Accounting, Organizations and Society 26 (2001) 565±596
www.elsevier.com/locate/aos
Institutional theory and accounting rule choice:
an analysis of four US state governments' decisions
to adopt generally accepted accounting principles
Vivian L. Carpenter a, Ehsan H. Feroz b,*
a
Florida A & M University, School of Business and Industry,
Division of Academic Programs, Tallahassee, FL 32307, USA
b
125 School of Business and Accounting, University of Minnesota-Duluth, Department of Accounting,
10 University Drive, Duluth, MN 55812-2496, USA
Abstract
In this study, we use institutional theory to explore how institutional pressures exerted on four state governments
(New York, Michigan, Ohio, Delaware) in¯uenced the decision of these governments to adopt or resist the use of
generally accepted accounting principles (GAAP) for external ®nancial reporting. We identify resource dependence as a
potent form of coercive institutional pressure that was associated with early GAAP adoption. We identify three factors
that may lead to initial resistance to institutional pressures for change. First, if accounting bureaucrats are not active in
professional associations that promote GAAP adoption, they may miss the educational process that we believe is
important to early adoption of GAAP. Second, organizational printing may impede GAAP adoption. Third, powerful
interests may impede GAAP if the proposed GAAP legislation is expected to alter the existing power relationships. We
found that key accounting bureaucrats in New York and Michigan used ``compromise'' as an initial strategic response
to institutional pressures to adopt GAAP, Ohio's key accounting bureaucrat adopted a ``defy'' strategy, although the
political leadership endorsed an ``acquiesce'' strategy. While Delaware initially employed a ``manipulate''strategy with
some success. Delaware did not adopt GAAP for external reporting until a political entrepreneur for GAAP emerged
in the early 1990s. Our study suggests that all strategic responses to resist institutional pressures for GAAP adoption
will ultimately fail because of the potency of the institutional pressures that result from the well organized professional
accounting and governmental institutional ®elds. # 2001 Elsevier Science Ltd. All rights reserved.
1. Introduction
This article integrates institutional and resource
dependency theories to develop a theoretical framework that will help to improve our understanding
of the processes that a€ect accounting choice in
the public sector. We argue that institutional
* Corresponding author. Tel.: +1-218-726-6988; fax: +1218-726-8510.
E-mail address: [email protected] (E.H. Feroz).
theory is complementary to economic theory in
general, and resource dependency theory in
particular. Institutional theory provides another
lens through which to view economic resource
dependency incentives for accounting rule choice.
Institutional theory views organizations as operating within a social framework of norms, values,
and taken-for-granted assumptions about what
constitutes appropriate or acceptable economic
behavior (Oliver, 1997). According to Scott (1987),
``organizations . . . conform [to institutional pressures
0361-3682/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved.
PII: S0361-3682(00)00038-6
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V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
for change] because they are rewarded for doing so
through increased legitimacy, resources, and survival
capabilities'' (p. 498). We employ institutional
theory and economic resource dependancy theory
as complementary theories that can be integrated
to increase our understanding of public sector
accounting choice and the di€usion of generally
accepted accounting principles (GAAP) across
institutional environments. As Dacin (1997) states:
Institutional pressures operate in concert with
other forces, such as competitive or market
pressures, to in¯uence ecological dynamics. In
fact, a more complete view of organizational
action reinforces the notion that organizations are inextricably embedded in a dynamic
system of interrelated economic, institutional,
and ecological processes. (p. 47)
Prior governmental accounting research based on
economic theory generally ignores how institutional
and organizational pressures constrain accounting
choice in the public sector. We argue that institutional theory can complement economic theory in
explaining accounting choice in the public sector. In
particular, we argue that non-economic factors such
as organizational values, politics, and institutional
norms may determine bureaucratic self-interest.
The assumption that, in accounting, economic
self-interest motives drive choice is not necessarily
inconsistent with the notion that self-interest
motives may be determined by organizational,
political, and institutional factors. Institutional
theory is important in explaining accounting
choice in organizations where self-interest maximizing actors cannot exert e€ective in¯uence over
the choice of accounting practices because of their
relative power positions in their organizations. We
argue that, in the public sector, where statutes
often dictate the choice of accounting methods,
interest-maximizing accounting bureaucrats may
not independently have the political in¯uence or
organizational power necessary to change the
accounting practices of governmental entities.
In the institutional theory literature this notion is
referred to as organizational imprinting (Kimberly,
1975, pp. 1±9; Mezias, 1990; Scott, 1987; Stinchcombe, 1965). Organizational imprinting refers to
the process by which organizations tend to maintain certain practices adopted at the time that the
organization was founded and ``not by rational
decision or design but because they are taken for
granted as `the way these things are done'''
(Scott). Thus, certain organizational practices,
such as cash basis accounting, that have been
accepted as the rational way to account for public
monies since the founding of state governmental
entities would tend to persist over time; not
because these accounting practices are the rational
way to account for public monies but because they
are the socially accepted method of the proper
way to account for public monies. When state
governments dictate accounting practices in their
constitutions and/or statutes, they are imprinting
such practices as the only acceptable methods, and
by that excluding consideration of other, alternative methods of accounting. Organizational
imprinting for state governments in the form of
cash-basis accounting regulations and statutes
establishes a social reality of correct procedures to
account for public monies. Prior to the 1970s, all
US state governments had laws and/or regulations
requiring cash-basis fund accounting.
DiMaggio and Powell (1983) label the process
by which organizations tend to adopt the same
structures and practices isomorphism, which they
describe as a homogenization of organizations.
Isomorphism is a process that causes one unit in a
population to resemble other units in the population
that face the same set of environmental conditions. Because of isomorphic pressures, organizations will become increasingly homogeneous
within given domains and conform to expectations
of the wider institutional environment. DiMaggio
and Powell identify two types of isomorphism:
competitive and institutional. Competitive isomorphism is not of interest for this study because
it primarily relates to free and open market competition scenarios, and therefore, is not applicable
to the analysis of public sector organizations. In
this study, we focus on the concept of institutional
isomorphism which relates to organizational competition for political power, social ®tness, and
institutional legitimacy. DiMaggio and Powell
state that the concept of institutional isomorphism
is a useful tool for understanding the politics and
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
ceremony that pervade modern organizations (p.
150). The institutional environments of organizations contain a number of exogenous pressures
that in¯uence their structure and practices. In this
study, we examine four state governments' strategic responses to the institutional pressures for US
governmental units to adopt GAAP for external
®nancial reporting which began in the early 1970s.
The institutional environments of state governments include the federal government, local
governments,
educational
institutions,
the
accounting profession, creditors, taxpayers, associations of government employees and elected
ocials, and various public interest groups. The
insights obtained from our four case studies
suggest that exogenous institutional pressures
were potent forces for GAAP adoption in all four
cases.
In particular, we found that coercive institutional pressures for GAAP adoption can become a
potent force for early adoption of GAAP ®nancial
reporting practices when conditions of ®scal stress
and resource dependence exist. These two factors
appear to be important conditions necessary for
supportive organizational actors to develop e€ective political arguments in overcoming strong
organizational cultures and values that are takenfor-granted beliefs regarding the appropriate continued use of cash-basis accounting systems. On
the other hand, normative isomorphic pressures
appear to be a more potent force for the late
adoption of GAAP by state governments. Our
®ndings suggest that the potency of isomorphic
pressures can change over time. In our cases, isomorphic pressures appear to be in¯uenced by
changes in elected ocials, ®scal condition, the
potential to change in power relations in the state
government, participation of accounting bureaucrats
in professional associations, and the nature of
organizational imprinting of cash-basis accounting
rules.
The main contributions of this study are the
elaboration of the sources of institutional patterns
that a€ect the choice of accounting practices in the
cases of four state governments and the identi®cation of conditions under which resource dependency
has its greatest in¯uence as an e€ective coercive
institutional pressure for changing accounting rule
567
choice in the public sector. This study also
demonstrates that the power with which institutional
pressures can in¯uence organization practices can
vary over time, given the particular set of actors in
place and their initial strategic responses to institutional pressures for change. Our case evidence
demonstrates that there can be signi®cant variation in
the presence and e€ect of institutional pressures over
time based on constantly changing endogenous
and exdogenous factors, including the cognitive
beliefs of the organizational decision-makers.
A clear understanding of the historical background in which accounting rule choice occurs
and longitudinal data are needed before one can
rigorously test propositions that can be derived
from this study. This study also contributes to
institutional theory by showing how organizational structures and practices became institutionalized over time in four speci®c cases.
Our case studies reveal that the decision of state
governments to adopt GAAP for external ®nancial
reporting is profoundly in¯uenced by the personal
beliefs of key organizational decision-makers,
organization imprinting and culture, professional
accounting education programs, and institutional
pressures for change emanating from the credit
markets. We also found that after GAAP adoption,
the budgetary decision-making process, at least
initially, is decoupled from the external ®nancial
reporting process, reinforcing the conclusion of
Carpenter and Feroz (1992) that GAAP is a symbol
of legitimacy in the public sector.
2. Research methods
This is a cross-case analysis, grounded in ®eldbased research methods, of factors that in¯uenced
the external ®nancial reporting practices of four
state governments in the aftermath of the 1975
municipal bond market crisis. The states included
in this study are: New York, Michigan, Ohio and
Delaware. Two states, New York and Michigan,
were selected because they were using GAAP for
external ®nancial reporting in 1984 (early adopters
of GAAP), while two, Ohio and Delaware, were
chosen because they were not using GAAP for
external ®nancial reporting in 1984 (late adopters
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V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
of GAAP).1 The year 1984 was critical in the institutional environment because of two signi®cant events:
passage of the Single Audit Act (SAA) of 1984, and
establishment of the Governmental Accounting
Standards Board (GASB). Passage of the SAA and
formation of the GASB signi®cantly increased institutional pressures for state and local governments to
adopt GAAP for external ®nancial reporting.
New York, an early adopting GAAP state, was
chosen for this study because the ®nancial problems of New York City are often cited as the
impetus for recent reforms in government
accounting principles. Michigan and Ohio were
selected as an early adopting GAAP state and late
adopting GAAP state, respectively, because they
are contiguous states with similar economic and
demographic factors, both have economies that
are reliant on manufacturing, and both have large
local governments (Wayne County, Michigan and
Cleveland, Ohio) that had nationally publicized
®scal crises and were under extreme ®nancial
stress in the late 1970s. Thus, they faced comparable resource dependency pressures for change
and could serve to highlight conditions that
impede GAAP adoption in the face of potent
coercive isomorphic pressures created by ®scal
stress. Delaware, a late adopting GAAP state, was
selected because their initial response to survey data
indicated that they had a single entry bookkeeping
system and were using GAAP.2 This response
obviously merited further inquiry since GAAP
required use of a double entry booking system. Data
for this research was collected over an 11-year period,
during which the two states that were originally
selected for study, because they were non-GAAP
states, elected to adopt GAAP for external ®nancial
reporting. As of this writing, all four states Ð
Michigan, Ohio, and New York, and Delaware Ð
are using GAAP for external ®nancial reporting.
Multiple sources of evidence were used to
examine the context in each state (Yin, 1984).
Structured and unstructured interviews were conducted by both authors. Archival documents were
1
In 1984, of the 50 continental states, 28 were using GAAP
and 22 were not using GAAP (Carpenter, 1991)
2
Based on a survey conducted by Vivian L. Carpenter for
the Data Availability Project of the GNP Research Committee
of the American Accounting Association, 1987
reviewed; press articles, state statutes, and other
ocial documents were located ans assessed; key
interviewees were asked to review draft reports and
interviewees were phoned to clarify their statements
and/or other information when necessary.
A case study protocol was used to guide the
interviews (Appendix A). The evidence was analyzed
using a replication logic across cases to ensure external validity (Eisenstadt, 1989). Replication procedures in a multiple case design allowed us to focus on
the institutional and organizational factors that
result in governments adopting professionally
endorsed accounting innovations due to institutional
pressures versus those conditions that result in governments resisting such pressures. The researchers
had certain expectations from the literature review as
to how institutional pressures would in¯uence decisions to adopt/not adopt GAAP. Intensive discussion of the apparent ®ndings at several stages in the
writing of this paper, coupled with insights from the
institutional theory literature resulted in the development of propositions for future research.
In this study, we attempt to identify those conditions that ease or impede the adoption of professionally endorsed accounting innovations with
the hope of gaining a better understanding of how
institutional pressures a€ect internal power relations, self-interest motives of actors in the public
sector and the process of institutionalization of
professionally endorsed accounting practices in
the public sector.
In the next section, we provide a review of the
resource dependency and institutional theory literatures that provide the rubric of a conceptual model
that can be used to generate a set of propositions that
can be tested in future research. The remaining three
sections of the paper include: the case evidence, a
cross-case analysis, and some concluding remarks.
3. Institutional theory
In this section, we focus on institutional theory,
highlighting3 its relationship with the economic
3
For more discussion of institutional theory see DiMaggio
and Powell (1983); Meyer and Rowan (1977); Meyer and Scott
(1982); Mezias (1990); Zucker (1987).
