- 14 Nov 2012
- Research & Ideas
New Agenda for Corporate Accountability Reporting
Professor Karthik Ramanna explains three ways to make corporate accountability reports potentially more useful to constituencies that include shareholders, communities, bondholders, and customers. Open for comment; 0 Comments.
- 07 Nov 2012
- Working Paper Summaries
Causes and Consequences of Linguistic Complexity in Non-US Firm Conference Calls
Does the form in which financial information is presented have consequences for the capital markets? The authors examine the level of linguistic complexity of more than 11,000 conference call transcripts from non-US firms between 2002 and 2010. Findings show that the linguistic complexity of calls varies with country-level factors such as language barriers, but also with firm characteristics. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases. Overall, these results may be useful to foreign firms that wish to communicate with investors globally. Analysts and investors around the world may also find the results helpful since they might be able to push managers to speak in a less complex manner. This study is the first to analyze conference calls in a cross-country setting. Key concepts include: Language barriers are a significant determinant of linguistic complexity in foreign firm's information disclosure. Linguistic complexity in information disclosures can be associated with lower information content, as measured by abnormal stock return volatility and trading volume. The effect is significant when there is greater (i) implicit (as captured by the presence of foreign investors) or (ii) explicit (as captured by how actively analysts ask questions) demand for the information disclosure. Closed for comment; 0 Comments.
- 14 Nov 2011
- Working Paper Summaries
The Impact of Corporate Sustainability on Organizational Process and Performance
Robert G. Eccles, Ioannis Ioannou, and George Serafeim compared a matched sample of 180 companies, 90 of which they classify as High Sustainability firms and 90 as Low Sustainability firms, in order to examine issues of governance, culture, and performance. Findings for an 18-year period show that High Sustainability firms dramatically outperformed the Low Sustainability ones in terms of both stock market and accounting measures. However, the results suggest that this outperformance occurs only in the long term. Managers and investors who are hoping to gain a competitive advantage in the short term are unlikely to succeed by embedding sustainability in their organization's strategy. Overall, the authors argue that High Sustainability company policies reflect the underlying culture of the organization, where environmental and social performance, in addition to financial performance, are important, but these policies also forge a strong culture by making explicit the values and beliefs that underlie the mission of the organization. Key concepts include: Organizations voluntarily adopting environmental and social policies represent a fundamentally distinct type of modern corporation, characterized by a governance structure that takes into account the environmental and social performance of the company, in addition to financial performance, a long-term approach towards maximizing inter-temporal profits, and an active stakeholder management process. Societal concern about sustainability, at both the level of the firm and society as a whole, has been growing from almost nothing in the early 1990s to rapidly increasing awareness in the early 2000s, to being a dominant theme today. The High Sustainability firms in this study pay attention to their relationships with stakeholders—such as employees, customers, and NGOs representing civil society—through active processes of engagement. The Low Sustainability firms, by contrast, correspond to the traditional model of corporate profit maximization in which social and environmental issues are predominantly regarded as externalities created by firm actions which only need to be addressed if required to do so by law and regulation. The group of firms with a strong sustainability culture is significantly more likely to assign responsibility to its board of directors for sustainability and to form a separate board committee for sustainability. Moreover, High Sustainability companies are more likely to make executive compensation a function of environmental, social, and external perception (e.g., customer satisfaction) metrics. Closed for comment; 0 Comments.
- 18 Aug 2011
- Working Paper Summaries
Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Key concepts include: Providing NAS does not automatically lead to weaker audit quality. Greater information systems consulting fees are associated with higher quality financial reporting for various proxies of earnings quality. This area of consulting likely improved the audit firms' knowledge base, leading to improved audit quality. Evidence suggests that the market does not fear an increase in economic dependence from the non-disclosure of NAS. Closed for comment; 0 Comments.
- 16 Aug 2011
- Working Paper Summaries
The International Politics of IFRS Harmonization
Contrary to its staid image in popular culture, accounting has reigned at the forefront of globalization over the last decade. As of 2010, about 100 countries, including all of the world's major economies, either have adopted a common set of accounting principles known as International Financial Reporting Standards, have initiated an IFRS harmonization program, or have in place a national strategy to respond to IFRS. In fact, the proliferation of IFRS worldwide is one of the most important developments in corporate governance today. Through a series of case studies on Canada, China, and India, Assistant Professor Karthik Ramanna analyzes key similarities and differences in the international political dynamics that contribute to countries' responses to IFRS. His framework helps explain and predict countries' decisions on IFRS harmonization, as well as the potential structure and impact of IFRS in the future. Key concepts include: How countries respond to IFRS depends on 1) their access to political power at the IFRS's rule-making body, the International Accounting Standards Board (IASB), which is based in London, and 2) their own direct political power at the IASB. While international politics is not the only or even the deciding element in understanding the growth of IFRS, it is very important. The politics of identity is key in a country's IFRS response strategy. While the Chinese government has been successful in making its voice heard at the IASB, the ability of other emerging markets to do so is less clear, as illustrated by Ramanna's case about India. Ramanna describes the development of IFRS over its first decade, particularly the role of the EU member states and their interests in the establishment and subsequent direction of the IASB. Closed for comment; 0 Comments.
