Finance
Advice to the Next US President: Accounting
Our fiscal health is in shambles. Accounting can help fix it, says Chazen Senior Scholar Shivaram Rajgopal.
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Problems in financial analysis and accounting are inextricably linked. Equity analysis relies on sound financial reporting but also recognizes and adapts to poor accounting and reporting. Events of the past several years have caused many people to question the quality of financial reporting and equity analysis. The economic consequences of malpractice have been significant, leading to a clear call for reform.
Located in a leading business school with a mandate for independent research, CEASA is positioned to lead a discussion of issues with an emphasis on sound conceptual thinking and objectivity.
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For more information about CEASA, including sponsorship opportunities, please contact ceasa@gsb.columbia.edu.
Initiatives & Resources
CEASA maintains the Accounting Design Project, Accounting Standards, and Security Analysis information.
The Accounting Design Project
The project focuses on research at the heart of the academic accounting endeavor: Evaluating and designing accounting for users, whether investors, equity or credit analysts, management, or broader constituents. In simple terms, the project seeks to understand what is “good accounting” and “bad accounting.” The normative focus brings attention to accounting under US GAAP and IFRS, aiming to enhance it where necessary. Focusing on users and their decisions brings research to practice. Not all research will have that immediate effect, but that should be the orientation.
Accounting Standards
Current accounting practice expenses many investments in intangible assets to the income statement, confusing earnings from current revenues with investments to gain future revenues. This has led to increasing calls to book those investments to the balance sheet. Drawing on the relevant research, this paper proposes solutions for the accounting for intangible assets that contrast with balance sheet recognition, and compares them to current practice and the IFRS standards that dictate practice. Key is the recognition that an accounting solution comes from a double-entry system which produces an income statement as well as a balance sheet, and that has features that both enable and limit the information that can be conveyed about the value in intangible assets.
Security Analysis Series
CEASA has been working in Security Analysis with the launch of our series at the 2005 roundtable that brought together a wide group of policymakers from around the country.
Insights
Research
Managers' Tools to Meet Earnings Management Incentives
Earnings management involves actions by managers to influence reported financial results, often to present a more favorable view of company performance. In this chapter, we discuss the tools available to managers for earnings management. We first consider manipulation of net income through accruals and real earnings management. Then, we disaggregate earnings management along the income statement, comparing manipulation of revenue, expenses, and gains and losses.
Right-of-Use Assets and the Prediction of Revenue
ASC 842, which requires balance sheet recognition of right-of-use (ROU) lease assets, resulted in a large increase in reported assets since 2019, thus impairing the time-series consistency of metrics that use assets (e.g., asset turnover). This paper shows that ROU assets can be estimated quite precisely using lease disclosure. Adding the estimated ROU asset for pre-ASC 842 observations substantially improves the ability of operating assets to explain sales. It also increases the ability of growth in operating assets to predict sales growth and explain analysts’ revenue growth forecasts.