Tuesday, June 13, 2017

Bricker identifies areas in need of additional accounting research

By John Filar Atwood

Noting that academic research can have a direct impact on the Commission’s policy decisions, SEC Chief Accountant Wes Bricker identified a number of areas that could benefit from further work by accounting researchers. At a recent accounting and public policy conference, he suggested the role of non-authoritative guidance in shaping financial reporting and the new expected credit loss standards issued by the FASB and IASB as possible topics for academic research.

In a keynote address, Bricker said that research on the impact of accounting standard setting often focuses on the accounting standard, which is a vital piece of financial reporting. However, the role of non-authoritative guidance from the staff of standard setters, accounting firms, and industry groups has not received much attention in academic literature.

Expected credit loss model. He also indicated that the recently issued expected credit loss standards issued by the FASB and the IASB offer opportunities for academic research. The FASB’s current expected credit loss model requires that the full amount of expected credit losses be recorded for all financial assets measured at amortized cost, he noted. In contrast, the IASB’s approach in IFRS 9 requires that an allowance for credit losses equal to the 12-month expected credit losses be recognized, until there is a significant increase in credit risk when lifetime expected credit losses are recognized.

Registrants are currently developing implementation plans and accounting policies for application of the expected credit loss standards, according to Bricker. He believes that research on the anticipated effect of the expected credit loss approach compared to today’s incurred loss model under various scenarios could be helpful. As an example, he suggested studies that compare the simulated performance of these models based on historical data with varying assumptions.

International standards. Bricker also advised that there are opportunities for research on the application of international accounting standards. He said that possible areas for further research include monitoring financial reports issued from jurisdictions that have not endorsed IFRS as issued by the IASB, or have done so in only a partial manner. Research in this area would contribute to an understanding of the similarities and differences in financial reporting attributes and outcomes, in Bricker’s view.

Research is also needed in the area of governance and controls, he said, including on the means of promoting appropriate ethics, tone and values within a company, oversight of performance management and accountability, and communicating information among the board, management, and internal auditors and external auditors. Studies on controls to manage risk and increase the likelihood that objectives and goals will be achieved also would be useful, he added.

Internal controls. Bricker believes there is value in furthering the existing research on the role of internal control over financial reporting (ICFR) in reducing the risk of material misstatements in financial statements. This may require moving beyond traditional database-driven research towards hand-collected data and perhaps even field studies, he noted.

Bricker encouraged researchers to advance the understanding of the role of audit committees in fostering effective ICFR, and the factors that strengthen or weaken audit committees’ effectiveness. Another area where academic research might be of interest is the characteristics and skills of audit committee members that contribute to their effective oversight of financial reporting, he said.

In Bricker’s opinion, research is needed in the area of advancing an understanding of the flow and uses of financial reporting information given the continuing changes from technology and capacity for data analytics. Studies could cover the disparate interests and financial reporting information needs of both professional and individual investors, he noted, or could examine the nature of information sources, decision styles, and implications for the accounting, audit and disclosure within the financial reporting process.

Delivery innovations. Examining the nature of delivery innovations in financial reporting, such as the role of analysts and data aggregators in the dissemination of structured and non-structured data in the capital markets, also would be helpful to the Commission staff, Bricker said. Research could examine the role of other parties in conforming the form, format, prominence, and distribution of financial statement data to investors and analysts.

Finally, Bricker mentioned the reporting of information other than in the financial statements, such as non-GAAP measures and non-financial metrics, as an area that could benefit from academic research. He noted that the staff monitors compliance in this area to foster disclosure practices consistent with Commission rules, but said that research could deepen the staff’s understanding of the determinants and consequences of both non-GAAP measures and non-financial metrics.