- 02 Jun 2011
- Research & Ideas
Signing at the Top: The Key to Preventing Tax Fraud?
In filling out self-reported documents such as tax forms, we declare the information truthful with our signature, but usually we sign at the end of the form. Researchers Francesca Gino and Lisa Shu discuss whether governments and companies can bolster honesty simply by moving the honesty pledge and signature line to the top of the form, before people encounter the opportunity to cheat. Closed for comment; 0 Comments.
- 19 Apr 2011
- Working Paper Summaries
Top Executive Background and Financial Reporting Choice: The Case of Goodwill Impairment
In the management literature, some theories hold that corporate actions and strategic choices can be partially predicted by knowing the functional background of executives. The authors provide evidence on how CEOs and CFOs who were former investment bankers, auditors, and private equity/venture capital executives managed decisions around goodwill impairments (essentially goodwill charge-offs)—a complex accounting choice involving a high degree of managerial discretion. Research by HBS professor Francois Brochet and doctoral candidate Kyle Welch. Key concepts include: Results of the research suggest that executive functional background is a significant explanatory factor of goodwill impairment reporting, and that its effect is better understood in the context of upper echelons theory and agency theory. The results can help researchers explore the role of the individual manager in explaining financial reporting choices and also help them to control for executive-level characteristics when investigating determinants of goodwill impairments. Since executive background is an actionable variable for corporate boards, a better understanding of its role in executives' financial reporting choices can be informative to those who monitor executive reporting. Closed for comment; 0 Comments.
- 07 Dec 2010
- Working Paper Summaries
Towards an Understanding of the Role of Standard Setters in Standard Setting
Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards. Key concepts include: While corporate lobbying is likely to influence the nature of accounting standards proposed by the FASB, the board members themselves are likely to shape Generally Accepted Accounting Principles (GAAP) by controlling which standards are proposed. Length of service on the board is associated with proposing standards perceived both as more favorable by big auditors and as decreasing accounting "reliability." Affiliation with the Democratic Party, measured by political donations, is associated with proposing standards perceived both as less favorable by big auditors and as increasing accounting reliability. The evidence in this study can be used toward building a more comprehensive theory of accounting standard setting, which can be helpful in informing future efforts at designing standard setting institutions, including considerations on term limits and prior work experience. Closed for comment; 0 Comments.
- 19 Nov 2010
- Research & Ideas
The Landscape of Integrated Reporting: An E-Book
An e-book written by participants of a recent HBS workshop on integrated reporting is now available. HBS Dean Nitin Nohria offers a forward. Closed for comment; 0 Comments.
- 12 Nov 2010
- Research & Ideas
One Report: Integrated Reporting for a Sustainable Strategy
What a company externally reports shapes how it behaves internally. The key question is, "What should companies report?" Key concepts include: Integrated reporting takes corporate reporting to the next level. The state of integrated reporting is embryonic, more an aspiration than a codified management practice. Expanding adoption will change how society thinks about the role of companies. An action plan for integrated reporting to drive its adoption has been developed. Closed for comment; 0 Comments.
- 20 Oct 2010
- Research & Ideas
HBS Workshop Encourages Corporate Reporting on Environmental and Social Sustainability
The concept of integrated reporting could help mend the lack of trust between business and the public, Harvard Business School Dean Nitin Nohria tells attendees at a seminal workshop. Closed for comment; 0 Comments.
- 25 Jun 2009
- Working Paper Summaries
Why Do Countries Adopt International Financial Reporting Standards?
Why do some countries adopt the European Union (EU)-based International Financial Reporting Standards (IFRS) when others do not? To expand our understanding of the determinants and consequences of IFRS adoption on a global sample, HBS professor Karthik Ramanna and MIT Sloan School of Management coauthor Ewa Sletten studied variations over time in the decision to adopt these standards in more than a hundred non-EU countries. Understanding countries' adoption decisions can provide insights into the benefits and costs of IFRS adoption. Key concepts include: Countries with high quality corporate governance systems and more powerful countries are less likely to adopt IFRS. There are network benefits to IFRS adoption, i.e., the likelihood of IFRS adoption for a given country increases with the number of IFRS adopters in its geographical region and with IFRS adoption among its trade partners. As more countries adopt the international standards, the relative import of network benefits from IFRS adoption (over direct economic benefits) are likely to increase. Similar effects might be seen in the adoption of accounting methods and standards, and of corporate governance best practices by firms and jurisdictions. Closed for comment; 0 Comments.
