What Distinguishes Accounting Harassment from Sexual One? Caveat Emptor Might Be Better Than You Think

Optimality in accounting standards is elusive, and a tireless quest for it through empirical research seems rather Sisyphean. Then, why don’t we let market participants decide as we do in most consumer goods? On the other hand, even card-carrying free market advocates seem to have a hunch that some labor standards such as prohibition of sexual harassment and protection of workers engaged in dangerous jobs are on the right track although it means usually sacrosanct voluntary agreements between adults are overruled. In this paper, I try to make this hunch a reasoned argument based on Kaushik Basu’s justification on prohibition of sexual harassment which consists of both positive and normative parts. In the positive economic part of the argument, the insufficiency of marginal analysis is presented. Freedom of contract or no mandatory requirement on accounting practices does not necessarily Pareto-improve the whole economy because the aggregate behavior of price-takers (investors) changes the demand structure. We need more than the economic argument to justify imposing standards, however. The normative part closes the argument for some labor standards invoking the inviolable principle. Although it is not difficult to admit to the reasonableness of the principle in case of these labor standards, it is rather doubtful to apply this moral part to accounting standards considering the nature and role of financial markets, to which accounting standards are expected to give service.