Description
DuringtheFallof2014,IhadtheopportunitytoparticipateintheAOSConferenceonAccountingEstimates.Theareaofaccount-ingestimatesisaveryimportantandtimelytopic.Changesinfi-nancialreportingstandardsandchangesinthenatureandcom-plexityoftransactionshaveresultedinaccountingestimatesbe-comingmorepervasiveinfinancialreporting.Thesechangeshaveresultedinanincreasedfocusonprocessesformakingaccountingestimatesandinternalcontrolsandgovernancerelatedtoaccout-ingestimates.
Accounting, Organizations and Society 46 (2015) 5–7
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
A practitioners perspective: 2014 AOS Conference on Accounting
Estimates
William Platt
1,2
Deloitte & Touche LLP, UK
During the Fall of 2014, I had the opportunity to participate in
the AOS Conference on Accounting Estimates. The area of account-
ing estimates is a very important and timely topic. Changes in ?-
nancial reporting standards and changes in the nature and com-
plexity of transactions have resulted in accounting estimates be-
coming more pervasive in ?nancial reporting. These changes have
resulted in an increased focus on processes for making accounting
estimates and internal controls and governance related to account-
ing estimates.
Accompanying the increased focus on the process, internal con-
trols and governance related to accounting estimates, the audit-
ing of accounting estimates has seen increased focus and complex-
ity. In summarizing its inspection results the Public Company Ac-
counting Oversight Board (PCAOB) found one of the three most fre-
quent and recurring audit de?ciencies identi?ed in the 2013 and
2014 inspection cycles related to auditing “accounting estimates
and fair value measurements, particularly related to testing of key
data and signi?cant assumptions used by management to develop
estimates”. (PCAOB, 2015, p. 3).
Accounting estimates are also inherently subject to bias. At
times, the incorporation of bias into the process to make an ac-
counting estimate will improve the quality of the accounting esti-
mate. For example knowledge gained from prior experience with
similar items could result in incorporating such history in the cur-
rent process and often produce a better estimate. However, to the
extent that other factors cause a bias that is either overly opti-
mistic or overly conservative, it may result in an estimate that is
E-mail address: [email protected]
1
About Deloitte: Deloitte refers to one or more of Deloitte Touche Tohmatsu Lim-
ited, a UK private company limited by guarantee (“DTTL”), its network of member
?rms, and their related entities. DTTL and each of its member ?rms are legally sepa-
rate and independent entities. DTTL (also referred to as “Deloitte Global”) does not
provide services to clients. Please see www.deloitte.com/about for a detailed de-
scription of DTTL and its member ?rms. Please see www.deloitte.com/us/about for
a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Cer-
tain services may not be available to attest clients under the rules and regulations
of public accounting.
2
The views expressed herein are the views of Mr. Platt and do not necessarily
re?ect the views of Deloitte & Touche LLP.
not the best estimate.
Unfortunately, many practitioners are not aware of the valu-
able contribution that academic research can make to improv-
ing ?nancial reporting and audit quality. The conference focused
on six papers, each of which can each make a positive contribu-
tion toward improving ?nancial reporting and audit quality. The
most impactful academic research disproves, or more often, chips
away at a commonly held belief; introduces a line of thinking
that is new or innovative; and/or helps us learn more about our-
selves and others, helping us to improve the manner in which
we act in the future. Each of the six papers makes a contribu-
tion in one or more of these areas and is worthy of considera-
tion by practitioners and others involved in our ?nancial reporting
ecosystem.
3
I want to express my thanks to the authors of each of the
six papers for their valuable contributions related to this im-
portant topic. In re?ecting on the papers, I have grouped them
into three groups – ?rst, the process used to develop account-
ing estimates; second, the impact of disclosures on accounting
estimates; and, third, the governance related to accounting es-
timates. In addition, one of the papers provides additional per-
spectives on the mixed attributes model (historical cost/fair value)
that currently exists in our ?nancial reporting framework, bring-
ing new insights into the bene?ts of using fair value measure-
ments. Below, I attempt to provide a few thoughts on how
each paper contributes to these areas and provide a perspec-
tive on implications for participants in the ?nancial reporting
ecosystem.