- 19 Jun 2008
- Working Paper Summaries
Accounting Information as Political Currency
The study of accounting and the political process has long been viewed through the political cost hypothesis, the basic premise of which is that firms manage earnings in order to extract first-order benefits (or avoid first-order costs) from regulators. This paper develops and tests a distinct, yet likely, complementary hypothesis: Firms manage reported earnings in order to supply first-order benefits to regulators. Focusing on Democratic and Republican candidates in congressional races in 2004, Ramanna and Roychowdhury test whether the management of accounting information is in some circumstances akin to a political contribution from firms to politicians: in other words, whether accounting information can be used as political currency. The authors predict and find that identified corporate donors to candidates in closely watched races in 2004 managed information related to outsourcing, a hot-button issue in those races. Key concepts include: While corporate donors in general do not exhibit evidence of downward earnings management, corporate donors to candidates in closely watched congressional races exhibit significant evidence of downward earnings management in the second and third quarters of 2004. The evidence of downward earnings management is stronger for firms likely to have greater outsourcing activities. These findings are consistent with firms managing accounting information in circumstances where this is likely to benefit allied politicians, thus supporting the idea of a "political currency" hypothesis. Closed for comment; 0 Comments.
- 22 Jan 2008
- Research & Ideas
New Challenges in Leading Professional Services
Professional service firms are being challenged as never before—by clients, associates, and the competition, just for starters. But old-style PSF leaders are not equipped to respond, says Harvard Business School professor Thomas J. DeLong. He discusses his new book When Professionals Have to Lead. Plus: Book excerpt. Key concepts include: Today's leaders of professional service firms are being overwhelmed by demanding clients, human capital challenges, lack of organizing strategies, and perhaps most of all, unrealistic expectations of the task itself. There is also on ongoing trend to focus on the development of only the highfliers and ignore a vast number of very competent professionals who are the heart and soul of the firm. The integrated leadership model is built on 4 specific dimensions: setting direction, gaining commitment to the direction, executing on the direction, and setting a personal example. Closed for comment; 0 Comments.
- 26 Jun 2007
- Working Paper Summaries
Contracting in the Self-reporting Economy
Intellectual property can be used by its owner directly, licensed to a third party for a fixed royalty, or licensed to a third party for a variable royalty. The variable royalty arrangement depends on self-reporting by the licensee, which in turn induces demand for auditing by the licensor. This research studies a setting with the following features: a production cost advantage on the part of the outside party that creates gains from licensing; a limited liability constraint that prevents the licensee from owing more royalties than the gross profits of licensing the intellectual property and prevents the licensor from capturing all of the economic surplus via a fixed royalty agreement; and accounting and auditing costs that reduce the benefits of a variable royalty agreement. Key concepts include: The owner of intellectual property will enter into a variable royalty agreement with an outside party if—and only if—the accounting and auditing costs are sufficiently low. With higher cost levels, the owner will use the property directly if the owner can do so profitably. Otherwise, the owner will prefer to license the property in exchange for a fixed royalty. The expected aggregate accounting system and audit costs are minimized when the licensor can compel the licensee to bear the audit costs in case underreporting is detected. Internal control provisions within the Sarbanes-Oxley Act make variable royalty arrangements based on self-reporting and auditing relatively more attractive than such arrangements prior to Sarbanes-Oxley. Sarbanes-Oxley effectively lowers the licensor's audit costs even though the licensor must audit all low reports, because auditing all low reports deters the licensee from underreporting in the first place. Closed for comment; 0 Comments.
- 23 Jan 2006
- Research & Ideas
Financial Reporting Goes Global
Globalization is the key issue in determining the future of financial accounting, says professor Gregory S. Miller. And as more countries consider adopting an international accounting standard, India is positioned to be a strong leader. Closed for comment; 0 Comments.
- 03 Mar 2003
- What Do You Think?
Are Conditions Right for the Next Accounting Scandal?
Will risk-averse corporate audit committees' natural tendencies to engage the biggest accounting firms insure that the current accounting oligopoly will become even stronger? Closed for comment; 0 Comments.
- 09 Dec 2002
- Research & Ideas
Most Accountants Aren’t CrooksWhy Good Audits Go Bad
The Sarbanes-Oxley Act sets stiff penalties for auditors and executives who commit fraud. Problem is, says Harvard Business School professor Max H. Bazerman and his collaborators, most bad audits are the result of unconscious bias, not corruption. Here's a new look at how to audit the auditors. Closed for comment; 0 Comments.
- 13 May 2002
- Op-Ed
A Cure for Enron-Style Audit Failures
In an opinion piece in the Financial Times, Harvard Business School professor Jay Lorsch argues for legislation to create an independent, self-regulatory organization to oversee accounting firms. Enron, he says, is not an isolated incident. Closed for comment; 0 Comments.
Are the Big Four Audit Firms Too Big to Fail?
Although the number of audit firms has decreased over the past few decades, concerns that the "Big Four" survivors have become too big to fail may be a stretch. Research by professor Karthik Ramanna and colleagues suggests instead that audit firms are more concerned about taking risks. Closed for comment; 0 Comments.