Accounting Research Center, Booth School of Business, University of Chicago

The Nature of Financial Accounting Objectives: A Summary and Synthesis Author(s): William H. Beaver and Joel S. Demski Reviewed work(s): Source: Journal of Accounting Research, Vol. 12, Studies on Financial Accounting Objectives: 1974 (1974), pp. 170-187 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2490504 . Accessed: 13/02/2012 06:51
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of The Nature Objectives: FinancialAccounting A Summary Synthesis and

WILLIAM H. BEAVER AND JOEL S. DEMSKI*

The natureand the specification financialaccountingobjectivesare of issues that recentlyhave receivedconsiderableattention.Nontrivialrefirms by the AICPA and sourceshave been expendedby publicaccounting in what these to among others, attempting specify ObjectivesCommittee, or illusiveobjectivesmight, should,be. There seems to be a consensusthat the primarypurpose of financial statement users. Yet, the to reporting to provideinformation financial is user-primacy role of objectiveswithinthis utilitarian, basic, fundamental framework remainsobscure-largely,we speculate,because the problem usershas not been forcefully of heterogeneous addressed.That is, explicit of of conflicts interestamong user classes (or recognition irreconcilable the users) providesthe key elementin defining objectivesissue. a A basic purposeofthissummary then,is to offer viewof and synthesis, rests the natureand role of financial accountingobjectivesthat explicitly on heterogeneous users.The argument presentedin six stages.Initially, is we providea summary of amongcomdescription the problemof selecting In alternatives. the secondsectionwe explicitly accounting petingfinancial formulate the user-primacy utilitarian notion. Followingthis is a disor of the basic nature of objectives.We then discuss the role of accussion countingresearchin this scheme, analyze the papers presentedat this in conference termsof the framework developed,and finally exploresome areas forfurther researchon the objectivesissue.
* Stanford University

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Alternatives ChoiceAmongFinancial Reporting availare procedures often accounting alternative financial Numerous agent, suchas theFASB, is to the able and,presumably, roleofa policy Recogor out that single thosealternatives are "desirable" "acceptable."' we outcomes, view different may alternatives produce thatdifferent nizing as alternatives a decision or of thisdeterminationthedesirable acceptable may individuals be affected that recognizing numerous Further problem. or as problem a multiperson social we by thesechoices, viewthisdecision choice problem. of a description theoutcomes we To pursue orientation, provide brief this procedure reporting of with adoption onefinancial thatmaybe associated on a initiallyfocus individual requires This, course, of to as opposed another. reports. usersoffinancial
THE INVESTOR-DECISION SETTING

user statement an investor. the we reasons, term financial For obvious deconsumption-investment a multiperiod faces investor The individual a hiswealth. Adopting by where opportunity is constrained his set cision we ofthisdecision process, characterization utility conventional expected states over distribution future a viewtheinvestor assessing probability as ofnature. or consensus of whyinvestor thissetting a variety reasons are Within be should produced. information which regarding may unanimity notexist a of incidence the cost of producing particular For example, precise the may investors agreeon the is set ofpublicinformationan openquestion; as to but relevance are likely disagree to who shouldbear information's mayensure opinions level, fundamental heterogeneous itscost.At a more speproviding And,in suchan event, as disagreement to whatis relevant. may to cial purpose reports thosein disagreement lead to moredisagreeon maydepend to ment, becausethevalue ofinformation one individual possess. whatinformation individuals other in investor our isolated relyon a single, we evident, cannot As becomes financial setting, of In setting. a multiperson description the investor sectors and information affect bothproduction exchange may statement in itself at manifests information ofan economy. theexchange In setting, investors among individual of (1) leasttworespects: theexchange securities in determines trade(which turn and (2) theprices which at those securities statement in The manner whichfinancial the wealthof each investor). of will and in will information be reflected trading in prices be a function
1We initiallyfocus on a policy group such as the FASB forexpositional convenience. At a very fundamentallevel, the question of what institutional mechanism should be employed remains unsettled (and unresearched).

