Standardizing oil and gas accounting in the US in the 1970s: Insights from the perspective of regulatory capture

Abstract

Attempts by the Financial Accounting Standards Board (FASB) to standardize oil and gas accounting in the 1970s has been referred to as the “most politicised accounting argument ever” (Van Riper, 1994, p.56). Marking the only instance in which the Securities and Exchange Commission (SEC) has declined to support the FASB’s standards, the failure of the FASB to limit accounting method choice has had lasting implications with divergent methods still practised by oil and gas companies today. This study presents a narrative of this development and specifically examines the events through the lens of regulatory capture theory to show that the industry was successful in capturing the regulatory process and securing its preferred outcome.

Keywords

accounting regulation accounting standard setting full cost accounting oil and gas accounting regulatory capture theory successful efforts accounting

Get full access to this article

View all access options for this article.

References

Adebayo

A.O.

Coffman

E.N.

(2007), “In memory of Marshall S. Armstrong: The First Chairman of the Financial Accounting Standards Board”, Research in Accounting Regulation, Vol.19, pp.295–309.

Amernic

J.H.

(1979), “Accounting Practices in the Canadian Petroleum Industry”, CA Magazine, Vol.112, No.3, pp.34–8.

Baker

C.R.

(1976), “Defects in Full Cost Accounting in the Petroleum Industry”, Abacus, Vol.12, No.2, pp.152–58.

Bandyopadhyay

S.P.

(1994), “Market Reaction to Earnings Announcements of Successful Efforts and Full Cost Firms in the Oil and Gas Industry”, The Accounting Review, Vol.69, No.4, pp.657–74.

Benston

G.J.

(1985), “The Market for Public Accounting Services: Demand, Supply and Regulation”, Journal of Accounting and Public Policy, Vol.4, No.1, pp.33–79.

Bierman

Dukes

Dyckman

T.R.

(1974), “Financial Accounting in the Petroleum Industry”, Journal of Accountancy, Vol.138, No.4, pp.58–64.

Boehm

(2007), Regulatory Capture Revisited – Lessons from Economics of corruption, Univeridad Externado de Colombia.

Bow Valley Industries (1977), Letter of Comment, Connecticut: Financial Accounting Standards Board.

Brown

P.R.

(1981), “A Descriptive Analysis of Select Input Bases of the Financial Accounting Standards Board”, Journal of Accounting Research, Vol.19, No.1, pp.232–62.

10.

Brown

P.R.

(1982), “FASB Responsiveness to Corporate Input”, Journal of Accounting, Auditing & Finance, Vol.5, No.4, pp.282–90.

11.

Carnegie

G.D.

West

(1997), “Observing the PSASB: ED 50 and the Recognition of Infrastructure Assets”, Australian Accounting Review, Vol.7, No.2, pp.30–8.

12.

Carolina Pipeline Company (1977), Letter of Comment, Connecticut: Financial Accounting Standards Board.

13.

Carpenter

V.L.

Feroz

E.H.

(1992), “GAAP as a Symbol of Legitimacy: New York State’s Decision to Adopt Generally Accepted Accounting Principles”, Accounting, Organizations and Society, Vol.17, No.7, pp.613–43.

14.

Carpenter

V.L.

Feroz

E.H.

(2001), “Institutional Theory and Accounting Rule Choice: An Analysis of Four US State Governments’ Decisions to Adopt Generally Accepted Accounting Principles”, Accounting, Organizations and Society, Vol.26, No.7/8, pp.565–96.

15.

Chua

W.F.

(1998), “Historical Allegories: Let Us Have Diversity”, Critical Perspectives on Accounting, Vol.9, No.6, pp.617–28.

16.

Collins

D.W.

Dent

W.T.

(1979), “The Proposed Elimination of Full Cost Accounting in the Extractive Petroleum Industry”, Journal of Accounting and Economics, Vol.1, No.1, pp.3–44.

17.

ConocoPhillips (2010), Phillips Company History. Retrieved 19 March 2010, from: http://www.conocophillips.com/en/about/who_we_are/history/phillips/pages/index.aspx

18.

Cortese

C.L.

Irvine

H.J.

Kaidonis

M.A.

(2010), “Powerful Players: How Constituents Captured the Setting of IFRS 6, an Accounting standard for the Extractive Industries”, Accounting Forum, Vol.34, No.2, pp.76–88.

19.

CPA Australia (2011), CPA Australia Timeline of Events. Retrieved 14 June 2011, from: http://www.cpaaustralia.com.au/newsletters/cpa-australia-125-year-timeline.pdf

20.

