Tag: IFRS


Audit Committees: 2015 Mid-Year Issues Update

Rick E. Hansen is Assistant Corporate Secretary and Managing Counsel, Corporate Governance, at Chevron Corporation.

Board audit committee agendas continue to evolve as companies are faced with a rapidly-changing global business landscape, the proliferation of standards and regulations, increased stakeholder scrutiny, and a heightened enforcement environment. In this post, I summarize current issues of interest for audit committees.

The Audit Committee And Oversight

During her remarks at the Stanford Directors’ College in June 2014, SEC Chair Mary Jo White observed that “audit committees, in particular, have an extraordinarily important role in creating a culture of compliance through their oversight of financial reporting.” [1] Since then, various Commissioners of the SEC and its Staff have reinforced this message by reminding companies of the audit committee’s duties under federal securities laws to:

  • oversee the quality and integrity of the company’s financial reporting process, including the company’s relationship with the outside auditor;
  • oversee the company’s confidential and anonymous whistleblower complaint policies and procedures relating to accounting and auditing matters; and
  • report annually to stockholders on the performance of these duties.

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How America’s Participation in International Financial Reporting Standards Was Lost

Chris Cox is partner and member of the Corporate Practice Group at Bingham McCutchen LLP and president of Bingham Consulting LLC. Mr. Cox served as Chairman of the Securities and Exchange Commission from 2005 to 2009. The following post is based on Mr. Cox’s recent keynote address to the 33rd Annual SEC and Financial Reporting Institute Conference. The complete publication is available here.

The modern quest for an “Esperanto” of business has been underway for nearly half a century. And though it was initiated by the United States, after 48 years, it has yet to gain our full support. That is unfortunate, because the promise of a global standard is truly dazzling.

An international language of disclosure and transparency would significantly improve investor confidence in global capital markets. Investors could more easily compare issuers’ disclosures, regardless of what country they came from. They could more easily weigh investment opportunities in their own countries against competing opportunities in other markets. And a single set of high-quality standards would be a great boon to emerging markets, because investors could have greater confidence in the transparency of financial reporting.

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Whose Trojan Horse? The Dynamics of Resistance against IFRS

The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University. The post is drafted based on a paper co-authored by Professor Gelter and Zehra G. Kavame of Fordham Law School.

The US is the last major economy that has not yet adopted International Financial Reporting Standards (IFRS) while, from Europe to Canada, from Australia to China, around 120 countries are already requiring or permitting IFRS; this figure will likely rise to 150 countries in the near future. The introduction of IFRS has been debated in the United States for several years. The Securities and Exchange Commission (SEC) first issued a paper that includes a plan for possible implementation, and several SEC Staff Reports followed up until the July 2012 Final Staff Report with regard to the work plan. However, whether domestic issuers should be permitted to use IFRS is still very controversial.

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Comparability, Capital Market Benefits, and the Voluntary Adoption of IFRS

The following post comes to us from Mary Barth, Professor of Accounting at Stanford University; Wayne Landsman, Professor of Accounting at the University of North Carolina; Mark Lang, Professor of Accounting at the University of North Carolina; and Christopher Williams of the Department of Accounting at the University of Michigan.

In our paper, Effects on Comparability and Capital Market Benefits of Voluntary Adoption of IFRS by US Firms: Insights from Voluntary Adoption of IFRS by Non-US Firms, which was recently made publicly available on SSRN, we examine whether voluntary adoption of IFRS is associated with an increase in comparability of accounting amounts and capital market benefits after the firms adopt IFRS. Our evidence is based on samples of non-US firms that voluntarily adopt IFRS matched with firms of similar size in their country and industry that either adopted IFRS before them or do not adopt IFRS.

We find that after firms voluntarily adopt IFRS, their accounting amounts become more comparable to those of firms that adopted IFRS before them and less comparable to those of firms that do not adopt IFRS. We also find that adopting firms generally exhibit an increase in capital market benefits—liquidity, share turnover, and firm-specific information—relative to both adopted and non-adopting firms. However, there is little evidence of capital market consequences for adopted firms and little evidence that non-adopting firms suffer a decrease in capital market benefits.

