Politics Prevail Over Accounting Data In Government Financial Decisions

UNIVERSITY PARK, PA (October 25, 2005)—A new research paper from Penn State's Smeal College of Business contends that philosophical, political, and emotional factors play a larger role than hard financial statistics in federal-government decisions to intervene in the private sector.

In "Saving Chrysler: The Use and Nonuse of Accounting Information by the U.S. Congress," which will be published in a forthcoming edition of Accounting History, Mark W. Dirsmith, Deloitte professor of accounting at Smeal, and Timothy J. Fogarty of Case Western Reserve University, examine the federal government's 1979 bailout of Chrysler. They argue that when accounting is used as evidence in politics, it is often employed as a rationalization for a decision or as ammunition for an argument—both applications for which it is not typically best suited.

A recent example of this trend can be found in Congress' consideration of the 2002 Sarbanes-Oxley Act, a law designed in the wake of several major accounting scandals to further regulate corporate financial-reporting standards. Had Congress fully considered accounting and economic analysis during debate over Sarbanes-Oxley, it's possible the law would not have made it out of the Capitol.

In the Chrysler case, the decision by Congress to guarantee the company's debt constituted the government's first loan guarantee for a private, for-profit company. According to the paper, the politics of job loss, re-election woes, and philosophical ideas about American economics weighed far more heavily on the final decision to back Chrysler debt than did the practical accounting evidence available.

Arguments over the changing face of capitalism and whether the federal government should interfere at all in the free market were piled on to the financial evidence presented to Congress. The role of Chrysler as a major employer and auto and auto-parts provider further crowded out hard economic analysis. Actual accounting data were used mainly as ammunition for both sides of the argument, and as a rationalization for those on the fence.

"The marketplace is not the court of final appeal as long as government-intervention powers exist," Dirsmith and Fogarty argue. "If anything, accounting information enters into the fray as a powerful part of the rhetoric." There is room for accounting data to play a larger role, however, the political and philosophical arguments ultimately prove too powerful for true financial numbers to be consequential, according to the authors.

In the end, despite the huge risk, the bailout saved Chrysler from bankruptcy. Dirsmith and Fogarty speculate that had more of the accounting analysis been considered, Congress may have been dissuaded from making such a leap-of-faith decision. But, as they put it, "That might be why we have politics."

Dirsmith is the author of more than 100 publications, including three monographs and more than 70 journal articles on topics ranging from accounting to strategic management. His research efforts currently focus on the expanding boundaries of the audit function and the organizational and societal determinants of decision making, among other issues. He received a master's degree and Ph.D. from Northwestern University.