Accounting

  • EAA Comment Letter in response to the PIR on IFRS 15 – Revenue from Contracts with Customers

    Elisabetta Barone (Brunel University London & Cork University Business School), Stephani Mason (DePaul University), Araceli Mora (Universidad de Valencia), and David Procházka (Prague University of Economics and Business) on behalf of the Financial Reporting Standards Committee (FRSC) of the European Accounting Association sent a comment on the Post-Implementation Review on IFRS 15 Revenue from Contracts with Customers to IASB and EFRAG. The purpose of the EAA FRSC and the EAA members is to bring contributions of academic research to the standard-setting process related to Financial Reporting. In this comment letter, the authors aim to provide research-based input to the debate on the PIR IFRS 15 Revenue from Contracts with Customers.

     

    The letter can be found in:

    Microsoft Word – EAA Comment Letter PIR IFRS 15 24 october 2023 IASB (azuremicroservices.io)

    Microsoft Word – EAA Comment Letter on PIR IFRS 15 sent to EFRAG 24 october

     

    Summary of our views

    Our starting point was identifying recently published papers, working papers, and dissertations that delve into various aspects of revenue recognition after implementing IFRS 15. We also consider the work on ASC 606, as the requirements of both standards are similar, and many of the results could be extrapolated, with the caveats caused by the different contexts in which IFRS 15 is applicable. From those papers, we selected and analysed those that we considered relevant and related to the PIR Request for Information.

    The literature on the direct accounting effects of the new standard (such as measurement, recognition, presentation, and disclosure) is particularly rich for disclosure and transition (i.e., Q7 and Q8 in the PIR). However, there is less prominent and rather indirect evidence available for some specific topics of the 5-step model, namely timing of revenue recognition (Q4 in the PIR), transaction price (Q3 in the PIR), and principle-agent consideration (Q5 in the PIR). The most robust evidence is available for (widely defined) user and stakeholder benefits, including capital market effects and preparers’ costs (Q1 in the PIR). Additionally, the academic literature provides multiple examples of real effects (Q11 in the PIR) for the new standard.

    The main findings from academic research are:

    • IFRS 15 is decision-useful for many stakeholders;
    • the adoption is associated with high implementation costs;
    • the impact of the new standard on the business is complex, with implementation driving significant investment in other areas, bringing additional benefits beyond accounting;
    • accounting figures are more comparable; disclosures are more relevant to users;
    • users value the full retrospective approach to transition more;
    • any negative effects identified appear to be temporary.

    We want to highlight that compared to other standards, the number of studies related to IFRS 15 (and ASC 606) at the date of writing this comment letter is relatively limited. Most of the studies we considered potentially relevant are still working papers (not published in peer-reviewed journals but distributed on websites or databases). Presumably, many are not finalised but are pending the academic peer review process. However, we still believe these studies are relevant and, thus, were of interest to the Comment Letter team.

    Despite the limitations, we believe that the results of these academic studies may be of great interest to the Board and that additional and more complete academic evidence on IFRS 15 will be available in the coming years.

     

     

  • Spillover Effect of Climate Disaster for Management Forecast

    Climate disasters not only impose substantial economic costs on firms that are directly exposed, but they also generate significant externalities. A comprehensive evaluation of climate disasters requires understanding its consequences, not only for exposed firms, but for other firms as well. In my study “Spillover Effect of Climate Disaster for Management Forecast” (forthcoming at European Accounting Review), I examine whether and how climate disasters hitting product market peers influence management forecasting and strategic planning by firms that were not exposed to significant climate disasters.

    Firms do not operate in isolation but sit within a broader system. Product market peers’ climate disasters can generate substantial uncertainty for a focal firm by disturbing its interactions with product markets. Such a shock can distort the role of the focal firm’s accounting system by diminishing the relevance and usefulness of managers’ existing information sets. This, in turn, can constrain forecasting and strategic planning of the focal firm. My paper attempts to identify indirect, spillover effects of climate disasters, which cannot be easily quantified, by examining management forecasts.

    I find that a firm is less likely to issue an earnings forecast when its product market peers experienced significant climate disasters. The spillover effects are mitigated by the focal firm’s past disaster experience or climate change-related regulatory intervention. My findings are robust to controlling for various alternative explanations. I also find some evidence that climate disasters hitting product market peers are associated with lower efficiency of a firm’s innovation efforts.