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as of market;it will involvesuch factors transthe structure the securities costs, and alternativesources of information.2 action costs, information In the productivesectorwe note that financialstatementinformation the may affectthe choice of productivealternativesand, therefore, agto From our standpoint,it is sufficient gregatesupply in the economy.3 consequencesmustbe addressedin choosthat these productive recognize schemes.(Disclosure issues proreporting financial ing among alternativevide a ready illustration.) To sum up, tracingthe possible outcomesassociated with alternative policies requiresa focus on productionand exchange financialreporting in ways by alterindividualsmay be affected differing sectors.Different as native policies. Indeed, noninvestors, well as nonusers,may be affected.Since our goal is to providea view of the objectivesproblemthat we outcomesassociatedwiththeseindividuals, require recognizes explicitly of a convenient, compact description theirrelevantindividualcharactersubsection. istics.This is providedin the following
ALGEBRA OF CHOICE

is preferences One way to describeindividualcharacteristics to represent and relation. let I denotethe set ofindividuals We witha binarypreference 3C the set of financialreporting alternatives.Considerany pair of alterv alternative as at natives,v and a' A. If individuali E I regardsreporting X A ready mnemonic least as good as alternativea', we denote this qVjq'. is characterization v is "as valuable as" -q'to individuali.4 To illustrate, suppose individuali regardsprice level adjusted income in (v) as at least as valuable as a conventionalincomemeasure(X1') selectoptions.We denote this fact by nVin'. ing among alternativeinvestment device encodes all of the indiObserve,now, that this Vi representation alternatives. Preciselyhow reporting vidual's opinionsabout the financial or are, theseopinionsare formed, what theirmajor determinants need not of is us concern forthe moment;our basic concern representation these,espreferences. exogenous, sentially deviceat the social Moving on, we employthe same basic representation level. If alternativev is at least as desirable,or valuable, as alternative if this by qVq'. Alternatively, v is not as desirableas a', a', we represent this then,forany two alternatives we represent by notrIfr'. Quite clearly,
2 The structure the marketwill also bear on the issue ofthe optimal formofinformaof tion regulation(e.g., whetherthe marketmechanismshould be used to make information decisions in the economy). and theirimpact on the incentivesforinforma3The nature of these productiveeffects tion production have been discussed by Arrow [1962], Hirshleifer[1971], and Demsetz [1969], among others. 4More formally,Vi is a subset of JC X C. We can think of it as encoding the indiFurther discussion in vidual's preferences terms of pair-wise comparisonsof all 77,77'EJC. can be found in Arrow [1963], Ijiri [1967], and Sen [1970].

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we have one regarded as good as the otherand vice versa (indifference), as one regardedas as good as the other but not vice versa (strict preference), or neither regarded as good as the other(noncomparability). as Suppose, now, that we must decide some specific issue, such as the aca firm's ceptable or desirablemethod(s) formeasuring land development income.We let k C Xc denotethe set ofviable alternatives X C X the and set of acceptable or desirablemethods.This set of desirablemethodsis, of If course,represented the V relation. alternative is one of the methods by v singledout as desirable,it must (by definition) as good as the other be viable alternatives. Hence,
=

C( , V) = {InE InVE' or not I'VE forall I' E k}

wherethe C(k, V) notationexplicatesthe fact that we are selectingthe best members k withrespectto the primitive of desirability ordering represented V. by Whateveropinionsindividuals hold,or whateverdesirability pronouncementsregulatory agencies or accountingtheorymake, then, can be represented withan appropriate binaryrelation. in We now use this representation device to formulate, the next two sections, financial the accountingobjectivesissue. Utilitarianism It is generally agreed that financial accountingoughtto provideuseful information those who use the resulting to data. The AICPA Objectives Committee Reporton Objectives Financial Statements of [1973],forexample, states:
The basic objective of financial statements is to provide informationuseful for making economic decisions. (P. 13)

In a simplistic sense, the information must be usefulto those who use it (otherwiseit will not be used and its productionwould needlesslyconsume resources). However, the usefulnessedict cannot be regarded as monolithicin the methods. formulating problemof choosingamong financial accounting In particular, seemsclear that we mustbe moreinclusivein our analysis it and look beyondthose who actually receivethe accountingdata. For exa ample, it is a straightforward exerciseto demonstrate settingin which all who receivethe data are indifferent between-qand -q'but thosewho do not receivethe data will be severelyharmedif -qas opposed to -' is used. Hence, we regard I as encompassing individuals,regardlessof their all user status. Directlyor indirectly theymay be affected choicebetween by v and I'; and we therefore individual between and I', recognize preferences v of regardless whether data. theyactually receivethe respective Whetherone systemis more valuable than anotherto some individual

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What choice optionsare availdepends,of course,on a varietyof factors. and the individual'sbemay be affected, able, what resourcedispositions of liefsand attitudesare all relevantat thispoint.Extensivediscussion the of determinants value to individuali is beyondour presentscope.5Rather, betweenindividualvalue, encoded in our concernis with the relationship that are deemedappropriate.In alternatives Vi, and the public reporting short,V must-in some basic sense-depend on the Vi. If everyonewere then it to regardcash basis accountingas useless forfinancialreporting oughtnot to be used. between V and the dependenceor relationship This as yet unspecified f: by can be represented a function, Vi

V = A(V, ... ., Vi,.., VI).

