The Decision to Adopt GAAP: A Case Study of the Commonwealth of Kentucky

12 Pages Posted: 28 Jul 2008 Last revised: 6 Dec 2018

See all articles by Vivian L. Carpenter

Vivian L. Carpenter

Atwater Entertainment

Ehsan H. Feroz

University of Washington Tacoma, Milgard School of Business-Accounting ; University of Illinois at Urbana-Champaign; Government of the United States of America - US GAO Advisory Council; University of Minnesota Duluth, Labovitz School of Business-Department of Accounting; University of Minnesota, Carlson School of Management-Department of Accounting; American Accounting Association

Date Written: July 28, 2008


The governmental accounting choice literature has posited that credit market incentives, citizens' demands, political competition and signaling incentives are important factors in influencing the adoption of the Generally Accepted Accounting Principles (GAAP). Based on actual field interviews conducted by the two authors, we find that political competition for the Governor's primary election, coupled with the state's weak financial condition and generally inadequate financial information system created an environment favorable to adoption of GAAP by the Commonwealth of Kentucky.

In the governmental accounting literature, political competition is hypothesized as influencing government officials to provide monitoring information. Evidence in the Kentucky case is consistent with prior studies to the extent that political competition helps create a demand for financial information,.which advocates of GAAP could exploit by seeking the passage of GAAP legislation. Nevertheless, political competition measures employed in prior studies are not good proxies for the relevant form of political competition described in this study because election data would not capture the change in the political environment created by Lt. Governor Stovall's legislative maneuvers.

The relevant form of political competition measure in this case is that of legislative competition. Legislative political competition relates to the efforts exerted to build, maintain or establish a dominant coalition of elected officials that is necessary to implement public policies. In this case, Stovall attempted to build a dominant coalition of elected officials to implement tax cuts as a means of establishing her fiscal leadership. Future work on this political competition hypothesis should incorporate legislative competition measures.

Although GAAP per se was never an issue during the Special Legislative Session, the political environment became conducive to the adoption of GAAP. The politics of the Special Session made Kentucky's legislators keenly aware of the need to improve the state's accounting system, and led to the highlighting of financial management themes in the Governor's race. In addition, the elected officials perceived that the state's accounting system need upgrading to improve the financial management practices of the state. Because the elected officials recognized that the state must improve its financial information system in order for them to fulfill their constitutional responsibilities to manage and monitor the government entity, one major conclusion of this study is: Legislative political competition motivates governments to adopt GAAP when financial management practices of the government entity fail to provide reliable monitoring information.

Evidence obtained for this study suggests that signaling incentives by accounting and auditing officials were very important factors in Kentucky's decision to adopt GAAP. Before 1979, neither Ross nor Atkins was convinced Kentucky should be producing GAAP financial statements. But, when Governor Brown took office in December 1979, he gave a clear signal that he intended to run Kentucky as a business by immediately appointing his Executive "Blue Ribbon" Management Commission. Given the recommendation of the "Blue Ribbon" Committee, the 1980 GAAP statute and increasing professional accounting peer pressure, it can be argued that both Ross and Atkins had sufficient signaling incentives to support GAAP in order to retain their jobs. The ability to produce GAAP disclosures became the public's accounting performance measure for "doing a good job."

Professional accounting organizations play an important role in influencing governments to adopt GAAP because they create professional peer pressure for change. These professional organizations help ensure that GAAP is recognized by the elected officials, the professional accounting community, and the public as the symbol of "doing a good job." Thus another important conclusion of this study is: Accounting bureaucrats in professional accounting and auditing associations are more likely to support GAAP adoption efforts.

We could not confirm that the bond rating agencies directly influenced the decision of Kentucky to adopt GAAP. Although it has been documented that credit rating agencies have been trying to influence governments to adopt GAAP with the expectation of better ratings and reduced net interest costs, we can draw no strong conclusion in the Kentucky case from our examination of credit market incentives.

The evidence in this case indicates that there was little or no citizens' demand for GAAP which is contrary to normative studies on governmental accounting. This finding does not imply that average voters/taxpayers or their information intermediaries do not demand any financial information to monitor the financial performance of the state. There are alternative sources of financial information available to the public other than GAAP financial reports which include: budgets, cash flow reports, and audit reports issued by the state auditors consisting of performance audits, efficiency audits and limited scope financial audits.

To summarize, this case analysis suggests bureaucratic signaling incentives and legislative political competition were important determinants in Kentucky's decision to move to GAAP. In the governmental literature, relations between voters and elected officials are assumed to be relevant in in explaining the governmental accounting (external reporting) choice. The evidence presented in this case suggests that the relationship relevant to understanding the governmental accounting choice is between the executive and legislative branches of government.

Keywords: Institutional Theory, Government, GAAP, Public Finance,Political Economy, Institutional Economics

JEL Classification: C93, E11, G18, G38, H10, H11, L30, L51, M40, M41, M49, P16, Z10

Suggested Citation

Carpenter, Vivian L. and Feroz, Ehsan H., The Decision to Adopt GAAP: A Case Study of the Commonwealth of Kentucky (July 28, 2008). Accounting Horizons, Vol. 4, No. 2, pp.67-78, 1990, Available at SSRN:

Vivian L. Carpenter

Atwater Entertainment

Detrroit, MI
United States

Ehsan H. Feroz (Contact Author)

University of Washington Tacoma, Milgard School of Business-Accounting ( email )

1900 Commerce Street, Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692 4728 (Phone)
253 692 4523 (Fax)


University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive# 2307
Champaign, IL 61820
United States

Government of the United States of America - US GAO Advisory Council ( email )

441 G Street NW
Washington, DC 20548-0001
United States

University of Minnesota Duluth, Labovitz School of Business-Department of Accounting ( email )

10 University Drive
Labovitz School of Business
Duluth, MN 55812
United States
218-726-6988 (Phone)
218-726-8510 (Fax)

University of Minnesota, Carlson School of Management-Department of Accounting ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

American Accounting Association ( email )

5717 Bessie Drive
Sarasota, FL 34233-2399
United States

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