    Collectively, my evidence suggests that an idiosyncratic shock such as climate disaster causes spillover effects transmitted across the entire product market through distorting management forecasts and strategic planning. My study complements the disclosure literature by showing that the uncertainty emerging from the external environment affects management forecast. My findings have practical implications for policy makers and regulators. Consistent with social practice theory suggesting that regulatory interventions can generate positive spillovers across different practices, stringent climate change-related regulatory enforcement can help mitigate the observed negative externalities of climate disasters.

     

    This paper is forthcoming at the European Accounting Review – https://www.tandfonline.com/doi/full/10.1080/09638180.2024.2301932

     

  • Understanding the Role of Audit Committee Chairs in Enhancing Audit Quality

    In the complex world of financial reporting, Audit Committee Chairs (ACCs) play a pivotal role in ensuring the integrity of corporate governance. What are their personal objectives and incentives that guide them in their actions to maintain and improve audit quality? The recent European Accounting Review article “Audit Committee Chairs’ Objectives and Risk Perceptions: Implications for Audit Quality” (Jürgen Ernstberger, Bernhard Pellens, André Schmidt, Thorsten Sellhorn & Katharina Weiß) shows how ACCs’ personal objectives and incentives help explain their audit-related preferences and actions.

    1. ACCs care about personal reputational risks

    Based on an in-depth analysis of 23 interviews with ACCs of public German firms, the study reveals that ACCs are more than just dutiful ‘cogs in the corporate governance machine.’ As individuals, they pursue personal objectives and incentives, which significantly impact their audit-related decisions. The following quotes illustrate that ACCs are concerned with their personal reputational risks and their self-perceptions as good stewards:

    I once said: “Listen, I’ve got a reputation to lose. And I have no desire whatsoever, after 40 years of success and successful retirement as a member of the Board of Management, to become the target of gossip. Then, someone else will have to do this job, please.”

     I am not concerned about money or having to pay a fine. It is about my reputation!

    1. ACCs’ perceived antecedents of reputational threats

    What kind of issues, then, do ACCs worry about the most? To ACCs, risks emerge from scenarios that would indicate a loss of control, such as financial restatements or unexpected profit warnings. Consequently, ACCs prefer moderate and predictable financial reporting outcomes. They shy away from extreme accounting decisions, be it overly aggressive or overly conservative ones. This preference is rooted in their desire to maintain a reputation of being firmly in control of the company’s financial reporting.

    1. ACCs count on auditors for evaluating their personal risks

    ACCs rely on external auditors with specific attributes that align with their personal risks and objectives. They prioritize auditor industry expertise, particularly client-specific business model expertise, enabling auditors to effectively assess the risk associated with management’s financial reporting decisions. Additionally, ACCs value auditors in terms of eminence, priority-setting abilities, and pragmatism. Besides, ACCs prefer auditors who communicate proactively, informally, and in a timely manner. Whereas some of these attributes echo prior empirical evidence, our personal ACC risk management perspective makes clear that ACCs value auditors who can act as ‘early warning systems’ against threats to ACCs’ reputations.

    1. ACCs personal risk mitigation activities

    ACCs are inclined to pay a higher audit fee to safeguard their personal reputation. They expect that auditors will provide transparency about the extremeness of management’s reporting decisions but do not expect them to actively engage in discussions with management. ACCs themselves are actively involved in influencing management’s decisions, for instance, in formal meetings of audit committee members, auditors, and management.

    Implications

    This study offers a fresh perspective on the determinants of audit quality, linking it to the personal objectives and risk perceptions of ACCs. It highlights the importance of understanding the personal incentives of key governance figures in enhancing audit quality. These findings underscore the need for considering the complex interplay between governance actors’ professional roles and the personal objectives, incentives, and (perceived) risks.

  • Earnings Management and the Role of Moral Values in Investing

    In a world where financial returns often take center stage, this study sheds light on the powerful role of moral values in investment decisions. This research delves into how investors perceive CEOs based on their engagement in earnings management and how these perceptions, coupled with the investors’ own moral values, influence their investment choices.

    The study primarily revolves around the concept of earnings management – the practice where CEOs can legally influence reported earnings. In laboratory experiments, we found that when CEOs engage less in earnings management, investors perceive them as more committed to honesty. This perception of a CEO’s honesty plays a significant role in investment decisions, but in a balanced manner.

    Specifically, a CEO’s perceived commitment to honesty influences how much weight investors place on the CEO’s future financial returns. Investors tend to become less sensitive to differences in promised returns when they perceive a CEO to be more committed to honesty. But the study also highlights differences in how ‘proself’ (self-oriented) and ‘prosocial’ (socially-oriented) investors react to these perceptions.

