Accounting at a Tipping Point

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• Accounting at a Tipping Point
• Accounting Program Leadership Group Meeting
• February 9, 2009
• Sue Haka, AAA President (suehaka_at_msu.edu )

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• The Accounting Academy Is At a Tipping Point
• The Basic Accounting
• We Have Grown-up With
• Is At a Cross Roads
• At the point of significant change

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• Four signs of potential decline
• Current faculty demographics
• Accounting doctoral supply
• Business school policies
• Accounting research issues

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• I. Current Faculty Demographics

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• II. Accounting Doctoral Production

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• Current demographics of professoriate suggest we
  could tip into decline
• The number of accounting faculty are eroding
• A large majority of current faculty are near
  retirement
• Supply of doctorates is inadequate (demand is
  estimated at roughly 500 per year for the next 5
  10 years, while available supply is estimated
  to be about half of that).

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• III. Other Related Business School Issues
• Dominance of MBA programs at doctoral granting
  schools are pushing out doctoral programs
• Supply of PhD slots in programs is eroding
• Accountings supporting role in the MBA
• Business school financial pressures (accounting
  salaries are relatively high)

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• IV. Accounting Research Issues
• Lack of research diversity
• We are too hard on ourselves-reviewers and review
  process
• We do not cite each others research like other
  disciplines (lowers citations counts)
• Need to put forth continuous effort to place
  accounting journals in Thompson SSCIcitation
  index

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• Four opportunities for renewal
• Increasing student interest in accounting
• Increasing global awareness and cooperation
  regarding accounting
• Increasing technological availability
• Demand for accounting thought leadership

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• Demand for Thought Leadership
• Assets/Liabilities vs. Revenue/Expense Model
• Fair Value Controversy
• True and Fair vs. In Conformity With
• IFRS
• XBRL initiative

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• I. Assets/Liabilities vs. Revenue/Expense Model
• A 2003 SEC report supported the adoption of a
  principles-based accounting system and
  simultaneously rejected the revenue/expense
  accounting model in favor of a model focused on
  assets/liability accounting.
• This shift to the balance sheet as the primary
  accounting statement is supported by standard
  setters1, but has generated controversy.
• 1 See the IASB-FASB joint discussion paper
  Preliminary Views on Financial Statement
  Presentation posted at http//go.iasb.org/FSP-DP
  or http//www.fasb.org/draft/DP_Financial_Stateme
  nt_Presentation.pdf comment period ends April
  14, 2009.

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• I. Assets/Liabilities vs. Revenue/Expense Model
• Abandoning principles such as matching and
  conservatism unsettles accountants and business
  folks.
• Some assert that the asset/liability model
  combined with increasing reliance on fair values
  will result in increased reliance on rules rather
  than principles based approach called for by the
  SEC and the IASB1.
• 1 Benston, G., M. Bromwich, and A.
  Wagenhoffer, Principles-Versus Rules-Based
  Accounting Standards The FASBs Standard Setting
  Strategy, ABACUS, (2) 42, 2006, pp. 165-188.

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• II. Continuing Fair Value Controversy
• Fans maintain that fair-value accounting rules
  result in greater transparency for investors.
• IASB Chairman David Tweedie says the "beauty of
  fair value accounting...is that it brought the
  credit crisis very very quickly into the open."
  Tweedie also said that "the disaster would be
  even worse without fair value accounting1.
• 1 Could Bank Rules End the Fair Value Debate?
  by Marie Leone and Tim Reason - CFO.com US,
  November 12, 2008.

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• II. Continuing Fair Value Controversy
• Critics such as former Federal Deposit Insurance
  Corp. Chief, William Isaac, argue that fair value
  accounting is intensifying the financial-sector
  crisis.
• "Mark-to-market accounting has been extremely
  and needlessly destructive of bank capital in the
  past year, and is a major cause of the current
  credit crisis and economic downturn," Isaac said
  in his remarks. 2
• 2 Former FDIC Chief Fair Value Caused the
  Crisis by David M. Katz - CFO.com US October
  29, 2008.

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• III. True and Fair vs. In Conformity With
• For the assets/liabilities model and fair values
  to work, auditing must play a significant role.
  Fair values invite manipulation and are difficult
  to audit.
• Many advocate that the audit profession should
  adopt a true and fair override to encourage
  auditors to use professional judgment to ensure
  financial reporting is representationally
  faithful to the underlying economic substance of
  events.

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• III. True and Fair vs. In Conformity With
• Current auditing standards, by reference to Rule
  203 of the AICPA Code of Professional Conduct
  converts auditing to a rules based approach and
  has not been interpreted to allow for an
  override1. A true and fair override may also
  mitigate against the increasing need for rules in
  a principles based approach to standard setting.
• 1 The rule states that present fairly
  implies that the application of officially
  established accounting principles almost always
  results in the fair presentation of financial
  position. The almost always qualifier has not
  been interpreted to allow for an override.

