Complexity of financial reporting standards and accounting expertise

This study tests whether firms seek to mitigate the adverse effects of Financial Reporting Complexity (FRC) by investing in accounting expertise. We develop a measure of FRC based on the complexity of accounting standards that govern annual disclosures. We find that FRC is positively related to the accounting expertise on a firm’s board of directors and audit committee. We also find that accounting expertise mitigates the relation between FRC and negative reporting outcomes. Collectively, this study increases our understanding of the actions firms take to mitigate the negative consequences of FRC, and the role of accounting expertise in this setting.     

An Essay on Accounting's Social Complexity and the Fairness Challenge/ESSAI SUR LA COMPLEXITÉ SOCIALE DE LA COMPTABILITÉ ET LE DÉFI DE LA FIDÉLITÉ DE L'INFORMATION

We are honoured to contribute our ideas to the tribute to Ross Skinner, stimulated by his 1995 CA Magazine article “Judgment in Jeopardy". Our effort is titled “An Essay” because we want to suggest an approach to the problem of judging fairness in financial reporting that Skinner raised and to explore some consequences of that approach. We include no literature references other than to “Judgment in Jeopardy", and occasionally to Homer, because we have developed the ideas in this essay specifically for this tribute and have not relied on others in doing so. There has been an enormous amount of writing about accounting standards, professional judgment, fairness, and other related topics, but rather than exploring all that, we have focused directly on Skinner's concerns and have tried to develop some consequences of those concerns. One of the issues Skinner's article raised is the possibility that a solution to the judgment problem will forever be elusive. Another is the enormous challenge that “fairness” presents in an increasingly complex world. To explore the implications of Skinner's call for judgment, we use a framework based on the relevance, reliability, and validity of accounting information as a means of addressing this challenge and the demands on social consensus that result. Since Skinner was concerned about the application of judgment to real problems, we illustrate our analysis by considering four contemporary accounting debates: principles versus rules, global convergence of accounting standards, the need for a stand‐alone Canadian standard‐setter, and accounting for stock options. We argue that ideological choices, competition among parties in society, and fundamental measurement problems support Skinner's prediction that a solution will remain elusive.     

Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally

Research has shown that accounting follows different patterns in different parts of the world. There have been claims that national systems are determined by environmental factors. In this context, cultural factors have not been fully considered. This paper proposes four hypotheses on the relationship between identified cultural characteristics and the development of accounting systems, the regulation of the accounting profession and attitudes towards financial management and disclosure. The hypotheses are not operationalized, and empirical tests have not been carried out. They are proposed here as a first step in the development of a theory of cultural influence on the development of accounting systems.     

Valuation-based accounting research: Implications for financial reporting and opportunities for future research

This paper discusses the relation between financial reporting research and practice, particularly standard setters. Many studies addressing financial reporting issues use a valuation approach. The paper describes alternative approaches to valuation research and summarises the findings relating to four major current issues: fair value accounting for financial, tangible, and intangible assets, cash flows versus accruals, recognition versus disclosure, and international harmonisation of accounting standards. The summaries include identifying what standard setters and others would like to learn from research, what we have learned, and what is left to learn. The paper concludes with observations about future financial reporting academic research.     

Accounting standards and value relevance of financial statements: An international analysis

Using 17,743 firm-year observations of industrial companies in 21 countries from 1991 to 1997, this paper finds that the use of accrual accounting (versus cash accounting) negatively affects the value relevance of financial statements in countries with weak shareholder protection. This negative effect, however, does not exist in countries with strong shareholder protection. These findings are consistent with the belief that shareholder protection improves the effectiveness of accrual accounting, and suggest the importance of considering shareholder protection when formulating accounting policies related to accruals.     

Agenda formation and accounting standards setting: lessons from the standards setters

There are many studies on lobbying of accounting standards, but the technical agenda of regulators is taken as ‘given’ and why a particular topic was admitted to the agenda is not investigated. Agenda formation is important as control of the agenda determines which topics get regulated and the form of the regulatory response. A few studies have explored agenda formation across regulatory institutions but are largely silent on the role of individual decision makers and technical staff. However, the standards setters have sought to explain their agenda processes. This paper reviews statements by the members of accounting standards setting agencies about their experiences of agenda formation. It identifies insights gained from standard setters and makes some suggestions for future research.     