Crenson

M.A.

(1971), The Un-politics of Air Pollution, Maryland, United States: John Hopkins Press Ltd.

21.

Dal Bo

. (2006), “Regulatory Capture: A Review”, Oxford Review of Economic Policy, Vol.22, No.2, pp.203–25.

22.

Deakin

E.B.

(1979), “An Analysis of Differences between Non-major Oil Firms using Successful Efforts and Full Cost Methods”, The Accounting Review, Vol.54, No.4, pp.722–34.

23.

Duso

(2005), “Lobbying and Regulation in a Political Economy: Evidence from the U.S. Cellular Industry”, Public Choice, Vol.122, pp.257–76.

24.

Dyckman

T.R.

(1979), “Market Effects of the Elimination of Full Cost Accounting in the Oil and Gas Industry: Another View”, Financial Analysts Journal, Vol.35, No.3, pp.75–82.

25.

Dyckman

T.R.

Smith

A.J.

(1979), “Financial Accounting and Reporting by Oil and Gas Producing Companies: A Study of Information Effects”, Journal of Accounting and Economics, Vol.1, No.1, pp.45–75.

26.

Federal Register (1978), Securities and Exchange Commission, Connecticut: FASB.

27.

Fehner

T.R.

Holl

J.M.

(1994), Department of Energy 1977–1994: A Summary History. Retrieved 10 January 2005, from: http://energy.gov/sites/prod/files/maprod/documents/Summary_History.pdf

28.

Financial Accounting Standards Board (1977), Statement of Financial Accounting Standards No.19, Connecticut: Financial Accounting Standards Board.

29.

Financial Accounting Standards Board (1978a), Letters of Comment – A, B, C, & D Statement No.19 – Financial Accounting and Reporting by Oil and Gas Producing Companies, 4 Vols, Connecticut: FASB.

30.

Financial Accounting Standards Board (1978b), Statement of Financial Accounting Standards No. 25. Suspension of Certain Accounting Requirements for Oil and Gas Producing Companies, Connecticut: FASB.

31.

Financial Accounting Standards Board (1982), Statement of Financial Accounting Standards No.69. Disclosures about Oil and Gas Producing Activities an Amendment of FASB Statements 19, 25, 33, and 39, Connecticut: FASB.

32.

Flory

S.M.

Grossman

S.D.

(1978), “New Oil and Gas Accounting Requirements”, The CPA Journal, Vol.48, No.5, pp.39–43.

33.

Fogarty

Hussein

M.E.A.

Ketz

J.E.

(1994), “Political Aspects of Financial Accounting Standard Setting in the USA”, Accounting, Auditing & Accountability Journal, Vol.7, No.4, pp.24–46.

34.

Frazier

Ingersoll

(1986), “SEC Staff Proposes Accounting Shift for Oil Industry”, Wall Street Journal.

35.

Funnell

(1998), “The Narrative and its Place in the New Accounting History: The Rise of the Counternarrative”, Accounting, Auditing & Accountability Journal, Vol.11, No.2, pp.142–162.

36.

Gaffikin

M.J.R.

(1998), “History is Dead, Long Live History”, Critical Perspectives on Accounting, Vol.9, No.6, pp.631–39.

37.

Gaffikin

M.J.R.

(2011), “What is (Accounting) History?”, Accounting History, Vol.16, No.3, pp.235–51.

38.

Georgiou

(2004), “Corporate Lobbying on Accounting Standards: Methods, Timing and Perceived Effectiveness”, Abacus, Vol.40, No.2, pp.219–37.

39.

Gore

(1992), The FASB Conceptual Framework Project 1973–1985: An Analysis, New York: Manchester University Press.

40.

Gorton

D.E.

(1991), “The SEC Decision Not to Support SFAS 19: A Case Study of the Effect of Lobbying on Standard Setting”, Accounting Horizons, Vol.5, No.1, pp.29–41.

41.

Hardy

D.C.

(2006), Regulatory Capture in Banking. Retrieved from: http://www.imf.org/external/pubs/ft/wp/2006/wp0634.pdf

42.

Hope

Gray

(1982), “Power and Policy Making: The Development of an R&D Standard”, Journal of Business Finance & Accounting, Vol.9, No.4, pp.531–58.

43.

Hussein

M.E.A.

Ketz

J.E.

(1980), “Ruling Elites of the FASB: A Study of the Big Eight”, Journal of Accounting, Auditing & Finance, Vol.3, No.4, pp.354–67.

44.

Hussein

M.E.A.

Ketz

J.E.

