [. . .] I grew up with reliability as a
very important tenet [. . .], so I don’t know whether I
am ready to give up the word reliability that easily’’
(IASB, 2009).
These statements show that not all board members
seemed to be satis?ed with the turn to faithful representa-
tion and the elimination of ‘‘reliability’’. Others, however,
very clearly articulated the need for a change. For example,
IASB staff member Peter Clark noted:
37
Comment letters on the ED may be found on the website of the IASB:http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Frame-
work/EDMay08/Comment-Letters/Pages/Comment-letters-2008.aspx. For
the staff’s analysis of comment letters cf. IASB (2008b).
30 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
‘‘I think the problem with reliability is that people just
don’t use it the way it is used in the existing framework
and no amounts of explanation we provide is going to
change that. They are not reading the existing de?ni-
tion, why on earth would they read the new one. [. . .]
Whenever people talk about reliability in comment let-
ters they clearly mean things like veri?ability or preci-
sion. [. . .] I think it is urgent to change [the word], I
think it’s the most urgent thing we actually have to do
probably’’ (IASB, 2009; emphasis added).
Mary Barth agreed and Tatsumi Yamada also supported
the change. Kalavacherla, however, once more objected
that
‘‘taking out reliability completely from the literature
would not be so good. [Perhaps] we can say that faithful
representation encompasses reliability [. . .]. That way it
would be a healthy medium’’ (IASB, 2009).
His comment was rebutted by Warren McGregor:
‘‘[Reliability] has been misused so many times and, in
fact, to be quite frank it is a touchstone for those who
have concerns about ?nancial reporting including
things that are estimates, particularly if that estimate
starts with ‘F’; because, [in their view] it’s not reliable;
if there isn’t an observable price, how can you possibly
have a reliable number. And it is an absolute nonsense
[. . .]. The sooner we make this change, get people used
to the new terminology, explain what it means, drive
on, the world will be a better place, trust me’’ (IASB,
2009).
This statement again clearly signi?es the perceived role
of reliability as a hindrance towards fair values. Robert
Garnett’s comment, however, highlights the inef?cacy of
such conceptual attempts, as he already anticipated that
constituents would not accept the new term/concept:
‘‘To the extent that we didn’t manage to communicate
what reliability meant before, I think we are going to
have the same problem. People are going to use the
words and use the words in the sense they want to
describe them [. . .]. Just be prepared that if we go back
to the standard level, people will ?ght all the time’’
(IASB, 2009).
At the end of the IASB meeting, there was no formal vote
on this issue. The ?nal framework document suggests anon-
ymous support for the change to faithful representation.
Discussion
In this section we have followed the IASB’s & FASB’s
deliberations during the framework revision in detail, in
which the boards reconstructed the concept of accounting
reliability. While SFAC 2 re?ected a ?rst step away from
traditional practice notions of evidence-based veri?ability,
in the framework revision this move was more pro-
nounced. We have shown that the turn towards ‘‘faithful
representation’’ was linked to the importance fair value
accounting had gained in standard-setting:
‘‘Others read the word [reliability] and then looked at
what the board was doing and said, wait a second, that
number is not reliable. Why are you putting that num-
ber in the ?nancial statement? By the board changing
the word it was trying to avoid that sort of common
misunderstanding.’’ (Cooper, interview).
The replacement thus conceptually extends the bound-
aries of appropriate ?nancial reporting as it moves away
from veri?ability towards assessments of allegedly user-
demanded future bene?ts:
‘‘If we put reliability ?rst, then forget fair value for
many situations where you do not have a liquid market.
For the Board at that time, which was more into the
direction of fair value, reliability was a stumbling block
on the road to pushing fair value for ?nancial instru-
ments. That’s why representational faithfulness
replaced it. That was on purpose. I do not object to this
objective as it is aligned with the concept of using
?nancial information for making economic decisions.’’
(Danjou, interview).
