Center for Financial Reporting and Auditing (CFRA)

Current topics of the CFRA

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Do pension obligations keep you awake at night?

Do pension obligations keep you awake at night?

The current low interest rates have wide-reaching economic consequences for corporations. On the one hand, debtors can take advantage when financing or re-financing investments. On the other hand, low interest rates can put a severe burden on the financial position of an entity, not least because of the effect on pension liabilities, with various consequences.  

More and more analysts and economists now assume that low interest rates will prevail for a long time despite the dangerous consequences they may entail. We believe it is worthwhile to elaborate on the matter from different perspectives. It is not simply an accounting issue or a matter for actuaries, but also involves many economic questions, financing challenges and tax implications.  

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.

Transparency and trust - the new auditor reporting model

Transparency and trust - the new auditor reporting model

The requirements governing auditor reporting have recently been substantially enlarged. A recent EU Regulation of 16 April 2014 among other things requires 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 measures 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.

Narrative disclosures

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 have affected overall financial reporting quality, for better or (sometimes) for worse.

 

Entrepreneurial accounting

Entrepreneurial accounting

In an increasingly regulated corporate world, accounting has become an extensive subject that is vital for companies, but in which only specialists hold sufficient expertise. Start-up firms enjoy exemptions from many regulatory requirements, but still need to implement accounting systems early on in their lifecycle and as they grow.  

We aim to investigate the venturing environment, where accounting systems have not yet been established or formalized, or are in the development process. Different actors with a different degree of accounting expertise influence therefore the emerging design of accounting systems that is needed not only to comply with regulatory requirements (e.g. taxation), but also for internal decision-making. This knowledge disparity leads to a significant expertise asymmetry in the start-up’s environment, potentially provoking power games that can hinder the core business and therefore the growth of the company.  

Entrepreneurial accounting research is relevant for society in broader terms, because the European (and worldwide) venture market is constantly growing, increasingly contributing to national economies. It provides valuable insights in how to facilitate start-ups’ compliance with regulation, while also identifying areas where entrepreneurs may be relieved from requirements. Hence, our research is also policy-relevant in that it can help inform legislators on how to create an enabling entrepreneurial economy.