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• IV. IFRS a Growing Epidemic?

Over 100 countries require or permit IFRS
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• IV. IFRS A Growing Epidemic
• In November 2008 the SEC released its roadmap
  outlining a proposal for domestic issuers to
  adopt IFRS by 2014.
• There is huge positive IFRS support by large
  public accounting firms, some academics 1 (but
  not others 2) and multinational corporations.
• 1 Response to the SEC Release Acceptance from
  Foreign Private Issuers of Financial Statements
  Prepared in Accordance with International
  Financial Reporting Standards without
  Reconciliation To U.S. GAAP File No. S71307,
  P. E. Hopkins et al. (AAAs Financial Accounting
  and Reporting Section Financial Reporting Policy
  Committee) Accounting Horizons 22(2), 223 (2008).
• 2 A Perspective on the SEC's Proposal to
  Accept Financial Statements Prepared in
  Accordance with International Financial Reporting
  Standards (IFRS) without Reconciliation to U.S.
  GAAP, by AAA Financial Accounting Standards
  Committee, K. Jamal et al., Accounting Horizons,
  22 (2), 241 (2008).

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• IV. IFRS a Growing Epidemic
• Many are not convinced about global accounting
  standards
• Charles Niemeier, an influential member of the
  PCAOB, said the switch to IFRS by 2014 could
  squander comparability among US financial
  statements and impede the ability of the
  regulators and auditors to do their jobs1.
• Mary Schapiro (nominee for SEC Chair) stated in
  congressional hearings she will not necessarily
  feel bound by the existing road map thats out
  for comment and highlighted a lack of
  consistency in the application of IFRS, the
  implementation cost, and the independence of the
  IASB--her greatest concern about IFRS2.
• 1 PCAOB Member Slams Stateside IFRS Plans, by
  Penny Sukhraj, Accountancy Age, 11 Sep 2008.
• 2 SEC Nominee Pledges to Revitalize
  Enforcement, Has concerns About IFRS by Mathew
  G. Lamoreaux, Journal of Accountancy, January 16,
  2009.

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• V. XBRL The silent revolution
• On Dec. 17, 2008 the SEC announced the use of
  XBRL will be required for the largest public
  companies (5 B) as early as the second quarter
  of 2009 1
• Once in the SEC's Edgar database, every
  organization and individual will be able to
  research and benchmark each firms cheaply and
  readily available financial information
• 1 http//www.xbrl.us/USGAAPPUBLICREVIEW/Pages/de
  fault.aspx

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or a product of the financial excesses of the
last 10 years?
Is this tipping point a coincidence?
We need your thought leadership!!
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• Demand for Thought Leadership Opportunities for
  academics
• Research
• Participation in FASB/SEC/IASB/IMA/PCAOB/GASB
  decision making processes
• Classroom conversations
• Conversations with each other

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• AAA long-run strategic vision focuses on Thought
  Leadership with three major initiatives
• Grow membershipGoing Global
• Increase the member value proposition
• Recruit and engage thought leadership through
  aaaCommons

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• Opportunities for Academics
• I. Research
• Assets Liabilities Model implications for how
  the firm is managed i.e. decision making,
  management compensation, planning/budgeting, etc.
• Fair Value measurement management compensation
  contracting and estimating fair values
• IFRS implications for management contracting,
  budgeting, etc.
• XBRL interesting data should become available
  (16000 tags allowing easy data collection)
• Research Hive on the aaaCommons

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• Opportunities for Academics
• II. Participation in creating accounting used by
  society--
• FASB, IASB, SEC, PCAOB, IMA, GASB, Congress, etc.
  welcome input from academics on exposure drafts
  and as members of advisory groups.
• III. Classroomdiscussions, syllabi, cases,
  exercises, textbooks, etc. (shared on the commons)

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• Tipping Points are affected by
• Contagion effects (messengers)
• Connectors and Thought leaders--you
• Stickiness (salient message-fundamental
  accounting changes)
• Context matters (current economic environment
  calls for engagement)
• Testing to see what works (continuous research)
• With the slightest push in just the right
  placeit can be tipped (p. 259)
• Ideas and quote from The Tipping Point by
  Malcolm Gladwell, Little, Brown and Company New
  York, 2002.

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• Together, We Can Be The Difference
• How our accounting tipping points are resolved
  depends on us to
• Provide thought leadership
• To students, practitioners, society
• Through our own activities (i.e. committee
  reports, blogging, research, textbooks,
  practitioner articles, editorials, etc.)
• Actively advocate engagement with your Accounting
  PhD students
• Take discussions to the classroom
• Promote an academic perspective among
  undergraduates
• Get involved
• Contact accounting leaders
• Volunteer

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COME TO THE ANNUAL MEETING IN AUGUST!