Preciselyhow V should depend on the individualVi is an open question. That is, Pareto optimality of course,a close to unassailable requirement. is, if 77Vi?7'holds for all I individualsit would certainlybe capriciousto allocationschemebased denyqVq'. Indeed,thiswouldamountto a resource people what theywant. on systematically denying a acceptable notionto impose is, Pareto optimality therefore, relatively controversies of on the specification f(.). It may wellbe that manyexisting alone. Unfortunately, however, this criterion can be resolvedby invoking resolveour problembecause choice among many this does not completely alternativesharms some individualsand benefitsothers. For example, nonissues fall into this category.Such cases are strictly many disclosure of view. These typesof choices a point comparablefrom Pareto optimality must,however,be made; and it is in guidingthese types of choices that role objectiveshave a significant to play.

Role of Objectives
A utilitarian view requiresthat V depend in some manneron value at is the individuallevel, or V1. Pareto optimality a natural,thoughincombetweenthe Vi and V. to plete, requirement impose on the relationship in we must be more specific observations Beyond these noncontroversial the questionof how V should depend on the Vi. addressing between Vi and V can take a of Furtherspecification the relationship for We of number forms. might, example,insistthat whateverrelationship cases. This requiresthat mustnot resultin any indeterminant is specified subsetsof SC.Alfor V be such that C(Qk,V) be nonempty all nonempty
I With consistentbehavior representedby the expected utilityhypothesis,we model use information in termsof individual probabilityrevision.The demand forinformation is, therefore,a derived demand, reflecting-ultimately-the information'sability to increase the individual's (primitive) well-being.Discussion of the basic theory is available in Demski [1972] and Marschak and Radner [1972]. Application to a setting of possibly heterogeneous individuals in a market setting can be found in Hirshleifer [1971], Radner [1968 and 1972], and Demski [1974a and 1974b].

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ternatively, mightrequirethat choicebetweenany two alternatives we not be influenced preferences by among other alternatives(independenceof irrelevant alternatives). Restrictionto a complete and transitive orderingof aC can, however, cause difficulties. Arrow'simpossibility theorem guarantees that restricting all preference and relationsto weak orders (withoutfurther restriction) imposing nondictatorship, independenceof irrelevantalternatives,and Pareto optimalityconditionsare mutuallyinconsistent The conditions.6 set ofall f(. ) satisfying is theseconditions null.As a result, any methodof movement from the Vi to V we selectis guaranteedto violate some subset of Arrow'sconditions.The question,of course, is which condition(s) to violate; presumably role of objectivesis to addressthis question. the More specifically, role of objectives is to specifythe relationship the betweenthe Vi and V that will formthe basis forresolution financial of reporting controversies. a very fundamental At level this requiresvalue or ethicaljudgments to whosewell-being be tradedoff-and in what as will dimensions-for whose.For example,the AICPA ObjectivesReport'states:
An objective of financial statements is to serve primarily those users who have limited authority,ability, or resourcesto obtain information.... (P. 17)

Preciselywhich tradeoffs are desirable is, of course, an open question. But the natureofthe problemand the fundamental ofobjectivesseem role clear. Objectives are neithernecessarynor sufficient conditionsfor optimalityin a narrowsense. Rather, they specifyor definethe relationship betweenVi and V. It is, forexample,difficult conceiveof the FASB's to making consistentchoices withoutsome fundamental conceptionof the betweenV. and V.7 relationship

