Accounting & Auditing: Interaction in the regulation and research ...
Accounting & Auditing: Interaction in the regulation and research ...
Accounting & Auditing: Interaction in the regulation and research ...
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<strong>Account<strong>in</strong>g</strong> & <strong>Audit<strong>in</strong>g</strong>:<br />
<strong>Interaction</strong> <strong>in</strong> <strong>the</strong> <strong>regulation</strong><br />
<strong>and</strong> <strong>research</strong> doma<strong>in</strong>s<br />
Wolfgang Ballwieser<br />
Munich University<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 1
Contents<br />
• Research doma<strong>in</strong>: Theories<br />
• <strong>Account<strong>in</strong>g</strong> <strong>the</strong>ories<br />
• <strong>Audit<strong>in</strong>g</strong> <strong>the</strong>ories<br />
• <strong>Interaction</strong><br />
• Deficits <strong>in</strong> <strong>the</strong>ory<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 2
Theories 1<br />
• Theories are systems of sentences<br />
about subjects of scientific <strong>in</strong>terest<br />
which<br />
– conta<strong>in</strong> no contradictions<br />
– can be proven false on logical <strong>and</strong>/or<br />
empirical level<br />
– have some k<strong>in</strong>d of generality<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 3
Theories 2<br />
• Theories can be<br />
– normative <strong>in</strong> <strong>the</strong> sense of prescriptive: if<br />
your aim is x <strong>and</strong> <strong>the</strong> conditions are y, <strong>the</strong>n<br />
you reach your aim by do<strong>in</strong>g z<br />
– positive <strong>in</strong> <strong>the</strong> sense of expla<strong>in</strong><strong>in</strong>g or<br />
reconstruct<strong>in</strong>g some aspects of reality<br />
– analytical <strong>in</strong> <strong>the</strong> sense of us<strong>in</strong>g logic <strong>and</strong><br />
giv<strong>in</strong>g def<strong>in</strong>itions<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 4
<strong>Account<strong>in</strong>g</strong> <strong>the</strong>ories<br />
F<strong>in</strong>ancial account<strong>in</strong>g<br />
<strong>the</strong>ories<br />
Management<br />
account<strong>in</strong>g <strong>the</strong>ories<br />
normative<br />
positive<br />
<strong>in</strong>come<br />
measurement<br />
<strong>regulation</strong><br />
<strong>regulation</strong><br />
f<strong>in</strong>ancial<br />
report<strong>in</strong>g<br />
Beaver/Demski<br />
1979: The nature<br />
of <strong>in</strong>come<br />
measurement<br />
Lev 1988: Theory of<br />
Equitable <strong>and</strong> Efficient<br />
<strong>Account<strong>in</strong>g</strong> Policy<br />
Watts/Zimmerman<br />
1986: PAT<br />
Beaver 1998: FR:<br />
An <strong>Account<strong>in</strong>g</strong><br />
Revolution<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 5
Normative <strong>regulation</strong> <strong>the</strong>ory 1<br />
• Regulatory aims are<br />
– improv<strong>in</strong>g allocational efficiency<br />
– guarantee<strong>in</strong>g fairness for <strong>in</strong>vestors, protect<strong>in</strong>g<br />
<strong>the</strong>m aga<strong>in</strong>st fraud <strong>and</strong> exploitation (SEC)<br />
– guarantee<strong>in</strong>g equality of opportunity (Lev)<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 6
Normative <strong>regulation</strong> <strong>the</strong>ory 2<br />
• Regulation avoids market failure<br />
• Unregulated f<strong>in</strong>ancial report<strong>in</strong>g leads to<br />
– free rider problem <strong>and</strong> under<strong>in</strong>vestment <strong>in</strong><br />
report<strong>in</strong>g (public good argument)<br />
– low network effects <strong>and</strong> high transaction<br />
costs<br />