Along these lines, note the course of events leading to
the demotion of veri?ability to becoming merely an
optional requirement. While the staff initially suggested
placing veri?ability as part of faithful representation, it
later adopted the reasoning employed in a small number
of comment letters to the DP – which was apparently also
held by some of the board members – that veri?ability
does not constitute a component of faithful representation,
as something may be a faithful representation of the
underlying economic phenomenon, albeit not being veri?-
able. The requirement of veri?ability was suspected to
exclude non-veri?able ‘‘forward-looking estimates that
are important in providing relevant ?nancial information
[. . .and] excluding those estimates would make ?nancial
reports much less useful’’ (BC3.36). In fact, this quote
exactly captures the function of veri?ability in its original
understanding. In particular, veri?ability problematised
the choice of fair value measurement in cases where esti-
mations were necessary (Barth, 2007, p. 11). Thus, this
change basically disentangled the two former subcompo-
nents of reliability in SFAC 2, leading to a minor role for
veri?ability:
‘‘In the newframework there is no trade-off between rel-
evance and faithful representation which are two differ-
ent ways to describe the same objective of providing
useful information. The trade-off still exists between
faithful representation and reliability but in the new
framework relevance and faithful representation are the
fundamental characteristics and reliability [veri?ability]
is only an enhancing characteristic.’’ (Danjou, interview).
The move away from the trade-off notion in SFAC 2 is
remarkable, as the boards now refrain from clearly sepa-
rating the concepts of relevance and faithful representa-
tion. This justi?es Power’s (2010, p. 200) observation of a
collapse of reliability into relevance.
All in all, this is suggestive of an increasing turn towards
fair value measurement, as has been indicated in the litera-
ture (O’Brien, 2009; Power, 2010; Walton, 2006;
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 31
Whittington, 2008b). ZhangandAndrew(2014) suggest that
the renaming of reliability can be seen together with the
framework’s focus oninvestors as primaryusers andthe sin-
gle objective of valuation usefulness de?ned in OB2 as
examples of an ongoing ?nancialisation and neoliberalisa-
tionof accounting(cf. also Power, 2010).
38
This development
might also be linked to the concept of sociology of worth as
outlined by Annisette and Richardson (2011). In this context
it might be proof of a move from an industrial order, where
transaction-based records were predominant, to a market
order, where markets or ?ctions of markets determine perfor-
mance. Our evidence is broadly consistent with such theories
of recent developments in ?nancial reporting.
Young (2006) ?nds that with regard to the objective of
?nancial accounting, the FASB and others continuously
tried to construct and enforce a limited idea of a hypothet-
ical, idealised rational economic decision maker as the user
of ?nancial statements. If, as is suggested in the reasoning
of Barth (2007), (hypothetically constructed) fair values
faithfully represent future cash ?ows from elements of
?nancial statements, the changes with regard to reliability
may be interpreted as only one further step to transform-
ing ?nancial statements into direct inputs to rational eco-
nomic decision models used by this ?ctitious
(constructed) user. Along these lines, Mary Barth’s claim
that ‘‘?nancial reporting is not about bookkeeping, it is
about providing information to outside providers of capi-
tal’’ (Barth, 2008, p. 1164) moves ?nancial reporting away
from its historical core to the information of capital mar-
kets. The conceptualisation of faithful representation by
Barth (2007) follows the intellectual spirit of Sterling and
his contemporaries, with corresponding arguments for a
turn to current/fair values and the necessary rede?nition
of reliability. While US accounting research has largely
refrained from debating qualitative characteristics and pri-
marily engaged in positivistic empirical work at least since
the 1980s (e.g. Oler, Oler, & Skousen, 2010), the academic
understanding of the role of accounting and its major prop-
erties developed by Staubus, Sterling and others was
adopted, or rather taken-for-granted, in most market-
based accounting studies. This is, for example, re?ected
in the summary of quantitative studies on reliability by
Maines and Wahlen (2006) where they characterise this
quality as corresponding to ‘‘the idea of representational
faithfulness in the FASB conceptual framework’’ (p. 403).
The presence of two in?uential academic members on
the boards, who promoted this line of reasoning during
the time of the framework revision (Barth and Schipper),
and the ongoing rise of the logic of ?nancial economics
in ?nancial reporting standard-setting more generally
(Miller & Power, 2013, p. 590 f.) might explain why the
concept was successfully rede?ned. In contrast to the
efforts in the 1970s before SFAC 2 (cf. section ‘From objec-
tivity to reliability: some re?ections’), this time there was
no compromise about the understanding of reliability
reached (or even attempted) with accounting practice.