Policy Making and theRole ofEvidence

With the relationship betweenVi and V specified, financial the accounting choice problembecomes more structured. particular, assumes a In it form appropriately of evaluatingalternatives and assimilating theseevaluations. An important issue at this point concernsthe role of researchin movementfrom analysisor evidentiary the domainto thepolicydomain.Recent empiricalresearchhas, forexample,investigated the associationbetween financial statement data and security prices.Such analysiscannot,however,
6Arrow [1963]. In fact, many possible ways of moving from Vs to V take the formof appropriate constitutional games. See Demski [1974b]; using such an approach, for example, we know the necessary and sufficient conditionsfor the formto be one of a group, such as the FASB. In fact,Bedford [1974] has suggestedthat the AICPA Objectives Committee Report may be viewed as the constitutiondefining role of the FASB. In this respect, the it seems anomalous that the FASB has been financedand appointed priorto construction of its constitution.
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in and of itself implyor dictatea preference one reporting for practiceover another.The role of such evidenceis to alter probability assessments;8 it carriesno preference encodingper se. Indeed, adherenceto the Savage axioms ensuressuch a decomposition beliefsand preferences. of To further develop this point, considera particularassociationmetric such as the API (abnormal performance index). Careful assimilationof any study relyingon such a metricwould address specification issues,9 to the necessary from ex post metric an ex ante probabilistic an movement alternatives. assessment, and the costs of the reporting With properspecification and appropriateenvironmental regularity, then interpret we the API as a measure of the private value of advance information. But, in general, privatevalue and social value ofinformation not coincide.'0 do The conclusion, course,is that empirical of research does not,in general, resolve choiceproblem." the fundamental issue at thispointconcerns testing conjectural Another important the of of hypotheses. We do not view such hypotheses the efficiency security as marketsas objectives.These hypotheses relateto the determinants inof dividual value, not to the relationshipbetween individual and social render value. 12 This does not, however, unimtestingof these hypotheses portant.For example,it may be valuable to produce information the on consequencesof alternatives priorto makingpolicypronouncements. Obthat thesetypesof studies,whether serve,moreover, directly indirectly or relatedto individualconsequencedeterminations, the may simplify consequence domain. Hence, it may prove to be desirableto specify guidelines as(or secondaryobjectives) to help make these essential simplifying
8 Put another way, we face a choice problem and these studies representadditional informationbeing brought to bear on the problem at hand. This issue has been discussed in an externalreportingcontextin Beaver [1973 and 1974]. See Demski [1973] for an elaboration of this theme in a managerial context. 9 Issues of risk measurement,specificationof the ex post relationship between risk across securitiesare important of and return, and specification the appropriateweighting examples. 10See Akerloff[1970], Demski [1974a and 1974b], Fama and Laffer [1971], Hirshleifer[1971], Kihlstromand Pauly [1971], Rothschild [1973], and Spence [1973]. Simplifications,of course, do exist. In the restricted setting of interperiod tax argument in which the API allocation, one of the authors has advanced an efficiency metricand social values are likely to agree. See Beaver and Dukes [1972 and 1973]. This issue constitutesa special case where all of the informativealternatives constitutepart and each can be provided at essentially zero cost by of publicly available information the firm.Given these conditionsand the findingthat earnings under deferralare more set used by the market, it would appear to be highly associated with the information Pareto optimal to report deferral.As noted earlier, Pareto optimality provides an incomplete ordering;as a result,it will not always resolve the issue. The above argument implicitlyassumes that the price domain remains constant and that the issue is merely one of cost. If the price domain is affectedthen Pareto optimality may no longer be invoked. 12 Moreover,they do not have the "first principle" or primitivenotion of an objective. The likelihood of their truthwill vary with the productionof evidence.

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sumptions. Harberger[1971],in fact,made such a proposalforresearch in economics. applied welfare

Other Approaches
We would characterizethe approach outlined above as a decisiontheoreticapproach to problemsof social choice where the existenceof heterogeneous users of financial reports explicitly is admitted.Contrasting viewstendto fallintooneoftwoschools:(1) the"truth"or"objectivist"approachand (2) the "decision-model" approach.'3The first assertsthe existence of truevalues and views the purposeof accounting reporting as the truevalues as accurately possible.'4 as The secondsuggests thatwe examine howinvestors actuallydo or should makedecisions and produceinformation whichwillprovideassessments the parameters that actual or idealized of of model."5 The problemswith the truthapproach centeraround its suppression of individualdifferences relegationof cost considerations secondary and to in importance. Focusingon truth(an imposition Arrow's utilitarian framework) denies the existenceof differing opinionsabout whichpublic information will be most valuable. For example,to the extentthat truthinvolves reporting past events,it does not allow fordiffering opinionsas to which events are relevantand hence worthreporting (e.g., the historical cost of an asset). Similarly, the extentthat truthimplicitly involvesa to prediction the future(e.g., depreciation the past year), it does not of for allow for heterogeneous expectationsover futurestates. Rather, heterois geneity suppressed underthe guise of a searchfortruth.Even withpresumedunanimity, however, typicalanalysesdo not explicitly the recognize the cost of producing is truemeasures.The resulting framework therefore incomplete. The decision-model approach also suffers fromsuppressionof heteroacross geneityand cost considerations. does admit to heterogeneity It classes of users but strictintraclasshomogeneity maintained.In the is limit,of course,we could have I classes of one membereach; and in this sense heterogeneity allowed. Interclassexternalities, is however,are not admitted to in the typical analysis and the central problemof heterogeneoususersis therefore ignored.'6 Indeed, this approach assumes that knowledgeof the decision model will automaticallyreveal what information needed.'7This typicallyis is
See Chapter 1 of Demski, et al., [1972] fora similar classification. E.g., MacNeal [1939]. 15Bierman [1974], Revsine [1973], and Sterling [1970] provide three recent examples. 16 It is, in fact,oftenfeltthat specificreportsforspecificclasses will completelyresolve the reportingchoice problem in an acceptable manner. Individual class determination, now, is a formof liberalism;and it is well known that no amount of liberalismwill repair the Arrowparadox. (See Sen [1970], Chapter 6*.) 17 For example, see Sterling [1970], p. 454.
13
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model and assume that a spenot the case. Considerthe investor-decision to cificmodel can somehowbe singledout. The parameters be predicted cash flows will are the probabilitiesthat the various state-dependent occur. No amount of inspectionof that model alone will reveal what (if any) financialstatementdata may be usefulin assessingthese probabilineeds, as opposed to ties. Both approaches,in fact,speak of information in context; and both, therefore, optimal information some cost-benefit forms impositions. of constitute is problemwhen heterogeneity The nature of the financialreporting exploredby examiningthe papers presentedat admittedcan be further this conference.
SORTER AND THE AICPA OBJECTIVES REPORT