    Proself investors, who focus more on personal gain, still value a CEO’s commitment to honesty, balancing it against the potential financial returns. On the other hand, prosocial investors, who consider broader social and moral implications, are more influenced by the CEO’s perceived honesty as such, often placing moral values ahead of financial returns.

    What’s intriguing about these findings is the shift in focus from purely financial motives to the incorporation of ethical considerations in investment decisions. The study demonstrates that morality is not just a niche interest; it plays a significant role in the decision-making process for various types of investors. This insight is pivotal, especially in an era increasingly focused on sustainable and responsible investing. The research not only expands our understanding of investor behavior but also underscores the importance of ethical leadership in the corporate world. CEOs’ commitment to honesty and moral values isn’t just a matter of personal integrity – it’s a strategic element that can significantly sway investor decisions and shape the future of businesses.

     

    Rajna Gibson, Matthias Sohn, Carmen Tanner, and Alexander F. Wagner

    European Accounting Review, forthcoming

    available at: https://www.tandfonline.com/doi/full/10.1080/09638180.2023.2291408

  • Enhancing the Social Relevance of Accounting Research

    What is the value of accounting research for diverse stakeholders? While this question is certainly very difficult to answer, let alone quantify, we often hear concerns regarding the lack of relevance beyond academia. Publishing high-quality research that addresses relevant research questions, however, is only the first step toward social impact beyond academia. Other criteria for accounting research to extend its social impact include translating it into accessible language for non-academics and effective dissemination. In other words, if our research findings are either not read or understood, our field likely does not have a large impact on society.

    While dissemination is not isolated from the question of what is relevant research, the recent article Dissemination of Accounting Research (Garcia Osma, Mora, & Pierk) published in the European Accounting Review and this blog focus on dissemination of accounting research to non-academic stakeholders. Here, we summarize the findings of the paper regarding the empirical evidence on the dissemination of accounting research findings, survey evidence on dissemination practices and motives, and recommendations of what can be improved.

    Our empirical findings indicate that accounting substantially trails similar disciplines across several dissemination measures (e.g., news articles, policy documents, patents, blogs, Wikipedia, Twitter, and Facebook). The survey responses point at multiple factors underpinning this finding, from limited relevance of research for practice, policy making, and the general public, to lack of incentives, time, training, and support infrastructures. Interview data suggests differences exist in the support that individual researchers receive from their institutions, with potential consequences for successful dissemination.

    While this sounds not very encouraging, the good news is that we as accounting researchers have ample opportunities to improve this situation, either individually or by shaping the mindset and infrastructure of journals, faculties, and schools toward successful (accounting research) dissemination.

    Recommendations for individual researchers

    A key recommendation for individual researchers is to start dissemination efforts early by aligning research questions with user interests, engaging with regulators, and building networks with institutions. Translation is crucial, and we encourage researchers to use executive summaries, blogs (like this one), and social media for wider reach. Additionally, some media outlets are interested in covering accounting research, for example, phys.org and The Conversation, which both mainly cover academic research. Also, Forbes or Harvard Business Review cover accounting research regularly.

    Recommendations for faculties and universities

    While individual researchers might be able to improve their dissemination efforts, we suggest that research teams or institutions (faculties/universities) should take the lead. Extrinsic incentives are crucial (e.g. promotion and tenure decisions), prompting a reevaluation of metrics by universities and accreditation systems. However, caution is needed to avoid oversimplified metrics and ensure a balance between subjective measurement and relevant assessments. Since it is not easy to shift the incentives to disseminate, releasing constraints might be more useful, i.e. making dissemination less costly. To facilitate dissemination, universities can establish science communication infrastructures, provide training, and consider including translation and dissemination training in their doctoral programs.

    Recommendations for journals and associations

    For certain types of dissemination, the relevant unit in terms of successful engagement may be journals or associations rather than individuals. Journals and associations are more likely to succeed in building networks of contacts, hiring professional writers, or even facilitating specific training particular to the accounting discipline. Associations can also organize committees that prepare comment letters, or respond to calls for literature reviews, incentivizing academics with the potential publication of academic versions of such reviews.

    In conclusion, we urge researchers to enhance the dissemination of their findings. Presently, incentives for dissemination are minimal, but we believe it is crucial for social impact, a trend likely to grow not only for accounting research but across all disciplines. Accounting should not lag behind due to misconceptions about its relevance. While encouraging institutions to boost incentives and ease constraints, we emphasize that researchers, especially research teams, must proactively design communication strategies.

