If Only We Had Listened to Ross Skinner!*

Ross Skinner built his intimate knowledge of the intricacies of the art of accounting through a very long and rich career as an “accounting philosopher". This allowed him to both observe, and be part of, the formalization of today's GAAP. The duration and timing of Skinner's career also allowed him to experience directly the gradual evolution of our accounting model from an approach based largely on principles to one based increasingly on rules. The objective of this paper is to look behind accounting figures, which are the product of varying combinations of rules and judgment, and to discuss some recent events that have rocked the auditing and accounting profession. Our comments are presented in the context of views expressed by Skinner in his 1995 “Judgment in Jeopardy” article. Skinner had a keen interest in accounting history. Therefore, we begin our paper by referring to Paciol's notion of “venture accounting". We use this notion to introduce our discussion of financial reporting, which has become an important instrument of resource allocation and a challenge for professional judgment. This leads us to describe some of the ideas Skinner presented in his article on accounting judgment as “visionary". Had we listened to him, perhaps we could have avoided some of the costly changes and additions recently imposed on our governance system, such as the creation of the Canadian Public Accountability Board and the tightening of several laws and regulations.     

Skinner's Thoughts on Professional Judgment and Recent Developments in Canadian Financial Reporting*/ LES RÉFLEXIONS DE SKINNER QUANT AU JUGEMENT PROFESSIONNEL ET LES RÉCENTS DÉVELOPPEMENTS DE L'INFORMATION FINANCIÈRE AU CANADA

In this commentary, we examine recent developments in Canadian financial reporting related to (1) the conceptual framework, (2) accounting standards, and (3) corporate governance issues, in light of Skinner's (1995) thoughts on professional judgment. We consider how effective these developments are in addressing several questions and concerns raised by Skinner.     

From Accounting to “Forecounting”*

Using Ross Skinner's 1995 CA Magazine article, “Judgment in Jeopardy", as a stepping stone, we revisit the meaning of professional judgment in accounting in light of developments in standard setting, financial markets, and business operations that have taken place over the past two decades. We argue that it is time to change the view that accountants' professional judgment is the application of accounting‐based knowledge and experience in the selection of an appropriate accounting method. Accountants now face a standard‐setting context that emphasizes the estimation of future cash flows as well as new business and financial realities. This context implies that, in exercising their professional judgment to choose between forecast alternatives, accountants must rely on knowledge and experience from other disciplines (even though this is not well integrated into accounting). Hence, accounting must evolve from its traditional stewardship role to the new role of “forecount‐ing” (the estimation of future cash flows). The implications as well as the challenges of that evolution are discussed.     

Professional Judgment and Departures from GAAP: “Judgment in Jeopardy” Revisited*/ JUGEMENT PROFESSIONNEL ET DÉROGATION AUX PCGR: LA PIERRE ANGULAIRE REVISITÉE

Prior to 2003, the CICA Handbook both required and allowed reporting entities to depart from generally accepted accounting principles if, in the professional judgment of the preparers and the auditors, compliance with GAAP would result in misleading financial statements. In 2003, the CICA Handbook was amended to remove these provisions. In this paper, the history of the amendment is discussed in light of Skinner's 1995 article “Judg‐ment in Jeopardy". I argue that while there is evidence of certain shortcomings in the exercise of professional judgment, remedies are available. Those remedies include (1) revisiting pre‐existing recommendations; (2) improving dialogue between standard‐setters, researchers, and practitioners; (3) increasing emphasis on accounting theory in professional accounting curricula; and (4) rigorously investigating and disciplining lapses in professional judgment. I suggest that we can rely on professional judgment, and that such reliance is both necessary and desirable. Admittedly, there will likely be few situations where compliance with GAAP would result in misleading financial statements and the discretion to depart from GAAP can lead to abuses that, at the very least, would hamper the comparability of financial statement information. However, the requirement to verify that the application of GAAP results in fair presentation is an important safeguard given the complexity of the financial reporting environment.     