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
resource dependency perspective to provide a
more comprehensive conceptual framework for
understanding accounting choice in the public
sector. Institutional theory assumes that organizations adopt structures and management practices that are considered legitimate by other
organizations in their ®elds, regardless of their
actual usefulness. Legitimated structures or practices
can be transmitted to organizations in a ®eld through
tradition (organization imprinting at founding),
through imitation, by coercion, and through normative pressures (Meyer & Rowan, 1977; Palmer,
Jennings, & Zhou, 1993; Scott 1987).
The two primary foundation works of the
``new'' institutional theory are Meyer and Rowan
(1977) and DiMaggio and Powell (1983). The
``new'' institutional theory is based on the premise
that organizations respond to pressures from their
institutional environments and adopt structures
and/or procedures that are socially accepted as
being the appropriate organizational choice.
Recent literature examines accounting as a symbol
of legitimacy (Carpenter & Feroz, 1992; Covaleski
& Dirsmith, 1988a; DiMaggio & Powell, 1983;
Meyer & Rowan, 1977). For instance, Meyer and
Rowan argue that many elements of formal structure in bureaucracies function as myths and cite
accounting as an example. Meyer and Rowan
(1977) argue that such, ``Institutional techniques
are not based on eciency but are used to establish an organization as appropriate, rational, and
modern. Their uses display responsibility and
avoid claims of negligence'' (p. 344). They state
that bureaucratization is caused, in part, by the
proliferation of these rationalized myths in
society. By designing a formal structure that
adheres to the prescription of myths in the institutional environment, an organization demonstrates that it is acting in a proper and adequate
manner. Meyer and Rowan maintain that myths
of generally accepted procedures Ð such as
GAAP Ð provide a defense against the perception
of irrationality and enhanced continued moral
and/or ®nancial support from external resource
providers. They go on to state that,
In modern societies, the myths generating
formal organizational structure have two key
569
properties. First, they are rationalized and
impersonal prescriptions that identify various
social purposes as technical ones and specify
in a rulelike way the appropriate means to
pursue these technical purposes rationally
(Ellul, 1964). Second, they are highly institutionalized and thus in some measure beyond
the discretion of any individual participant or
organization. They must, therefore, be taken
for granted as legitimate, apart from evaluations of their impact on work outcomes.
(Meyer & Rowan, 1977).
Professional power not only shields decisionmakers from having others pass judgement on
their decisions but also ``binds supervisors and
subordinates to act in good faith'' (Meyer &
Rowan, 1977, pp. 343±344). Thus organizations
that have highly institutionalized formal structures
tend to delegate work activities to appropriate
professionals thereby avoiding the need for eciency evaluations.
Institutionalization [of management practices] may
be viewed as ``a process entailing the creation of reality'' (Scott, 1987, p. 505). Covaleski and Dirsmith
(1988a) de®ne institutionalization as ``the processes
by which societal expectations of appropriate
organizational form and behavior come to take on
rule-like status in thought and action'' (p. 562).
A state's decision to adopt GAAP can be
in¯uenced at the individual level through the key
decision-maker's norms, values and unconscious
conformity to traditions (ideology, motivation,
competence, professionalism); at the organizational level by shared belief systems, power and
politics (nature of political competition, professionalism, decentralization); and at the organizational ®eld level through regulatory pressures,
public pressures, and the accounting profession's
norms and values (accounting institutional environment). The basic premise of institutional theory
suggests that an organization's tendency toward
conformity with predominant norms, traditions
and social in¯uences in their internal and external
environments will lead to homogeneity among
organizations in their structures and practices, and
that successful governments are those that gain
support and legitimacy by conforming to social
570
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
pressures. Thus, institutional theory strongly suggests that there will be a tendency for all state
governments to eventually adopt GAAP for
external ®nancial reporting.
4. Institutional isomorphic pressures for change:
normative, mimetic and coercive
Within the general framework of institutional
theory, DiMaggio and Powell (1983) discuss the
concept of structural isomorphism that they call
institutional isomorphism. Institutional isomorphism is identi®ed as the process by which
organizations tend to adopt the same practices
and/or structures over time in response to common institutional pressures which may exist at the
individual, organizational or organizational ®eld
level. They argue that structural isomorphism
makes organizations look more alike without
necessarily improving them. Bureaucratization
and other forms of standardization in organizational practices arise because organizations want
institutional legitimacy. DiMaggio and Powell
(1983) suggest that governments, which often have
ambiguous goals and unreliable performance measures, resort to legitimacy rituals to demonstrate
social and economic ®tness. One manifestation of
organizations in need of institutional legitimacy is
the collecting and displaying of huge amounts of
information that have no immediate relevance for
actual decisions. Hence, those state governments
that have adopted GAAP, yet do not use GAAP
information in making ®nancial management
decisions (e.g. budgetary decisions), may have
adopted GAAP for purposes of institutional
legitimacy.
4.1. Normative isomorphism
Institutional legitimacy ``refers to the degree of
cultural support for an organization Ð the extent
to which the array of established cultural accounts
provide explanations for its existence, functions,
and jurisdiction, and lack or deny alternatives''
(Meyer & Scott, 1982, p. 202). Institutional legitimacy is derived from the wider institutional
environment Ð not from the local bureaucrats
who may employ their own unique interpretations of
proper procedure. Meyer and Scott (1982) state that,
``Legitimacy is a question of cultural theory, and
speaking on behalf of theory requires cultural licenses'' (p. 202). Therefore, institutional legitimacy
can only be successfully challenged by collective mobilization of those with cultural licenses and action by
those that have ``collective authority over what is
acceptable theory'' (Meyer & Scott, 1982, p. 202).
Bureaucracies continuously engage in cultural
(or institutionally driven) innovation. Innovations
linked to cultural authority are more likely to have
in¯uence and easier implementations than innovations which lack institutionalized legitimacy.
Cultural innovations are much more likely to have
in¯uence when they are supported by national or
worldwide professional associations (Meyer &
Scott, 1982, p. 200; Meyer & Rowan, 1977, pp.
346±347). Walker (1969) argues that interstate
communications are important in the process of
innovation (pp. 897±898). He identi®es professional associations among state administrators as
important information networks that make elected
ocials aware of cultural innovations at the state
level of government. Walker (1969) states,
Before states may respond to new programs
adopted in other states, their political leaders
must be aware of these developments, so
interstate communications are important in
the process of di€usion . . . many specialized
systems of communication among states have
grown up during the last thirty years, mainly
through the creation of professional associations among state administrators. (pp. 897±
898).
DiMaggio and Powell's (1983) work suggests
that institutional pressures for state governments
to adopt GAAP for external ®nancial reporting
may stem from the professional education of
accounting bureaucrats and from the growth of
professional associations, such as the Government
Finance Ocers Association (GFOA), that span
government organizations and promote speci®c
®nancial management practices.
The adoption of GAAP by a governmental entity
is an organizational innovation. Organizational
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
innovation concerns the adoption of processes
that are new in the sense of being di€erent from
the entity's own tradition. Therefore, the adoption
of GAAP by a governmental entity that has previously used other accounting practices represents
an organizational innovation. The organizational
theory literature has identi®ed size, wealth, environment, ideology, motivation, competence, professionalism,
political
competition,
and
decentralization as being linked to innovations in
organizations (Mohr, 1969, p. 113; Walker, 1969,
pp. 883±886). Our review of institutional theory
suggests that the environment, ideology, motivation, competence, professionalism, and nature of
political competition may all be viewed as measures of institutional pressures for socially
endorsed innovations in organizations.
4.2. Mimetic isomorphism
When organizations face situations where there
is no clear cut best course of action, they may limit
the selection of structures or practices to those
structure or practices that are bing used by organizations who they view as being successful in the
institutional environment. DiMaggio and Powell
(1983) state that, ``Organizations tend to model
themselves after similar organizations in their ®eld
that they perceive to be more legitimate or successful. The ubiquity of certain kinds of structural
arrangements can more likely be credited to the
universality of mimetic processes than to any concrete evidence that the adopted models enhance
eciency'' (p. 152). Thus, mimetic isomorphism is
a response to organizational uncertainty in identifying the best course of action. According to Palmer et al., (1993):
Institutional theory assumes that organizations
will select among alternative structures [or practices] on the basis of eciency considerations,
primarily at the time that their organization ®eld
are being founded or reorganized. Subsequently,
they adopt forms that are considered legitimate by other organizations in their ®eld,
regardless of these structures' [or practices']
actual eciency (p. 104).
571
Uncertainty can be a powerful force that
encourages organizations to imitate the actions of
those organizations that are viewed as being successful in their organization ®eld.
4.3. Coercive isomorphism: resource dependency
theory
State governments, like ®rms, require resources
from the environment to survive. Thus, the political
survival of government ocials depends on their
ability to negotiate exchanges with the environment (e.g. levying taxes, passing budgets, issuing
bonds). Particularly during periods of ®scal stress,
elected ocials try to ensure continued ®nancial
resources for the government. Hence, other organizations that can provide resources, such as the
credit markets, can exercise power over the government entities (Meyer & Scott, 1982). This
power can be used to dictate the use of certain
institutional rules Ð such as GAAP.
This resource dependency perspective (Pfe€er,
1981; Pfe€er & Salancik, 1978) does not take the
acquisition of environmental resources as given.
Unlike agency theory, which focuses on how
scarce resources are allocated in an organization
and how employees can be motivated to maximize
resource allocation objectives, the resource dependency perspective focuses on problems associated
with the acquisition of ®nancial resources from the
environment to understand the behavior of individuals within a given organization. Even for a
state government, the acquisition of ®nancial
resources can be problematic and uncertain, with
resource providers becoming unreliable in times of
national recessions. Hence, in times of ®scal stress,
government ocials focus on exchanges that will
ensure the continuation of needed ®nancial resources.
According to Pfe€er and Salancik (1978):
A good deal of organizational behavior . . .
can be understood only by knowing something about the organization's environment
and the problems it [faces] for obtaining
resources. What happens in an organization
is not only a function of the organization, its
structure, its leadership, its procedures, or its
goals. What happens is also a consequence of
572
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
the environment and the particular contingencies and constraints from that environment. (p. 3)
Covaleski and Dirsmith (1988a) use an institutional perspective to examine the role of power in
the budgetary process in Wisconsin. They cite
DiMaggio and Powell (1983) as identifying budgeting as ``one speci®c form of coercive isomorphism
that governments often require for funding.'' (p.
563). Covaleski and Dirsmith (1988a) found that
the state's budget, which represents the end product of many processes of institutionalization, was
infused with power and self-interest in¯uence (p.
585). They also found that powerful groups and
individuals (such as state governors) use their power
to enforce compliance with institutional rules when
their interests are at stake (Covaleski & Dirsmith,
1988a).
A more common form of power is that which is
due to one's formal role in the structure of an
organization (Pfe€er & Salancik, 1974). In state
governments, formal structure and the resulting
organizational power, are often codi®ed in state
constitutions and laws. Thus, the use of GAAP
and GAAS (generally accepted auditing standards) for external ®nancial reporting can a€ect
the distribution of organizational power if it
results in a reorganization of the state government
entity to satisfy independence requirements of
GAAS. A redistribution of organizational power
may occur if a state auditor has broad organizational record-keeping responsibilities coupled with
auditing responsibilities. Such dual responsibilities
are discouraged under GAAS. The use of GAAP
and GAAS can also limit the power of a governor
to manipulate the reported fund balance, thereby
weakening the governor's power position in the
allocation of budgetary resources (Healy, 1981).
A central premise in organizational theory is
that the potential to alter existing power relationships can a€ect an organization's response to
institutional pressures for change (Covaleski and
Dirsmith, 1988a; Pfe€er, 1981). Power is a reserve
of potential in¯uence through which the allocation
of budgetary resources can be a€ected. Politics is the
study of power in action; therefore, an investigation
of organizational power implies an investigation of
organizational politics. Pfe€er de®nes organizational politics as follows: ``Organizational politics
involves those activities taken within organizations
to acquire, develop, and use power and other
resources to obtain one's preferred outcomes in a
situation in which there is uncertainty or dissensus
about choices'' (Pfe€er, 1981, p. 7).
The resource dependency perspective focuses
attention on the external factors in understanding
organizational decision-making. The work of
Mizuchi and Fein (1999) suggests that pressures
from external resource providers results in coercive
isomorphism and ``is thus analogous to formulations of the resource dependency model, in which
organizations are viewed as constrained by those
on whom they depend for resources'' (p. 657).
Oliver's focus on political self-interest to explain
organizational strategic responses to institutional
pressures for change uses the resources dependency
perspective (Oliver, 1991, pp. 145±179). Oliver
identi®es ®ve strategic responses to institutional
pressure for change: acquiesce, compromise,
avoid, defy, and manipulate. Acquiescence may
take many forms including habit, imitation, and
compliance. Compromise as a strategy involves an
attempt to balance, pacify or bargain with internal
constituents. Avoidance is an organizational
attempt to exempt itself from conformity to internal norms by using tactics such as concealment,
bu€ering and escape. De®ance is a more active form
of resistance involving tactics such as dismissal,
challenge and attack. Finally, manipulation refers to
purposeful and opportunistic attempts to co-opt,
in¯uence, or control institutional pressures and
evaluations (Oliver, 1991, pp. 154±156). Thus,
Oliver (1991) concludes that, ``organizations do not
invariably conform to rules, myths or expectations
of their institutional environments'' (p. 175).