1. The process used to develop accounting estimates
Like many practitioners, I have long held the view that a
bottom-up (in other words – disaggregated) approach towards
preparing (or auditing) a forecast or an estimate generally would
3
In this context, the ?nancial reporting ecosystem is intended to be thought of
holistically and includes accounting and auditing standard setters, ?nancial state-
ment preparers, audit practitioners, regulators, ?nancial statement users and other
stakeholders.http://dx.doi.org/10.1016/j.aos.2015.10.007
0361-3682/© 2015 Published by Elsevier Ltd.
6 W. Platt / Accounting, Organizations and Society 46 (2015) 5–7
result in a more “accurate” measurement than a top-down (aggre-
gated) approach.
Two papers focus on the impact of a disaggregated process used
to develop (or audit) accounting estimates.
In “The effects of forecast type and performance-based incen-
tives on the quality of management forecasts”, Chen, Rennekamp,
and Zhou (2015) attempt to dispel the widely held view that using
a disaggregated approach (vs. an aggregated approach) will pro-
duce a more accurate prediction. By introducing the impact of per-
formance based incentives they predict a disaggregated approach
will result in managers incorporating a greater level of optimism
into their forecasts. Given that forecasts are a key assumption in
many estimates, it raises the question of the impact of forecast op-
timism on accounting estimates (presumably introducing an opti-
mistic bias into estimates also).
In “Construal instructions and professional skepticism in eval-
uating complex estimates”, Rasso (2015) ?nds that auditors that
have been instructed to think more broadly (that is look at the big
picture/end result) will exhibit more skeptical behavior than audi-
tors that are instructed to look at a lower level and conclude on
details within the estimation process.
Both of these papers raise interesting questions around how
preparers and auditors can continue to focus on the details of their
forecast/estimation processes, but also take a step back for an in-
dependent, objective assessment of the end result – does the out-
come of the process make sense on an overall basis?
These papers both challenge my long-held view on the superi-
ority of a disaggregated approach towards preparing and auditing
accounting estimates. It would be interesting to explore whether
a process which incorporates an assessment and analysis of why
the ?nal result makes sense would remove the bias and intro-
duce skeptical behaviors into preparing and auditing accounting
estimates, including cases in which a disaggregated estimation ap-
proach is initially used.
2. The impact of disclosures on accounting estimates
The overriding objective of disclosures frameworks is typically
to provide information that will be useful to investors and others
that use ?nancial statements (FASB, 2014).
Two papers explore the impact of disclosures on the effective-
ness of processes used by management.
In “Disclosure transparency about activity in valuation al-
lowance and reserve accounts and accruals-based earnings man-
agement”, Cassell, Myers, and Seidel (2015) explore an interesting
perspective, that the presence of disclosures may also decrease the
level of discretion/earnings management in the related estimate.
In “The impact of risk modeling on the market perception of
banks’ estimated fair value gains and losses for ?nancial instru-
ments”, Bhat and Ryan (2015) ?nd that ?rms that disclose model-
ing activities experience enhanced returns-relevance of unrealized
fair value gains and losses.
These two papers raise the question of whether a focus of stan-
dard setting for disclosures should also incorporate the concept of
the impact of disclosure on the quality of ?nancial information.
This is an interesting aspect of disclosure that is worthy of further
consideration by academics, standard setters and other participants
in the ?nancial reporting ecosystem.
3. Governance related to accounting estimates
Audit committees play an important role in the oversight of the
?nancial reporting process/internal control systems of companies,
including the processes and internal controls related to accounting
estimates.