As repeatedly shown, constituents mainly associated
reliability with notions of veri?ability, which indicates that
the original idea of the veri?ability of accounting informa-
tion is so entrenched in practice and accountants’ thinking
that it might remainpart of their understandingof basic nec-
essary qualities of accounting information irrespective of
how‘‘?nancial accounting theory’’ or a framework renames
or rede?nes the normative qualities supposedly underlying
its standards. What board members (e.g. Schipper in FASB,
2005) qualifyas a ‘‘misunderstanding’’ of the concept of reli-
abilityis actuallythemeaningassociatedwithreliableinfor-
mation in accounting practice. Thus, a mere rewording
might not be able to disentangling this connection. Re?ect-
ingonconstituent reactions toDPandED, numerous constit-
uents reacted negatively to the boards’ proposals because
they were opposed to fair value accounting. However, many
responses also suggest the constituents’ dif?culties in
understanding the ‘‘academic’’ reasoning of the boards
when de?ning ‘‘faithful representation’’. Accounting practi-
tioners felt unable to reconcile this idea with their everyday
use of the term ‘‘reliability’’. Gilbert Gélard’s comment sug-
gests that it was a deliberate decision to raise the level of
abstraction to avoid the misuses of the term ‘‘reliability’’
springing from the ambiguities of common language:
‘‘[This is about the difference between] plain English
and technical English. Faithful representation certainly
seems technical. Reliability is plain English. We have
to say that in this case plain English is not good enough’’
(IASB, 2009).
At this point it is worth mentioning the important role of
the staff (for the importance of the staff, also cf. Botzem &
Quack, 2009; Pelger, 2013). Interviewees repeatedly noted
that the FASB’s staff played a dominant role, particularly at
thebeginningof theproject (Johnson, 2005), mainlybecause
of the larger resources that the FASB could devote to the
framework revision. First, in the initial agenda papers, the
staff prepared the proposition to replace reliability. This
was actively supported by some board members and then,
despite the constituents’ repeated concerns, was carried
through the entire framework project to eventually turn
up in the ?nal version. Second, the relegation of veri?ability
in the ED was proposed by the staff and simply rubber-
stamped by the boards – although they had before accepted
its placement as a subcomponent of faithful representation
in the DP. Third, in the ?nal IASB meeting on reliability in
2009the unease expressedby some boardmembers, Cooper
and particularly Kalavacherla, was muted by comments of
proponents of the change (Barth, McGregor) and ultimately
ignored by the staff. Even though vice-chairman Jones,
chairing the January 2009 IASB session, noted that there
‘‘seems to be a pretty divided view’’ (IASB, 2009) on the
replacement no vote was carried out.
39
Indeed, there were
no formal votes during the due process which factually gave
38
While differences in the treatment of stewardship and reliability during
the framework revision are observable, for example where the boards
carried out in-depth consultations with constituents about stewardship
(Pelger, 2013), no such effort was made with regard to reliability; in the end
traditional concepts were abandoned in the 2010 framework. This decision
was made by the same small group of board members and suited the mood
of the time, as outlined by Whittington (2008b).
39
At the beginning of this particular meeting, Jones noted his intention to
avoid any votes because the board was three votes down due to the absence
of Leisenring, Tweedie and Smith.
32 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
the staff control over the ?nal outcome. The quotes above
illustrate that some board members pursued a clear agenda
to install faithful representation and get rid of the notions of
‘‘reliability’’ and ‘‘veri?ability’’. Our ?ndings suggest that the
staff’s views, supported and possibly shaped by these board
members, were so dominant because other board members
struggled with the term and concept of ‘‘faithful representa-
tion’’ or were simply disinterested. It is particularly notewor-
thy that despite the extensive (formal) consultation activities
carriedout by the boards and the staff during nearly ?ve years
of due process, inthe endthe developedconcept appears tobe
further decoupled fromthe world of accounting practice. Par-
adoxically, the strong opposition by constituents was taken
up by staff and some board members to reaf?rm their obser-
vation of a pervasive ‘‘wrong’’ understanding of reliability
among constituents:
‘‘Based on the comments that we received from respon-
dents, the staff continues to think that we should
replace the term as many respondents continue to
interpret reliability differently from how we de?ne it
in either the IASB or FASB conceptual framework’’ (Lian
(IASB staff), IASB, 2009).