Institutional pressures may work in concert with
other pressures such as resource dependancy in
shaping a government's decision to adopt a particular structure or management practice. Mizuchi
and Fein (1999) acknowledge that ``Coercive isomorphism, at least in the ®rst instance (pressure
from other organizations on which a focal organization is dependent), is thus analogous to formulations of the resource dependance model, in
which organizations are viewed as constrained by
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
those whom they depend for resources'' (p. 657).
Resource dependance results in coercive isomorphic pressures for change which can be a
dominant factor in in¯uencing a government's
choice of accounting practices. Thus, the theoretical arguments related to the resource dependency
perspective represent a particular form of the
coercive isomorphic pressures that have been previously described.
DiMaggio and Powell (1983) point out that it
may not always be possible to distinguish between
the three forms of isomorphic pressure, and in
fact, two or more of these isomorphic pressures
may be operating simultaneously making it nearly
impossible to determine which form of institutional pressure was more potent in all cases.
Moreover, the power and potency of the various
institutional pressures for change may vary over
time. Palmer et al. (1993) state that, ``Institutional
processes are believed to be most salient and
detectable during the late states of a new form's
proliferation.'' (pp. 101±102)
In the next section, we present the case study
evidence.
5. The case evidence
Five years have passed since budgetary gimmicks led the nation's largest city to the brink
of bankruptcy. Yet governmental accounting
is still undergoing major structural change.
Concepts and standards are under debate.
Special interest groups vie for authority to
make the rules. States and cities, worried over
the specter of federal controls, attempt to
police themselves, creating the perception of
progress. Much still needs to be done. (Standard and Poor's Perspective, 1980).
The New York City ®scal crisis in 1975 brought
into question the ®nancial reporting practices of
many governmental entities. The Securities and
Exchange Commission (SEC) observed that one of
the ``fundamental factors underlying the City's
®nancial diculties was the use of budgetary,
accounting and ®nancing practices which enabled
573
it to borrow funds from the public which could
not be supported by its sources of revenue'' (SEC,
1965, p. 1). The New York City ®nancial crisis
resulted in a decline of investor con®dence in
municipal securities, increased pressure on the
accounting profession to improve GAAP for state
and local governments, and increased institutional
pressure on state and local governments to adopt
GAAP for external ®nancial reporting. In 1979,
the institutional legitimacy of using cash-basis
accounting for external ®nancial reporting by
governments was revoked by the professional
accounting community by issuance of Statement
No. 1 by the National Council on Government
Accounting (NCGA) and its endorsement by the
American Institute of Certi®ed Public Accountants.4 During the 1980s, authoritative GAAP as
prescribed by NCGA Statement No. 1 became the
institutional symbol of legitimacy embraced by the
professional government accounting community.
Since the 1975 ®scal crisis of the City of New
York was identi®ed as the critical event that created
the institutional pressures for GAAP adoption by
US state and local governmental units, we begin
the presentation of our case reports with the State
of New York, followed by Michigan, Ohio and
Delaware, respectively.
5.1. State of New York
The conversion to GAAP will ®nally put an
end to the historic practice of manipulating
New York State's books±the taproot of the
excessive spending and taxing in the late
1960s and 1970s that drove business and jobs
from our State and our cities and impaired
4
Currently, in the US, GAAP for state and local governments are promulgated by the GASB. The pronouncements of
GASB are endorsed by the major government accounting
organizations, the federal government, and the public accounting profession. Government GAAP before 1981 allowed legally
mandated accounting principles to be considered without disclosing departures from Governmental Accounting and Auditing Financial Reporting (GAAFR). NCGA Statement No. 1
put legally mandated accounting practices and authoritative
governmental GAAP on the same standing for ®nancial
reporting for ®scal year end 1980.
574
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
our economy. (Edward V. Regan, Comptroller, State of New York, 1978-Present,
Press Release, December 1980).
The State of New York's constitution and statutory provisions related to the duties of the state
comptroller are unique among state governments
because they assign so many responsibilities and
powers to the state comptroller. Responsibilities
that in most states are divided between the state
auditor, the state treasurer, and the Oce of
Management and Budget are all given to the elected State comptroller in New York state. New
York's constitution requires that the Governor
submit a proposed budget to the legislature. The
courts have held that this proposed budget must
be balanced, but a balanced budget does not have
to be enacted or maintained during the ®scal year
(Per Waring, personal communication, 2 June
1989). In practice, the Division of the Budget does
attempt to maintain a balanced cash budget so
that at year's end the General Fund receipts and
disbursements are equal.
In part, because of increased spending and
decreased federal government support in the
1970s, the state engaged in some questionable
®nancial management practices. The state would
systematically defer Ð or ``rollover'' Ð state
liabilities, recording such expenditures only when
actually paid, usually in the next ®scal year. For
example, state aid to local units was routinely
manipulated, resulting in rollovers that were in
excess of $2 billion in 1979. Similarly, payment of
income tax refunds was deferred until after the
start of the next ®scal year. Since the state operated
on a cash basis, the millions owed to taxpayers
showed up on the ®nancial statements as revenues
until paid. Because of these ®nancial management
practices, the state had to secure a great deal of
short-term ®nancing at the inception of each ®scal
year. This annual issuance of debt was also known
as ``spring borrowing.'' By the late 1970s, New
York's borrowing was more than three billion
dollars every spring.
The process had a cyclical nature; by postponing
payment of its bills at year end, the state could pay
back money borrowed in April of the preceding
year. It would then close its books on March 31
with a cash surplus and no outstanding short-term
debt. Within days to weeks the state would again
borrow billions to make the postponed bill payments.
During his term as comptroller (1954±1978),
Arthur Levitt was reluctant to make major changes in the state's accounting system without the
support of the governor's oce and the legislature
due to the legal interrelation between budgeting
and accounting. The State Comptroller's Oce
did make many recommendations for simple
changes that would move the cash-basis accounting
practices closer to GAAP. For instance, it recommended showing only 12 months (rather than 13
months) of revenues in a ®scal year. The ®rst
written recommendations for New York to
improve its accounting system were made in the
late 1960s in the Annual Report of the State
Comptroller (Ives, September 1987).5 The 1972±73
Annual Comptroller's Report contains the ®rst
recommendation for the state to adopt GAAP
(which they termed modi®ed accrual) and a single
line bill requiring modi®ed accrual was routinely
introduced for political reasons related to budget
each legislative session in the late 1970s.
According to the director of the Commission on
Economy and Eciency of the Assembly, neither
the governor nor the legislature initially had an
interest in GAAP. He corroborates the view that
GAAP was seen by some legislators as a way to
embarrass the Governor, furthering their e€orts to
gain more control over the budget (Healy, 1981).
Perhaps most signi®cant contribution Levitt
made to the New York State's ultimate decision to
convert to GAAP was his issuance of prototype
GAAP ®nancial statements for ®scal years 1977±
1979. These were presented as supplements to the
state's regular cash basis statements in the annual
report. However, the prototype GAAP reports
were not issued on a timely basis. New York needed to simplify the fund structure in order to not
impede the process of getting out the prototype
5
Thomas Waring, director of Fiscal Research and Special
Projects for the Bureau of State Financial Reporting in the
Oce of the State Comptroller, con®rms this stating that the
1969 Annual Report of the State Comptroller documents the
fact that New York began moving toward an accrual accounting system in the late 1960s (Waring, December 1987).
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
GAAP ®nancial statements (Waring, December
1987).
In the late 1970s, the entire nation was experiencing a tightening of resources as the recession
set in. New York State's revenue base was declining
while its expenditures were growing. The state
began deferring greater amounts of payments and
securing increasing amounts of short-term ®nancing in order to meet current needs and pay o€ the
previous year's obligations. New York's weak
®nancial condition had several detrimental e€ects.
First, the state was forced to rely heavily on shortterm borrowing to cover a signi®cant portion of
its current operations. In the event the state could
not issue any more short term notes, the state
would be on the edge of bankruptcy. Second, the
short-term ®nancing was expensive. Not only did
the state incur interest costs, local governments
also had to borrow to meet their needs until state
aid became available, resulting in needless interest
costs to local governments. Last, large amounts of
short-term debt were a sign to the credit market
that the state was not solvent and lacked proper
®nancial management (Green, 1987).
In 1978, Edward Regan was elected comptroller
of the State of New York. Regan learned about
GAAP from his accounting sta€. The comptroller's accounting sta€, which wanted to adopt
GAAP, had a history of being considered leaders
in government ®nancial management practices.
Many on the comptroller's sta€ were active members of the Municipal Finance Ocers Association
(now the GFOA), a professional organization of
government ®nance ocers that promotes the
development and use of GAAP in the public sector. The comptroller's sta€ had decided to move
New York State toward accrual-based accounting
practices before the 1975 New York City ®scal
crisis. In fact, in the early 1970s, then Comptroller
Levitt sponsored a bill to improve the states ®nancial management practices. At that time there was
no support from the legislature or the governor for
adopting GAAP for external ®nancial reporting.
The comptroller's sta€ under Levitt continued to
engage in activities that would move the state closer to GAAP, like producing GAAP prototype
®nancial statements. These e€orts intensi®ed with
the election of Ned Regan as the new comptroller.
575
Regan, an attorney, became a vocal proponent of
GAAP; his earliest statements denounced the state's
poor and manipulative ®nancial reporting practices. Regan's challenges to the state's accounting
practices produced a heated political environment.
Based on the prototype GAAP statement of 1978±
1979, Regan announced that New York had an
annual de®cit of $108 million in 1979 in contrast to
the $5 million cash surplus previously reported. The
prototype GAAP statement re¯ected an accumulated de®cit of over $2 billion and a very bleak picture of overall ®nancial conditions.
In December 1979, Standard and Poor's lowered the state's credit rating on general obligation
bonds from AA to AA , just days before New
York was to market $81million in bonds. New
York then had the lowest rating of all states except
Michigan (Green, 1987, p. 208). In 1980, Standard
and Poor's issued a policy statement related to use
of cash basis accounting for ®nancial reporting
that stated, ``We are becoming increasingly concerned that the cash basis method of ®nancial
reporting may not provide us with the information
sucient to rate bonds'' (Standard and Poor's,
1980).
In response to Regan's charges and the lowered
bond rating, the merits of GAAP became a hotly
debated political topic. Terms like ``manipulation,'' ``hidden de®cits,'' ``poor ®nancial management,'' and ``government spending'' sparked
attention as the GAAP issue made newsworthy
stories of con¯ict, controversy, and challenges to
those in oce. Legislative and ad hoc committees
were formed to discuss whether the state should
adopt a GAAP system to improve its ®nancial
management practices, reestablish the state's
credibility, and better its credit rating. Committee
members representing bond rating agencies and
underwriters emphasized the need for external
®nancial statements conforming with GAAP to
establish the state's ®scal credibility. Accountants
on committees stressed the need for a data processing system to support GAAP ®nancial statements
and make them auditable, one that could later be
expanded into an e€ective management information system. In 1980, the Legislative Commission
on Economy and Eciency in Government, in a
well publicized report, Accounting and Financial
576
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
Reporting Reform in the State of New York (State
of New York Legislative Commission of Economy
and Eciency in Government, 1980), was highly
critical of cash basis accounting and recommended
that the state adopt GAAP.
In summary, two sources of institutional pressure in¯uenced New York's ®nal decision to adopt
GAAP: (1) pressure from Standard and Poor's
and (2) the threat of the federal government mandating government accounting standards (Standard and Poor's, 1980). In April 1980, Standard
and Poor's issued a policy statement at the annual
conference of the Municipal Finance Ocers
Association (MFOA) indicating that non-use of
GAAP in ®nancial reporting by governments
would be considered a negative factor in the credit
rating process (Standard and Poor's, 1980; Healy,
1978). This statement also suggested that GAAP
could reduce net interest costs for governments
(Standard and Poor's, 1980). In 1979 and 1980,
US Senator Harrison Williams introduced bills
that would have amended the SEC Acts to set up a
Council on State and Local Government
Accounting and Financial Reporting Standards
within the federal government to ensure the availability of recognized accounting and ®nancial
reporting standards for state and local governments [Senate Bill S-1667-B(1979)]. The threat of
federal action ultimately resulted in the establishment of the GASB, which is not a federal agency.6
The New York GAAP conversion began in
October 1980. The state retained a formerly ``Big
Eight'' (now one of the ``Big Six'') accounting ®rm
in December 1980 to begin converting the accounting system. The contract was awarded following a
special session of the legislature in which an initial
$1 million was appropriated to fund the project
through the rest of the ®scal year. Regan submitted
an additional budget request to fund the remainder
of the approximately $4.1 million project.7
6
The GASB is funded by the Financial Accounting Foundation (FAF) which also funds the Financial Accounting Standards
Board (FASB) Ð the accounting rule-making body recognized by
the private sector. The FAF is primarily funded by the public
accounting profession (Feroz, 1986; Greathouse, 1985).
7
The total cost for the modernization and redesign of New
York's cash-basis accounting system was over $19.3 million
dollars over a 5-year period (1980±1984).
However, a GAAP bill was yet to be passed.