Busy auditors,financial reporting timeliness and quality

We investigate whether audit partners with multiple clients are able to complete their audits in a timely fashion, an important but largely unexplored area of academic research. One view is that having multiple clients increases the knowledge and experience of the audit partner resulting in a more efficient and therefore, quicker audit. On the other hand, having multiple clients may over-burden an audit partner resulting in a slower audit process and longer completion times. We find that audit partners with multiple clients take longer to complete their annual audit. More importantly, we also find that companies with busy auditors who take longer to complete their audits also have poorer levels of financial reporting quality. Additionally, in terms of consequences for busy auditors, firms with lengthy audit report lag switched their auditors the next year suggesting that busy audit partners may lose clients if their workload is excessive and they are not able to maintain audit quality. Our results are robust to alternative measures for both audit report lag and audit partner busyness and a range of endogeneity tests. We also undertake simultaneous quantile regression to assess changes in audit report lag depending on the number of audit clients per partner where we find preliminary evidence of a knowledge spill-over effect. Consequently, our results have implications for companies, audit firms, regulators and other key stakeholders.     

Culture and accounting in Indonesia: An empirical examination

This study examines the relationships among the cultural characteristics of Indonesian society, reporting practices of Indonesian firms, and accounting standards promulgated by the Association of Indonesian Accountants. It is argued that an empirical relation exists between the change in cultural values, as conceived by Hofstede's theory of the five dimensions of cultural values (power distance, uncertainty avoidance, individualism, masculinity, and time horizon and the change in accounting values as captures by Gray's four dimensions (professionalism, conservatism, secrecy, and uniformity). Using LISREL to evaluate data between 1981 and 1992, three of Hofstede's five cultural values (power distance, uncertainty avoidance, and individualism) have significant relationships with one or more accounting value. This limited confirmation of the culture-accounting relationships suggest that particular historical and economic configurations must be considered in longitudinal analysis. The conflicting influences of extensive government involvement in the economy and nascent market competition are a possible explanation of the Indonesian results.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

Evidence-based financial reporting regulation

In this introductory paper at the Abacus Forum on International Financial Reporting, I contend that it is difficult to argue that financial reporting and disclosure regulation around the world is evidence-based. Anecdotes and references to more systematic research and surveys of research are used to demonstrate this. 'Evidence-based' is a term that I borrow from medicine. There the term stands for basing medical patient care and health policy choices on the 'current best [scientific] evidence'. I contend that financial reporting and disclosure regulation (and perhaps practice as well) are currently not evidence-based in the specific sense of not being based on the current best scientific evidence available about accounting and auditing. Next I discuss possible causes of this state of affairs and look at future possibilities for financial reporting and disclosure regulation to become (more) evidence-based. The discussion ends by providing a link with the papers that follow in this issue.     

The focus of attention in financial reporting

This article discusses a concept of the focus of attention and its implications for financial reporting, a concept that has essentially been ignored in the financial reporting literature. Ignoring it has made dealing with the conflict between the proprietary and the entity theories of the firm the most intractable problem in financial reporting. Exploring the concept of the focus of attention permits abandonment of the conflict rather than continuation of the attempt to solve it. It permits avoiding the errors committed by those involved in the conflict: dealing with the wrong level of abstraction and incorporating contradictions, fictions, and false assumptions. Applying the concept of the focus of attention helps solve a number of issues not solvable by consideration of the theories of the firm.     

A literature survey of financial reporting in private firms

This paper provides a survey of the empirical literature on financial reporting in private firms. Although private firms play a dominant role in country-level economic development, research on their financial reporting is limited. The survey reveals that there remains uncertainty as to the purpose of financial reporting in private firms which is also reflected in the current body of the empirical literature. The survey provides implications for regulators with respect to regulating the financial reporting of private firms. The survey also identifies some limitations of existing research and offers potential avenues for future research.     

Real effects of financial reporting and disclosure on innovation

This paper reviews the literature on the real effects of financial reporting and disclosure on corporate innovation, highlighting both the possible channels of influence and the potential challenges that researchers face when attributing causal effects. We discuss the concept of innovation, emphasising the specific characteristics that make investments in innovation difficult to report. We then provide a review of the nascent work relating disclosure to innovation, which we organise around three channels: financing, compensation and learning. Finally, we discuss recent efforts aimed at increasing the quality of corporate disclosures, including disclosures of firms’ innovative activities. Throughout the paper, we highlight the trade-offs of disclosure (reduced information asymmetry and increased proprietary costs), which are particularly exacerbated in the context of corporate innovation.     

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.     

FRC intervention,financial reporting quality and due diligence

This study provides evidence of the relationship between government intervention, financial reporting quality and due diligence. Specifically, the authors examine the consequences of the disclosure of inspection reports by the Financial Reporting Council (FRC) for individual audit firms inspected in the UK. Using a difference-in-differences design, it is found that clients are more likely to receive qualified audit opinions during the post-disclosure period. This significant impact on reporting decisions is more concentrated among clients of small audit firms. Moreover, despite general efficiency during the sample period, clients affected by an FRC intervention experience longer delays in receiving their audit reports. Overall, this study contributes to literature on corporate governance and audit regulation, and has implications for policy making. FRC inspections are of greater concern to small audit firms than large firms, as the latter have already built a strong reputation. In general, the transparent inspection process may be beneficial in enhancing auditor oversight.     

