Policy Implications of Research on Non-GAAP Reporting
D.E. Black and T. E. Christensen
Over the past two decades, the regulatory landscape for non-GAAP reporting has evolved significantly. Despite a temporary decline in the frequency of non-GAAP reporting following Regulation G, the incidence of non-GAAP disclosure has continued to increase steadily, leading to a current all-time high in reporting activity. This proliferation of non-GAAP disclosure has captured the attention of standard setters and regulators in recent years. This paper provides an academic perspective on policy implications for both regulation and standard setting. We contend that current Compliance and Disclosure Interpretations (C&DIs) of the SEC staff may perhaps have gone too far in restricting certain types of non-GAAP disclosures. As a result, we advocate a slight relaxation of the current enforcement of Regulation G. We agree with FASB proposals for greater disaggregation in the income statement to allow for more transparency in non-GAAP reporting. Finally, we believe the PCAOB should consider requiring auditors to take a more direct role with respect to non-GAAP disclosures.
Keywords: Non-GAAP earnings, regulation, standard setting, auditing
Do Specialized Board Committees Impact the Transparency of Corporate Political Disclosure? Evidence from S&P 500 Companies
D. G. DeBoskey, Y. Luo and J. J. Wang
This study examines how the specific attributes of one type of voluntary corporate governance mechanism, a specialized political contribution committee, improves the transparency of corporate political disclosure (CPD). The results demonstrate that the existence of a committee that establishes and reviews key political activities and disclosure policies, particularly one composed entirely of outside directors, significantly enhances the transparency of corporate political disclosure, and reveal that an under-studied board committee, the political contribution committee, effectively improves CPD transparency. The results are consistent with agency theory and further support the more generalizable idea that specialized governance mechanisms (e.g., a political contribution committee) and fully independent committees lead to more transparent disclosure. Finally, the results suggest that the existence of a political contribution committee and committee independence are channels to improve CPD transparency. Public-policy makers and regulators seeking to enhance CPD transparency might consider implementing regulations that mandate or recommend these governance mechanisms as best practice.
Keywords: Corporate political contribution, committee, disclosure, transparency
Sustainability Assurance Provider Participation in Standard Setting
R. Flasher, C. K. Luchs and J. L. Souza
This paper examines the participation of accounting firms in the development of sustainability standards by the Securities and Exchange Commission (SEC) and the Sustainability Accounting Standards Board (SASB). This study shows that the Big Four accounting firms have an active role in both the submission of comment letters on sustainability to the SEC and participation in the industry working groups (IWG) for the SASB. The SASB participation reveals that individuals located within the US and at international affiliates are participating at earlier career stages. In addition, this paper leverages LinkedIn data, identifying the career path of the individuals subsequent to their participation with the IWG, to determine how large accounting firms are retaining the skills and knowledge necessary for this field. Since the Big Four firms are market leaders in sustainability assurance, the finding that Big Four firms can retain individuals with financial assurance backgrounds differently than individuals with other backgrounds speaks to the unique skill set that financial assurance develops. This suggests that the career opportunities for interested financial assurance individuals within the sustainability sphere remain robust within the Big Four environment.
Keywords: SASB, SEC comment letters, sustainability assurance, Big Four, experience levels
Index Investors and the Return of Stewardship Accounting
T.A. King
Passive asset managers, seeking to deliver investment returns that mirror market indices, now control and vote about 30% of all managed U.S. shares. When bad news surfaces, index investors do not sell a company’s shares. Instead, these beneficial owners protect the value of equity investments by influencing governance practices to restore long-term value creation. Interviews with stewardship offices at leading index investment firms suggest that passive investors do not use financial accounting information to value securities. The implication of this study is that the current focus of accounting standard setting – predicated on the idea that the purpose of financial reporting is to permit prediction of future cash flows – does not meet the needs of a particular group of financial statement users who have considerable influence over the governance of leading listed companies around the world.
Keywords: Passive investing, stewardship, governance, valuation, financial reporting
A Literature Survey of Financial Reporting in Private Firms
A. Habib, D. Ranasinghe and H. Huang
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.
Keywords: Private firms; Financial reporting, Regulation
The Financial Accounting Standards Board: Profiles of Seven Leaders
D.L. Flesher, T. K. Flesher and G. J. Previts
Since its inception over four decades ago, the Financial Accounting Standards Board (FASB) has been led by seven individuals who have served as Board Chair. This paper includes a biographical sketch of the individuals, their terms of service, standards topics and some points of commonality and difference in their prior experience and Board service. This study provides a synoptic review to assist those interested in learning more about the Board Chairs, and to inform as to the role and style of each individual in contrast to the others. The paper provides a foundation for future research of these individuals, their activities and actions through other historical research such as oral histories, collections of writings and speeches and similar catalogues of activity.