From September 1980 through May 1981 weekly
meetings were held between executive and legislative
sta€ to develop a GAAP bill. Much of the negotiation was related to the budgetary implications
of GAAP. Part of the controversy surrounding the
GAAP bill stemmed from the belief of some
executive branch sta€ members that the bill gave
more power to the legislature and took responsibilities away from the governor, while other legislative sta€ members believed the governor could
still do things ``o€ budget,'' implying that the
GAAP bill did not go far enough in limiting the
budget manipulating powers of the governor
(Waring, December 1987; Healy, 1981).8 Regan
believed GAAP would discipline the budget process,
ending ``a political advantage that Governors have
enjoyed for the last 50 years Ð budget manipulation'' (Healy, 1981).
Table 1 illustrates the di€erence in the reported
de®cit on a cash versus GAAP basis of accounting.
Governor Hugh Carey in his Annual Budget
Message of 1980±1981 proposed reforming and
restructuring the state's budgeting and accounting
system. He ordered the director of budget to work
with the comptroller in developing a modi®ed
accrual system of budgeting and accounting that
would ``substantially conform to GAAP.'' Carey
stated, ``Meaningful reform requires not only that
we change our way of counting what we spend,
but that we change the pattern of spending itself''
(State of New York, 1982a,b). Governor Carey in
July 1981 signed the GAAP law. At the annual
meeting of the MFOA (now GFOA) in May 1982,
Regan made the following comments:
In the short span of 15 months, New York
has converted its method of accounting and
®nancial reporting to a state-of-the-art system
which has restored the state to a position of
national leadership . . . The new accounting
system instills discipline in the budget making
and the ®nancial reporting process and reduces
8
Waring maintains that the legislature's incentive to pass
the GAAP bill was a desire to limit the governor's executive
power over the budgetary process (Waring, personal communication, 2 June 1989).
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
577
Table 1
State of New York general fund revenues and expenditures in accordance with GAAP, cash-based receipts and disbursements, Fiscal
Years 1982±1985 (dollars in millions)a
Fiscal Year 1982
Fiscal Year 1983
Fiscal Year 1984
Fiscal year 1985
Revenues and expenditures in accordance with GAAP
Revenues
$17,782
Taxes
15,134
Miscellaneous revenues
975
Federal grants
37
Bond funds
±
Transfers from other funds
1627
Expenditures
$18,334
Grants to local governments
10,010
State operations
6055
General state charges
1126
Debt service
±
Capital construction
3
Transfers to other funds
1140
Repayment for de®cit TRANs
±
Expenditures not requiring current resources
±
Surplus/(de®cit)
($552)
$17,853
15,674
851
37
±
1291
$19,147
11,317
5422
1557
236
±
1219
500
(218)
($1,076)
$20,412
17,920
881
41
±
1571
$20,758
11,145
6795
1339
237
±
1242
±
±
($345)
$21,292
19,579
1,140
77
±
496
$21,503
12,221
6156
1650
246
±
1295
±
(65)
($211)
Cash-based recepits and disbursementsb
Revenues
Taxes
Miscellaneous revenues
Federal grants
Transfers from other funds
Expenditures
Grants to local governments
State operations
General state charges
Debt service
TRANs repayment
Transfers to other funds
Surplus/(de®cit)
$17,194
15,446
1134
40
574
$17,756
10,574
4347
1296
235
±
1304
($562)
$19322
18,117
897
60
248
$19,269
11,229
4732
1423
236
500
1150
$51
$20870
19,521
1004
77
268
$20,819
12,293
5512
1559
246
±
1295
$51
$16142
15,004
827
41
270
$16,139
9696
4206
1074
±
±
1163
$3
a
Source: Fiscal years 1982 and 1984 data provided by State of New York, Oce of the Comptroller, ®scal year 1983 data from
State of New York. 1983 Annual Report of the Comptroller, ®scal year 1985 data provided by State of New York, Division of the
Budget.
b
Excludes $500 million in proceeds from Tax and Revenue Anticipation Notes.
signi®cantly the ability to manipulate budget
numbers . . . Thus, the di€erences we have
witnessed over the last three years in New
York State between the Governor and Legislature and the budget disruptions which have
occurred as result will be minimized (State of
New York, 1982)
New York issued its ®rst statewide GAAP annual
®nancial report for the ®scal year ending 1981,
reporting an accumulated General Fund de®cit of
$2.3 billion. Table 1 and Figs. 1 and 2 display the
reported de®cit on a GAAP versus cash basis of
accounting. The accumulated de®cit on governmental funds rose from $2 billion to over $5 billion in 1982, was reduced to $4.3 billion in 1985
(Green, 1987), and was further reduced during
1986 and 1987 to $1.1 billion, primarily because of
improvements in the timeliness of payments to the
Employees Retirement System and a windfall in
revenues due to federal tax reforms that increased
state personal income tax revenues (Green, 1991).
In 1982, the New York State legislature passed a
GAAP law that requires the presentation of a
578
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
Fig. 1.
Fig. 2.
budget in accordance with GAAP, but does not
mandate that the adopted budget be balanced in
accordance with GAAP (Green, 1987, pp. 200±203).
New York's GAAP law only requires that a positive
cash balance be maintained (Green, 1987, p. 203).
In 1990, the State of New York was still negotiating its budget on a cash-basis only, although
those active in the budgeting process ``think about
the GAAP impact'' during negotiations (Martin,
April 1990). This shows that the adoption of
GAAP has apparently had little impact on the
budgetary process in the State of New York as the
following quote reveals,
after the longest delay in state history, the
budget was passed using accounting gimmicks and re®nancing schemes . . . Now, with
the state's accumulated de®cit at $5 billion,
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
and a possible $3 billion to $5 billion operating
de®cit for the 1991±92 ®scal year, calls for
reform are on the rise and the pressure is on
for the governor and the Legislature to get
the ®scal reform ball rolling. (Storozynski,
1991, p. 43)
The audited 1990 GAAP accumulated General
Fund de®cit exceeded $3.1 billion and Regan was
forced to oversee the short-term borrowing of over
$5.1 billion in tax and revenue anticipation notes
(Storozynski, 1991, pp. 40±41). New York's 1994±
1995 Comprehensive Annual Financial Report
(CAFR) reported a $3.3 billion de®cit. By the
early 1990s, it was becoming apparent that New
York's basic ®nancial management practices were
not altered by the adoption of GAAP, even
though GAAP basis ®nancial plans are also provided to the legislature to assist in their decisionmaking process. It should be noted that the State
Constitution requires the Governor to submit a
cash basis balanced Executive Budget to the State
Legislature for approval. Therefore, two ®nancial
plans are now presented to the legislature: a cash
basis and GAAP.
On May 1, 1993, Ned Regan resigned to accept
another position. H. Carl McCall was immediately
elected to ®ll Regan's unexpired term by the New
York State Legislature. Mr. McCall was a former
New York State Senator and was Vice President
of Citibank/Citicorp at the time of his appointment. Mr. McCall was elected by the voters as
Comptroller in 1994 and was re-elected in 1998. In
May 2000, Mr. McCall was still serving as the
Comptroller and on the board of the New York
Stock Exchange. Mr. McCall follows in the footsteps of Mr. Regan in publicly calling for ®scal
reforms.
In the 1999 Comprehensive Annual Financial
Report, Mr. McCall reports that ®nancial reform
issues remain a challenge. He states,
This year, New York was late in meeting the
deadline for enacting a budget for the ®fteenth
consecutive year . . . Many New Yorkers have
thrown up their hands in frustration, but the
status quo continues with no end in sight
. . .The fact that our leaders are unable to
579
construct a budget is a signi®cant fundamental weakness for the State's ®nancial
condition. Because of the late budget, many
billions of dollars have been spent over the
years with no plan of how that spending ®ts
into the overall picture ... And this lack of
planning helps give New York the distinction
of still having one of the highest debt burdens
and lowest credit ratings in the country . . .
New York's March 31, 1999 CAFR reports an
accumulated surplus of $1.646 billion. Of this
amount, $433.7 million was unreserved and $472.9
was reserved for Tax Stabilization (which can be
used to cover an operating de®cit). Without the
bene®t of $5 billion of net bond proceeds between
1991 and 1996, the general fund accumulated de®cit
would have been $2.935 billion. Thus, the state of
New York has incurred long-term debt to fund general government operations and balance its budgets.
E€orts to reform the State of New York's
®nancial management practices continue.
5.2. State of Michigan
Our hopes for the future . . . must be tempered
by the lessons of the past . . . we cannot simply
hope that optimistic forecasts will spur economic recovery. We cannot continue to manage by using the magic of accounting
adjustments. (Michigan Governor James J.
Blanchard, Budget Message, April 21, 1983)
According to Gerald H. Miller, Michigan budget
director from 1975 to 1982 and former executive
director for the National Association of State Budget
Directors, the force driving the ®nancial management
practices of Michigan had been and continues to be
the constitutional requirement for a balanced budget.
In 1974±1975 Michigan went through a dicult
®nancial period and political forces were operating
that made it dicult to reduce the level of government expenditures (Miller, March 1988).
Frank Pinkelman, CPA, deputy auditor general
since 1966 and auditor general from 1982 to 1989,
belongs to many professional organizations, including the American Institute of Certi®ed Public
580
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Accountants (AICPA), Michigan Association of
Certi®ed Public Accountants (MACPA), GFOA,
Midwest Intergovernmental Audit Forum, and
National Association of State Auditors, Comptrollers, and Treasurers (NSAACT). He has been
a member of the NCGA and served as chairman
of the Advisory Committee to the GASB. The
State of Michigan requires that the auditor general,
who must be a CPA, be appointed to a 10-year
term by the legislature.
Pinkelman stated that the attestation process
associated with the release of the state annual
®nancial report was the impetus for Michigan
adopting GAAP for external ®nancial reporting
because it created embarrassment for the administration. By the noting of departures from GAAP
in the opinion letter accompanying the ®nancial
statements, the executive branch and the legislature were repeatedly reminded that the accounting practices of the state were not in conformance
with GAAP. Nevertheless, there was little political
support to adopt GAAP for external ®nancial
reporting since the state's constitution prohibited
the state from budgeting a de®cit. The politicians
believed that they were constitutionally required
to reduce current expenditures by the amount of
the reported de®cit Ð non-GAAP or GAAP. The
constitution did not specify the accounting principles
to be used in determining the ocially reported
®nancial condition of the state. Pinkelman recalled,
``In the 1970s, I became convinced that we should
be using GAAP but GAAP had to be ®nanced . . .
The decision to adopt GAAP was not a high level
decision; it was in the trenches . . . there were legal
barriers to GAAP'' (Pinkelman, March 1988).
In the hard ®nancial times of 1975, the legislature and Governor William G. Milliken faced
the choice of raising either taxes or cutting expenditures. Since the Governor needed to present a
budget that looked balanced in 1976±1977, the
accounting method for Medicaid expenditure was
changed from an accrual basis to cash. Meanwhile, the accounting sta€s in the Department of
Management and Budget (DMB) and the State
Auditor General's Oce were pushing for the
state to use ``authoritative'' GAAP, that is, the
accounting principles set forth in the 1968 Governmental Accounting, Auditing, and Financial
Reporting (GAAFR) published by the NCGA, the
authoritative source for governmental GAAP
until 1979 (Pinkelman, March 1988; Miller, March
1988). Governmental GAAP before 1981 allowed
legally mandated accounting principles to be considered GAAP without disclosing the departures
from GAAFR. NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles (1979), put legally mandated accounting
practices and authoritative governmental GAAP
on the same standing for external ®nancial
reporting for ®scal years ending after 1980.
Miller's initial reaction to the accounting sta€'s
request to use authoritative GAAP was to question the budgetary e€ect. Miller, an economist,
was not an active member in GFOA . He indicated that the prince tag for authoritative GAAP
was estimated to be $50±100 million in 1980±1981
budget cuts, since Michigan's constitution prohibits
passing de®cit budgets. In spite of this, the DMB
still went to the legislature to push for authoritative
GAAP accounting. Political leaders, however, saw
little expedience in cutting programs to pay for
improved accounting.
In 1980, Miller tried to force the GAAP issue to
gain legislative approval of needed budget cuts,
but the legislature passed a statute forcing the
state to again account for Medicaid expenditures
on a cash basis. Michigan, in essence, decided to
accrue revenues without accruing expenditures.
Revenues such as income taxes and sales taxes
were accrued in 1980, while Medicaid liabilities
were not. According to Miller,
In 1980, Michigan showed 13 months of revenue
while only showing 11 months of expenditures
. . . In the General Fund there was a severe cash
problem which led to delayed payments to local
units of government, schools, universities, but
we never delayed payments to welfare recipients.
(Miller, March 1988).
Also in 1980, the state borrowed to satisfy cash
¯ow needs, borrowing $500 million with a credit
rating of MG1. When Michigan again went into
the credit market to meet cash ¯ow needs in 1981,
the market reacted by lowering the state's credit
rating to MG2. At the time, Michigan had the
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
lowest bond rating of the 50 states (Green, 1987).
It was questionable whether the state would ®nd
any buyers for its notes (Miller, March 1988).