Skinner's “Interpretation Panel”— A Means to Balance “Power”

The rules versus principles debate and the vital importance of context ‐ the circumstances‐specific nature of judgment ‐ are at the heart of Ross Skinner's suggestion for an “interpretation panel". International considerations and developments involving governance and regulation have created imbalances in power, expertise, and impartiality, increasing the importance of and need for such a panel. This analysis considers the nature of the problem, how professional judgment has been characterized, and why a panel would be appropriate to address, among other concerns, the audit committee's dilemma when accounting disputes arise. Evidence is provided that management turnover is higher in cases involving multiple restatements, governance problems, or regulators' sanctions. Although, intuitively, management turnover is likely to be associated with widely publicized restatements, some patterns suggest that it is a function of entity size, scope of management changes considered, and the manner in which the restatement was identified. Specifically, an identifiable source of discovery, as well as external involvement, is associated with a greater propensity for management change. In contrast, restatements linked to changes in available guidance from regulators are less likely to result in such turnover. One implication is that effective control design and monitoring to facilitate internal discovery of errors can decrease the likelihood of multiple restatements and reduce fault finding that leads to management change. The judgmental nature of restatements suggests that an infrastructure supporting “right‐mindedness” does have merit. An interpretation panel would increase the feasibility of principles‐based standards, facilitating timely resolution of accounting‐associated disputes and thereby enhancing the information environment underlying the allocation of capital.     

Earnings Quality under Rules‐ versus Principles‐based Accounting Standards: A Test of the Skinner Hypothesis / LA QUALITÉ DES RÉSULTATS SELON QUE LES NORMES COMPTABLES SONT AXÉES SUR LES RÈGLES OU SUR LES PRINCIPES: VÉRIFICATION DE L'HYPOTHÈSE DE SKINNER*

We provide preliminary evidence, consistent with Skinner (1995), that Canada's relatively principles‐based GAAP yield higher accrual quality than the United States' relatively rules‐based GAAP. These results stem from a comparison of the Dechow‐Dichev (2002) measure of accrual quality for cross‐listed Canadian firms reporting under both Canadian and U.S. GAAP. However, we document lower accrual quality for Canadian firms reporting under U.S. GAAP than for U.S. firms, which are subject to stronger U.S. oversight, reporting under U.S. GAAP. The latter results suggest that stronger U.S. oversight compensates for inferior accrual quality associated with rules‐based GAAP. Consistent with the positive effect of Canada's principles‐based GAAP and the offsetting negative effect of Canada's weaker oversight, we find no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. Our results imply that (1) policymakers who wish to compare the effectiveness of oversight across jurisdictions must control for the GAAP effect; and (2) accounting standard‐setters who wish to compare the effectiveness of principles‐ versus rules‐based GAAP must control for oversight strength.     

THE LOGIC OF EARNED ECONOMIC INCOME—A REPLY

Skinner (1998) challenged the papers that had presented the theory of Earned Economic Income (EEI) and had developed it in an attempt to show how it could be applied in practice. He asserted that they were illogical, inconsistent and based on a flawed chain of reasoning. This paper contends that Skinner's arguments were probably based on confusion. Such confusion could be attributable to a misinterpretation of adequate exposition by the proponents of EEI, because of Skinner's apparent fixation on a valuation-based concept of income measurement. Alternatively, it could be an indication of inadequacies in such exposition. Due to the possibility of the latter, this response seeks very briefly to clarify some of the concepts that Skinner disputes, indicating the reasons for dismissing his contentions. It is possible that Skinner dislikes EEI because it is inconsistent with a model for which he has a prior preference, but that would not be an appropriate basis for dismissing reasoned argument.     

The Information Economic Perspective of Accounting: Its Coming of Age*/LA COMPTABILITÉ SOUS L'ÉCLAIRAGE DE L'ÉCONOMIQUE DE L'INFORMATION ‐ UNE ÈRE NOUVELLE

Although this paper is not a book review, it discusses several recent publications in the area of information economics as applied to accounting. The major books mentioned and compared are those by Christensen and Demski (2003), the two volumes by Christensen and Feltham (2003, 2005), as well as two German books by Ewert and Wagenhofer (1993/ 2003) and Wagenhofer and Ewert (2003). The paper discusses the contrast between the traditional “value approach” and the more recent “information perspective", as well as the major methodological and theoretical tenets of the latter. Additional sections are devoted to “issues beyond the competence of the information perspective", “opposition and criticism” (with such subsections as “resistance to the mathematical‐analytical approach", the “neglect of traditional accounting terminology", and “other objections"), an inquiring section “toward a general theory of accounting", and, finally, a conclusion from a wider angle.     