Moreover, proponents repeatedly referred to the pres-
ence of multiple understandings of reliability to demote
opposition to the change. For instance, Mary Barth noted:
‘‘It is not just that people only think of it as veri?ability.
It was clear from the comment letters on the Discussion
Paper that people use the word differently. Everybody
seems to have a clear idea what reliability means to
them, and it’s not the same as what it means to different
people, so it has to go’’ (IASB, 2009).
However, as perceived by Whittington (interview):
‘‘The IASB’s argument when abolishing ‘reliability’ was:
there is no common notion so it doesn’t exist. But there
is also no common notion of what an economic phe-
nomenon is. There is also no common notion of what
a representation is or of what faithful means.’’
Altogether, this puts the argument that a speci?c term
is misunderstood and therefore needs to be changed, in
place of a mere rhetoric to justify the boards’ wish to
change it. In other words, independent of which umbrella
term was chosen by the boards, confusion about its mean-
ing, or different interpretations, were likely to persist.
In contrast to what might be expected from our argu-
ment, since the publication of the conceptual framework
in 2010, the IASB and FASB have not moved further in
the direction of fair value accounting:
‘‘Recent experience with the IASB’s standard-setting
activity under the new framework has shown that they
have not got the way I feared they would [i.e. increase
the use of fair value measurement].’’ (Whittington,
interview).
Instead, it seems that they have accepted the existence
of a mixed measurement model (IASB, 2013, par. 6.14).
While this might well be due to the controversial debates
on the role of fair value accounting in the ?nancial crisis
(e.g. Laux & Leuz, 2009), it might also hint at a pragmatic
use of the concept of faithful representation. Along these
lines Geoffrey Whittington (interview) noted that
‘‘I am not sure whether the change from reliability to
representational faithfulness in the new framework will
actually in?uence future standard-setting. Standard-
setters are pragmatic people. They form their consensus
on what they mean by faithful representation in every-
day language. They don’t think like philosophers, they
don’t analyse words.’’
Leisenring (interview) noted:
‘‘Reliability always meant to me essentially what we
now mean by representational faithfulness. If the de?-
nition of reliability had been applied properly (it never
meant precision), I doubt there will be any changes
from what we have done.’’
As described above, the change was important to sev-
eral board and staff members because of reliability’s per-
ceived role as a hindrance to fair values, but the early
board meetings already revealed different understandings
of the term ‘‘faithful representation’’, not all interpreting
it as promoting fair values:
‘‘There is no reason something must be at some current
value to be representationally faithful. I think some
people are afraid that it might mean fair value and other
people want it to mean it.’’ (Leisenring, interview).
This statement suggests that the implications of the
faithful representation concept are inherently controver-
sial, with the effect that even though some actors intended
to replace reliability in order to pave the way for fair val-
ues, others would not follow that reasoning.
Moreover, several board members did not seem to be
particularly prone to de?ning and positioning respective
qualities:
‘‘In my opinion it is twisting words. Whether this should
come before this or after that, if this is a subset of this or
not, I really don’t care. With reliability there was much
discussion of a misunderstanding of the term. As I recall
it no one objected to this criticism of reliability. I liked
bothviews onreliabilityandI can’t remember I hadmuch
opinion on these characteristics. I was quite confused by
the arrangements of characteristics. Youcan’t take a ?ght
on everything. It was at that time a very academic
approach to these things.’’ (Engström, interview).
40
The (former) chairman of the IASB also noted that the
consequences of de?ning speci?c characteristics for stan-
dard-setting decisions should not be exaggerated:
40
The comment by Engström hints at possible dif?culties that non-native
English-speaking board members might experience when confronted with
abstract constructs such as ‘‘faithful representation’’. More generally a bias
in board meetings towards dominant Anglo-American members was
identi?ed by Walton (2009). He revealed that in 2002 and 2003 North
American board members accounted for 50% of the time of all board
member contributions (if Anglo-Saxon countries are de?ned more broadly
the number increases to over 80%) (p. 48).