The Objectives Report presentstwelve objectives designed to assist by policymakers providinga means for evaluating desirable goals and second, and last two) helpingto achieve them. Four of them (the first, fromVi to how movement represent objectivesin the sense of specifying items,thoughtermedobjectives, V is to be accomplished.The remaining disguisedpolicydecisions. actually represent The first and last two objectivescall forproductionof usefulinformation:
The basic objective of financial statements is to provide informationuseful for making economic decisions. (P. 13) An objective of financial statements for governmentaland not-for-profit organizaof tions is to provide informationuseful for evaluating the effectiveness the management of resourcesin achieving the organization's goals. (P. 46) An objective -f financialstatementsis to reporton those activities of the enterprise society . . . and which are important to the role of the enterprisein its affecting social environment.(P. 55)

in thesestatements, broadestterms, requiring as that Pareto We interpret be optimality observedin movementfromVi to V. As previouslymentioned,this is a close to unassailablerequirement. of we Beyondthiscall forefficiency, stillface the problem whichtypesof or surfaceare to be permitted whose wellmovements along an efficient such issuesappears for beingwill be tradedoff whose.The key to resolving of to lie in the introduction the power of various individualsto enforce theirwishesover the wishesof others.And at thispoint the secondobjective is quite explicit:
An objective of financial statements is to serve primarily those users who have limited authority, ability, or resources to obtain information and who rely on about an enterprise's financial statements as their principal source of information *economic activities. (P. 17)

this obthat such a set of individualsis nonempty, Underthe assumption in that whenconflict arise,the disadvansituations jective requires, effect,

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taged individualsare to have sufficient power to achieve theirwishes.'8 Whether theseindividuals shouldpossesssuch poweris an ethicalquestion that we are not preparedto address at this time. But some such set of is tradeoffs essentialifwe are to admitto movement along an efficient surface. Observe,however,that marketefficiency raises an interesting question of how stringent this preferential is treatment likelyto be. In particular, ifthe marketis efficient respectto publiclyavailable information with then investors playinga "fairgame" withrespectto all public information, are includingfinancialstatementinformation. Hence, it is not obvious how serving constituency this woulddiffer from serving larger ofinvestors the set who relyupon othersourcesof publishedinformation. The remaining statementsin the Report deal with the nature of preferred than withthe relationship accounting rather methods, betweenindividual and social preference. thesepolicychoicesare established Moreover, withina decision-model analysisand are, therefore, subject to the general whether criticisms detailedabove (apart from are consistent withthe they Pareto optimality preferential and treatment disadvantaged to individuals' objectives). The Report,forexample,notes that all investors need to knowthe timing,magnitude, and riskiness future of cash flows.
Thus, the information needs of creditorsare essentiallythe same. Both groups are concernedwith the enterprise'sability to generatecash flowsto them and with their own ability to predict, compare, and evaluate the amount, timing,and related uncertaintyof these futurecash flows. (P. 20)

Extant models of the investor-decision processunderuncertainty virare in tuallyunanimous suggesting that,at a minimum, investor's the outcome should include a specification the (state-dependent) of future description cash flows.But having said this in no way identifies which set of costly measures should be employedfor this purpose or solves the problemof heterogeneous users. Though we may appear to be quibblingover semantics, of the term use in user "needs" reflects inherent an difference philosophy. The termcreates the implicationthat without the needed information, decision making is would be infeasible. the Furthermore, cost of this needed information not discussedin the Report.'9The role of information to alter investors' is assessments the probability of distribution states of the world. overfuture
18 Let c be the disadvantaged subset of I. This objective then requires that qVi j' for all iEc =X 77VT'. In Bloomfield's [1971] axiomatization of cooperative game (and social choice) theory, this objective specifies a constitution. Addition of responsiveness and independenceof irrelevantalternative conditionsensures that all choice processes admit to the constitutionalinterpretation. Note, however,that if we admit to conflicts within the disadvantaged class, the sound objective still provides an incomplete ordering. 19Interestingly, the Report chooses to model firmbehavior according to a sacrificebenefitdichotomy (see page 28). Yet, it does not apply the same simple paradigm to the analysis of information decisions.