(1991), “Accounting Standards-setting in the U.S.: An Analysis of Power and Social Exchange”, Journal of Accounting and Public Policy, Vol.10, No.1, pp.59–81.

45.

Johnson

S.B.

Messier

W.F.

(1982), “The Nature of Accounting Standards Setting: An Alternative Explanation”, Journal of Accounting, Auditing & Finance, Vol.5, No.3, pp.195–213.

46.

Johnson

W.B.

Ramanan

(1988), “Discretionary Accounting Changes from Successful Efforts to Full Cost Methods: 1970–76”, The Accounting Review, Vol.63, No.1, pp.96–110.

47.

Katz

L.C.

(1985), “Oil and Gas: A Compromise Method of Accounting”, Journal of Accountancy, Vol.159, No.6, pp.116–24.

48.

Keener Oil and Gas Company (2010), History. Retrieved 19 March 2010, from: http://www.deweybartlett.com/

49.

Laffont

J.-J.

Tirole

(1991), “The Politics of Government Decision-Making: A Theory of Regulatory Capture”, The Quarterly Journal of Economics, Vol.106, No.4, pp.1089–127.

50.

Larcker

D.F.

Revsine

(1983), “The Oil and Gas Accounting Controversy: An Analysis of Economic Consequences”, The Accounting Review, Vol.LVIII, No.4, pp.706–32.

51.

Lenzner

(1985), The Great Getty: The Life and Loves of J. Paul Getty, Richest Man in the World, New York: Crown Publisher.

52.

Lev

(1979), “The Impact of Accounting Regulation on the Stock Market: The Case of Oil and Gas Companies”, The Accounting Review, Vol.54, No.3, pp.485–504.

53.

Lilien

Pastena

(1981), “Intramethod Comparability: The Case of the Oil and Gas Industry”, The Accounting Review, Vol.56, No.3, pp.690–704.

54.

Luther

(1996), “The Development of Accounting Regulation in the Extractive Industries”, The International Journal of Accounting, Vol.31, No.1, pp.67–93.

55.

Makkaia

Braithwaite

(1992), “In and Out of the Revolving Door: Making Sense of Regulatory Capture”, Journal of Public Policy, Vol.12, pp.61–78.

56.

McBride

Carroll

(eds.) (2005), “Accounting Handbook”, Maryborough, Australia: Pearson Australia.

57.

McEnroe

J.E.

Martens

S.C.

(1996), “An Analysis of the FASB’s Independence”, Journal of Applied Business Research, Vol.13, No.1, pp.129–32.

58.

Merino

B.D.

(1997), “Critical Theory and Accounting History: Challenges and Opportunities”, Critical Perspectives on Accounting, Vol.9, pp.603–16.

59.

Meyer

P.E.

(1974), “The APB’s Independence and its Implications for the FASB”, Journal of Accounting Research, Vol.12, No.1, pp.188–96.

60.

Mitnick

B.M.

(1980), The Political Economy of Regulation: Creating, Designing and Removing Regulatory Forms, New York, USA: Columbia University Press.

61.

Parker

L.D.

(1999), “Historiography for the New Millennium: Adventures in Accounting and Management”, Accounting History, Vol.4, No.2, pp.11–42.

62.

Peltzman

(1976), “Toward a More General Theory of Regulation”, Journal of Law and Economics, Vol.19, pp.211–40.

63.

Pioneer Corporation (1977), Letter of Comment, Connecticut: Financial Accounting Standards Board.

64.

Polsby

N.W.

(1963), Community Power and Political Theory, New Haven, USA: Yale University Press.

65.

Posner

R.A.

(1974), “Theories of Economic Regulation”, The Bell Journal of Economics, Vol.5, No.2, pp.335–58.

66.

Pratt

(1990), “Accounting for the Value of Oil and Gas Reserves”, Management Accounting, Vol.68, No.9, pp.18–21.

67.

Previts

Parker

L.D.

Coffman

E.N.

(1990), “Accounting History: Definition and Relevance”, Abacus, Vol.26, No.1, pp.1–16.

68.

Puro

(1984), “Audit Firm Lobbying before the Financial Accounting Standards Board: An Empirical Study”, Journal of Accounting Research, Vol.22, No.2, pp.624–46.

69.

Roberts

R.W.

Kurtenbach

J.M.

(1998), “State Regulation and Professional Accounting Educational Reforms: An Empirical Test of Regulatory Capture Theory”, Journal of Accounting and Public Policy, Vol.17, No.3, pp.209–26.

70.