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 33
‘‘Frankly, qualitative characteristics, I couldn’t care less.
The number of times they shuf?ed them backwards and
forwards, it was ‘deckchairs on the Titanic’-stuff. Who
cares if this is there or there? But they argued and argued
and frankly I just thought as long as you have them
described, that is suf?cient. I lost interest because I felt
it was saying: it’s gonna be relevant, it’s gonna depict
what’s there, what youcall true-and-fair andthat encom-
passes substance over form and all sorts of things. If the
measures are totally unreliable, not understandable,
not timely, then they are of no use. How do you rank
them? We got round and round and round and I didn’t
care. It wasn’t affecting one little bit of what I do about
the standards. In standard-setting you never compare
thesecharacteristics bysayingthis oneis bigger thanthat
one. It does not work that way.’’ (Tweedie, interview)
As the statements by Engström and Tweedie indicate,
the ‘‘very academic approach’’ to qualitative characteris-
tics, and the level of abstraction in debates were not appre-
ciated by some board members. Given that even board
members struggled with these terms and doubted their
usefulness, it only appears fair to ask about the extent to
which this might be the case for constituents. The level
of abstraction per se, thus, raises doubts about whether
the concept (regardless of its name) can be useful for sys-
tematising discourses about accounting issues. For
instance, about two years after the publication of the
revised framework Cooper (interview) noted that still
‘‘[w]e use the word [reliability] a lot because it is easier
to say than representationally faithful, so people have
reverted back to it. The word, the phrase representa-
tional faithfulness is a very cumbersome word.’’
We predict that constituents will continue to use the
term ‘‘reliability’’ (in their understanding as veri?ability)
in future standard-setting consultations. This is also corrob-
orated by the terminology of auditing standards, which still
(even those updated after 2010) refer to reliability (e.g.
Auditing Standards Board, 2012, par. 14, refers to the rele-
vance and reliability of auditing evidence). Hence, the board
has so far been unsuccessful to convey its idea of faithful
representationto accounting practice. Inthe end, the debate
on reliability to some extent indicates an exhaustion of the
conceptual project in ?nancial reporting in that endless
debates about the ‘‘proper’’ de?nition of concepts, by
recourse to ever more abstract ideas, do not necessarily gen-
erateclear andoperable (‘‘useful’’) tools for standard-setting
Conclusion
In this paper we have traced the development of the
concept of reliability in ?nancial accounting standard set-
ting. We ?nd that traditional notions of objectivity and
veri?ability, which were evolutionarily linked to account-
ing practice, were subject to change even before the issu-
ance of SFAC 2. With a focus on accounting practice,
early accounting theorists, most prominently Paton and
Littleton (1940), stated the prevalence of the convention
of objectivity, as essentially accounting based on evidence.
In the 1960s this notion was further developed in academic
approaches to accounting. First, academics were in?uenced
by and introduced perspectives from the natural sciences
into the accounting discourse which reshaped the concep-
tual de?nition of objectivity/veri?ability towards a more
abstract ‘‘consensus by different observers’’. Second, the
advent of the decision usefulness orientation in account-
ing, also developed by academics, led to the promotion of
the concept of relevance and reduced the relative impor-
tance of veri?ability (e.g. ASOBAT, APB Statement No. 4).
In this setting, reliability was basically constructed in SFAC
2 as a compromise between traditional practice notions of
veri?ability and the academic concept of faithful represen-
tation. The latter concept served the purpose of giving the
FASB the opportunity to move away from traditions of
accounting in order to introduce current value accounting.