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Probabilisticassessmentsare always feasiblein the absence of any particularset of information under consideration. fact,the decision-theoIn retic approach to the information-choice problempresumessuch assessmentsexist in the formof priordistributions. Information value if it has is expectedto induce a revisionof probabilities and actions that implya greaterexpectedutility(withcost considered)to the investor. This is one on way to place a meaningful interpretation a termlike user needs.Howof with the manner ever, such an interpretation user needs is inconsistent in whichit is applied in the ObjectivesCommittee Report. The decision-model approach and its attendantuser-needs dictumalso createa falseimpression unanimity. example,consider twomajor of the For in classes of users identified the Report-creditors and investors.The payoff-relevant partitionof futurestates will vary considerably between thesetwo classes. The creditor concerned is with two basic events: default and no default,with finer partitions the former. on The investor, the on otherhand, is concerned withfiner partitions theno defaultevent.Even of withinthese major classes of users,lack of unanimity may exist because of heterogeneity preferences futureconsumption of for and heterogeneity of expectations. Anotherexample of wheredisguisedpolicy decisionsare offered within a decision-model is framework in the Report's reaffirmation the imporof tance of incomedetermination. is The basis forsuch a statement that in cash flowsthe investor orderto assess future needs to knowpast earnings. is Moreover,the term incomedetermination used as if it were some unambiguous,monolithic concept(such as trueearnings)devoid of any meaerror. surement its of we Apartfrom ambiguity meaning, view such an "objective" as an implicitpolicy decisionand one that is questionablein light of evidence on marketefficiency. The Report,by its reaffirmation the primacyof of accountingearnings,adopts the positionthat considerableinterpretation of events (in termsof earningseffects) requiredin financialstatement is In marketthe justification such a position is for reporting. an efficient unclear.In an inefficient marketthat does not fullyreflect information the publiclyavailable it mightbe argued that the financialstatementdata for lest he be misledand purmust be carefully interpreted the investor, chase an overpriced security(or sell an underpriced one). However,in an marketsuch paternalism even more questionable.Put another is efficient is market-but it way, incomemeasurement not precludedin an efficient cannot be automaticallyassumed either.Managementmay have a comof the parative advantage in interpreting effects certainevents on future cash flows.In such instances, theirinterpretations reporting (i.e., earnings measurement) may be quite appropriate. the information constraint Finally, the committeeReport, reflecting of primarily leaves the impression that relying upon financialstatements, In with financialstatementsmust be self-contained. a market efficient

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respectto published information, investorwho relies upon financial the statement data is stillplayinga fairgame, even thoughpricesmay reflect a much broader information In such a setting,it may not be costset. effective a Pareto optimality statements (in sense) to have financial convey all of the firm-specific information, ratherreportonly that portionin but whichit has a comparative advantagerelativeto otherinformation sources. The issue of comparative advantage is essentially ignoredby the Report, withthe possibleexception management of wherecost consideraforecasts, tionsare stillomitted. In short,the Report offers two classes of statements:objectives and policychoices.The policychoicesare foundedon a decision-model philosophy of information production and therefore cannotbe taken as ultimate, unchallengeableguides to resourcecommitment. Rather, they represent the combinedjudgmentof the committee to what broad rankings as will in be reflected V. Given that their argumentsare debatable at several points,we do not view these disguisedpolicychoicesas the centraltheme of the Report. Instead, its central thrustlies in a noncontroversial call forPareto optimality and a controversial forpreferential call treatment for disadvantaged individuals.It is this (second) objective that constitutes the essenceof the Report. The unanswered questions,of course,are what the consequencesof such powerare likelyto be and whether theyare, in some ethicalsense,desirable.
CYERT-IJIRI

a Cyertand Ijiri offer view of the financial environment that reporting explicitly recognizesa limitedamount of heterogeneity. Three classes of individuals distinguished: are users,corporations, the profession. and Conflictsamong the threegroups are admitted,but intragroup conflicts are not. Denoting the threegroups'preference relationsVu, Vc, and Vp, the objectivesissue is now (re)expressed specifying function: as the V = f(Vu, Vc Vp). In elaboratingtheirview, Cyert-Ijirimake two observationsthat deserve reinforcement. First, they explicitlyrecognize (limited formsof) conflict among the individuals.Hence, usefulnessin a narrow sense of value to thosewho receivethe data is not viewed as necessarily specifying the unanimity Pareto efficient or surface.That is, nonusersare acknowledgedas havinga stake in thedetermination financial of methods. reporting frontier explicitlyentertained is Second, movementalong the efficient and alternativepower configurations admitted to. The Objectives are Report grantssuch power to users (and, in particular,to disadvantaged users). But other alternativesare available-the extremesin the CyertIjiri tripartite beingacquiescenceto eitherthe corporation theprofession or groups.

