Accounting & Auditing: Interaction in the regulation and research domains

Transcription

1 Accounting & Auditing: Interaction in the regulation and research domains Wolfgang Ballwieser Munich University W. Ballwieser: Accounting and Auditing 1

2 Contents Research domain: Theories Accounting theories Auditing theories Interaction Deficits in theory W. Ballwieser: Accounting and Auditing 2

3 Theories 1 Theories are systems of sentences about subjects of scientific interest which contain no contradictions can be proven false on logical and/or empirical level have some kind of generality W. Ballwieser: Accounting and Auditing 3

4 Theories 2 Theories can be normative in the sense of prescriptive: if your aim is x and the conditions are y, then you reach your aim by doing z positive in the sense of explaining or reconstructing some aspects of reality analytical in the sense of using logic and giving definitions W. Ballwieser: Accounting and Auditing 4

5 Accounting theories Financial accounting theories Management accounting theories normative positive income measurement regulation regulation financial reporting Beaver/Demski 1979: The nature of income measurement Lev 1988: Theory of Equitable and Efficient Accounting Policy Watts/Zimmerman 1986: PAT Beaver 1998: FR: An Accounting Revolution W. Ballwieser: Accounting and Auditing 5

6 Normative regulation theory 1 Regulatory aims are improving allocational efficiency guaranteeing fairness for investors, protecting them against fraud and exploitation (SEC) guaranteeing equality of opportunity (Lev) W. Ballwieser: Accounting and Auditing 6

7 Normative regulation theory 2 Regulation avoids market failure Unregulated financial reporting leads to free rider problem and underinvestment in reporting (public good argument) low network effects and high transaction costs information asymmetry and abstaining from market transactions W. Ballwieser: Accounting and Auditing 7

8 Normative regulation theory 3 Regulation supports network effects because of increasing returns for accumulated information learning effects comparability of financial statements economies of scale large and cheap supply of complementary goods, e.g. auditing services & techniques W. Ballwieser: Accounting and Auditing 8

9 Normative regulation theory 4 FASB/IASB/GASB... follow the concept of decision usefulness for unidentified users It is theoretically not clear what this means (Demski 1973) It is practically not clear; think of segmental reporting (SFAS 131, IAS 14, GAS 3) goodwill amortization (history of SFAS 141&142!) consolidation of special purpose entities W. Ballwieser: Accounting and Auditing 9

10 Auditing theories Theories on auditing financial reporting Internal control theories normative positive auditing regulation regulation auditing & auditing firms Sampling approach System approach Risk approach Quality approach Corporate Governance Independency Influence of peer review Independency Qualified opinions Auditor change Risk analysis Concentration process W. Ballwieser: Accounting and Auditing 10

11 Normative regulation theory 1 Regulatory aims are enforcement of accounting rules improving allocational efficiency guaranteeing fairness for investors (SEC) guaranteeing equality of opportunity (Lev) W. Ballwieser: Accounting and Auditing 11

12 Normative regulation theory 2 Regulation avoids market failure Same arguments as above W. Ballwieser: Accounting and Auditing 12

13 Interaction 1 Accounting and auditing regulation must be combined because auditing shall enforce accouting rules Accounting rules have to be auditable: what about fair value measurement or impairment test of good will? Auditing techniques must be problem solving (effective) and efficient W. Ballwieser: Accounting and Auditing 13

14 Interaction 2 The auditor creats a new agency problem (risk of moral hazard and collusion); therefore the enforcement of accounting rules by auditors has to be supervised incentives have to be given in order to support the independence of auditors, e.g. by liability W. Ballwieser: Accounting and Auditing 14

15 Interaction 3 Experience shows that audit regulation reacts on damages in the accounting and/or auditing sector Audit regulation should be pro-active W. Ballwieser: Accounting and Auditing 15

16 Deficits in Theory 1 Empirical research in auditing has many objections: What is the governance structure in audit firms? What is the role of committees? How competitive is the audit market? What signals quality to whom: client, investor, regulatory body? What are the institutional devices to support auditor independence? Public commission / peer review? W. Ballwieser: Accounting and Auditing 16

17 Deficits in theory 2 Theoretical research has many open questions: How can efficient audit tools be developed in a dynamic world of accounting? What are the consequences of a separation of auditing and consulting, e.g. with respect to recruiting good personell and risk assessment of audit clients? What are the consequences of the globalization of audit firms on management and risk? W. Ballwieser: Accounting and Auditing 17

18 Deficits in theory 3 Recommendations on policy are restricted by the mentioned deficits : What kind of recommendations can be given with respect to regulatory aims, bodies, institutions, supervisions etc. in the case of further globalization of accounting rules? What shall be tought at universities and colleges in order to prepare students for the auditing sector? W. Ballwieser: Accounting and Auditing 18

19 Literature Ballwieser, Wolfgang, Entwicklung der Theorie der Rechnungslegung in den USA, in: Wagner, Franz W. (ed.), Ökonomische Analyse des Bilanzrechts, Sonderheft 32/93 der zfbf, Düsseldorf, Frankfurt a.m. 1993, pp Beaver, William H., Financial Reporting: An Accounting Revolution. 3. ed., Upper Saddle River Beaver, William H./Demski, Joel S., The Nature of Income Measurement, AR 54 (1979), pp Demski, Joel S., The General Impossibility of Normative Accounting Standards, AR 48 (1973), pp Lev, Baruch, Towards a Theory of Equitable and Efficient Accounting Policy, AR 63 (1988), pp Währisch, Mark, The Evolution of International Accounting Systems, Frankfurt a.m. (Peter Lang), Watts, Ross L./Zimmerman, Jerold L., Positive Accounting Theory. Englewood Cliffs, N.J W. Ballwieser: Accounting and Auditing 19