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Mandatory Financial Reporting Environment and Voluntary Disclosure

The following post comes to us from Karthik Balakrishnan and Holly Yang, both of the Department of Accounting at the University of Pennsylvania Wharton School, and Xi Li of the Fox School of Business at Temple University.

In the paper, Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption, which was recently made publicly available on SSRN, we investigate the interaction between mandatory financial reporting environment and voluntary disclosure by employing the mandatory adoption of International Financial Reporting Standards (IFRS) in 2005 as an exogenous increase to mandatory reporting to examine changes in firms’ voluntary disclosure practices. To measure voluntary disclosure, we focus on a discretionary action, namely the extent to which managers provide earnings forecasts, the most prominent performance measure that a firm supplies to investors. Ex-ante, it is unclear how the increase in reporting quality following the mandatory adoption of IFRS could influence management forecasts. On the one hand, mandatory financial reporting and voluntary disclosure can be complements, wherein the former produces verifiable information that improves the credibility of the latter and therefore encourages managers to issue more forecasts, i.e. the confirmatory role of mandatory reporting.

Prior studies document improved reporting quality following IFRS adoption, evidenced by earnings with lower manipulation and higher value relevance, timeliness, and information content. Therefore, given the evidence that IFRS improves the verifiability of earnings, the complementary view suggests that the mandatory adoption of IFRS should increase management forecasts. On the other hand, mandatory financial reporting and voluntary disclosure could also be substitutes, as private information that was previously conveyed through voluntary disclosure is now directly reflected in mandatory financial reports. Since IFRS produces more timely and value-relevant earnings numbers, the substitution effect predicts that the increased quality of financial reporting may reduce the demand for supplementary information from investors to predict future earnings. Therefore, IFRS adoption may also lead to fewer management forecasts.

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The Political Economy of International Financial Regulation

The following post comes to us from Pierre-Hugues Verdier, Associate Professor of Law at University of Virginia.

In my paper, The Political Economy of International Financial Regulation, forthcoming in the Indiana Law Journal, I examine the current system of international financial regulation (IFR) from a historical and political perspective. In contrast with conventional theories of IFR, which see the current system of informal regulatory networks and non-binding standards as overall rational and efficient, I argue that historical path dependence and political economy play a major role in shaping outcomes in IFR. As a result, it produces mixed results—while it adequately addresses some international regulatory challenges, it is relatively ineffective at others, and avoids some altogether. This state of affairs has several important implications; perhaps most worrisome, it raises doubts that IFR can live up to the G-20’s ambitious post-crisis promises to address the international dimensions of systemic risk and moral hazard.

As readers of this blog will no doubt appreciate, there are substantial difficulties involved in developing a general account of IFR. The field is deeply fragmented, as international standards address a broad range of issues: accounting and disclosure rules, fraud, capital adequacy, prudential supervision, and cross-border resolution, to name but a few. All of these areas present different challenges and outcomes vary substantially across them. This being said, one recurrent feature of IFR is its informality. Instead of legally binding treaty obligations and formal international organizations, IFR relies almost exclusively on non-binding standards developed by networks of national regulators, such as the Basel Committee, IOSCO and IAIS. This feature is striking in comparison with many other areas of international governance where more formal mechanisms loom larger, such as trade, investment and the environment.

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Mandatory IFRS Reporting and Changes in Enforcement

The following paper comes to us from Hans Christensen of the Department of Accounting at the University of Chicago; Luzi Hail of the Department of Accounting at the University of Pennsylvania; and Christian Leuz, Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago.