     

  • International PhD Visit Scheme – Simon Thies

    Simon Thies is a PhD student at the University of Duisburg-Essen, Germany. He recently concluded his visit at Tilburg University.

     

    During my visit, I had many interesting conversations with inspiring and supportive researchers that significantly helped me develop my projects. The reading group and the accounting research seminars provided a great opportunity to learn about current research topics and to witness diverse perspectives on research projects. Together with several colleagues, I also attended the Junior Accounting Meetings (JAM) Conference in Amsterdam that allowed me to interact with the Dutch accounting research community even beyond Tilburg University. At the end of my visit, I had the opportunity to present one of my papers in a brown bag seminar. The feedback from my colleagues in Tilburg helped me a lot in further developing the corresponding project, particularly regarding the overall argument of my paper.

    In addition to these rather research-related aspects, the visit was a great social experience. Very friendly and supportive colleagues, a unique PhD community, daily lunches together with many colleagues, as well as nice office mates and neighbors are just a few aspects to mention in this context.

    I would like to sincerely thank all members of the Department of Accountancy for their warm welcome and for making my visit an exceptional experience. Moreover, I would like to express my gratitude to the EAA for supporting this invaluable experience and for organizing the PhD visit scheme. Overall, my visit was a great success for me. I have learned a lot and feel that I have grown both personally and as a young researcher.

     

    Find more information regarding the PhD Visiting Scheme on our website. Starting next year, we will have 6 scholarships in total (1,000 EUR each) to award – 3 scholarships per deadline. Please note that the next deadline is 29 February 2024!

  • The Impact of Transparency on Banks’ Loan Loss Provisioning: A Closer Look at Privately Held Banks

    Transparency plays a pivotal role in maintaining stability and trust in the banking sector. However, in many countries, a significant fraction of banks is privately held, with few incentives for transparent disclosures and notoriously low pressure from stakeholders absent any capital market. In fact, the traditional business model of these banks relies on a certain level of proprietary knowledge and confidentiality. Privately held banks are thus worth a closer look when it comes to transparency regulation.

     

    Our study “Does Greater Transparency Discipline the Loan Loss Provisioning of Privately Held Banks?” (forthcoming at European Accounting Review), uses the German implementation of an EU regulations that promotes bank transparency and investigates whether greater transparency disciplines managerial behavior. Specifically, we assess the loan loss provisioning of privately held banks which is critical for bank lending and risk-taking as many prior studies have shown (e.g., Beatty and Liao 2011; Bushman and Williams 2012). Our setting has the advantage that it holds the recognition and valuation rules constant. That is, we can solely focus on the effect of more transparent disclosures. We take advantage of proprietary supervisory data provided by the Deutsche Bundesbank, the central bank in charge of banking supervision in Germany. The data enables us to track loan loss reporting even before the first mandatory disclosure, i.e., when the loan losses were not publicly reported.

     

    The research uncovers four essential findings:

    1. Transparency Disciplines Provisioning: Public disclosure significantly reduces opportunistic provisioning practices by privately held banks, especially its use for income smoothing, even without capital market pressure.
    2. Improved Information Content: The change in provisioning behavior is economically meaningful because it enhances the information content of loan loss provisions for future losses.
    3. The Context Matters: The response to public disclosure varies across banks, depending on the incentives of their stakeholders to exploit the new information. Banks with less secured funding and those in regions with more competitive local newspaper markets are more affected by the transparency change.
    4. Transparency Has Consequences: The reduction in reporting opportunism leads to better mapping of loan loss provisions into future charge-offs and improvements in the loan portfolio quality, consistent with the notion of transparency as a means of assuring market discipline.

     

    Key Take-away

    In conclusion, the paper underscores the vital role of transparency in shaping bank behavior, also for privately held banks. Ultimately, transparency remains a key tool in maintaining trust and accountability in the world of banking and finance. At the same time, our evidence suggests that transparency works well even in the absence of capital market pressure, informing a much broader literature, e.g., on the consequences of the recently mandated ESG-related disclosures.

     

    Our study that is forthcoming at European Accounting Review provides more insights that can be found here.

     

  • Professor Steve Zeff’s digital library

    Rice University’s Jones Graduate School of Business is pleased to share Professor Steve Zeff’s digital library with the EAA community: https://business.rice.edu/stephen-zeff-digital-library.