In the 1990s reliability was regularly employed by scep-
tics to demote the merits of fair value accounting, referring
to the traditional notionof objectivity/veri?ability. The joint
framework revision gave the IASB and FASB the chance to
replace ‘‘reliability’’ with ‘‘faithful representation’’, a con-
cept entailingfewer limitations onthe useof fair values. This
academic construct, however, was more detached from
practitioners’ thinking, which was responsible for the large
opposition to renaming ‘‘reliability’’. The material effect of
the replacement, however, remains unclear, given diverse
views on the meaning and relevance of qualitative charac-
teristics even among board members. This diversity might
be rooted in the very abstract character of the framework,
raisinggeneral questions about the usefulness of conceptual
activities by standard-setters. In this regard, it is striking
that during the framework revision the boards basically
re-used the conceptual terminology that had already been
introduced to the standard-setters’ discourses in the 1960s
and 1970s. While the boards deliberately did not want to
revolutionise their conceptual frameworks (Bullen &
Crook, 2005, p. 3), this approachmight have limitedthe staff
andboardthinkingtotraditional conceptual ideas, unable to
escape the long-lived con?icts about accounting measure-
ment. Nonetheless, there might very well be alternatives
for approaching the concepts. For example, reliability might
also be framed in a context of uncertainty and risk (e.g. cf.
Power, 2007) which might lead to further re?ections on
the appropriateness of single-point values in ?nancial state-
ments, in particular in a context of level three fair value esti-
mates.
41
While this is just one possibility for rethinking
reliability, developing newlines of thinking about conceptual
terms more generally might also be a very interesting area for
future academic research.
Our study has largely focused on the academic and stan-
dard-setting discourse on reliability and how the term was
reconstructed by a small circle of actors from these ?elds.
We have not, however, scrutinisedin detail how‘‘the practi-
tioner consensus about reliability’’ (Power, 2004, p. 777) has
changed. While the references in our study suggest a fairly
consistent use of the veri?ability notion we suspect that
the discourse in practice is more complex. Auditors have,
for instance, adapted to the increasing use of fair values in
41
Indeed, the IASB’s DP 2013/1 suggests that the IASB is aware of the
importance of uncertainty in its de?nition of assets and liabilities (IASB,
2013, par. 2.17–2.36).
34 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
accounting standards by developing their own guidelines
(ISA 540 (IAASB, 2008)). Exploring the interaction between
auditing and ?nancial reporting standards with respect to
reliability, for example in light of litigation concerns, might
be a future area for research. According to the ?ndings of
Smith-Lacroix, Durocher, and Gendron (2012) auditors in
the ?eld seem to encounter dif?culties in reconciling their
traditional understanding of reliability and auditing values
with a fair value regime (also cf. Humphrey, Loft, & Woods,
2009, p. 818 f.). One reaction might be to outsource certain
parts of the audit to valuation experts (Power, 2010;
Smith-Lacroix et al., 2012). Apart from the practical reper-
cussions of fair value, research into how accounting con-
cepts develop and are contested in practice (e.g. cf. Edgley,
2014, on materiality) might further enrich our understand-
ing of ?nancial reporting.
Acknowledgements
We would like to thank Joni Young (Editor), two anon-
ymous reviewers, Richard Barker, Guido Förster, Christoph
Kuhner, Ronita Ram (EAA discussant), Thomas Schildbach,
Brian Singleton-Green, Tomo Suzuki, Robert Ullmann, Ste-
phen Zeff and participants at the EAA Conference in Paris
2013, the VHB P?ngsttagung in Würzburg 2013, the 6th
International Workshop on Accounting and Regulation in
Siena 2013, the 9th EUFIN Workshop in Valencia 2013,
the 50th Annual Meeting of the British Accounting and
Finance Association in London and the members of the
Academic Panel of the Financial Reporting Council for help-
ful comments and suggestions. All errors remain the sole
responsibility of the authors. We express particular grati-
tude to Peter Walton for granting access to relevant vol-
umes of the IStaR newsletter and to all interviewees for
sharing their time and insights. Carsten Erb gratefully
acknowledges ?nancial support provided by the Konrad
Henkel Foundation. The research in this paper bene?ted
from a research stay by Christoph Pelger at Saïd Business
School, University of Oxford.
Appendix
See Tables 1, 2 and Fig. 1.
Table 1
Contributions considered in the analysis of the origins of ‘‘reliability’’.