In “The effect of an Audit Judgment Rule on audit commit-
tee members’ professional skepticism: The case of accounting es-
timates”, Kang, Trotman, and Trotman (2015) explore the impact
of an Audit Judgment Rule on the professional skepticism exhib-
ited by audit committee members. Similar to the two papers on
the process used to develop an accounting estimate, the authors
explore if an Audit Judgment Rule will hinder or enhance the pro-
cess used by audit committees in their oversight of management
estimates.
This paper sets the stage for further research into increasing
the effectiveness of audit committees during a period in which the
responsibilities of audit committees in many companies are being
expanded.
4. Use of fair values in ?nancial reporting
While we have seen an evolution to incorporate more fair
value measures into our ?nancial reporting model, we still have
a mixed measurement model in which some accounts are mea-
sured at historical cost and some at fair value. Notwithstanding
the signi?cant evolution toward fair-value-based reporting, there
continues to be signi?cant debate around the bene?ts of continu-
ing to use historical cost accounting for certain ?nancial statement
measurements.
In their paper entitled “The effect of alternative accounting
measurement bases on investors’ assessments of managers’ stew-
ardship”, Anderson, Brown, Hodder, and Hopkins (2015) challenge
the assumption that historical cost basis information is better
than fair value in assessing managers’ stewardship and argue that
amortized-historical-cost-based ?nancial information is not always
better than fair-value-based information in assessing stewardship.
The paper calls for research that investigates “not whether, but
under what conditions, amortized-cost-based ?nancial statements
or fair-value-based ?nancial statements are likely to provide more
useful information” (p. 15).
While the debate over the best measurement basis is likely to
continue for some time, and we will continue to have a mixed
measurement model – this paper explores a topic which will be
useful to standard setters.
5. In conclusion
Each of the accompanying six papers is an excellent example of
how academic research can provide valuable information and per-
spectives for standard setters, ?nancial statement preparers, those
involved in governance and audit practitioners.
I would like to extend a special thanks to Lisa Koonce, Mark
Peecher, and Hun Tong Tan who organized the conference, as well
as the discussants for each of the papers.
Participation in the conference and reading each of the papers
provides me with a renewed sense of con?dence in the tremen-
dous value that academic research will have on ?nancial reporting
and auditing in the future.
References
Anderson, S., Brown, J. L., Hodder, L., & Hopkins, P. E. (2015). The effect of alterna-
tive accounting measurement bases on investors’ assessments of management
stewardship. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.007.
W. Platt / Accounting, Organizations and Society 46 (2015) 5–7 7
Bhat, G., & Ryan, S. G. (2015). The impact of risk modeling on the market percep-
tion of banks’ estimated fair value gains and losses for ?nancial instruments.
Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.04.004.
Cassell, C. A., Myers, L. A., & Seidel, T. A. (2015). Disclosure transparency about ac-
tivity in valuation allowance and reserve accounts and accruals-based earnings
management. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.004.
Chen, C. X., Rennekamp, K. M., & Zhou, F. H. (2015). The effects of forecast type and
performance-based incentives on the quality of management forecasts. Account-
ing, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.002.
Financial Accounting Standards Board (FASB) (2014). Proposed statement of ?nancial
accounting concepts – Conceptual framework for ?nancial reporting: Ch. 8: Notes
to ?nancial statements. Norwalk, CT: FASB.
Kang, Y. J., Trotman, A. J., & Trotman, K. T. (2015). The effect of an audit judgment
rule on audit committees’ questioning on accounting estimates. Accounting, Or-
ganizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.001.
Public Company Accounting Oversight Board (PCAOB) (2015). Staff inspection brief:
Vol. 2015/2. Washington, DC: PCAOB.
Rasso, J. (2015). Construal instructions and professional skepticism in evaluating
complex estimates. Accounting, Organizations and Society.http://dx.doi.org/10.
