What choices do accountants make when preparing financial reports?

December 10, 2015

What choices do controllers make when preparing their financial reports and which factors influence these choices? Dr. Therese de Groot wrote a PhD thesis on the accounting choices of controllers. "My research shows that the final choice is not determined by one or several factors, but by the whole setting in which a controller works. It also appears that the considerations underlying the choice are sometimes more interesting than the final choice itself."

De Groot did her PhD at TIAS, her promotores were Prof. dr. Arco van de Ven RA and Prof. dr. ir. Michael Corbey.

For non-financials, figures, such as the profits of a business, always seem "hard" and objective. But when putting these figures together, choices often have to be made which contain a subjective element, for example, with regard to the valuation of items (such as stocks) and possible risks (such as claims).

De Groot: "I have had to deal with annual or financial reports in different roles. I prepared them myself, but I also advised controllers regarding reporting choices. I was curious about how the controllers made their choices and what factors influenced them."  

How did you do the research?

"There was very little in the professional literature on this subject. There has been research into earnings management, but that is about profit management, which are actions aimed at guiding the results in a particular direction. My research is broader and it focuses on accounting choices in general and not specifically on choices to do with profit management. Moreover, virtually all studies are based on the quantitative analysis of annual statements of accounts or on experiments. The reality in which the controller works is much more complex than an experimental setting and the question is: How do the controllers make their choices when drawing up financial reports. 

I have reviewed the financial reports of 18 business units. I have also conducted interviews with the controllers of these business units. This yielded 98 accounting choices that I have analyzed further. I looked at how this choice came about and what factors played a role. There were also interviews with corporate employees and there have been two group sessions."

What are the results?

"The choices can be split in two categories: "doing nothing" and "making adjustments." You may wonder whether you would need five years of research to discover that. Certainly, the choice of doing nothing seems unattractive at first sight. But, it appears that the considerations behind a choice are sometimes more interesting than the final choice itself. A controller can send a signal that the external conditions have changed and decide whether a new or amended provision is required. When it is finally decided that it is not (yet) necessary to change anything, no adjustment is made. This consideration is not reflected in the final figures.

On the other hand, choices are sometimes made based on routine or habit. The controller does not always realize that other choices are possible. Finally, the evaluation estimate of balance sheet items can be very different per person, depending on his/her frame of reference. In one of the chapters, three financials talk about how they assessed a certain balance sheet item each from their own position (business controller, division controller, and corporate employee). All three of them had assessed the value of this item differently, and all three are confident that their estimate is the best, and they suspect that the person who has a different assessment wants to guide the result toward a certain target. This shows that there are many personal choices underlying the results."

What further research do you suggest?

"The research has resulted in an analysis model that provides a means to analyze accounting choices. It would be interesting to apply this in a number of different organizations to proceed with the analysis of the accounting choice process in various settings. Furthermore, this research has, of course, been done from a certain perspective. Analysis of these data from different perspectives would enrich our understanding further. The data collected in this type of research is very rich, containing qualitative and quantitative insights, and lends itself very well to different perspectives. The financial data for management reports can, for example, be used for the "traditional" earnings management research method. It would also be interesting to have the qualitative data analyzed by someone who has no knowledge of reporting, in order to get a very different perspective on the choice process. By expanding this research further, you gain further insight into the main lines that occur generically and the nuances in the different settings of the controllers. I am very curious about its findings."

What do you hope this study will change?

"Accountancy is a profession in which financials are trained to think in terms of right or wrong and to check whether the financial reports represent faithfully the 'actual financial situation.'" Nobody wants to hear that the profit is approximately somewhere between two amounts. My research shows that profit is not such a hard figure and that the interpretation of the 'real financial situation' varies per person. The current financial accounting research focuses very much on the end result, the figures that are eventually presented in the financial statements. We seem to be in a kind of funnel: We tighten the accounting rules or make them more detailed to represent 'the real situation' even more accurately. Attention to the soft side of reporting – the world behind the numbers, the context in which they come into being and the considerations that are made when they are put together – may teach us to think out of the box and come up with totally new ways of reporting."

What would such a new form of reporting look like? 

"I don't know yet. I am also still too stuck in the mindset of accountants. For new reporting ideas we might need that additional research with the same data but with other perspectives." 

More information

Titel proefschrift: Accounting Choices of Controllers. An insight into controller deliberations
Promotores: prof. dr. A.C.N. van de Ven RA, prof. dr. ir. M.H. Corbey
CentER Dissertation Series, No. 446, Tilburg University
ISBN 978 90 5668 447 1.

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