Much attention is given in the academic and professional accounting literatures to
accounting standards, how they vary across countries, and political and economic
pressures to reduce variation. We view the focus on standards as substantially and
misleadingly incomplete, because financial reporting practice under a given set of
standards is sensitive to the incentives of the managers and auditors responsible for
financial statement preparation. Preparer incentives depend on the interplay between
market and political forces in the reporting jurisdiction. Market forces include the
extent of demand for high-quality financial reporting (influenced, for example, by the
amount of publicly traded equity, the size of the market for public debt, and the
extent of private versus public contracting in the economy). Political forces include
the extent of involvement of governments in codifying and enforcing accounting
standards, taxes, and political incentives to reduce the volatility of reported income
(i.e. to avoid large profits and large losses). These economic and political variables
profoundly affect financial reporting practice.