Research Center supports Practice
Prof. Per Olsson is optimistic: The newly established CFRA can bridge the gap between accounting research and practice. The most recent topics are auditor reporting and financial communication.
Accounting regulation is more influential today
As a consequence of the financial turmoil over the last decade, increasing global capital flows, and the increasing reliance on public financing through the capital markets, financial reporting and auditing face enhanced regulatory and political scrutiny on both the national and the international level.
In recent years, research has also become increasingly important for activities in the capital markets generally, and financial reporting and auditing are no exceptions. At the same time, academic research is getting more specialized, and many feel that the gap between academic research and practice has widened. We see it as our objective to narrow this gap.
When ESMT was founded in 2002 by leading global companies and institutions to establish an international business school in Germany, part of the purpose was to bring research and teaching closer to industry and policy-making. As “the business school founded by business” ESMT keeps working on this ambition, and the Center for Financial Reporting and Auditing, CFRA, is the fifth center to be founded at ESMT’s campus in central Berlin. Allianz, Daimler, Deloitte, Ernst and Young, KPMG, Linde, PricewaterhouseCoopers, Siemens, and Stiftungsfonds Deutsche Bank support the CFRA.
The CFRA will work through publications, seminars, and other forms of conferences on issues of interest to financial statement preparers, auditors, standard setters and political policy makers. A natural question from a busy professional in any of these areas would then be: why should I spend valuable time attending a workshop organized by CFRA or reading one of its reports? Our answer is that the “questions that are likely to keep you awake at night” in practice are the questions we intend to work on. Let me give a couple of concrete examples.
The current low interest rate environment has large economic consequences. Many economists are now predicting that interest rates will remain low for the foreseeable future. This will put stress on many aspects of the economy, not least the pension system. This involves real economy issues (the underlying economics of the pension system, financing challenges and tax implications) as well as financial reporting challenges (the valuation of pension obligations, various actuarial assumptions, etc.). We intend to have activities around this issue – both on the very practical accounting issues involved as well as the policy issues. This will naturally involve attendees from industry, accounting firms and the actuarial profession, but also from government, unions, and various national and international policy makers.
The new auditor reporting model is a current research area
Another, more auditing-related, example of questions to address is the new auditor reporting model. The requirements governing auditor reporting have recently been substantially enlarged. Recent EU regulations among other things require a description of the most significant assessed risks of material misstatement in the financial statements, a summary of the auditor’s response to those risks, and, where relevant, key observations arising with respect to those risks. ISA 701 „Communicating key audit matters in the auditor’s report“ was issued by the International Auditing and Assurance Standards Board (IAASB ) in January 2015 and requires the auditor to discuss key audit matters. Such recent regulatory events can have substantial influence over information flows both within the firm (between auditors, audit committees and firms’ supervisory boards) as well as over information in external financial reports, where care has to be exercised to ensure consistency. Activities around this question would involve academics, preparers, auditors as well as representatives from the Federal Ministry of Justice and Consumer Protection, the EU and from the IAASB. We would also draw on international experience - for example, the UK is approaching the third financial reporting period where similar requirements are in place, so it is helpful to draw on their experience.
Communication with investors
An example where there is substantial academic research to draw from concerns firms’ non-financial, or narrative, disclosures. Narrative disclosures represent a large part of companies’ overall financial communications with investors. Textual commentaries are meant to help to clarify issues that can be obscured by complex accounting methods and footnote disclosures. In addition, narratives summarize corporate strategy, contextualize results, explain governance arrangements, describe corporate social responsibility policy, and provide forward looking information for investors. Recent academic linguistic research has made great progress in measuring the quality and tone of company narratives, and has documented various ways in which narratives has affected overall financial reporting quality, for better or (sometimes) for worse.
CFRA wants to provide a platform to strengthen the dialogue between academia and practice. Academia can clearly benefit from being informed by practice, and practice can benefit from academic insights. The above examples are only some examples. We are very happy to receive input on various topics that can be of interest.