– <strong>in</strong>formation asymmetry <strong>and</strong> absta<strong>in</strong><strong>in</strong>g from<br />
market transactions<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 7
Normative <strong>regulation</strong> <strong>the</strong>ory 3<br />
• Regulation supports network effects<br />
because of<br />
– <strong>in</strong>creas<strong>in</strong>g returns for accumulated <strong>in</strong>formation<br />
– learn<strong>in</strong>g effects<br />
– comparability of f<strong>in</strong>ancial statements<br />
– economies of scale<br />
– large <strong>and</strong> cheap supply of complementary<br />
goods, e.g. audit<strong>in</strong>g services & techniques<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 8
Normative <strong>regulation</strong> <strong>the</strong>ory 4<br />
• FASB/IASB/GASB ... follow <strong>the</strong> concept of<br />
decision usefulness for unidentified users<br />
• It is <strong>the</strong>oretically not clear what this means<br />
(Demski 1973)<br />
• It is practically not clear; th<strong>in</strong>k of<br />
– segmental report<strong>in</strong>g (SFAS 131, IAS 14, GAS 3)<br />
– goodwill amortization (history of SFAS 141&142!)<br />
– consolidation of special purpose entities<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 9
<strong>Audit<strong>in</strong>g</strong> <strong>the</strong>ories<br />
Theories on audit<strong>in</strong>g<br />
f<strong>in</strong>ancial report<strong>in</strong>g<br />
Internal control<br />
<strong>the</strong>ories<br />
normative<br />
positive<br />
audit<strong>in</strong>g<br />
<strong>regulation</strong><br />
<strong>regulation</strong><br />
audit<strong>in</strong>g &<br />
audit<strong>in</strong>g firms<br />
Sampl<strong>in</strong>g<br />
approach<br />
System approach<br />
Risk approach<br />
Quality approach<br />
Corporate<br />
Governance<br />
Independency<br />
Influence of peer<br />
review<br />
Independency<br />
Qualified op<strong>in</strong>ions<br />
Auditor change<br />
Risk analysis<br />
Concentration<br />
process<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 10
Normative <strong>regulation</strong> <strong>the</strong>ory 1<br />
• Regulatory aims are<br />
– enforcement of account<strong>in</strong>g rules<br />
– improv<strong>in</strong>g allocational efficiency<br />
– guarantee<strong>in</strong>g fairness for <strong>in</strong>vestors (SEC)<br />
– guarantee<strong>in</strong>g equality of opportunity (Lev)<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 11
Normative <strong>regulation</strong> <strong>the</strong>ory 2<br />
• Regulation avoids market failure<br />
• Same arguments as above<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 12
<strong>Interaction</strong> 1<br />
• <strong>Account<strong>in</strong>g</strong> <strong>and</strong> audit<strong>in</strong>g <strong>regulation</strong><br />
must be comb<strong>in</strong>ed because audit<strong>in</strong>g shall<br />
enforce accout<strong>in</strong>g rules<br />
– <strong>Account<strong>in</strong>g</strong> rules have to be auditable: what<br />
about fair value measurement or impairment<br />
test of good will?<br />
– <strong>Audit<strong>in</strong>g</strong> techniques must be problem solv<strong>in</strong>g<br />
(effective) <strong>and</strong> efficient<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 13
<strong>Interaction</strong> 2<br />
• The auditor creats a new agency<br />
problem (risk of moral hazard <strong>and</strong><br />
collusion); <strong>the</strong>refore<br />
– <strong>the</strong> enforcement of account<strong>in</strong>g rules by<br />
auditors has to be supervised<br />
– <strong>in</strong>centives have to be given <strong>in</strong> order to support<br />
<strong>the</strong> <strong>in</strong>dependence of auditors, e.g. by liability<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 14
