The recent American Accounting Association (AAA) Annual Meeting in Chicago largely focused on changes in accounting and society – how they shape the future and the challenges they pose for academics, governments, and the profession as a whole – while giving a nod to the past as well.
The 2015 AAA Annual Meeting brought together teachers, researchers, and practitioners to discuss some of the common challenges that they face. This is my roundup of the meet up, which took place Aug. 10 to 12 and attracted more than 3,000 delegates from all over the world.
High-quality financial reporting boosts growth and accountability
Panelists pointed out that high-quality accounting and financial reporting play a valuable role in society. In particular, increased transparency, trust, and common standards all support higher levels of investment and better resource allocation. They also promote accountability – not only for managers in the private sector, but for governments. Accounting is an essential tool in economic development; the World Bank, for example, invests in supporting the development of accounting skills and standards in poorer countries around the world.
This noteworthy session also pointed out that companies that can show a reliable track record of financial reporting should find it easier to raise money from external sources and they are likely to have a lower cost of capital. Doing business with third parties – including potential customers – is easier when reliable financial reporting information is available. Well-informed investors are able to make better decisions about where to allocate their money, improving the distribution of capital in society.
Other speakers at the AAA pointed out that in the public sector, financial reporting still leaves much to be desired. One panelist claimed that if private-sector companies did their accounting like governments, all the CEOs would end up in jail. History shows that prosperous and successful societies accept the need for accountability. Ordinary people need to understand accounting, not just so that they can manage their own affairs better, but so that they can hold governments accountable. Delegates at the AAA Annual Meeting suggested that accounting ought to be taught in schools.
Another aspect, that perhaps was not broadly discussed at the AAA meeting but should nonetheless be mentioned, is the positive impact of standardization of financial reporting rules and procedures. Accountants can rely on agreed guidelines that they can apply at work which saves them time. Their clients can easily access information on what should be included in their financial reports so accounting practitioners know that their customers will have a better understanding of the information provided. This, in turn, leads to time-saving, increased trust, transparency, and better communication.
Embedding sustainability into business decision-making
Sustainability is becoming increasingly important. At this point, there is perhaps more reporting and debating rather than acting and integrating; this can be viewed as a starting point. The panelists agreed that the issue will only continue to increase in importance. Companies that are moving toward an integrated operational approach rather than one based on disclosure are already experiencing greater success in terms of sustainable growth compared to those relying on reporting only. This is very evident with regards to organizations that are moving beyond "offsetting" behaviors to adjusting their core-business models toward sustainable outcomes.
Debates going beyond financial capital into natural capital, as well as monetary measurement, have gained ground in work on corporate reporting and sustainability. Companies and accountants should familiarize themselves with natural capital accounting; this will help them understand their impact and dependencies on nature and embed this into their decision-making.
IFRS: A global passport for investors
Most countries now either require or allow International Financial Reporting Standards (IFRS) for at least some companies. As one investor speaking at the AAA put it, IFRS is “a global passport for investors." It allows them to understand the financial statements of international companies, making it much easier to take sensible decisions about investing abroad.
IFRS has brought much more disclosure than was expected prior to implementation. This obviously created more complexity for accountants; however, increased transparency has had a positive impact on levels of investment. IFRS also introduced requirements for accounting for financial instruments, which had not been covered in UK GAAP; an obvious move forward. Though again, practicing accountants had to take steps to ensure their technical knowledge was up to date.
However, the benefits of adoption remain controversial and research results on the subject are divided. On balance, research findings suggest that IFRS adoption and improvements in enforcement have contributed to increased liquidity, transparency, comparability, and other benefits. But it was also pointed out at the AAA Annual Meeting that the effects of the global financial crisis and recession make it difficult to draw firm conclusions from the evidence.
Panelists at the AAA Annual Meeting also stressed that there is still a need for more research on these issues. For example, although better enforcement seems to improve the quality of financial reporting, we still need to identify which aspects of enforcement are most efficient in raising standards.
ICAEW was pleased to be able to make a significant contribution to this discussion and to emphasize the important role that accounting practitioners and scholars should play in building prosperous and sustainable economies.
About the author:
Robert Hodgkinson is executive director, technical at the Institute of Chartered Accountants in England and Wales (ICAEW). He has been with the Institute for 10 years and is currently responsible for ICAEW’s technical strategy department which includes its seven specialist faculties in audit and assurance, corporate finance, finance and management, financial reporting, financial services, IT and tax.