Mautz

Gasp! How could an accountics scientist question such things? This is sacrilege!
Let me end my remarks with a question: Have Ball and Brown (1968)—and Beaver (1968) for that matter, if I can bring Bill Beaver into it—have we had too much influence on the research agenda to the point where other questions and methods are being overlooked?
Phil Brown of Ball and Brown Fame

"How Can We Do Better?" by Phillip R. Brown (of Ball and Brown Fame), Accounting Horizons (Forum on the State of Accounting Scholarship), December 2013 ---
http://aaajournals.org/doi/full/10.2308/acch-10365
Not Free

Philip R. Brown AM is an Honorary Professor at The University of New South Wales and Senior Honorary Research Fellow at The University of Western Australia.

I acknowledge the thoughtful comments of Sudipta Basu, who arranged and chaired this session at the 2012 American Accounting Association (AAA) Annual Meeting, Washington, DC.

The video presentation can be accessed by clicking the link in Appendix A.

Corresponding author: Philip R. Brown AM. Email: philip.brown@uwa.edu.au

When Sudipta Basu asked me whether I would join this panel, he was kind enough to share with me the proposal he put to the conference organizers. As background to his proposal, Sudipta had written:

Analytical and empirical researchers generate numerous results about accounting, as do logicians reasoning from conceptual frameworks. However, there are few definitive tests that permit us to negate propositions about good accounting.

This panel aims to identify a few “most wrong” beliefs held by accounting experts—academics, regulators, practitioners—where a “most wrong” belief is one that is widespread and fundamentally misguided about practices and users in any accounting domain.

While Sudipta's proposal resonated with me, I did wonder why he asked me to join the panel, and whether I am seen these days as just another “grumpy old man.” Yes, I am no doubt among the oldest here today, but grumpy? You can make your own mind on that, after you have read what I have to say.

This essay begins with several gripes about editors, reviewers, and authors, along with suggestions for improving the publication process for all concerned. The next section contains observations on financial accounting standard setting. The essay concludes with a discussion of research myopia, namely, the unfortunate tendency of researchers to confine their work to familiar territory, much like the drunk who searches for his keys under the street light because “that is where the light is.”

ON EDITORS AND REVIEWERS, AND AUTHORS

I have never been a regular editor, although I have chaired a journal's board of management and been a guest editor, and I appointed Ray Ball to his first editorship (Ray was the inaugural editor of the Australian Journal of Management). I have, however, reviewed many submissions for a whole raft of journals, and written literally hundreds of papers, some of which have been published. As I reflect on my involvement in the publications process over more than 50 years, I do have a few suggestions on how we can do things better. In the spirit of this panel session, I have put my suggestions in the form of gripes about editors, reviewers, and authors.

One-eyed editors—and reviewers—who define the subject matter as outside their journal's interests are my first gripe; and of course I except journals with a mission that is stated clearly and in unequivocal terms for all to see. The best editors and the best reviewers are those who are open-minded who avoid prejudging submissions by reference to some particular set of questions or modes of thinking that have become popular over the last five years or so. Graeme Dean, former editor of Abacus, and Nick Dopuch, former editor of the Journal of Accounting Research, are fine examples, from years gone by, of what it means to be an excellent editor.

Editors who are reluctant to entertain new ways of looking at old questions are a second gripe. Many years ago I was asked to review a paper titled “The Last Word on …” (I will not fill in the dots because the author may still be alive.) But at the time I thought, what a strange title! Can any academic reasonably believe they are about to have the last say on any important accounting issue? We academics thrive on questioning previous works, and editors and their reviewers do well when they nurture this mindset.

My third gripe concerns editors who, perhaps unwittingly, send papers to reviewers with vested interests and the reviewers do not just politely return the paper to the editor and explain their conflict of interest. A fourth concerns editors and reviewers who discourage replications: their actions signal a disciplinary immaturity. I am referring to rejecting a paper that repeats an experiment, perhaps in another country, purely because it has been done before. There can be good reasons for replicating a study, for example if the external validity of the earlier study legitimately can be questioned (perhaps different outcomes are reasonably expected in another institutional setting), or if methodological advances indicate a likely design flaw. Last, there are editors and reviewers who do not entertain papers that fail to reject the null hypothesis. If the alternative is well-reasoned and the study is sound, and they can be big “ifs,” then failure to reject the null can be informative, for it may indicate where our knowledge is deficient and more work can be done.¹

It is not only editors and reviewers who test my emotional state. I do get a bit short when I review papers that fail to appreciate that the ideas they are dealing with have long yet uncited histories, sometimes in journals that are not based in North America. I am particularly unimpressed when there is an all-too-transparent and excessive citation of works by editors and potential reviewers, as if the judgments of these folks could possibly be influenced by that behavior. Other papers frustrate me when they are technically correct but demonstrate the trivial or the obvious, and fail to draw out the wider implications of their findings. Then there are authors who rely on unnecessarily coarse “control” variables which, if measured more finely, may well threaten their findings.² Examples are dummy variables for common law/code law countries, for “high” this and “low” that, for the presence or absence of an audit/nomination/compensation committee, or the use of an industry or sector variable without saying which features of that industry or sector are likely to matter and why a binary representation is best. In a nutshell, I fear there may be altogether too many dummies in financial accounting research!

