Accounting Standard-setting Mechanism Design Concept

There are two different perspectives about the setting of accounting standard: one perspective is that accounting standard setting is a technical process, the other perspective is that accounting standard is a political process. The former is difficult to be carried out because of its not considering of the effect of economic consequence, the later is difficult to be the guideline of standard setting because of its lacking of explicit objective. This thesis provides a mechanism-designing perspective which combine the advantages of technical process perspective and political process perspective to guide accounting standard setting explicitly and feasibly.The thesis introduces the fundamental problem of accounting through the analysis of the two fundamental characters of modern enterprise system (public company), and explains the problem from the perspective of information economics. The problem is that the best mechanism used to control adverse selection in order to secure investors efficient information is not necessary the best mechanism used to control moral hazard in order to stimulate the manager. Therefore accounting must decide how to trade off the two objectives when there is only one bottom line number. In this thesis the fundamental problem of accounting is analyzed from the perspective of equity valuation and compensation contract. After introducing and analyzing specific models using accounting information to valuate, we come to the conclusion that fair value measurement is unavoidable if valuation model is to be efficiently used. Principal-agent model demonstrates the information used in compensation contract may not be equivalent to the information needed for equity valuation, which verifies the previous statement about the fundamental problem of accounting. It implies the probability of solving the fundamental problem of accounting through the illustration of correlation among accounting objectives, information characteristics and measurement attributes and the intrinsic relation between EVA (a measurement of performance) and residual income valuation (an equity valuation method). Accounting standard setting is the core of the thesis, and it is the main method used present all over the world to solve the fundamental problem of accounting as well. Investigation into the origin of accounting standard tells us that accounting standard is in essence aneconomic mechanism. We can work out a feasible solution to the fundamental problem of accounting from the mechanism-designing perspective using decision usefulness as objective and performance measurement as incentive compatibility constraint.From the mechanism-designing perspective of accounting standard setting, the accounting standard setter in our country must adapt the measurement perspective of decision usefulness according to the market environment of our transition economy. We must also introduce due process in the course of accounting standard setting. Fair value is unavoidable in accounting standard setting. Though fair value is used in our accounting standard at first, it is abandoned at last by the standard setter. The way of treating fair value is helpless to solve the fair value paradox in our country.