Stakeholder engagement in internet financial reporting: The diffusion of XBRL in the UK

Internet financial reporting is now widespread with most medium and large companies in the developed world providing a wide variety of financial data online. However, much of this information mirrors the paper versions of financial reports, often with little attempt to enhance the decision usability of the data, providing a so called ‘first generation’ of online reporting (ICAEW, 2004). eXtensible Business Reporting Language (XBRL) has been designed to provide a ‘second generation’ of online reporting, specifically to enhance the usability of the data. Documents rendered in XBRL are digitally-enabled so that it is easier for stakeholders to extract information directly into spreadsheets, or any other XBRL-enabled analysis software, without the need to re-key data thus providing significant improvements in information flows and enhancing inter-company comparability.XBRL consortia have spent more than 15 years promulgating the use of this technology within the business and government communities. However, despite their efforts XBRL has not become widely diffused, there is little stakeholder engagement and very few organisations have voluntarily adopted XBRL in practice.The results of a questionnaire survey in the UK indicate that awareness of XBRL, and second generation reporting more generally, resides in key champions but there is little diffusion outside this narrow set of stakeholders. Regulatory engagement seems to be the only impetus for diffusion and better channels of communication within stakeholder networks, such as between regulators, preparers, users and the XBRL community are needed. This paper suggests that currently the supply-push for XBRL is failing to produce effective use of this technology in the UK. Greater regulatory commitment is now needed to create an impetus for XBRL such as creating tools and making publicly available, accessible, repositories of XBRL data. Unless this happens, diffusion will not occur, and the demand-pull which is now needed will vanish and XBRL will fade and die.     

Financial reporting of European banks during the GFC: a pitch

This short paper applies the pitch template developed by Faff (2015a), for a proposed accounting research project on financial reporting of European banks and the global financial crisis. I begin by giving a brief background to writing the pitch. I then give a brief commentary on my pitch, followed by a few key personal reflections on the pitch exercise itself.     

The regulatory framework for financial reporting and auditing in the United Kingdom: the present position and impending changes

This paper provides an overview of the current regulatory framework for financial reporting and auditing in the United Kingdom. The framework remained stable for 10 years following significant reforms in 1990-1991. A further process of change is now taking place. These changes arise from three sources: refinements in the UK's regulatory framework, the European Commission's drive for a single capital market, and political interest in accounting regulation following the Enron collapse. The present position is explained and the future implications of recent and impending changes are considered.     

The price of sinful behavior window dressing: Cultural embeddedness on cigarette packages and financial reporting quality

Using hand-collected data from China, we examine whether cultural embeddedness on cigarette packages affects corporate financial reporting quality, and further investigate the moderating effect of foreign directors. The findings reveal that firms in provinces with more cultural embeddedness on cigarette packages exhibit significantly higher extent of discretionary accruals. This finding suggests that cultural embeddedness on cigarette packages as a tobacco-related sinful behavior window dressing shapes unethical social atmosphere, elicits unethical managerial behavior, brings out information distortion, and eventually reduces financial reporting quality. Moreover, the positive relation between cultural embeddedness on cigarette packages and discretionary accruals is less pronounced for firms with foreign directors than for their counterparts. Furthermore, our findings are robust to a variety of sensitivity tests using alternative proxies for cultural embeddedness on cigarette packages and financial reporting quality, and further our conclusions still stand after employing the difference-in-difference approach, two-stage least square regression procedure and two-stage Heckman method to address the endogeneity problem. Lastly, pictorial health warnings on cigarette packages are significantly negatively related with country-level smokers, but cultural embeddedness on cigarette packages is significantly positively associated with tobacco consumption at the province level and owner-manager agency costs in China, providing supportive evidence to our findings.     

Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting

EU Regulation 1606/2002 requires application of International Financial Reporting Standards (IFRS) by groups listed on European stock markets. In Spain, listed groups are now obliged to prepare consolidated financial information under IFRS, and legislative changes to bring local rules into line with international standards have been tabled.In this context, the potential impact of IFRS is fraught with uncertainty. Our study of IBEX-35 companies focuses on the effects of the new standards on comparability and the relevance of financial reporting in Spain. We address these objectives by seeking significant differences between accounting figures and financial ratios under the two sets of standards (i.e. Spanish accounting standards and IFRS).The results obtained show that local comparability has worsened. The study reveals that local comparability is adversely affected if both IFRS and local accounting standards are applied in the same country at the same time. Reforms to bring local rules into line with international standards are therefore urgent. We also find that there has been no improvement in the relevance of financial reporting to local stock market operators because the gap between book and market values is wider when IFRS are applied. While there has been no gain in terms of the usefulness of financial reporting in the short-term, improved usefulness may be achieved in the medium to long-term.