The Public Policy Debate on Investors' Need for Disclosure Regulation: Accounting Historians' Help Wanted?*/ LE DÉBAT PUBLIC SUR LES BESOINS DES INVESTISSEURS EN MATIÈRE DE RÉGLEMENTATION DE L'INFORMATION: FAUT‐IL L'AIDE DES HISTORIENS DE LA COMPTABILITÉ?

This paper explores how research in accounting history can contribute to the important public policy debate regarding investors' need for disclosure regulation. Accounting, finance, and economics researchers and practitioners argue for, as well as against, disclosure regulation. The debate remains theoretical, however, because empirical studies are virtually nonexistent. This paper reviews five contexts in which accounting historians can begin a search for empirical insights concerning the costs, benefits, externalities, and effects on stakeholders of disclosure regulation. The paper's investigation of the accounting history literature suggests that accounting historians could improve the quality of the debate and help accommodate broader interests or alternative solutions to financial crises.     

Principles‐Based Reasoning about Accounting Estimates

This article proposes a key principle and related concepts for reasoning about accounting estimates. The reasoning is consistent with a principles‐based professional judgment framework proposed by Ross Skinner and the Institute of Chartered Accountants of Scotland. The principle deals with reasonable ranges and related risk assessments in the audit of accounting estimates. It does so by using concepts first introduced by Boritz and Skinner and updates them for the requirements of CAS/ISA No. 540 and International Financial Reporting Standards. The article identifies the conditions for the existence of the benchmark ranges proposed by Smieliauskas in identifying fairly presented estimates. The need for a professional judgment framework and related guidance has been recognized recently by the International Federation of Accountants, a 2010 EU Green Paper, and the Public Company Accounting Oversight Board as a result of challenges auditors have been facing in the current reporting environment. This recognition echoes calls first made by Ross Skinner in his pioneering 1995 article, and reinforced by the FASB/IASB 2006 proposal for principles‐based accounting standards.     

Forces Leading to the Adoption of Accrual Accounting by the Canadian Federal Government: An Institutional Perspective*/ LES FORCES AYANT MENÉ L'ADMINISTRATION FÉDÉRALE CANADIENNE À ADOPTER LA COMPTABILITÉ D'EXERCICE: UNE PERSPECTIVE INSTITUTIONNELLE

In 1995, the federal government of Canada announced that it would adopt full accrual accounting. The change was fully implemented at the department level in 2001 and for government‐wide financial reporting in 2003. Using the perspective of institutional theory, we examine several factors that had the potential to influence the federal government's decision to adopt full accrual accounting, including two royal commissions, the Office of the Auditor General of Canada, the Canadian Institute of Chartered Accountants, credit markets, and the practices of other national governments. We find that the decision to change to accrual accounting can be largely attributed to coercive and normative influences of the Office of the Auditor General of Canada (supported by the normative influence of the Canadian Institute of Chartered Accountants' Public Sector Accounting Board) and mimetic isomorphism with other members of the federal government's organizational field.     

Institutional Dances: How the First Accounting Degree in Canada Came to Be at the University of Saskatchewan*/ PÉRIPÉTIES COMPTABLES: LA CRÉATION DU PREMIER DIPLÔME CANADIEN EN COMPTABILITÉÀ L'UNIVERSITÉ DE SASKATCHEWAN