Author Year Source
American Accounting Association (1936) The Accounting Review, 11 (1)
Paton, W.A. & Littleton, A.C. (1940) Monograph
American Accounting Association (1941) The Accounting Review, 16 (1)
American Accounting Association (1948) The Accounting Review, 23 (4)
American Accounting Association (1957) The Accounting Review, 32 (1)
Arnett, H.E. (1961) Journal of Accountancy, 111 (5)
Mautz, R.K. & Sharaf, H.A. (1961) Monograph (study)
McFarland, W.B. (1961) Journal of Accountancy, 112 (3)
Moonitz, M. (1961) Monograph (study)
Anonymous (1963) Journal of Accountancy, 115 (1)
Bierman, H. (1963) The Accounting Review, 38 (3)
Chambers, R.J. (1963) Journal of Accounting Research, 1 (1)
Vatter, W.J. (1963) Journal of Accounting Research, 1 (2)
American Accounting Association (1964) The Accounting Review, 39 (2)
Burke, E.J. (1964) The Accounting Review, 39 (4)
Chambers, R.J. (1964) The Accounting Review, 39 (2)
Gordon, M.J. (1964) The Accounting Review, 39 (2)
Cowan, T.K. (1965) The Accounting Review, 40 (4)
Chambers, R.J. (1965) Journal of Accounting Research, 3 (1)
Wagner, J.W. (1965) The Accounting Review, 40 (3)
American Accounting Association (1966) ASOBAT (monograph; study)
Anton, H.R. (1966) Collected edition (Jaedicke, Ijiri & Nielsen (eds.))
Fertig, P.E. (1966) Collected edition (Jaedicke, Ijiri & Nielsen (eds.))
Ijiri, Y. & Jaedicke, R.K. (1966) The Accounting Review, 41 (4)
Arnett, H.E. (1967) The Accounting Review, 42 (2)
McDonald, D.L. (1967) The Accounting Review, 42 (4)
Snavely, H.J. (1967) The Accounting Review, 42 (2)
Sterling, R.R. (1967) Journal of Accounting Research, 5 (1)
Brief, R.P. & Owen, J. (1969) Journal of Accounting Research, 7 (1)
APB (1970) Statement No. 4
Staubus, G.J. (1970) Abacus, 6 (2)
Wojdak, J.F. (1970) The Accounting Review, 45 (1)
Schattke, R.W. (1972) The Accounting Review, 47 (2)
Staubus, G.J. (1972) Journal of Accountancy, 133 (2)
AICPA (1973) Trueblood Report (monograph; study)
American Accounting Association (1973) ASOBAC (monograph; study)
Langenderfer, H.Q. (1973) Journal of Accountancy, 136 (1)
Parker, J.E. (1975) The Accounting Review, 50 (3)
FASB (1976) Discussion Memorandum (monograph; study)
Staubus, G.J. (1976) Accounting and Business Research, 6 (24)
American Accounting Association (1977) Statement on Accounting Theory and Theory Acceptance (monograph; study)
(continued on next page)
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 35
Table 2
Documents considered in the due process analysis.