To insure buyers for the notes, the state made a
deal with a Japanese bank. The state purchased
insurance for the notes from the Japanese bank
and was therefore able to borrow on the Japanese
bank's credit and ``make money on the split on the
borrowing with the investing'' (Miller, March 1988).
However, this deal created a political problem. Many
in the public blamed competition from Japanese
companies Ð especially automobile companies Ð for
Michigan's ®nancial problems, yet the state government had solved its ®nancial problem by making a deal with the Japanese. The Japanese
®nancial deal became a campaign issue in 1982.
Governor Milliken, a Republican, choose not to
seek reelection. James J. Blanchard, a Democrat,
was elected governor (Miller, March 1988).
The ®rst year Michigan released a statewide
®nancial report with no major departures from
GAAP was 1982. Since 1977, ®nancial reports had
been prepared in accordance with GAAP, but
with major departures from authoritative
GAAP Ð for instance, the amount reported for
Medicaid expenditures did not include millions of
known liabilities (Miller, March 1988; Pinkelman,
March 1988). James Bolthouse, Michigan's Director of Accounting since 1976, was another key
player in the state's decision to adopt GAAP.
Bolthouse, a CPA, held memberships in the
AICPA, MACPA, GFOA, and AGA. He was a
member on the NCGA for a term when it ®rst
started. According to Bolthouse, the state's ®rst
preliminary GAAP report for the year ended October 30, 1982, was issued in December 1982, and was
supported by outgoing Governor Milliken.
Governor Blanchard came into oce in January
1983; hence the 1982 annual ®nancial report was
issued under Blanchard and credit for the state
going to GAAP is generally given to the Blanchard administration. Indeed, Blanchard criticized
the Milliken administration for poor ®nancial
reporting practices in his ®rst and second budget
messages. Figs. 1 and 2 (originally included with
Blanchard's ®rst budget message) shows the General
Fund de®cit of Michigan on a GAAP basis and a
cash-basis of accounting from ®scal years 1974±
581
1983. In his second budget address, Blanchard
stated that one of his ``principle management
objectives is to control the size of government and
to make it more ecient.'' Following Blanchard's
pledge to improve ®nancial management practices
of the state government, Act 431 of 1984 Ð
requiring the state to use GAAP for external
®nancial reporting Ð was passed by the state legislature, after Michigan had already published its
®rst GAAP report.9
The following statement by Michigan's former
Budget Director, Miller sums up his view on the factors that contributed to the state adopting GAAP:
If the Michigan economy had been stable, we
probably would not have gone to GAAP. If
borrowing had not been an issue, GAAP
would not have been and issue. Except for
people who want to make GAAP a political
issue, it is not an issue. What drives the
GAAP issue is whether the state's budget is
balanced and what the ratings are . . . Who
can be against GAAP? The terminology contributes to a positive response [supportive of
GAAP] . . . You can make GAAP an issue
and get people to respond.
In late 1990, Governor Blanchard was defeated
in an upset election by then State Senate Majority
Leader John M. Engler, a Republican. In departing from oce, Governor Blanchard stated:
I'm handing to John Engler a AA credit rating,
a $422-million rainy-day fund, no accumulated
budget de®cits, and a state Ð one of the few Ð
that adheres to generally accepted accounting
procedures. A state that was listed (by Financial
World) in April as one of the ten best ®nancially
managed states in the nation. (Weeks, 1990).
In early 1991, Governor John Engler announced a
$1.1 billion projected budget de®cit for 1991 and a
1990 General Fund de®cit of $310 million determined
in accordance with GAAP and certi®ed by the State
Auditor. In January 1991, the press reported:
9
See Blanchard's budget messages of April 1983 and January 1984. Also, Bolthouse, March 1988
582
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The state's budget mess has made it easier for
Engler to quickly put his stamp on state government. He can restructure government the
way he wants while blaming former Gov.
James J. Blanchard for leaving the ®nancial
mess that requires sweeping spending cuts.
(Roger & Hornbeck, 1991).
Almighty to help us through the economic
blizzard that created a budget crisis . . . Today
. . . like a ship that has weathered stormy seas
and found shelter . . . the worst budget crisis
in the history of Ohio is being solved . . .
(Ohio Governor James A. Rhodes, State of
the State Address, 1981)
Governor Engler has pursued a ®scal policy of
slowing the growth of state government, signi®cantly a€ecting the growth in the welfare budget, and has not endured a major recession since
his 1990 election. As a result, the September 1999
CAFR shows a $1575 billion reserved General
Fund balance, a zero unreserved General Fund
Balance, a $189.2 million transfer to the Budget
Stabilization Fund as required by law (no unreserved fund balance can be carried forward in the
General Fund), and a $1.222 billion surplus in the
Budget Stabilization Fund to o€set any future
revenue shortfalls in the budget.
By law, the size of the state budget in the State
of Michigan is now determined by revenue estimates that are determined at a conferences of the
Director of the House Fiscal Agency, Director of
the Senate Fiscal Agency, and the State Treasurer.10 These revenue estimating conferences are
held twice a year. In January of each budget year,
a conference is held to establish the revenue estimate on which the Governor's proposed budget is
based. Another revenue estimating conference is
held in May to determine the revenue estimate on
which ®nal legislative action of the budget is to be
based. The agreed to May revenue estimate serves as
a constraint on the size of the state's general fund
budget and is published as a part of the budget. By
law, GAAP-based ®nancial numbers are not used to
determine the size of the state budget.
In the early 1970s, Ohio's budget director agreed
with the state auditor that Ohio's accounting system
should be improved. The proposed improvements
were intended to bring the state's accounting system
in line with then authoritative GAAP for governmental entities. However, in 1974, before any
actual steps were taken to alter the state's
accounting system, there was a change in both the
governor's and the state auditor's oces.11 Hence all
plans to modify the state's accounting system were
put on hold until ``con®dence could be rebuilt'' on the
need to change the accounting system (Manuger,
October 1989).12 In 1978, Governor James A.
Rhodes (a Republican) was reelected to a second
term and then current state auditor, Thomas E.
Ferguson (a Democrat), was elected to his ®rst term.
By the end of 1979, the national recession and
changing federal budget policies were causing ®scal
stress to become evident in many state and local
governmental units. Cleveland, the largest municipality in Ohio, defaulted on its short-term notes
in December 1978, and again in August 1979.
Cleveland's default led to the creation of a ®nancial planning commission composed of state and
local government ocials and private sector
members to oversee the ®scal a€airs of Ohio
municipalities facing severe ®nancial problems.13
5.3. State of Ohio
Just two months ago . . . I stood before this
General Assembly and prayed to God
10
State of Michigan, Public Act 431 of 1984, as amended.
The amendment requiring the provision for the revenue estimating conferences was passed in 1991.
11
Both the governor and state auditor are statewide elected
ocials. James A. Rhodes, a Republican, was governor from 1974
to 1982. The governor's oce is limited to two consecutive terms.
Ohio's state auditor is not required to hold a CPA certi®cate. The
state auditor has accounting and auditing responsibilities for the
state, universities, and local units of government. The auditor's
oce has historically focused on local government ®nancial, legal
compliance and performance auditing matters. Richard Nuss, the
appointed deputy state auditor, is a CPA. There are a number of
CPAs on the state auditor's sta€.
12
Manuger was Ohio's Deputy State Auditor from 1975 to
1983.
13
In June 1979, Ohio passed ®scal emergency legislation for
its local units of government.
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
Cleveland's poor ®scal condition and subsequent
municipal default were heralded by some as the
impetus that began Ohio's 9-year conversion to a
GAAP-based accounting system.
Ohio's old accounting system used archaic
accounting conventions that failed to provide
relevant information for assessing the state's
®nancial condition. Even the cash-basis ®nancial
report was not prepared well for external users.
The Oce of Budget and Management (OBM),
with the support of the state treasurer and the
state auditor, in 1979 initiated a GAAP bill that
would eventually move the state toward a GAAPbased ®nancial information system. However, a
tremendous amount of consensus building
regarding the responsibilities of the state auditor
and other executive agencies had to be done
before a GAAP bill could pass the state legislature. The GAAP bill transferred signi®cant
authority over state accounting practices from the
state auditor to other executive departments to
ensure the ``independence'' of the elected state
auditor. At the time of the bill's proposal, the state
auditor was responsible for portions of the state's
accounting system. The new GAAP bill charged
the OBM director with keeping all necessary
accounting records and issuing the annual ®nancial report of the state in accordance with GAAP.
This bill did not pass the legislature in 1979
because hundreds of statutes had to be repealed or
amended to ensure its legal e€ectiveness and the
lack of agreement on organizational changes
a€ecting the duties and responsibilities of the state
auditor.
Since the economy of the state was hit hard by
the recession, attention focused on the accounting
information system, which was perceived as an
obvious target for improving ®nancial management practices. But the quest for improved information alone was not a sucient motive for the
state to move toward a GAAP-based accounting
system. During legislative hearings, Ohio bureaucrats also argued that a GAAP-based information
system would enhance the state's bond rating. The
concepts of improved ®nancial management information and GAAP reporting became intertwined in
discussions regarding the state's new central
accounting system. The predominant attitude was
583
that Ohio needed to improve its ®nancial management and reporting practices. This attitude was
driven by a general belief that an improved management information system for program managers would provide for more e€ective ®nancial
management.
The funding necessary to convert Ohio's
accounting system to a GAAP-based system was
included in the state's 1981 budget. Almost two
years after the initial GAAP bill's defeat in the
legislature, Ohio was on its way to producing what
it was thought would be an improved ®nancial
information system. In November 1981, the state
hired a then ``Big Eight'' (now ``Big Six'')
accounting ®rm to modify the state's accounting
system so GAAP ®nancial statements could be
prepared. State Auditor Thomas E. Ferguson
concurred with the decision to convert to a
GAAP-based information system, but he disagreed
with the planned implementation approach,
doubting that the chosen accounting ®rm could
deliver the promised system, especially since its bid
of $56,000 was so low in relation to others
received.
In 1983, Governor Rhodes was succeeded by a
Democrat, Governor Richard Celeste. The new
governor commissioned a task force to look at
®nancial management practices of the state, which
concluded the state should adopt GAAP for
external ®nancial reporting. After review, Governor Celeste's administration supported the previous administration's decision to adopt GAAP,
but did not agree with the conversion method or
the contractor selected by the Rhodes administration.
Meanwhile, the state auditor's sta€ attempted to
participate in the GAAP conversion process with
the hired ®rm. According to Deputy State Auditor
Richard Nuss, ``as a result of participation, we
developed a healthy skepticism about the implementation process which was employed by the
®rm'' (personal communication, 25 August 1989).
Another then Big Eight ®rm reviewed the
approach of the winning ®rm. This review concluded that the winning ®rm's approach to installing
an ``o€ the shelf'' GAAP accounting software
package was inappropriate. In 1984, the ®rst Big
Eight ®rm was asked to leave the project. A lawsuit
584
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for nonperformance followed and was settled out
of court.
The state decided to continue the system installation project by continuing its e€orts to install
and customize an ``o€ the shelf'' GAAP software
package with the help of the original subcontractors for the accounting software. This
time, however, state sta€ from OBM provided
leadership for the project. The state's approach to
the GAAP conversion project also changed. The
conversion project now focused on the installation
of a modern appropriation and accounting system
®rst with the production of GAAP ®nancial statements as a secondary concern.
Organizational problems surfaced within OBM
as the software program development e€orts
required a greater interaction with the accounting
function, which had been left undisturbed during
the ®rst three years of the system implementation/
GAAP conversion e€ort. The accounting administrator, with no formal ®nancial accounting
background, was now providing major input on
program speci®cations to the programmers, shaping the new accounting system. Signi®cant problems ensued and it became apparent to executive
management that the organizational structure
within OBM would have to be changed.
Ohio was slow in converting to GAAP due to
three major reasons. First, the entire accounting
system had to be redesigned. The old accounting
system employed a fund structure that was
incompatible with GAAP and contained hundreds
of cash accounts within a limited number of state
funds that had to be replaced. Moreover, the
state's internal control system needed major
improvements; modern computer technology had
not been implemented in several agencies, and the
state's old accounting system was extremely fragmented. Essentially, Ohio had to redesign its purchased GAAP-based ®nancial reporting software
package system almost from scratch to accommodate dual processing procedures with the old
accounting system.
Second, the old accounting system, a manual
batch-driven system, was run primarily by supervisors and clerks without strong ®nancial
accounting backgrounds. In most state departments, agency personnel entering transactions into
the accounting system are not formally trained
accountants.14 Hence, delay in adding accounting
sta€ trained in GAAP contributed to delay on the
GAAP conversion project. In addition, Ohio's
accounting administrator had strong convictions
concerning what the state accounting system
should be. Ohio's accounting administrator was
not a CPA and was not active in GFOA. He
believed in law-driven cash-basis accounting
rather than GAAP. This caused signi®cant problems during the conversion process because of his
decision-making authority within the organization
and his private knowledge concerning the structure
and procedures of the old accounting system. In
spite of his reluctance to change to a GAAP-based
system, he was indispensable to the GAAP conversion project because of his knowledge of the
old accounting system.