In our paper, Mandatory IFRS Reporting and Changes in Enforcement, which was recently made publicly available on SSRN, we examine the underlying sources of the capital-market benefits around the introduction of mandatory IFRS reporting. Prior work finds significant capital market benefits and also shows that the effects around IFRS adoption are significantly stronger in countries with stricter and better functioning legal systems, and that they are stronger in the EU than in other regions of the world. We argue that this evidence is consistent with several interpretations and that it is still an open question to what extent these positive effects around mandatory IFRS adoption are indeed attributable to the switch to arguably better, more capital-market oriented, and globally harmonized accounting standards.

We focus on market liquidity and rely on within- and across-country variation in the timing of IFRS adoption and of other institutional changes to disentangle several possible explanations. Specifically, we explore whether (i) the switch from local GAAP to IFRS reporting played a primary role for the observed capital-market benefits; (ii) the introduction of IFRS had capital-market benefits, but only in countries with strong institutions and legal enforcement; or (iii) the switch to IFRS reporting itself had little or no effect and, instead, concurrent changes to countries’ institutions drive the observed capital-market benefits.

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Mandatory IFRS Adoption, Accounting Information, and Executive Compensation

The following post comes to us from Neslihan Ozkan of the School of Economics, Finance, and Management at the University of Bristol, Zvi Singer of Desautels Faculty of Management at McGill University, and Haifeng You of the Department of Accounting at Hong Kong University of Science and Technology.

In the paper, Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation, forthcoming in the Journal of Accounting Research, we investigate the contracting implications of the transition to IFRS. Specifically, we examine how the mandatory adoption of IFRS affects the contractual usefulness of accounting information in executive compensation, as reflected in pay-for-performance sensitivity (PPS) and relative performance evaluation (RPE). These tests allow us to infer whether compensation committees of European companies view IFRS as leading to increased earnings quality and comparability.

The mandatory adoption of International Financial Reporting Standards (IFRS) on January 1, 2005, by the European Union (EU) and several other countries (e.g., Australia; South Africa) marks major progress toward a single set of high-quality, globally accepted accounting standards (Daske et al., [2008]). IFRS is primarily aimed at enhancing earnings quality and achieving a high degree of comparability of financial statements (Regulation (EC) No. 1606/2002 of the European Parliament and of the Council). The extant research, however, has provided mixed evidence on whether mandatory IFRS adoption has achieved these goals (e.g., Barth et al., [2008], Ahmed et al. [2010], DeFond et al. [2011], Lang et al. [2010]).

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The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS

The following post comes to us from Wayne Landsman, Professor of Accounting at the University of North Carolina at Chapel Hill; Edward Maydew, Professor of Accounting at the University of North Carolina at Chapel Hill; and Jacob Thornock of the Department of Accounting at the University of Washington.

In the paper, The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS, forthcoming in the Journal of Accounting & Economics as published by Elsevier, we examine whether the information content of earnings announcements increased in countries that mandated adoption of IFRS compared to countries that retained domestic accounting standards. We address this research question using a sample of 20,517 earnings announcements from 16 countries that mandated adoption of IFRS and 11 countries that retained domestic accounting standards. We measure information content of earning announcements based on abnormal trading volume and return volatility around firms’ earnings announcements.

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Criteria for an Independent Accounting Standard Setter

Donna Street is the Mahrt Chair in Accounting at the University of Dayton.

In 2008, the Council of Institutional Investors (Council) adopted a policy regarding the independence of international accounting and auditing standard setters. The Council’s policy supports the goal of convergence to a single set of high quality accounting standards designed to produce comparable, reliable, timely, transparent and understandable financial information that will meet the needs of investors and other consumers of financial reports. Importantly, the policy also opposes replacing U.S. accounting standards and standard setters with international accounting standards and standard setters unless and until seven criteria have been achieved.

In a recent white paper commissioned by the Council of Institutional Investors, Criteria for an Independent Accounting Standard Setter How Does the IASB Rate? I explore evidence and views regarding each of the seven criteria. The paper is designed to assist Council members and other interested parties in evaluating whether the International Accounting Standards Board (IASB) and its International Financial Reporting Standards (IFRS) satisfy any or all of the criteria. This evaluation is particularly timely.

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