Time period Board Document Origin/reference
Stage 1 (before DP) IASB Agenda paper 7 (17 May 2005) IASB (2005)
IASB IStaR Newsletter (17 May 2005) IStaR (2005)
FASB Board meeting minutes (25 May 2005) FASB (2005)
IASB Agenda paper 6 (22 June 2005) IASB website
FASB Board meeting minutes (22 June 2005) FASB website
IASB Agenda paper 7A (20 July 2005) IASB website
IASB IStaR Newsletter (20 July 2005) Peter Walton
FASB Board meeting minutes (27 July 2005) FASB website
IASB Agenda paper 15B (22 September 2005) IASB website
IASB IStaR Newsletter (22 September 2005) Peter Walton
FASB Board meeting minutes (21 September 2005) FASB website
IASB Agenda paper 8 (19 Oktober 2005) IASB website
IASB Agenda paper 8A (19 Oktober 2005) IASB website
IASB IStaR Newsletter (19 Oktober 2005) Peter Walton
IASB/FASB Agenda paper 6 (25 Oktober 2005) IASB website
IASB/FASB Agenda paper 6A (25 Oktober 2005) IASB website
IASB/FASB Board meeting minutes (25 Oktober 2005) FASB website
IASB/FASB IStaR Newsletter (25 Oktober 2005) Peter Walton
IASB Agenda paper 2 (13 December 2005) IASB website
FASB Board meeting minutes (14 December 2005) FASB website
IASB/FASB Discussion Paper IASB (2006); DP
IASB/FASB Comment letters IASB website
Stage 2 (before ED) IASB Agenda paper 3A (20 February 2007) IASB (2007a)
IASB Audio tape board meeting (20 February 2007) IASB (2007b)
IASB IStaR Newsletter (20 February 2007) IStaR (2007a)
FASB Board meeting minutes (28 February 2007) FASB (2007a)
IASB Agenda paper 5 (18 April 2007) IASB (2007c)
IASB Audio tape board meeting (18 April 2007) IASB (2007d)
IASB IStaR Newsletter (18 April 2007) IStaR (2007b)
FASB Board meeting minutes (2 May 2007) FASB (2007b)
IASB Agenda paper 3 (20 February 2008) IASB website
IASB Audio tape board meeting (20 February 2008) IASB website
IASB IStaR Newsletter (20 February 2008) Peter Walton
FASB Board meeting minutes (20 February 2008) FASB website
IASB/FASB Exposure Draft IASB (2008a); ED
IASB/FASB Comment letters IASB website
Stage 3 (after ED) IASB Agenda paper 2A (16 December 2008) IASB (2008b)
IASB Audio tape board meeting (16 December 2008) IASB website
IASB IStaR Newsletter (16 December 2008) Peter Walton
IASB Agenda paper 5 (20 January 2009) IASB website
IASB Audio tape board meeting (20 January 2009) IASB (2009)
IASB IStaR Newsletter (20 January 2009) IStaR (2009)
FASB Board meeting minutes (14 January 2009) FASB website
IASB Agenda paper 14A (19 March 2009) IASB website
IASB Audio tape board meeting (19 March 2009) IASB website
IASB IStaR Newsletter (19 March 2009) Peter Walton
FASB Board meeting minutes (2 April 2009) FASB website
IASB Agenda paper 10B (15 September 2009) IASB website
IASB Audio tape board meeting (15 September 2009) IASB website
IASB IStaR Newsletter (15 September 2009) Peter Walton
IASB Agenda paper 6 (17 May 2010) IASB website
Table 1 (continued)
Author Year Source
Ashton, R.H. (1977) The Accounting Review, 52 (3)
De?iese, P.L. (1977) Journal of Accountancy, 144 (1)
Burton, J.C. (1978) Journal of Accountancy, 145 (1)
Solomons, D. (1978) Journal of Accountancy, 146 (5)
Horngren, C.T. (1981) Journal of Accountancy, 151 (4)
Pacter, P.A. (1983) Journal of Accountancy, 156 (1)
Miller, P.B.W. (1985) Journal of Accountancy, 159 (3)
36 C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40
1930
1970
2010
(1934) Creation of SEC
(1973) Foundation FASB and IASC
(1939 – 1959) CAP
(1959 – 1973) APB
Paton & Littleton (1940)
(2002) Norwalk Agreement
(2005 - 2010) Framework revision
SFAC 8 / IASB Framework (2010)
(2001) IASB (replacing IASC)
Moonitz (1961)
ASOBAT (1966)
APB Statement No. 4 (1970)
Trueblood Report (1973)
FASB Discussion Memorandum (1976)
SFAC 1 (1978)
SFAC 2 (1980)
IASC Framework (1989)
(1992 – 2001) G4+1
Fig. 1. Timeline of major events and contributions.
Table 2 (continued)
Time period Board Document Origin/reference
IASB Audio tape board meeting (17 May 2010) IASB website
IASB IStaR Newsletter (17 May 2010) Peter Walton
FASB Board meeting minutes (17 May 2010) FASB website
FASB/IASB Framework for ?nancial reporting IASB website
IASB Feedback statement IASB website
C. Erb, C. Pelger / Accounting, Organizations and Society 40 (2015) 13–40 37
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