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of beIn short,the role of objectives is specification the relationship along the tweenV and the individualVs. Whetherone class of movements ethical quesPareto surfaceis more desirablethan anotheris a distinctly tion; and the basic, fundamental purposeof objectivesis to delineatethese choices. Again, though,the unansweredquestions are what the consethey quences of variouspowerconfigurations likelyto be and whether are are, in some ethicalsense,desirable.
GONEDES-DOPUCH

Gonedesand Dopuch offer view of the financial a reporting environment that explicitly allows forheterogeneity (withthe exceptionof constraints in core). Unlikethe Objectives introduced section5 to ensurea nonempty Committeeor Cyert and Ijiri, however,they confinethemselvesto the moveunanimity criterion Pareto optimality of and thus do not entertain mentsalong an efficient surface. markets More specifically, and then theypostulatecompleteand perfect examinethe financial information production problemwitha conventional marketsolution,as well as one based on the core of the corresponding sense,theyaddressthe question cooperative game. 20 And,in a morenarrow ofwhenthe laissez-faire (in approachwill be efficient the senseof inducing Pareto optimal information productiondecisions). Here they document of the marketfailurecase when information a public good naturecannot conbe excludedfrom nonpurchasers (the freeriderproblem),and thereby clude that the laissez-faire approach cannot be entirelyrelied upon. Inare deed, the marketfailurepossibilities far deeper than those associated with the freeriderproblem.Issues of adverse selection(Akerloff [1970]), of on signalling(Spence [1973]),and the effect information the completearrangements (Kihlstromand ness of marketsand efficient risk-sharing Pauly [1971]and Radner [1968and 1972]) are also relevant.Informational differences may lead to noncooperative pathologiesof adverse selection, and and the attendant fraud,moralhazard, cheating, bluffing, punishing; are marketfailurepossibilities indeedimmense.2' Several additional aspects of the Gonedes-Dopuchanalysis are worth noting. First, their analysis of movementfromthe evidentiaryto the that, barpolicy domain is less than completeand createsthe impression In ringfreeriderproblems,such movementis straightforward. a literal in the sense,however, behavioralassumptions theiranalysis (as well as in the evidence information; ours) confine roleofevidenceto thatofproviding per se carriesno inherent preference encoding.
20 The formeris, essentially, a unanimity game that admits to a constitutional interpretation(Bloomfield[1971]). The core approach, in turn,is consistentwith the usual along with Wilson's [19701core propertybeing imposed on the constitutionalrestrictions f(-) function (Bloomfield [1971]). And, as the number of actors increases, the core approaches the perfectcompetitionsolution. 21 See Baiman [1974] and Rothschild [1973] foradditional discussion.

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Second, Gonedes-Dopuch do conclude that price domain analysis is consequences). for sufficient assessingconsequences(as opposedto ordering as Perfectand completemarkets, assumed by Gonedes and Dopuch, are or to sufficient support this argument;but incompleteness imperfection markets underincomplete of tendsto negateit. In fact,the theory the firm may manifest consequences In is close to beingin a stateofdisarray.22 short, security pricemovein far themselves manners beyondthoseof immediate ments. Third, Gonedes-Dopuchconclude in the final section,after observing approachesto settlingthe financial marketfailure,that some nonmarket issue information-production may be desirable.This strikesus as an imMarket failure renders a market solution portant point to reinforce. The real issue is how a marketsoludeficient. suspect,but not necessarily and in this sense the effialternatives; tion compareswith the nonmarket studiesas eitherconsequenceor evaluation devices cacy of market-based is an unsettledquestion. Rejection of the marketapproach is, therefore, at at premature the least and incorrect the worst.That is, we presently evaluationschemescomand nonmarket lack evidenceon how well market consequencemeasuresare. pare, as well as on how completemarket-based The centraldifference Finally,we returnto the relianceon unanimity. between the Objectives Report and the analysis of Gonedes-Dopuchis to individuals movealongthePareto on reliance disadvantaged theformer's surface.Nondisadvantagedindividualsare not, in the Objectives Report to approach,permitted block or preventthe realizationof the disadvanlevel, then,the central taged individuals'wishes.At a most fundamental fromVi to V here is how movement issue amongthe approachesproferred is to Where,admitting Pareto optimality, powerto is to be accomplished. of reside? Herein lies the central role, and central importance, financial we objectives.Unfortunately, knowverylittleabout thisissue. accounting