1016/j.aos.2015.03.003.
doc_231138551.pdf
DuringtheFallof2014,IhadtheopportunitytoparticipateintheAOSConferenceonAccountingEstimates.Theareaofaccount-ingestimatesisaveryimportantandtimelytopic.Changesinfi-nancialreportingstandardsandchangesinthenatureandcom-plexityoftransactionshaveresultedinaccountingestimatesbe-comingmorepervasiveinfinancialreporting.Thesechangeshaveresultedinanincreasedfocusonprocessesformakingaccountingestimatesandinternalcontrolsandgovernancerelatedtoaccout-ingestimates.
Accounting, Organizations and Society 46 (2015) 5–7
Contents lists available at ScienceDirect
Accounting, Organizations and Society
journal homepage: www.elsevier.com/locate/aos
A practitioners perspective: 2014 AOS Conference on Accounting
Estimates
William Platt
1,2
Deloitte & Touche LLP, UK
During the Fall of 2014, I had the opportunity to participate in
the AOS Conference on Accounting Estimates. The area of account-
ing estimates is a very important and timely topic. Changes in ?-
nancial reporting standards and changes in the nature and com-
plexity of transactions have resulted in accounting estimates be-
coming more pervasive in ?nancial reporting. These changes have
resulted in an increased focus on processes for making accounting
estimates and internal controls and governance related to account-
ing estimates.
Accompanying the increased focus on the process, internal con-
trols and governance related to accounting estimates, the audit-
ing of accounting estimates has seen increased focus and complex-
ity. In summarizing its inspection results the Public Company Ac-
counting Oversight Board (PCAOB) found one of the three most fre-
quent and recurring audit de?ciencies identi?ed in the 2013 and
2014 inspection cycles related to auditing “accounting estimates
and fair value measurements, particularly related to testing of key
data and signi?cant assumptions used by management to develop
estimates”. (PCAOB, 2015, p. 3).
Accounting estimates are also inherently subject to bias. At
times, the incorporation of bias into the process to make an ac-
counting estimate will improve the quality of the accounting esti-
mate. For example knowledge gained from prior experience with
similar items could result in incorporating such history in the cur-
rent process and often produce a better estimate. However, to the
extent that other factors cause a bias that is either overly opti-
mistic or overly conservative, it may result in an estimate that is
E-mail address: [email protected]
1
About Deloitte: Deloitte refers to one or more of Deloitte Touche Tohmatsu Lim-
ited, a UK private company limited by guarantee (“DTTL”), its network of member
?rms, and their related entities. DTTL and each of its member ?rms are legally sepa-
rate and independent entities. DTTL (also referred to as “Deloitte Global”) does not
provide services to clients. Please see www.deloitte.com/about for a detailed de-
scription of DTTL and its member ?rms. Please see www.deloitte.com/us/about for
a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Cer-
tain services may not be available to attest clients under the rules and regulations
of public accounting.
2
The views expressed herein are the views of Mr. Platt and do not necessarily
re?ect the views of Deloitte & Touche LLP.
not the best estimate.
Unfortunately, many practitioners are not aware of the valu-
able contribution that academic research can make to improv-
ing ?nancial reporting and audit quality. The conference focused
on six papers, each of which can each make a positive contribu-
tion toward improving ?nancial reporting and audit quality. The
most impactful academic research disproves, or more often, chips
away at a commonly held belief; introduces a line of thinking
that is new or innovative; and/or helps us learn more about our-
selves and others, helping us to improve the manner in which
we act in the future. Each of the six papers makes a contribu-
tion in one or more of these areas and is worthy of considera-
tion by practitioners and others involved in our ?nancial reporting
ecosystem.
3
I want to express my thanks to the authors of each of the
six papers for their valuable contributions related to this im-
portant topic. In re?ecting on the papers, I have grouped them
into three groups – ?rst, the process used to develop account-
ing estimates; second, the impact of disclosures on accounting
estimates; and, third, the governance related to accounting es-
timates. In addition, one of the papers provides additional per-
spectives on the mixed attributes model (historical cost/fair value)
that currently exists in our ?nancial reporting framework, bring-
ing new insights into the bene?ts of using fair value measure-
ments. Below, I attempt to provide a few thoughts on how
each paper contributes to these areas and provide a perspec-
tive on implications for participants in the ?nancial reporting
ecosystem.