Keywords: FASB, Standard Setting, Biography
Developments in Accounting Regulation: A Synthesis and Annotated Bibliography of Evidence and Commentary in the 2016 Academic Literature
S. R. Moehrle, T. Kozloski, M. Meckfessel, J. Reynolds-Moehrle and H. Wen
In this paper key regulation-related findings and commentaries in the 2016 academic literature are synthesized in annotated form. This paper is one in a series of previously published annotated bibliographies published in this journal. Papers published in academic outlets including The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Accounting Horizons, The Journal of Accounting, Auditing & Finance, Journal of Accounting and Public Policy, Journal of Business, Finance & Accounting, The Journal of Financial Reporting, Auditing: A Journal of Practice and Theory, and Research in Accounting Regulation were reviewed for potential inclusion. The 2016 literature featured strong regulation-related threads as follows: financial accounting regulation, analysis of individual pronouncements, SEC regulatory activity and its impact, international financial reporting standards, income tax reporting, and auditing.
Keywords: Financial Accounting Standards Board, FASB, Regulation, Securities and Exchange Commission, SEC, International Financial Reporting Standards, IASB, Auditing
Can Clients of Economically Dependent Auditors Benefit from Voluntary Audit Firm Rotation? An Experiment with Lenders
K. Booker
This study utilizes a nationwide random selection of 111 lenders in a 2x2 between-subjects experiment to determine whether the level of an auditor’s economic dependence on a client and type of auditor rotation affect lenders’ independence and reliability perceptions and decisions to lend money to a potential borrower. Previous literature shows that financial statement users use client importance as a measure of audit quality when revenue streams are not equal across clients. This can negatively affect perceptions of independence and financial statement reliability. As United States regulators look for ways to improve audit quality under the current partner rotation mandate, this study explores whether an audited entity that voluntarily adopts a policy of firm rotation can mitigate the negative effects of the auditor’s dependence on the client. Findings suggest that lenders view clients of economically dependent auditors (CEDA) as less independent from its auditor and perceive its financials as less reliable than clients without a dependent auditor (non-CEDA). Lenders are less likely to grant a loan to CEDA. However, under firm rotation, there is not only an increase in lenders’ perceptions of reliability of CEDA financials, but also no difference in perceptions of reliability of CEDA and non-CEDA financials.
Keywords: auditor independence, voluntary firm rotation, economic dependence, financial statement reliability, loan decisions, experimental study
The Accountants Coalition and the 1990s:
“Are you in the boat, or out of the boat”?
L. Blazey
This writing provides a historical marker about a significant coordinated effort of the members of the “Big Six” accounting firms in response to the litigious environment which threatened their existence in the early 1990s. Approximately 1,300 federal class action securities fraud lawsuits were filed from 1988 to 1996 resulting in settlements averaging $7.3 million. The TAC, i.e. The Accountants Coalition, was formed to leverage the firms’ legislative efforts to seek a Federal remedy to these so called, “strike suits.” The TAC helped the PSLRA, i.e. Private Securities Litigation Reform Act, become law, led to the defeat of California’s proposition 211, influenced the establishment of Limited Liability Partnerships, and organized CPA’s into a potent political force.
Keywords: The Accountants Coalition (TAC), Class Action – Strike Suits, Private Securities Litigation Reform Acts 1995, 1997 (PSLRA)
Benedetto Cotrugli: The Book of the Art of Trade
A. Sangster
This book review essay evaluates one of the earliest known manuscripts relating to merchant ‘best practices’ in the decades prior to Luca Pacioli’s published work. Benedetto Cotrugli: The Book of the Art of Trade offers an insight into one man’s perception of business, mercantile practice, attitudes and norms, and the mercantile environment of Renaissance Italy. Cotrugli’s book is a fascinating mixture of details. For the first time, this scribe written manuscript, now translated into the English language, provides new foundations upon which business and accounting historians can build their interpretation and analysis of medieval management and accounting practice. In a way it is also a study of ‘self-regulatory’ or market discipline as practiced by the merchant of this day. The book is replete with other insights of the world of medieval commerce that will be useful to inform those who may have assumed too much that business in that period was not different from today.
Keywords: Benedetto Cotrugli, Trade, Barter, Accounting, Accounting History, Merchant