The state's solution was to create the new position of deputy director for state accounting and a
®nancial reporting section within the Accounting
Division. The accounting administrator would
report directly to the new deputy, and have no
authority over the ®nancial reporting section.
Clear decision-making power over data processing, accounting procedures, and external ®nancial
reporting was granted to the new deputy director
to resolve organizational con¯icts and technical
problems inhibiting the conversion of the state's
accounting system to GAAP. The accounting
administrator runs the state's accounting procedures related to processing accounting transactions
but has no responsibility for ®nancial reporting. In
April 1985, Timothy Murphy, a CPA, was
appointed deputy director of OBM for State
Accounting.
Finally, it required extraordinary e€orts to
break down two legal barriers to GAAP. Two
barriers had to be overcome by the GAAP bill: (1)
14
Unlike many other states, Ohio did not attempt to train
personnel or require the state agencies to prepare detailed
GAAP ®nancial reporting packages. Instead, OBM requires
agencies to input the pertinent receipts and disbursements
information Ð with appropriate GAAP adjustment
indicators Ð into the accounting system in a manner as close as
possible to their old procedures. This approach reduced the
need to train individual state agency sta€ in the debit-credit
mechanism and fund accounting concepts required by GAAP.
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
statutory language that could complicate the
computer programming required to satisfy GAAP
and legally mandated account requirements, and
(2) statutory accounting funds de®nitions that
were inconsistent with GAAP.
The GAAP bill became law in 1985. At over
1000 pages in length, it was the largest single piece
of legislation ever passed in Ohio. Passage of the
GAAP bill demanded the focused attention and
commitment of then Deputy Director of OBM
Lee Walker, an attorney who is now director of
OBM. She supported the bill's sponsor, Representative Richard Hinig (a Democrat) who has an
accounting background. Breaking down the legal
barriers to GAAP required a total of six years,
from 1979 to 1985.
As of June 1986, all of Ohio's 145 state agencies
were using the new GAAP system except for seven
units that required extensive redesign of their
internal control systems. Conversion to the new
GAAP system involved the reclassi®cation of the
600±800 individual funds into eight GAAP fund
types and account groups. The new GAAP system
was in full operation by July 1, 1987, at a total
cost of over $10 million. Ohio issued its ®rst audited GAAP annual ®nancial report in April 1989
(Murphy, November 1987; Nuss, November 1987;
Nuss personal communication, 25 August 1989;
Murphy tape recorded comments).15 In 1990,
Ohio ended the ®scal year with a $50 million
GAAP-based surplus.
By June 30, 1999 Ohio had an accumulated
General Fund Balance of $2.64 billion with $1.562
billion reserved, $323 million unreserved and
undesignated, and $755.3 million unreserved and
designated determined in accordance with GAAP
and certi®ed by the external auditors. The reserved
fund balance ($907 million) is for the Budget Stabilization Fund.
15
The audited ®nancial report for the state of Ohio for the
year ended June 30, 1988 has a clean opinion except for the
omission of certain ®xed assents, accumulated depreciation,
depreciation expense, and capital lease obligations for the
internal service funds. In addition, the auditors disclaimed an
opinion on the enterprise fund type primarily due to inadequate
accounting records at the Ohio Bureau of Workers' Compensation and the Industrial Commission of Ohio.
585
However, Ohio still budgets on a cash-basis and
must maintain cash-basis accounting reports for
budgetary decision-making. Use of cash-basis
accounting in the budgetary process is still
imprinted in the State of Ohio in spite of the adoption of GAAP for external ®nancial reporting.
5.4. State of Delaware
In the short run, I am quietly pushing for
GAAP but it's not a sexy issue . . . There is no
large scale constituency for GAAP statements
within the Delaware political or business
community. Until there is a crisis or a proven
cost-bene®t to the state, I think the state will
remain on a cash-basis. (R. Thomas Wagner,
Jr., Delaware Auditor of Accounts, April
1989)
Like most state governments, Delaware experienced ®scal problems in the 1970s. In 1971 Governor Russell W. Peterson asked for $17 million in
new taxes and $10 million in spending cuts
because of inaccurate forecasts of the franchise
tax Ð a major source of the state's revenue Ð to
be collected from the 60±70,000 companies incorporated in the state (Wall Street Journal, 30 June
1971). Again in 1972, the state made a major error
in estimating the franchise tax, resulting in the
state missing a payroll. All of this led to a call for
improved ®nancial information.
The state's accounting system was a single entry,
highly summarized, manual general ledger system
that was ``like a checkbook.'' (Crawford, April
1989).16 Although there were some suggestions for
upgrading the state's accounting system, it was not
viewed as the major reason for the poor ®nancial
information that led to ``Black Monday'' in 1972,
when the state did not make its payroll. Instead,
they sought better methods of revenue forecasting;
GAAP was not an issue. Governor Peterson
established the Economic Forecasting Advisory
Group to assist the state in developing revenue
estimates.
16
The ``checkbook'' analogy was made by Cli€ord
Edwards, director of accounting (Edwards, April 1989).
586
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In his 1977 budget message, the new governor,
Pierre S. duPont, stated that the state faced a $121
million accumulated two-year de®cit rather than
the $19.2 million cash de®cit previously reported.
According to Cli€ord Edwards, Division of
Accounting director, ``Everybody had their own
number.'' The governor's statement created a crisis within the credit markets (Edwards, interview;
Wall Street Journal, 8 March 1977). At the time of
the governor's statement, Moody's rated Delaware's bonds A while Standard and Poor's rated
the bonds AA. When Delaware issued $60 million
in bonds in October 1977, the bond ratings were
dropped to BAA by Moody's and A+ by Standard and Poor's Ð at the time the lowest rating of
any state government (Wall Street Journal, 8
March; 11 March; 25 October, 1977).
After the 1977 ®nancial crisis, there was an outcry for better ®nancial information, but not
necessarily for GAAP. Governor duPont created
the Delaware Economic and Financial Advisory
Council (DEFAC) to provide revenue and expenditure estimates used in the state budget process.
DEFAC still exists and is presently composed of
31 members appointed by the Governor for inde®nite terms.17 Delaware did not identify GAAP
®nancial information as the key to improving the
®nancial management practices of the state.
Nevertheless, the state had to address the issue of
computerizing its manual accounting system.
In fall of 1982, the state hired a then ``Big
Eight'' ®rm to install a new computerized information system that could produce the required
GAAP disclosures and promised to provide
GAAP-based ®nancial reporting in the future. At
that time, Delaware issues a non-GAAP cashbasis ®nancial report as their ocial annual
report. Arthur Mays, Delaware's GAAP conversion project manager, who is not a CPA, maintained that the state of Delaware did use GAAP
for external ®nancial reporting. Title 29, Section
2906(b) of the Delaware Code states:
17
The current members of DEFAC include the state treasurer, seven legis-lators, four cabinet-level ocials, two University of Delaware faculty members, and 17 business and
commu-nity leaders.
At least quarterly during each ®scal year, the
Auditor of Accounts shall arrange for an
audit to determine that the books and records
maintained by the oce of the Secretary of
Finance are kept in accordance with generally
accepted accounting principles and are
reconciled with the various bank accounts.
This law was passed before the establishment of
the NCGA and GASB. Mays, Derek Crawford,
executive assistant to the secretary of ®nance, and
Edwards, director of the Division of Accounts,
maintained that this law required the use of cashbasis accounting principles, since such principles
were generally accepted at the time the bill was
passed.18 This statute did not de®ne ``generally
accepted accounting principles.'' Hence, Delaware's legal interpretation of GAAP was the cash
basis accounting principles that have historically
been practiced by the state (contrary to NCGA
Statement No. 1). This created constant tension
between the State Auditor's sta€, which employed
GAAS as prescribed by US General Accounting
Oce and the Single Audit Act of 1984, and kept
the GAAP debate going. The GAAP debate continues, creating constant pressure for GAAP
adoption, because GAAS requires the reporting of
major departures from GAAP. This institutional
pressure is evidenced in the audit report for the
®scal year ended June 30, 1988:
Because the Department of Finance, by law,
is utilizing a cash basis accounting system
which could prevent the recording of ®nancial
information in the proper accounting period,
and currently the ocial ®nancial statements
of the State are based on this accounting system,
the State could not present fairly and with full
disclosure the ®nancial position and results of
®nancial operations of the funds and account
groups. (State of Delaware, 1989, p. 5)
The auditor's report listed speci®c departures
from all of the major principles of governmental
accounting as prescribed by the NCGA in Statement
18
Edwards is a CPA. He does not belong to any professional associations other that the AICPA.
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
No. 1, Governmental Accounting and Financial
Reporting Principles (1979). The report stated,
``While we have made substantial progress in the
last six years in developing our ability to prepare
GAAP ®nancial statements, we are not yet in a
position to have them certi®ed with no exceptions'' (State of Delaware, 1989, p. 5).
Within the state administration, the GAAP
debate was couched in cost-bene®t terms. The
argument was that unless GAAP-based reporting
improves Delaware's credit rating status appreciably there was no point in spending a half million
dollars to convert the accounting system to a fullscale GAAP ®nancial reporting system. In 1989,
Delaware currently maintained a AA bond rating.
Several interviewees indicated Delaware has been
informed by bond raters that without diversifying
its economic base, the state could not increase its
bond rating any higher. Delaware has the highest
debt per capita among state governments in the
nation. Such statements reveal that the use of an
audited GAAP ®nancial report for external ®nancial reporting is not a necessary condition for an
increased bond rating. In 1989, the credit rating
agencies seem satis®ed with the unaudited GAAP
statements that the state had a ``Big Eight'' (now
``Big Six'') accounting ®rm compile each year.
Potential net interest cost savings did not appear
to justify incurring additional GAAP conversion
costs to satisfy credit market incentives.
According to Edwards and Mays, little or no
demand existed for audited GAAP ®nancial statements from the legislature, executive branch, or
outsiders such as the bond rating agencies. The
legislature did not need GAAP or even audited
®nancial statements since budgetary decisions are
based on independent reports and requests from
agencies. Little demand for ®nancial information
is expressed by citizens or taxpayers. At the time
of our on-site interviews the circulation of
accounting reports was approximately 200 per
year. Politically, the elected state auditor was in a
weak position to push for the GAAP issue since he
had must go through the Executive Branch and
the legislature for his budget authorizations.
Moreover, the former state auditor, Thomas
Wagner, appointed by the governor to ®ll a
vacancy, was not a CPA.
587
Through involvement in professional associations,
the state auditor's sta€ developed an interest in
GAAP-based ®nancial reporting and had been pushing the state to adopt GAAP for the ocial annual
®nancial report. However, the former state auditor,
Thomas Wagner, would rather focus on internal
auditing issues and contract out auditing of the
annual ®nancial report, believing that his sta€
resources should be used to address problems that
exist at the agency level (Edwards, April 1989;
Crawford, April 1989; Brittingham, October 1987;
Wagner, October 1989).
In 1989, the state of Delaware had no plans for
producing GAAP based ®nancial statements for
external ®nancial reporting. At that time, Delaware's accounting bureaucrat in charge of the
state's GAAP conversion project appeared committed to seeing that Delaware did not use GAAP
in the ocial annual ®nancial report provided to
the public. Arthur Mays, GAAP project conversion manager, is not a CPA and is not in the
GFOA. Both Mays and Edwards used cost bene®t
arguments in defending the state's decision not to
use GAAP for external ®nancial reporting. Mays
vowed that the State of Delaware was not going to
produce a CAFR as long as he held his position.
Mays has stated, ``In 25 years the public has never
asked for a comprehensive annual ®nancial report,
S & P is the only one whoever asks . . . as long as I'm
in my position the state's money is not going to be
wasted on the CAFR'' (Mays, October 1987).
In 1992, Thomas Caper (a Democrat) was elected
governor. It is interesting to note that Governor
Caper served as Delaware's elected state treasurer
from 1976 to 1982. As state treasurer, Caper
established the state's ``®rst cash management
system and played a major role in improving the
state's credit rating from the worst in the nation to a
respectable `AA' rating'' (Caper, 2000). Governor
Caper states that he has been focused on improving
the state's credit rating as governor (Caper, 2000).
Governor Caper appointed Sarah Jackson,
secretary of ®nance. Ms. Jackson was treasurer of
a major private sector ®rm in Delaware prior to
her appointment as the Secretary of ®nance. In
1993, State Auditor Wagner and Secretary Jackson
convinced the legislature to fund the hiring of a
Big Six ®rm to audit the state's ocial GAAP
588
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®nancial report in accordance with GAAS. The
State of Delaware issued its ®rst audited CAFR for
the year ended June 30, 1994. Thus Delaware ®nally
quietly acquiesced to institutional pressures for
GAAP adoption without a change in its statutes Ð
the decision was administrative. There was no recent
demand from the credit markets or public for using
GAAP in the state's ocial ®nancial statements. Fiscal stress was not a factor in the state's ®nal decision
to adopt GAAP. It appears that the impetus for
change was the appointment of a new secretary of
®nance with no prior public sector experience. Both
Thomas Wagner and Cli€ord Edwards maintain that
the decision to adopt GAAP for external ®nancial
reporting was simply the culmination of a GAAP
conversion process that began in the early 1980s.