1. The process used to develop accounting estimates
Like many practitioners, I have long held the view that a
bottom-up (in other words – disaggregated) approach towards
preparing (or auditing) a forecast or an estimate generally would
3
In this context, the ?nancial reporting ecosystem is intended to be thought of
holistically and includes accounting and auditing standard setters, ?nancial state-
ment preparers, audit practitioners, regulators, ?nancial statement users and other
stakeholders.http://dx.doi.org/10.1016/j.aos.2015.10.007
0361-3682/© 2015 Published by Elsevier Ltd.
6 W. Platt / Accounting, Organizations and Society 46 (2015) 5–7
result in a more “accurate” measurement than a top-down (aggre-
gated) approach.
Two papers focus on the impact of a disaggregated process used
to develop (or audit) accounting estimates.
In “The effects of forecast type and performance-based incen-
tives on the quality of management forecasts”, Chen, Rennekamp,
and Zhou (2015) attempt to dispel the widely held view that using
a disaggregated approach (vs. an aggregated approach) will pro-
duce a more accurate prediction. By introducing the impact of per-
formance based incentives they predict a disaggregated approach
will result in managers incorporating a greater level of optimism
into their forecasts. Given that forecasts are a key assumption in
many estimates, it raises the question of the impact of forecast op-
timism on accounting estimates (presumably introducing an opti-
mistic bias into estimates also).
In “Construal instructions and professional skepticism in eval-
uating complex estimates”, Rasso (2015) ?nds that auditors that
have been instructed to think more broadly (that is look at the big
picture/end result) will exhibit more skeptical behavior than audi-
tors that are instructed to look at a lower level and conclude on
details within the estimation process.
Both of these papers raise interesting questions around how
preparers and auditors can continue to focus on the details of their
forecast/estimation processes, but also take a step back for an in-
dependent, objective assessment of the end result – does the out-
come of the process make sense on an overall basis?
These papers both challenge my long-held view on the superi-
ority of a disaggregated approach towards preparing and auditing
accounting estimates. It would be interesting to explore whether
a process which incorporates an assessment and analysis of why
the ?nal result makes sense would remove the bias and intro-
duce skeptical behaviors into preparing and auditing accounting
estimates, including cases in which a disaggregated estimation ap-
proach is initially used.
2. The impact of disclosures on accounting estimates
The overriding objective of disclosures frameworks is typically
to provide information that will be useful to investors and others
that use ?nancial statements (FASB, 2014).
Two papers explore the impact of disclosures on the effective-
ness of processes used by management.
In “Disclosure transparency about activity in valuation al-
lowance and reserve accounts and accruals-based earnings man-
agement”, Cassell, Myers, and Seidel (2015) explore an interesting
perspective, that the presence of disclosures may also decrease the
level of discretion/earnings management in the related estimate.
In “The impact of risk modeling on the market perception of
banks’ estimated fair value gains and losses for ?nancial instru-
ments”, Bhat and Ryan (2015) ?nd that ?rms that disclose model-
ing activities experience enhanced returns-relevance of unrealized
fair value gains and losses.
These two papers raise the question of whether a focus of stan-
dard setting for disclosures should also incorporate the concept of
the impact of disclosure on the quality of ?nancial information.
This is an interesting aspect of disclosure that is worthy of further
consideration by academics, standard setters and other participants
in the ?nancial reporting ecosystem.
3. Governance related to accounting estimates
Audit committees play an important role in the oversight of the
?nancial reporting process/internal control systems of companies,
including the processes and internal controls related to accounting
estimates.