This paper tells how the School of Accounting and the bachelor of science in accounting degree were established at the University of Saskatchewan. Archives, various published histories, and contemporaneous periodicals serve as the main sources of information. The Institute of Chartered Accountants of Saskatchewan plays a key role in the history and it is evident that the establishment of the accounting program was critical for the legitimacy of both the University and the Institute. The paper argues that the University of Saskatchewan had the first school of accounting and the first accounting degree in Canada. A brief overview of the development of other business‐oriented degrees and diplomas in universities across Canada is provided in order to support this claim. Based on the history provided and some additional contextual material, some speculation is offered as to why the University of Saskatchewan was the first to offer an accounting degree instead of one of the older, more established universities in eastern Canada. The paper makes three contributions. First, it fills a void in the literature with regard to the history of the School of Accounting and the accounting degree at the University of Saskatchewan. Second, it provides a bird's‐eye view of the establishment of business education programs at other universities in Canada. Third, it adds to our understanding of the relationship between the accounting profession and academe by demonstrating how people and institutions align to create new educational mechanisms.     

Expanding the perspective and knowledge of the accounting curriculum and pedagogy in other locations: The case of Mexico

In our analysis of the accounting career and practice in Mexico, we include a comparative examination of the university curriculum, noting how it has changed over time, and we examine the differences between the accounting programs in the public and private higher education systems. We took this approach to investigate recent concerns raised by many academics from the field of accounting, about the ethicality of the accounting practice and the role played by universities in teaching would-be accountants ethics, and how Mexico compares to other countries that are currently being studied in response to Chabrak and Craig's (2012) work. Our perspective and experience with Community Service-Learning as a tool to achieve critical self-reflexivity, foster community engagement, and experiential understanding with principles of social justice, leads us to suggest CSL as another method to help address the valid concerns that have been raised about ethics education in the accounting career.     

Accounting Standards: Rules,Principles, or Wild Guesses?/ LES NORMES COMPTABLES: RÉGLES,PRINCIPES OU JEU DE HASARD?

This commentary considers the issue of judgment in the application of accounting standards. The rules‐versus‐principles argument is discussed, with particular attention to the relationship between accounting standards, accounting objectives, and the exercise of judgment. Both the types of judgment and the locus of judgment are examined: What types of accounting estimates are needed, and who makes those estimates? In particular, the problematic use of probability estimates and expected values is discussed. The paper concludes with proposals for improving the quality of accounting standards.     

Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality

Materiality is an elusive, but fundamentally important concept in corporate reporting of all kinds—not only in traditional financial reporting, but in sustainability and integrated reporting as well. In the end, materiality is entity‐specific and based on judgment. Moreover, it is a judgment that should ultimately be made by a company's board of directors, which makes materiality as much a governance as a reporting issue. Whether a given ESG issue is material is in large part a function of the corporate stakeholders, or “audiences,” that the company's board of directors deems to be “significant”—that is, important to the company's ability to create value over the short, medium, and long term. The identification of such audiences—together with the time frames the board uses to evaluate the impact of the company's decisions on these audiences—provides the basis for determining the sustainability issues that corporate management must focus on for performance and reporting purposes. To help ensure that decisions about materiality receive the attention they deserve, the authors propose that corporate boards articulate their views in an annual “Statement of Significant Audiences and Materiality.” Contrary to the prevailing belief that the fiduciary duty of the board is to place shareholders’ interests first, nothing precludes corporate boards from issuing such a statement. Recent research, including the compilation of legal memos on fiduciary duty and nonfinancial reporting for all G20 countries, makes it clear that the board's fiduciary duty is to “the corporation itself.” In exercising this duty, directors have full discretion, under the business judgment rule and other authorities, to decide which audiences, along with the company's shareholders, should be deemed significant.     

Elusive boundaries,power relations,and knowledge production: A systematic review of the literature on digitalization in accounting

A third wave of technological advancements, which is often referred to as “digitalization,” is affecting organizations across the board. This paper aims to present a comprehensive synthesis of the extant scholarly work on digitalization in the accounting literature. It does so through a systematic literature review that focuses on articles on digitalization published by the highest-ranked accounting journals in the period 2007–2017. By conducting a thorough review, we extend Rom and Rohde's (2007) literature review on integrated information systems (IIS) in management accounting. Furthermore, we utilize a modified version of the framework proposed by Rom and Rohde (2007) to classify and interpret the literature. This allows us to understand the differences between IIS and digitalization in accounting, and to illuminate avenues for future research. The paper concludes with an overview of three main differences in how IIS and digitalization have influenced accounting, and three concurrent avenues for future research on digitalization in accounting: the elusive boundaries of accounting, power relations, and knowledge production for decision making.     