Finally, there are the International Financial Reporting Standards (IFRS) papers that fit into the category of what I describe as “before and after studies.” They focus on changes following the adoption of IFRS promulgated by the London-based International Accounting Standards Board (IASB). A major concern, and I have been guilty too, is that these papers, by and large, do not deal adequately with the dynamics of what has been for many countries a period of profound change. In particular, there is a trade-off between (1) experimental noise from including too long a “before” and “after” history, and (2) not accommodating the process of change, because the “before” and “after” periods are way too short. Neither do they appear to control convincingly for other time-related changes, such as the introduction of new accounting and auditing standards, amendments to corporations laws and stock exchange listing rules, the adoption of corporate governance codes of conduct, more stringent compliance monitoring and enforcement mechanisms, or changes in, say stock, market liquidity as a result of the introduction of new trading platforms and protocols, amalgamations among market providers, the explosion in algorithmic trading, and the increasing popularity among financial institutions of trading in “dark pools.”

ON FINANCIAL ACCOUNTING STANDARD SETTING

I count a number of highly experienced financial accounting standard setters among my friends and professional acquaintances, and I have great regard for the difficulties they face in what they do. Nonetheless, I do wonder

. . .

ON RESEARCH MYOPIA

A not uncommon belief among academics is that we have been or can be a help to accounting standard setters. We may believe we can help by saying something important about whether a new financial accounting standard, or set of standards, is an improvement. Perhaps we feel this way because we have chosen some predictive criterion and been able to demonstrate a statistically reliable association between accounting information contained in some database and outcomes that are consistent with that criterion. Ball and Brown (1968, 160) explained the choice of criterion this way: “An empirical evaluation of accounting income numbers requires agreement as to what real-world outcome constitutes an appropriate test of usefulness.” Note their reference to a requirement to agree on the test. They were referring to the choice of criterion being important to the persuasiveness of their tests, which were fundamental and related to the “usefulness” of U.S. GAAP income numbers to stock market investors 50 years ago. As time went by and the financial accounting literature grew accordingly, financial accounting researchers have looked in many directions for capital market outcomes in their quest for publishable results.

Research on IFRS can be used to illustrate my point. Those who have looked at the consequences of IFRS adoption have mostly studied outcomes they believed would interest participants in equity markets and to a less extent parties to debt contracts. Many beneficial outcomes have now been claimed,⁴ consistent with benefits asserted by advocates of IFRS. Examples are more comparable accounting numbers; earnings that are higher “quality” and less subject to managers' discretion; lower barriers to international capital flows; improved analysts' forecasts; deeper and more liquid equity markets; and a lower cost of capital. But the evidence is typically coarse in nature; and so often the results are inconsistent because of the different outcomes selected as tests of “usefulness,” or differences in the samples studied (time periods, countries, industries, firms, etc.) and in research methods (how models are specified and variables measured, which estimators are used, etc.). The upshot is that it can be difficult if not impossible to reconcile the many inconsistencies, and for standard setters to relate reported findings to the judgments they must make.

Despite the many largely capital market outcomes that have been studied, some observers of our efforts must be disappointed that other potentially beneficial outcomes of adopting IFRS have largely been overlooked. Among them are the wider benefits to an economy that flow from EU membership (IFRS are required),⁵ or access to funds provided by international agencies such as the World Bank, or less time spent by CFOs of international companies when comparing the financial performance of divisions operating in different countries and on consolidating the financial statements of foreign subsidiaries, or labor market benefits from more flexibility in the supply of professionally qualified accountants, or “better” accounting standards from pooling the skills of standard setters in different jurisdictions, or less costly and more consistent professional advice when accounting firms do not have to deal with as much cross-country variation in standards and can concentrate their high-level technical skills, or more effective compliance monitoring and enforcement as regulators share their knowledge and experience, or the usage of IFRS by “millions (of small and medium enterprises) in more than 80 countries” (Pacter 2012), or in some cases better education of tomorrow's accounting professionals.⁶ I am sure you could easily add to this list if you wished.

In sum, we can help standard setters, yes, but only in quite limited ways.⁷ Standard setting is inherently political in nature and will remain that way as long as there are winners and losers when standards change. That is one issue. Another is that the results of capital markets studies are typically too coarse to be definitive when it comes to the detailed issues that standard setters must consider. A third is that accounting standards have ramifications extending far beyond public financial markets and a much more expansive view needs to be taken before we can even hope to understand the full range of benefits (and costs) of adopting IFRS.

Let me end my remarks with a question: Have Ball and Brown (1968)—and Beaver (1968) for that matter, if I can bring Bill Beaver into it—have we had too much influence on the research agenda to the point where other questions and methods are being overlooked?