In “The effect of an Audit Judgment Rule on audit commit-
tee members’ professional skepticism: The case of accounting es-
timates”, Kang, Trotman, and Trotman (2015) explore the impact
of an Audit Judgment Rule on the professional skepticism exhib-
ited by audit committee members. Similar to the two papers on
the process used to develop an accounting estimate, the authors
explore if an Audit Judgment Rule will hinder or enhance the pro-
cess used by audit committees in their oversight of management
estimates.
This paper sets the stage for further research into increasing
the effectiveness of audit committees during a period in which the
responsibilities of audit committees in many companies are being
expanded.
4. Use of fair values in ?nancial reporting
While we have seen an evolution to incorporate more fair
value measures into our ?nancial reporting model, we still have
a mixed measurement model in which some accounts are mea-
sured at historical cost and some at fair value. Notwithstanding
the signi?cant evolution toward fair-value-based reporting, there
continues to be signi?cant debate around the bene?ts of continu-
ing to use historical cost accounting for certain ?nancial statement
measurements.
In their paper entitled “The effect of alternative accounting
measurement bases on investors’ assessments of managers’ stew-
ardship”, Anderson, Brown, Hodder, and Hopkins (2015) challenge
the assumption that historical cost basis information is better
than fair value in assessing managers’ stewardship and argue that
amortized-historical-cost-based ?nancial information is not always
better than fair-value-based information in assessing stewardship.
The paper calls for research that investigates “not whether, but
under what conditions, amortized-cost-based ?nancial statements
or fair-value-based ?nancial statements are likely to provide more
useful information” (p. 15).
While the debate over the best measurement basis is likely to
continue for some time, and we will continue to have a mixed
measurement model – this paper explores a topic which will be
useful to standard setters.
5. In conclusion
Each of the accompanying six papers is an excellent example of
how academic research can provide valuable information and per-
spectives for standard setters, ?nancial statement preparers, those
involved in governance and audit practitioners.
I would like to extend a special thanks to Lisa Koonce, Mark
Peecher, and Hun Tong Tan who organized the conference, as well
as the discussants for each of the papers.
Participation in the conference and reading each of the papers
provides me with a renewed sense of con?dence in the tremen-
dous value that academic research will have on ?nancial reporting
and auditing in the future.
References
Anderson, S., Brown, J. L., Hodder, L., & Hopkins, P. E. (2015). The effect of alterna-
tive accounting measurement bases on investors’ assessments of management
stewardship. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.007.
W. Platt / Accounting, Organizations and Society 46 (2015) 5–7 7
Bhat, G., & Ryan, S. G. (2015). The impact of risk modeling on the market percep-
tion of banks’ estimated fair value gains and losses for ?nancial instruments.
Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.04.004.
Cassell, C. A., Myers, L. A., & Seidel, T. A. (2015). Disclosure transparency about ac-
tivity in valuation allowance and reserve accounts and accruals-based earnings
management. Accounting, Organizations and Society.http://dx.doi.org/10.1016/j.
aos.2015.03.004.
Chen, C. X., Rennekamp, K. M., & Zhou, F. H. (2015). The effects of forecast type and
performance-based incentives on the quality of management forecasts. Account-
ing, Organizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.002.
Financial Accounting Standards Board (FASB) (2014). Proposed statement of ?nancial
accounting concepts – Conceptual framework for ?nancial reporting: Ch. 8: Notes
to ?nancial statements. Norwalk, CT: FASB.
Kang, Y. J., Trotman, A. J., & Trotman, K. T. (2015). The effect of an audit judgment
rule on audit committees’ questioning on accounting estimates. Accounting, Or-
ganizations and Society.http://dx.doi.org/10.1016/j.aos.2015.03.001.
Public Company Accounting Oversight Board (PCAOB) (2015). Staff inspection brief:
Vol. 2015/2. Washington, DC: PCAOB.
Rasso, J. (2015). Construal instructions and professional skepticism in evaluating
complex estimates. Accounting, Organizations and Society.http://dx.doi.org/10.
1016/j.aos.2015.03.003.
doc_231138551.pdf