<strong>Interaction</strong> 3<br />
• Experience shows that audit <strong>regulation</strong><br />
reacts on damages <strong>in</strong> <strong>the</strong> account<strong>in</strong>g<br />
<strong>and</strong>/or audit<strong>in</strong>g sector<br />
• Audit <strong>regulation</strong> should be pro-active<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 15
Deficits <strong>in</strong> Theory 1<br />
• Empirical <strong>research</strong> <strong>in</strong> audit<strong>in</strong>g has many<br />
objections:<br />
– What is <strong>the</strong> governance structure <strong>in</strong> audit<br />
firms? What is <strong>the</strong> role of committees?<br />
– How competitive is <strong>the</strong> audit market?<br />
– What signals quality to whom: client, <strong>in</strong>vestor,<br />
regulatory body?<br />
– What are <strong>the</strong> <strong>in</strong>stitutional devices to support<br />
auditor <strong>in</strong>dependence? Public commission /<br />
peer review?<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 16
Deficits <strong>in</strong> <strong>the</strong>ory 2<br />
• Theoretical <strong>research</strong> has many open<br />
questions:<br />
– How can efficient audit tools be developed <strong>in</strong> a<br />
dynamic world of account<strong>in</strong>g?<br />
– What are <strong>the</strong> consequences of a separation of<br />
audit<strong>in</strong>g <strong>and</strong> consult<strong>in</strong>g, e.g. with respect to<br />
recruit<strong>in</strong>g good personell <strong>and</strong> risk assessment<br />
of audit clients?<br />
– What are <strong>the</strong> consequences of <strong>the</strong> globalization<br />
of audit firms on management <strong>and</strong> risk?<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 17
Deficits <strong>in</strong> <strong>the</strong>ory 3<br />
• Recommendations on policy are<br />
restricted by <strong>the</strong> mentioned deficits :<br />
– What k<strong>in</strong>d of recommendations can be given<br />
with respect to regulatory aims, bodies,<br />
<strong>in</strong>stitutions, supervisions etc. <strong>in</strong> <strong>the</strong> case of<br />
fur<strong>the</strong>r globalization of account<strong>in</strong>g rules?<br />
– What shall be tought at universities <strong>and</strong><br />
colleges <strong>in</strong> order to prepare students for <strong>the</strong><br />
audit<strong>in</strong>g sector?<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 18
Literature<br />
• Ballwieser, Wolfgang, Entwicklung der Theorie der Rechnungslegung <strong>in</strong> den USA, <strong>in</strong>:<br />
Wagner, Franz W. (ed.), Ökonomische Analyse des Bilanzrechts, Sonderheft 32/93<br />
der zfbf, Düsseldorf, Frankfurt a.M. 1993, pp. 107-108.<br />
• Beaver, William H., F<strong>in</strong>ancial Report<strong>in</strong>g: An <strong>Account<strong>in</strong>g</strong> Revolution. 3. ed., Upper<br />
Saddle River 1998.<br />
• Beaver, William H./Demski, Joel S., The Nature of Income Measurement, AR 54<br />
(1979), pp. 38-46.<br />
• Demski, Joel S., The General Impossibility of Normative <strong>Account<strong>in</strong>g</strong> St<strong>and</strong>ards, AR 48<br />
(1973), pp. 718-723.<br />
• Lev, Baruch, Towards a Theory of Equitable <strong>and</strong> Efficient <strong>Account<strong>in</strong>g</strong> Policy, AR 63<br />
(1988), pp. 1-22.<br />
• Währisch, Mark, The Evolution of International <strong>Account<strong>in</strong>g</strong> Systems, Frankfurt a.M.<br />
(Peter Lang), 2001.<br />
• Watts, Ross L./Zimmerman, Jerold L., Positive <strong>Account<strong>in</strong>g</strong> Theory. Englewood Cliffs,<br />
N.J. 1986.<br />
W. Ballwieser: <strong>Account<strong>in</strong>g</strong> <strong>and</strong> <strong>Audit<strong>in</strong>g</strong> 19