The Usefulness of Academic Research in Understanding the Effects of Accounting Standards

Abstract

This paper provides an overview of why, and how, academic research can assist regulators and standard setters in evaluating ex ante and ex post the effects of standardization and regulation of corporate financial reporting and disclosure. We argue that academic research is a valuable and often underutilized resource that can help standard setters and policymakers understand the possible effects of accounting standards and regulations. We give an overview of approaches that can, and are, used for this objective and provide selected examples to illustrate how academic research can inform standard setters and regulators.

Acknowledgements

We thank the other members of the FRRG, particularly Peter Walton (FRSC chair), Anja Hjelström, and Soledad Moya, and participants at the ASC Academic Panel for valuable comments and suggestions.

Notes

^†This paper is a slightly revised version of the second part of the response to the ASB/EFRAG Discussion Paper on Considering the Effects of Accounting Standards, written in our capacity as members of the EAA's Financial Reporting Research Group, on behalf of the EAA's Financial Reporting Standards Committee.

While our paper uses terminology and examples that focus on accounting standards, our arguments are more generalizable and also apply to other types of financial reporting and disclosure regulations and the enforcement of these regulations.

In its recent effect analysis of IFRS 11 and IFRS 12, the IASB (2011, p. 3) acknowledges the usefulness of academic research for post-implementation reviews: ‘We encourage academic researchers to perform empirical research into the way our standards are incorporated into economic decisions.’

See also the responses to these proposals in the DP in Haller et al. (2012).

For example, the US Financial Accounting Standards Board (FASB) used the expertise of academic researchers to evaluate the economic consequences of the potential adoption of IFRS by the USA (see FASB comment letter to the US Securities and Exchange Commission – www.sec.gov/comments/s7-27-08/s72708-65.pdf). A summary of this background research can be found in Hail et al. (2010a, 2010b).

See, e.g. Buijink (2006) and Singleton-Green (2010).

The discussion draws from Buijink (2006), Ewert and Wagenhofer (2012), Fülbier et al. (2009), Leuz and Wysocki (2010), Schipper (2010), and Singleton-Green (2010).

It is not in the best interest of standard setters to encourage (or perform by itself) research that is not rigorous and base its decisions about standards on its results.

E.g., the European Commission (2007) sent out a questionnaire in the endorsement process of IFRS 8, Operating Segments. Questions included ‘Do you think that the cost/benefit balance of replacing International Accounting Standard (IAS) 14 by IFRS 8 is positive […]?’ or ‘Are you of the opinion that segment information based on the management approach provides greater accuracy for measuring individual segments and ultimately results in greater forecast precision than segment information based on IAS 14?’. On the other hand, a recent survey of the effects of IFRS 3 by the Australian Accounting Standards Board includes mostly descriptive questions rather than opinions (http://www.aasb.gov.au/admin/file/content102/c3/Initial_accounting_for_intangible_assets_acquired_in_Business_Combinations_-_Survey.pdf).

This overview draws from Leuz and Wysocki (2010), Hail et al. (2010a, 2010b), Leuz (2010), and Wysocki (2011). Additional surveys of effects of IFRS adoption are Soderstrom and Sun (2007), Brown (2011), and Pope and McLeay (2011).

See Wysocki (2011) for a discussion of the definition of institutions and how they evolve and interact with the accounting in a country.

The IASB frequently performs field studies during the deliberation of new standards for that reason.

See Ewert and Wagenhofer (2012), who suggest such a process for post-implementation reviews. See also recently IASB (2011).