Wagner stated, ``we had been setting the stage (for
GAAP adoption).'' Edwards stated that, ``we were
waiting for the time that the numbers could withstand
an audit.'' However, both Wagner and Edwards
concede that the appointment of a new secretary
of ®nance, who had organizational decision-making
rights over accounting matters in the State of Delaware, was a signi®cant factor in the state's decision
to adopt GAAP for external ®nancial reporting
(Wagner, October 1995; Edwards, October 1995).
Delaware's ®rst audited CAFR was issued for the
year ended June 30, 1994. It reported a $310 million
General Fund surplus which included a $185 million
undesignated fund balance and a $79 million reserve
for a ``rainy day.'' The only audit exception identi®ed
by its Big Six accounting ®rm was for ®xed assets.
Delaware's June 30, 1999 CAFR shows General
Fund Balance of $879.8 million with a $304 million
reserved balance ($122 million is allocated to a
Budget Reserve Account) and $575.5 million is
unreserved. The 1999 CAFR was issued with a clean
opinion by a ``Big Six'' audit ®rm and the State
Auditor. Of the four states included in this study,
Delaware is the only state that did not included a
GFOA Certi®cate of Achievement for Excellence
in Financial Reporting in its current CAFR.19
19
The GFOA Certi®cate of Achievement Award is a prestigious national award recognizing conformance with the highest
professional accounting standards. This award requires that the
CAFR must satisfy both GAAP and applicable legal requirements. In addition, the CAFR must be published, easily readable, and eciently organized.
In spite of the adoption of GAAP, Delaware
still uses cash-basis accounting numbers in the
budgetary process and relies on the DEFAC for
projecting revenues on a cash-basis. Arthur Mays
is retired. Delaware now maintains a AA+ bond
rating.
6. Cross case analysis and interpretations of evidence
The adoption of GAAP by state governments
for external ®nancial reporting is a slow and evolutionary process embedded in politics. The decision to use GAAP for external ®nancial reporting
is an expensive one, involving many actors in the
legislative and executive branches of state government who must be educated and persuaded that
GAAP-based ®nancial reporting is needed. Our
evidence shows that an early decision to adopt
GAAP can be understood in terms of coercive
isomorphic pressures from the credit markets,
while late adoption seems to be associated with the
combined in¯uences of normative and mimetic
institutional pressures. Factors identi®ed as
increasing the potency of institutional pressures
include: (1) ®scal stress and need to access credit
markets; (2) support of key appointed and/or
elected ocials for GAAP adoption; (3) organizational politics and potential to alter power relations; (4) participation of key accounting
bureaucrats in professional accounting organizations; and (5) change in elected leadership. Organizational imprinting of cash-basis accounting
practices was found to decrease the potency of
institutional pressures for GAAP adoption.
Table 2 presents a summary of key factors
identi®ed in this study that in¯uenced the state's
decision to adopt GAAP, along with an identi®cation of the state's initial and ®nal strategic
response to the institutional pressures for GAAP
adoption. The evidence presented in the case studies
suggests that severe, prolonged ®nancial stress
may be an important condition a€ecting the
potency of isomorphic pressures leading to an
early decision to adopt GAAP for external ®nancial reporting. Michigan, Ohio, and New York
were in extended periods of ®scal stress at the time
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
589
Table 2
Key factors in¯uencing GAAP adoptiona
State
Early
adoption
Resource
dependenceb
Potential to
alter power
relations
Professionally
active sta€ in
GFOA
Initial
strategic
responsec
Final
strategic
response
Organizational
imprinting
Change in
elected
leadershipd
New York
Michigan
Ohio
Delaware
Yes
Yes
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
No
Yes
Yes
No
No
Compromise
Compromise
Defy
Manipulate
Acquiesce
Acquiesce
Acquiesce
Acquiesce
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
a
A ``Yes'' indicates that the evidence suggests that this condition exited at the time that the decision was made to adopt GAAP for
external ®nancial reporting.
b
A ``Yes'' under Resource Dependence indicates that the state has historically experienced prolonged period of ®scal stress, is
extremely vulnerable to national recessions, and the evidence suggests that ®scal stress created a demand for improved ®nancial
information which resulted in the adoption of GAAP. Delaware's classi®cation is based on the criteria of prolonged periods of ®scal
stress.
c
The initial strategic response refers to the response of the key accounting bureaucrat. Ohio made an initial organizational decision
to acquiesce, but the key accounting bureaucrat with power within the organizational structure to dictate accounting practices choose
to defy organizational and institutional pressures for change.
d
All states included in this study had a change in elected leadership positions during 1975±1984 time period. Delaware adopted
GAAP in 1994, Gov. Thomas R. Caper, who appointed a new Secretary of Finance was became on January 19, 1993.
the decision to adopt GAAP for external ®nancial
reporting was made (see Tables 1 and 2 and Figs. 1
and 2, which demonstrate the extreme ®nancial
stress evidenced by pro forma estimates of GAAP
fund de®cits.) When governments face ®scal stress,
making compelling cost-bene®t arguments for
GAAP adoption to elected ocials forced to rely
on credit markets for critically needed short-term
®nancing may be easier. However, organizational
imprinting of cash-basis accounting practices and
lack of participation by key accounting bureaucrats appears to reduce the potency of coercive
and normative isomorphic pressures for GAAP
adoption.
The case studies reveal that both early adoption
states Ð Michigan and New York Ð had key
accounting and/or auditing bureaucrats who were
leaders in the government accounting professional
community. Both states employed a compromise
response to institutional pressures for adoption of
GAAP. They both had accounting bureaucrats
active in GFOA who sought to de®ne the institutional rules GAAP that they would be required to
comply with. Furthermore, in both states, the
adoption of GAAP was expected to in¯uence the
power relations associated with the political budgetary process, i.e. the power to determine the size
of the state budget. In New York, the elected
comptroller and legislature pushed the GAAP
issue with the hope of altering excessive spending
patterns; in Michigan, the governors pushed the
GAAP issue to justify tax increases and spending
cuts to the legislature.
It appears that the basic ®nancial management
practices of the State of Michigan were altered
under the administrations of Governor James
Blanchard (a Democrat) and Governor John
Engler (a Republican) and these ®nancial management practices have been imprinted on the
state government through the constitutional provisions against de®cit spending, enactment of legislation in 1984 requiring the use of GAAP for
®nancial reporting, and the enactment of legislation
in 1994 requiring a zero unreserved fund balance in
the General Fund and the transfer of any projected unreserved fund balance to the Budget Stabilization Fund. On the other hand, New York
has not passed legislation actually requiring the
use of GAAP in determining the size of the state's
budget and its basic ®nancial management practices have not been altered by the use of GAAP for
external ®nancial reporting. Organizational
imprinting of ``acceptable'' ®nancial management
practices in the form of legislation appears to be
an important factor in determining whether or not
the adoption of GAAP for external reporting will
590
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
be simply a symbol legitimacy or an actual ®nancial management tool.
Although Ohio's political leadership initially
endorsed an acquiescent organizational response
to institutional pressures to adopt GAAP, the
accounting bureaucrat with organizational decision-making rights over accounting matters chose
a de®ant strategic response. This event in Ohio
highlights an unclear boundary in the work of
Oliver (1991, 1997), which is: who in an organization has the organizational decision-making rights
to establish organizational strategic response in an
organization? In the public sector, is it top ranking
bureaucrats with civil service protection or elected
politicians? In Ohio's case, we identi®ed the
accounting administrator as having the organizational decision-making rights in regard to the
GAAP adoption issue due to the nature of the
organizational imprinting of accounting practices
in hundreds of statutes and the administrator's
decision-making authority over the accounting
function. The political leadership could not
impose their will, in terms of organizational strategic response, without dismantling legal barriers
to GAAP and reorganizing the accounting function to remove external reporting responsibilities
from the accounting administrator. Altering the
organizational strategic response required the
focused attention of a top level political appointee
for over a year; it was 1985 before Ohio's political
leadership could implement an acquiescent organizational response.
We expected the potential to alter power relations to impede GAAP adoption. Both of the
early adopting GAAP states Ð Michigan and
New York Ð were identi®ed as having conditions
where the potential power relationships could be
altered by GAAP adoption. In these cases, it
appears that the potency of the isomorphic institutional pressures for GAAP adoption were sucient to overcome the expected counter-pressures
to retain cash-basis accounting. Moreover, we
found that Delaware Ð the only state in our study
where GAAP adoption would not require legislative action to rearrange the powers and authorities
of elected ocials, was not likely to alter budgetary
decision-making because of the creation of the
DEFAC, and may not require legislation to
remove cash-basis accounting requirements (organizational imprinting)20 Ð did not decide to convert to GAAP until 1994, after the election of
Governor Thomas R. Caper in 1992.
The inability to identify an early political entrepreneur in Delaware until the election of Governor Caper may be understood from the power and
resource dependency perspectives. No political
entrepreneur was identi®ed who stood to improve
his/her power relations in the budgetary process
from GAAP adoption. The DEFAC is responsible
for determining the revenue and spending estimates used in the budgetary process. Moreover,
the credit markets appeared to be satis®ed with
the nature of ®nancial information that they are
receiving from Delaware and the formal adoption
of a GAAP conversion project. Furthermore,
Delaware has not reported any recent budgetary
problems. Thus, the early coercive isomorphic
pressures related to resource dependency lost
potency when the credit markets restored Delaware's credit rating to an acceptable level without
the requirement of actual GAAP adoption.
For many years, Delaware successfully implemented a ``manipulate'' strategic response to
institutional pressures to adopt GAAP. Delaware
reported in nationwide surveys that it conforms to
GAAP (National State Auditors Association,
1988) and had a CPA on its accounting sta€ to
make compelling, rational cost-bene®t arguments
against the adoption of GAAP. During the 1980s
there was no reason for the ®nancial community
to challenge the e€ectiveness of Delaware's
accounting practices. Delaware's cash management system was an e€ective management tool. In
1990, Delaware had made a ®rm organizational
decision not to GAAP, while the other three states
in this study were using GAAP for external ®nancial reporting. Delaware was very resistant to
institutional pressures to adopt GAAP.
The major factors distinguishing Delaware from
all the other states in our study were lack of participation in professional governmental accounting
20
We believe that accounting bureaucrats in Delaware could
choose to interpret their GAAP law as requiring authoritative
GAAP. However, we have not sought a legal opinion on this
point.
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
organizations by the key accounting bureaucrats,
lack of an early political entrepreneur to shepherd
the GAAP issue through the political process, and
the creation of an alternative mechanism for generating consensus on the state's ®nancial
condition Ð the DEFAC. In other words, Delaware created another structural element to perform the legitimizing ritual that is necessary to
satisfy the ®nancial community that the ®nancial
management practices of Delaware were sound. It
is interesting to note that Governor Caper, as the
elected state treasurer, was the public ocial who
developed Delaware's cash management system
and takes credit for moving Delaware's credit rating from the worst in the country to a respectable
AA rating. Governor Caper's stated focus on
improving the state's credit rating likely made the
``manipulate'' organizational strategic response
unacceptable to him as the newly elected governor. He also had the professional background,
institutional knowledge, and historical background that would make bureaucratic attempts to
convince him of the continued viability of a
``manipulate'' strategy ine€ective.
The fact that accounting bureaucrats Ð who
may be licensed certi®ed accountants Ð do not
support GAAP adoption for their organization
does not mean that they do not seek to maximize
their professional self-interest. An alternative
exists for accounting bureaucrats to promote their
professional interest at the inter-organizational
®eld level where institutional rules are created.
Competing interests pursuing maximization of
professional objectives are the driving forces
which lead to the evolution of legitimizing rules
such as GAAP at the institutional level. If changes
in accounting practices cannot be established at
the organizational level due to organizational
structure, power, and/or cultural values, institutional pressures for change created at the interorganizational ®eld level may result in the adoption
of new accounting practices by governments.
Institutional theory recognizes that the rule-making
mechanisms Ð such as the establishment of
GAAP by the GASB Ð may involve highly political and con¯ictual processes that are driven by
the self-interest motives of professionals active in
the professional ®eld.
591
Thus, individual self-interest motives may lead
to changes in institutional rules which, in turn,
result in change within government organizations.
If bureaucrats lack sucient organizational power
to initiate change at the intra-organizational level,
they may participate in the professional political
process at the inter-organizational ®eld level in
order to create institutional rules that re¯ect their
interests (DiMaggio, 1988, pp. 3±22). DiMaggio
and Powell (1983) have noted the importance of
professional elites in challenging and establishing
®eld wide norms such as GAAP. Once norms have
been endorsed by the professional elites, actors at
the individual organizational level may be forced
to conform to professional standards even if conformance to such norms is not in the political best
interests of the organization, or the organization
may choose to resist the organizational pressures
for change. Hence, the possibility exists that some
of those that did not participate in the political
process that resulted in the establishment of institutional rules may ®nd out, after the fact, that
their best interests are not served by professionally
endorsed institutional rules. This possibility can
result in individual organizations resisting institutional pressures for change.