for Implications FutureResearch

As indicated above, researchplays at least two roles: (1) to provide researchprovides evidence on various aspects of Vi (e.g., security-price on information certainaspects of the consequencespace that will in part for alternative);and (2) individualpreference an information determine to provideevidence on the consequencesof various mappingsfromVi to V. In these respectsthe papers and subsequent discussionsat the conor of ference have called foradditionalresearch one form another.GonedesDopuch providethe most elaborate attemptto take stock of the current proand suggestways in whichthe evidence-gathering body of knowledge for concerns future be However,mostoftheexpressed cess might improved. above. One of the implica-rolecitedresearch directedtowardthe first are generating tionsoftheframework developedhereis thatwe shouldconsider
22 Ekern

and Wilson [19741and Radner [1972].

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evidence on the issue of objectives itself.There has been essentiallyno one of the of recognition this second role of researchthus far; hopefully, forresearchinto this will resultsof the conference be to suggestdirections list: (incomplete) the we area. Tentatively, offer following in failure additionto the freeriderprob(1) What are sourcesof market What are the costs aslem? What are the consequencesof these failures? to removemarketfailure? sociatedwithattempting and attendantmappings fromVi arrangements (2) What institutional and what are the (costs and) consequencesof to V are to be considered as these solutionforms opposed to thoseof a marketsolution? domain, of assumption unrestricted to (3) If we are willing violateArrow's of are and/orpreferences forms unanimity on underwhatrestrictions beliefs attainable? (See Ohlson [1974],Lintner[1969],Wilson [1968],and Ekern and Wilson [1974]forsome aspects of thisissue.) what mechanisms in context, (4) If we view theproblem a game-theoretic and what are the are needed to ensurethat the game will be cooperative, and litigatsuchmechanisms (e.g., costsof detecting costsof implementing ing contractviolations)? soluto sufficiently ensurea cooperative (5) If we relaxthe assumptions behaviorcan occur and what are the tion,what formsof noncooperative moral consequencesassociatedwithsuch behavior (e.g., adverse selection, etc.)? In thisbroadercontext, cheating, fraud,bluffing, hazard, signalling, and analyzed; and in introduced can the role of certification be formally such a settingwe may arrive at a more precise notion of what CyertIjiri implyby movingobjectivestowardthe P circle. what additional markets, and/orimperfect (6) If we admitto incomplete of dimensions the consequencespace become relevant?Considerthe issue may affect forecasting mandatory Instituting offorecasts management. by the incidenceof risk borne by managementvis-h-visinvestors.In commay insureagainst such risksand the conseplete marketsmanagement However,in straightforward. quences of such a policymay be relatively incompletemarketssuch policies representimplicitattempts at wealth become betterunderstood. and redistribution objectionsby management manageMoreover,since the incidenceof the riskcannotbe fullyinsured, behavior that considerably ment may respondwith formsof forecasting of In the affect value offorecasts. any event,theseare dimensions the conhave onlybegun to admitto. sequence space that we in information supporting the (7) Finally,what is the roleof accounting markets? existenceof morecomplete will-in and of itself-resolvethe fundaOf course,none of thisresearch of how preferences should be weightedacross mentallyethical question financialreporting in determining policies. We are, however, individuals of on hopefulthat it will providesome information what the consequences we choicesmay be. On the otherhand, though, mustadmitto a alternative in this research.At a basic certainphilosophicalreservation suggesting

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level, the major focus of our paper is the problemof providinga social information systems.Yet researchis also a for ordering alternative-public and, in the limit,our analysisapplies withequal force of form information; and financial accountingresearch. accounting to financial

Conclusion
a we In conclusion, have offered view ofthe natureand roleofobjectives the users. This view incorporates that explicitlyrests on heterogeneous of usual utilitarianstatement.But explicit consideration heterogeneous between in the difficulties delineating relationship usersraisesthe inherent and the choicesthat mustbe made. This is the area, individuals conflicting it seemsto us, in whichobjectiveshave a vital role. specification however,stops far short of the refined Our presentation, of accompaniesstatements objectives.We have not,forexample, thatoften policies reporting our structured analysis on an assumptionthat financial need to be regulatedby some agency.This can onlybe an outcomeof the analysis; it does not serveas an acceptable assumption. more disclosure, or Similarly,we have not issued a call for forecasts, of financialactivities. There is no general presentationof a statement Again, these that will supporteithercontention. economiclaw or theorem onlybe theproductofanalysis;and the roleofobjectives can requirements in the is to specify natureof the tradeoffs such analysis. BIBLIOGRAPHY
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