“No accounting for these people”: Shell in Ireland and accounting language

Accounting lays claims to be the language of business: a clear, technical, unambiguous means of communication for decisions on investment and economic development. Accounting concepts have increasingly entered mainstream debate on issues affecting society at large. This makes the fairness and effectiveness of accounting as a mode of communication more important for social justice than ever before. In a contentious development, if the discussion is framed primarily in accounting terms, this may disenfranchise those parties to the dispute whose issues are not readily expressed in the common vocabulary of business. Their concerns may become invisible in the debate. If this happens, then accounting has failed as a means of communication, and that failure is non-neutral in that it favours those whose position is best supported by economic arguments.This paper explores this phenomenon using the case of a dispute between Royal Dutch Shell and a local community in Ireland concerning a gas refinery located in an environmentally sensitive area. The issues in conflict are complex and at times intangible. I explore how the limitations of accounting as a language blinded the protagonists to an understanding of each other's concerns, marginalised the concerns of protestors from the public discourse, shifting power from objectors within the local community to those whose primary concern was the economic exploitation of natural resources. I argue that accounting failed as a mode of communication to progress a resolution of the dispute, and that this failure was both unnecessary, and systematic in its support of economic interests.     

Zur Entscheidungsnützlichkeit eines IFRS-Abschlusses von Versicherern – Analyse der angedachten Regelungen zum endgültigen IFRS 4

In its Discussion Paper from May 2007 for the final IFRS 4 (“Insurance Contracts”), the IASB planned the “Current Exit Value” (CEV) to evaluate insurance liabilities. The aim of this article is to examine the impacts of the planned Current-Exit-Value-Approach on the decision usefulness of insurers' financial statements. In order to evaluate accounting rules, the criterion decision usefulness is divided into two sub-criteria – relevance and reliability. We found out that the Current-Exit-Value-Approach for insurance contracts in conjunction with fair value accounting of relating assets actually generates relevant information for users of insurers' financial statements. But we have serious concerns about a cost-adequate implementation of CEV approach. Furthermore, the reliability of accounting information based on a synthetic fair value is strongly questionable. Only extensive disclosure requirements can bring transparency to users and therefore assure reliable accounting information. Besides, there are other topics that should be reviewed before releasing a final standard (e.?g. customer relationship, credit characteristics of insurance liabilities, unit of account).     

A Marxist accounting history of the British industrial revolution: a review of evidence and suggestions for research

An important debate neglected by accounting historians concerns the existence, origins and significance of the British Industrial Revolution (BIR). A key problem is explaining why Britain was such a technologically creative society. Part one uses accounting ideas to explain Marx's theory that industrial capitalism first appeared in Britain and was revolutionary because it took control of production to maximise the rate-of-return on capital employed. Part two shows that accumulating evidence of the use of modern management accounting by leading firms during the BIR supports Marx's view that it was a capitalist revolution in his sense. Part three argues that the accounting history of Boulton and Watt supports the hypothesis that the capitalist mentality and accounts drove revolutions in the technical and social relations of production during the BIR. Part four re-examines other well-known key sites for the study of accounting history and argues that these cases support the hypothesis that the primary cause of variations in accounting during the BIR was variations in the social relations of production. The paper makes suggestions for further research and concludes that, by thoroughly testing Marx's theory, accounting historians can make an important contribution to a major historical debate.     

Information Control, Career Concerns, and Corporate Governance

We examine corporate governance effectiveness when the CEO generates project ideas and the board of directors screens these ideas for approval. However, the precision of the board's screening information is controlled by the CEO. Moreover, both the CEO and the board have career concerns that interact. The board's career concerns cause it to distort its investment recommendation procyclically, whereas the CEO's career concerns cause her to sometimes reduce the precision of the board's information. Moreover, the CEO sometimes prefers a less able board, and this happens only during economic upturns, suggesting that corporate governance will be weaker during economic upturns.