Across all cases, our evidence indicates that
GAAP is normally sold to legislatures as a means
of improving a state's credit rating. Although we
have no evidence to indicate that the use of GAAP
reduces net interest costs to states, Standard and
Poor's Perspective Statement, issued at the 1980
Annual Conference of the Municipal Finance
Ocers Association (now GFOA), is frequently
cited by interviewees to support their perception
that GAAP reduces borrowing costs. This event
represents a signi®cant change in the institutional
environment for the government accounting community and represents the social construction of
reality (Cohen, June 1988; Grossman, June
1988).21 No empirical evidence was identi®ed to
support this claim by any of the interviewees. All
21
Bond rating agency personnel indicated that in most cases
they could convert cash-basis statements to GAAP statements
with a little help from the preparers. While the GAAP statements may facilitate the rating process, there seems to be no
guarantee that the use of GAAP for external reporting will
ensure improved ratings.
592
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
states were subject to normative isomorphic pressures from the accounting profession, coercive
isomorphic pressures from the credit markets, and
from the federal government to adopt GAAP
from 1975 through 1984. Coercive isomorphic
institutional pressures were signi®cantly increased
in 1984 with the passage of the SAA and the formation of the GASB. Since it is likely that both
normative and coercive isomorphic pressures act
in concert to move state governments to GAAP
adoption, it may be impossible to empirically distinguish the two forms of isomorphic pressure.
Powell identi®es the central research question
concerning institutional legitimacy as whether or
not formal structured, institutionalized procedures
penetrate and alter operating processes. The evidence collected for this study is mixed (Powell,
1985, pp. 564±566). It appears that values
ingrained in the state organizations related to the
public reporting of de®cits in¯uence whether or
not the state's ®nancial management practices are
a€ected by the use of GAAP. Michigan had not
reported a de®cit since initial adoption of GAAP
until 1990 (the onset of a national recession); Ohio
has not reported a de®cit since adopting GAAP;
but New York continued to report tremendous
budget de®cits for many years after GAAP adoption. Some of its funds still report de®cits. Of these
states, only New York has a long history of publicly
reporting de®cits. Our preliminary ®ndings suggests
that GAAP as an institutional procedure does not
signi®cantly alter budgetary practices nor the political processes that resulted in state governments
incurring de®cits during times of ®scal stress.
Finally, we found that the ®nancial management
control systems currently used by the states in this
study are still primarily cash-basis, with GAAP
accrual information being collected at year end.
We believe that cash-basis accounting dominates
state ®nancial management practices because state
budgets are based on projected cash ¯ow expenditures and receipts. The continued reliance on cashbasis data for budget negotiations and day-to-day
management of state government operations, after
ocial adoption of GAAP for external ®nancial
reporting, suggests that GAAP may be more of a
symbol of legitimacy for state government than an
actual ®nancial management tool.
We found that GAAP has been sold as a symbol
of sound ®scal management practices to elected
ocials and the public. We also found that the
professionalization of the government accounting
community is creating a constant institutional
pressure for governments to use GAAP. Institutional theory suggests that myths generated by
particular organizational practices (in our context,
that the use of GAAP improves ®nancial management practices) and di€used through professional
associations (such as the GFOA) have legitimacy
based on the supposition that they are rationally
e€ective (Meyer & Rowan, 1977, p. 347). Our
®ndings tend to support this premise. We believe
that all state governments will eventually bow to
institutional pressures to adopt GAAP which are
expected to gain potency in the later stages of
GAAP's proliferation among state government
entities (Palmer et al., 1993, p. 101; Tolbert &
Zucker, 1983).
7. Conclusions
In this study, we identify ®ve organizational
factors that can signi®cantly in¯uence the adoption of professionally endorsed accounting innovations by state governments: (1) participation of
key administrative accounting/auditing personnel
in professional organizations; (2) dependency on
credit markets for ®nancial resources; (3) potential
to alter power relations of elected ocials; (4)
organizational imprinting; and (5) change in elected
political leadership. We note that all state governments were subject to potent institutional pressures to adopt GAAP after 1975. These
institutional pressures were created by the federal
government, professional accounting associations,
and representatives of the credit markets. Thus, state
governments were subjected to at least two forms of
isomorphic pressures: normative and coercive.
It is also possible that mimetic isomorphic pressures were active forces for the four states in this
study. However, no compelling evidence was
identi®ed revealing whether or not this form of isomorphic pressure was, in fact, potent for the selected
states during the period of study. Empirically, it
may be dicult to distinguish the three forms of
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
isomorphic pressures that may be acting on an
organization at any given point in time, since it is
possible that two or more forms will be acting at
the same time. Identi®cation of one form of isomorphism acting on an organization at a particular point in time does not preclude the
possibility that another form of isomorphic pressure
is present and potent (Mizuchi & Fein, 1999).
Moreover, it may be dicult for researchers to
operationalize the mimetic isomorphic variable as
a distinct attribute of the institutional environment to be measured. Thus, researchers should be
aware of this point and cautious in interpreting
future research results.
We found that key accounting bureaucrats in
New York and Michigan used ``compromise'' as
an initial strategic response to institutional pressures to adopt GAAP, Ohio's key accounting
bureaucrat adopted a ``defy'' strategy, even
though the political leadership endorsed an
``acquiesce'' strategy. Delaware initially used a
successful ``manipulate'' strategy. The ``compromise'' strategies were accompanied with active
participation of key accounting administrators in
professional government accounting associations,
while the ``defy'' strategy was associated with a
lack of participation at the institutional level in the
standards setting process. Based on the evidence in
this study, it appears that the ``manipulate'' strategy, which requires a higher level of e€ort than the
``defy'' strategy, is a more e€ective strategy for
resisting institutional pressures for change. The
``manipulate'' strategy requires a ``purposeful and
opportunistic attempt to co-opt, in¯uence or control institutional pressures and evaluations . . . The
intended e€ect of co-option tactics is to neutralize
institutional opposition and enhance legitimacy.''
Future research might be fruitfully directed to
investigating Oliver's strategic response model to
demonstrate or refute its relevance for this particular decision-making context in a more rigorous
fashion than the treatment in this paper. Another
follow-up to this work, would be an extension of
the extant governmental accounting literature
incorporating institutional variables in a statistical
model of the GAAP decision-making process. As
we have argued, institutional theory is complementary to economic theory and we believe
593
that we can build on the existing empirical e€orts
by incorporating institutional variables to further
our understanding of accounting choice in the
public sector. We suspect that economic variables
based on size, ®scal stress, and debt levels will no
longer continue to be signi®cant variables in
explaining GAAP adoption by state governments.
We predict that institutional factors related to
imprinting, power relationships, professionalism,
accounting education, and elected ocial turnover
will provide better insights into understanding the
decision of late GAAP adopting states in the USA.
In conclusion, we predict that all state governments in the USA will eventually bow to institutional pressures for change and adopt GAAP for
external ®nancial reporting. Our prediction is based
on insights from institutional theory, coupled with
insight on the potency of the institutional pressures
for change identi®ed in our four case studies. In
particular, we identi®ed coercive and normative
isomorphic pressures as potent forces for GAAP
adoption in our cases. We also showed that, for
US state governments, resource dependency on
the credit markets resulted in potent coercive isomorphic pressures for GAAP adoption. Finally,
we discovered that institutional theory provides a
useful theoretical lens through which to view
accounting choice in the public sector. We continue to view GAAP as a symbol of legitimacy.
8. Interviews
Bolthouse, James. (7 March 1988) Director of
Accounting, State of Michigan, Interview with
authors. Lansing, Michigan.
Brillo€, Abraham. (8 June 1988). Professor
Emeritus, City University of New York-Baurch
College; Member, Review Panel for the Commission on Economy and Eciency in Government,
State of New York. Interview with the authors.
New York, New York.
Brittingham, 8 October 1987. Deputy State
Auditor, State of Delaware. Interview with the
authors. Dover, Delaware.
Cohen, Claire. (7 June 1988). Vice President,
Moody's Investor Services, Inc. Interview with
authors. New York, New York.
594
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
Crawford, Derek. (14 April 1989). Assistant
to the Secretary of Finance, State of Delaware, Interview with authors. Wilmington,
Delaware.
Edwards, Cli€ord. (13 April 1989). Director of
the Division of Accounts, State of Delaware.
Interview with authors. Dover, Delaware.
Edwards, Cli€ord. (6 October 1995). Telephone
interview with authors.
Grossman, Hyman. (8 June, 1988). Managing
Director, Standard and Poor's Corporation.
Interview with authors. New York, New York.
Hadley, J. Dwight. (11 March 1988). Deputy
State Comptroller of Municipal Audits, State of
New York. Interview with the authors. Albany,
New York.
Ives, Martin. (18 September 1987). Former
Deputy State Comptroller, State of New York.
Telephone interview with author.
Manuger, Charles. (October 1989). Former
Deputy State Auditor, State of Ohio. Telephone
interview with author.
Martin, David. (April 1990). Interview with the
authors.
Mauro, Frank. (17 December 1987). Former
Director Commission on Economy and Eciency
in Government, State of New York. Interview
with the authors.
Mays, Arthur. (7 October 1987.). GAAP Project
Conversion Manager, State of Delaware, Interview with the authors. Dover, Delaware.
Miller, Gerald. (16 March 1988). Former
Director of the Department of Management and
Budget, State of Michigan. Interview with author.
Washington, D. C.
Murphy, Timothy. (11 November 1987). Deputy
Director of the Oce of Budget and Management,
State of Ohio. Interview with the authors. Columbus, Ohio.
Nuss, Richard. (12 November 1987). Deputy
State Auditor, State of Ohio. Interview with the
authors. Columbus, Ohio.
Pinkelman, Frank. (4 March 1988). State Auditor,
State Of Michigan. Interview with the authors.
Detroit, Michigan.
Rzewinecki, Janet. (13 April 1989). State Treasure,
State of Delaware. Interview with the authors.
Dover, Delaware.
Wagner, Thomas E. (14 April 1989). State
Auditor, State of Delaware. Interview with
authors. Dover, Delaware.
Wagner, Thomas E. (6 October 1995.) Telephone Interview.
Waring, Thomas E. (17 December 1987). Director
Special Projects and Fiscal Research, State
Comptroller's Oce, State of New York. Interview with the authors. Albany, New York.
White, Zelda. (14 April 1989). Assistant to the
Director of the Division of Accounting, State of
Delaware. Interview with authors. Wilmington,
Delaware.
Acknowledgements
We thank individuals interviewed for this study:
Robert Anthony (Professor Emeritus, Harvard
University), James Bolthouse (Michigan Director
of Accounting), Abraham Brillo€ (Professor
Emeritus, CUNY-Baurch College), Leon Brittingham (Delaware Deputy State Auditor), Derek
Crawford (Delaware Assistant to the Secretary of
Finance), Claire Cohen (Managing Director/Vice
President Municipal Ratings, Moody's Investment
Services, Inc.), Cli€ord Edwards (Delaware
Director of the Division of Accounts), Hyman
Grossman (Managing Director, Standard &
Poor's Corporation), Dwight Hadley (N.Y. Deputy State Comptroller of Municipal Audits),
Martin Ives (Former N.Y. Deputy State Comptroller), Charles Manuger (Ohio Former Deputy
State Auditor), David Martin (N.Y. Assembly
Ways and Means Committee), Frank Mauro (Former Deputy Director of N.Y. State Assembly Commission on Economy and Eciency in Government),
Arthur Mays (Delaware GAAP Project Manager),
Gerald Miller (Michigan Former Budget Director),
Timothy Murphy (Ohio Deputy Director of the
Oce of Budget and Management), Richard Nuss
(Ohio Deputy State Auditor), Frank Pinkelman
(Former Michigan State Auditor), Edward Regan
(N.Y. State Comptroller), Janet Rzewinecki
(Delaware State Treasurer), Thomas Wagner
(Delaware State Auditor), Thomas Waring (N.Y.
Director of Special Projects and Fiscal Research),
and Zelda White (Delaware Assistant to the
Director of the Accounting Division).
V.L. Carpenter, E.H. Feroz / Accounting, Organizations and Society 26 (2001) 565±596
Appendix A
List of individuals interviewed
Robert Anthony, Professor Emeritus, Harvard
University
James Bolthouse, Michigan Director of
Accounting
Abraham Brillo€, Professor Emerittus, CUNYBaurch College
Leon Brittingham, Delaware Deputy State Auditor
Claire Cohen, Managing Director/Vice President Municipal Ratings, Moody's Investment
Services, Inc.
Derek Crawford, Delaware Assistant to the
Secretary of Finance
Cli€ord Edwards, Delaware Director of the
Division of Accounts
Hyman Grossman, Managing Director, Standard & Poor's Corporation
Dwight Hadley, N.Y. Deputy State Comptroller
of Municipal Audits
Martin Ives, Former N.Y. Deputy State Comptroller
Charles Manuger, Ohio Former Deputy State
Auditor
David Martin, N.Y. Assembly Ways and Means
Committee
Frank Mauro, Former Deputy Director of N.Y.
State Assembly Commission on Economy and
Eciency in Government
Arthur Mays, Delaware GAAP Project Manager
Gerald Miller, Michigan Former Budget Director
Timothy Murphy, Ohio Deputy Director of the
Oce of Budget and Management
Richard Nuss, Ohio Deputy State Auditor
Frank Pinkelman, Former Michigan State
Auditor
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