    This open digital library was created by the Jones School as a permanent repository for Steve’s contributions to our understanding of the historical evolution of financial reporting standards and regulations in the U.S. and globally. The website includes several short video clips and two of Steve’s related publications.

    In the first video series, Steve summarizes, in his own incomparable style, his decades of research on the evolution of the regulation and standard-setting process for financial reporting in the U.S. from the 1930s to the early 2020s. In the second video series, he takes a global perspective and shares his deep insights on the evolution of the International Accounting Standards Committee into the International Accounting Standards Boards and the challenges it faced along the way.

    Please use the comments/feedback section on the website to share your thoughts on the digital library. Steve and the Jones School would love to hear from you.

    Regards,

    K. Ramesh

    Herbert S. Autrey Professor of Accounting

    Jones Graduate School of Business

    Rice University

  • Update from the EAA Stakeholder Reporting Committee – Response to the Request for Information- Consultation on Agenda Priorities, issued by the International Sustainability Standards Board (ISSB) Posted by Liz Demers and Joanna Krasodomska on behalf of the EAA Stakeholder Reporting Committee (EAA SRC).

    The ISSB published the Request for Information Consultation on Agenda Priorities on 4 May 2023.

    The objective of the agenda consultation was to ask all those interested in sustainability-related financial reporting for their views on:

    • the strategic direction and balance of the ISSB’s activities;
    • the suitability of criteria for assessing which sustainability-related matters (including topics, industries and activities) to prioritize and add to the ISSB’s work plan; and
    • a proposed list of new research and standard-setting projects that could be added to the ISSB’s work plan.

    In reply to the Consultation Paper on Request for Information, the Stakeholder Reporting Committee of the European Accounting Association (“the SRC”) submitted its survey response on August 25th. This response outlines the SRC’s position in relation to the issues raised therein.

    In the submitted response, the SRC held the view that activities such as “beginning new research and standard-setting projects” and “supporting the implementation of ISSB Standards” should be assigned the highest priority among the ISSB activities. The SRC acknowledged that the ISSB had identified suitable criteria for assessing sustainability reporting matters that could be added to the ISSB’s work plan but presented some reservations about their practical implementation. Concerning new research and standard-setting projects that could have been added to the ISSB’s work plan, the SRC believed that projects focusing on “biodiversity, ecosystems, and ecosystem services” and “human capital and human rights” carried equal significance and were considerably more important than “integration in reporting”. The SRC also recommended either merging the two human-related projects into a single cohesive project (named “own workforce”), or alternatively, retaining both human-related projects but renaming them. Additionally, the SRC suggested leveraging and building upon the several frameworks that were currently in place because of their relevance to the raised issues and widespread application. Moreover, the SRC proposed adding Tax Transparency as a priority project.

    The detailed responses to survey questions can be found here.

  • New version: Introductory Guide to Using Stata in Empirical Financial Accounting Research

    A new version of my Stata guide is now available and freely accessible via Github (including code and data examples). Please see https://github.com/dveenman/stataguide or here to go directly to the pdf.

    The objective of this guide is to assist BSc/MSc students, PhD students, and junior researchers in using Stata for empirical archival research. Stata is a powerful program that can be used to analyze many different research questions in the fields of accounting, finance, economics, and beyond. While many statistical packages exist, a major advantage of Stata is that it allows you to carefully manage your data and research process, compute key variables needed in empirical research (e.g., fitted or residual values from a prediction model), and easily merge large sets of data (e.g., combining financial statement data from Compustat with stock market data from CRSP and analyst forecast data from IBES). The purpose of this guide is to give students a head start in using Stata in empirical accounting and finance research settings.

    Version history:

    • Version 5.0: September 2023
    • Version 4.1: May 2019
    • Version 4.0: January 2019
    • Version 3.0: December 2013
    • Version 2.0: December 2011
    • Version 1.0: December 2010

    New in version 5:

    • Update to Stata 18;
    • Publication of code on Github;
    • Improved and expanded section on standard errors;
    • Improved section of fixed effects estimation;
    • Improved section on matching and added entropy balancing;
    • Added section on robust regression estimators in Chapter 4;
    • Added section on difference-in-differences estimators in Chapter 4;
    • Added section on creating and formatting graphs in Chapter 4;
    • Added a separate chapter on simulations and programming in Chapter 5;
    • Added Appendix on the use of Stata for downloading of data from WRDS;
    • Improved Appendix on implied cost of capital estimation;
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