Ryan

Dunstan

Stanley

(1999), “Constituent Participation in the Australian Public Sector Accounting Standard-setting Process: The Case of ED 55”, Financial Accountability & Management, Vol.15, No.2, pp.173–200.

71.

Saemann

(1999), “An Examination of Comment Letters Filed in the U.S. Financial Accounting Standard-setting Process by Institutional Interest Groups”, Abacus, Vol.35, No.1, pp.1–28.

72.

Sikka

(1992), “The Politics of Political Contributions”, Certified Accountant, May, pp.46–7.

73.

Slinko

(2005), “Laws for Sale: Evidence from Russia”, American Law and Economics Review, Vol.7, No.1, pp.284–318.

74.

Smith

A.J.

(1981), “The SEC’s Reversal of FASB Statement No.19: An Investigation of Effects”, Journal of Accounting Research, Vol.19, pp.174–211.

75.

Solomons

(1978), “The Politicisation of Accounting”, Journal of Accountancy, Vol.146, No.5, pp.65–72.

76.

Solomons

(1983), “The Political Implications of Accounting and Accounting Standard Setting”, Accounting and Business Research, Vol.13, No.50, pp.107–18.

77.

Stigler

G.J.

(1971), “The Theory of Economic Regulation”, Bell Journal of Economics and Management Science, Vol.2, No.1, pp.3–21.

78.

Tandy

P.R.

Wilburn

N.L.

(2000), “An Empirical Analysis of the Petroleum Refining Industry’s Participation in the FASB’s Standard-setting Process”, Petroleum Accounting and Financial Management Journal, Vol.19, No.2, pp.44–61.

79.

Tutticci

Dunstan

Holmes

(1994), “Respondent Lobbying in the Australian Accounting Standard-setting Process: ED49”, Accounting, Auditing & Accountability Journal, Vol.7, No.2, pp.86–104.

80.

Uche

C.U.

(2001), “The Theory of Regulation: A Review Article”, Journal of Financial Regulation and Compliance, Vol.9, No.1, pp.67–81.

81.

Upadhyaya

K.P.

Mixon

F.G.

(1995), “Regulatory Capture and the Price of Electricity: Evidence from Time Series Estimates”, International Journal of Social Economics, Vol.22, No.1, pp.16–23.

82.

Van Riper

. (1994), Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process, Connecticut, USA: Quorum Books.

83.

Walker

R.G.

(1987), “Australia’s ASRB: A Case Study of Political Activity and Regulatory ‘Capture’”, Accounting and Business Research, Vol.17, No.67, pp.269–86.

84.

Walker

R.G.

Mack

(1998), “The Influence of Regulation on the Publication of Consolidated Statements”, Abacus, Vol.34, No.1, pp.48–74.

85.

Walker

R.G.

Robinson

(1993), “A Critical Assessment of the Literature on Political Activity and Accounting Regulation”, Research in Accounting Regulation, Vol.7, pp.3–40.

86.

Weetman

(2001), “Controlling the Standard-setting Agenda: The Role of FRS 3”, Accounting, Auditing & Accountability Journal, Vol.14, No.1, pp.85–108.

87.

Williamson

O.E.

(1975), Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization, New York: Free Press.

88.

Wise

Spear

(2000), “Accounting for Extractive Industries: An Australian Perspective”, Petroleum Accounting and Financial Management Journal, Vol.19, No.1, pp.30–53.

89.

Wise

Spear

(2002), “Factors and Forces of the Extractive Industry Environment, and their Implications for Accounting Measurement and Financial Reporting”, Petroleum Accounting and Financial Management Journal, Vol.21, No.3, pp.1–28.

90.

Wright

C.J.

Gallun

R.A.

(2008), Fundamentals of Oil and Gas Accounting, Oklahoma: Pennwell.

91.

Young

(1988), “The Economic Theory of Regulation: Evidence from the Uniform CPA Examination”, The Accounting Review, Vol.63, No.2, pp.283–91.

92.

Young

(1991), “Interest Group Politics and the Licensing of Public Accountants”, The Accounting Review, Vol.66, No.4, pp.809–17.

93.

Zeff

S.A.

(1978), “The Rise of ‘Economic’ Consequences”, Journal of Accountancy, Vol.146, No.6, pp.56–63.

94.

Zeff

S.A.

(2002), “‘Political’ Lobbying on Proposed Standards”, Accounting Horizons, Vol.16, No.1, pp.43–54.

95.

Zeff

S.A.

(2007), “The SEC Rules Historical Cost Accounting: 1934 to the 1970s”, Accounting and Business Research, Vol.37, No.5, pp.49–62.