Knowledge that Transforms

Fatigue and burnout are root causes of audit quality issues and turnover. Leveraging the job demands‐resources theory, we investigate whether two mechanisms can reduce accountants' fatigue and, in turn, improve audit quality. We conduct a field study of public accountants during both normal and busy season work periods, collecting bi‐daily logs to examine whether the use of microbreaks (i.e., brief respite activities) as a job crafting mechanism and/or the receipt of supervisory support as a job resource lessen end‐of‐day fatigue. We posit and find that engaging in microbreaks is associated with reduced end‐of‐day fatigue within busy season. Similarly, we posit and find that higher levels of daily supervisory support during busy season are associated with lower end‐of‐day fatigue. However, neither of these mechanisms is associated with lower end‐of‐day fatigue during normal work periods. Our results also indicate that these two mechanisms function as complements during busy season, with either one significantly reducing end‐of‐day fatigue, but both together having an interactive effect. Further, end‐of‐day fatigue during busy season reduces sleep quality, which increases accountants' fatigue the following morning. In a follow‐up experiment, we consistently find evidence that a 1‐min microbreak reduces fatigue and that this reduction directly translates into improved error detection.

As early as 2015, financial regulators were developing disclosure frameworks aimed at enabling capital markets to price climate risks. Yet the literature on sustainability disclosure offers little insight into how regulatory agendas change, instead focusing on how nongovernmental organizations drive voluntary disclosure. To address this deficiency, this paper charts how financial regulators came to embrace climate risk, analyzing how an array of non‐state initiatives became coordinated in highlighting climate‐related impairment risks. This coordination is conceptualized via scholarship on decentered regulation, allowing a first, theoretical, contribution by constructing and demonstrating one analytical approach to studying substantive change on sustainability. This paper draws on a 25‐month participant observation of a United Nations standard‐setting project, supported by semi‐structured interviews. This allows a second, empirical, contribution by mapping how an accounting device, the so‐called “carbon budget” (the maximum amount of cumulative greenhouse gas emissions that limits the probability of exceeding 2°C of warming to 20%), coordinated this array of non‐state action toward resolving a core trade‐off: if we burn our current fossil fuel reserves, we will exceed our warming targets. The paper then shows how these coordinated efforts pressured regulatory authorities to intervene on how finance affects and is affected by climate change.

Academic and anecdotal evidence suggests that acquirers prefer to record higher goodwill values in business combinations so they can benefit from higher post‐acquisition earnings when goodwill is only tested for impairment. We conduct multiple experiments to test the hypothesis that this perspective ignores two costs that acquirers may also consider. Specifically, goodwill generally carries negative market perceptions and is associated with a risk of costly future impairment losses. Our results indicate that consideration of these two costs offsets acquirers' preferences for the earnings benefit of upwardly biasing goodwill. We also document that when there is no earnings benefit from higher goodwill valuations—namely, in a setting where goodwill is amortized to expense—we observe acquirers downwardly biasing goodwill values. Overall, our findings add nuance to our understanding of managerial discretion in the context of business combinations.

This study uses valuation allowances (VAs) for deferred tax assets to examine whether hedge fund activists (HFAs) use and affect financial reporting of income taxes. Specifically, we investigate whether HFAs target firms with VAs and whether target firms are more likely to release VAs post‐intervention. We find that the existence, magnitude, and increases in VAs increase the marginal probability that HFAs will target a firm by between 12% and 24%. We also find that target firms are 4.6% more likely to release VAs following the intervention, and this effect persists for up to 2 years. Releases of VAs appear to stem from implemented tax avoidance strategies and changes in financial reporting of income taxes rather than real changes in operating performance or earnings management. Overall, HFAs appear to understand the interplay between tax planning and financial reporting of income taxes and use both to unlock value in target firms.

This study examines the impact of the presence of institutional dual‐holders, whose portfolios hold both loans and equity securities of the same firms, on those firms' voluntary disclosures. Using mergers between institutional shareholders and lenders to the same firms as exogenous shocks to identify firms with institutional dual‐holders that have high relative equity ownership, we document that such firms are less likely to provide management forecasts and disclose fewer voluntary 8‐K items. In cross‐sectional analyses, we find that the reduction in voluntary disclosures is more pronounced when institutional dual‐holders have higher board representation and when firms have lower litigation risk. In addition, we find that firms with institutional dual‐holders provide more private disclosures to their lenders via loan contract covenants. Additional analyses indicate that the impact of institutional dual‐holders on corporate disclosures is driven by both their monitoring and trading incentives.

Discretionary income smoothing has been argued to increase bank opacity and degrade financial system stability by making banks more difficult to monitor. However, no direct empirical association between discretionary smoothing and opacity has been established to date. We argue that smoothing could reflect either the opportunistic exercise of discretion that disconnects loan loss provisions (LLPs) from changes in underlying credit quality, consistent with smoothing increasing opacity, or an informative exercise of discretion to communicate forward‐looking information about loan losses. We examine the association between discretionary smoothing and the informativeness of LLPs for a sample of banks from 1994 to 2019 and find that discretionary smoothing is, on average, associated with more informative LLPs. However, this association is nuanced, with cross‐sectional differences and changes over time. We find evidence that an intervention by the SEC into bank LLP practices in the late 1990s curbed opportunistic smoothing via provisioning for homogeneous loans. Subsequently, smoothing is associated with more informative provisions, including for banks with both more homogeneous and more heterogeneous loan portfolios. Our findings are inconsistent with the notion that smoothing may be associated with greater opacity.

Statement of Financial Accounting Standards (SFAS) 141 (Accounting Standards Codification [ASC] 805) requires that firms record identifiable assets and liabilities acquired in business combinations at fair value. While the FASB argued that these fair values should provide users with incremental decision‐useful information, opponents have continuously argued that they are too difficult to reliably estimate and could be subject to managerial discretion. Using hand‐collected data from US mergers and acquisitions, we find that, on average, fair value adjustments predict future cash flows incrementally beyond pre‐deal book values and cash flows, goodwill, and other firm and deal characteristics. We also find that the relation between fair value adjustments and future cash flows varies predictably based on several factors that affect managers' ability and incentives to provide accurate estimates. Furthermore, despite prevailing concerns about their usefulness, we find that fair values for intangible assets predict future cash flows, on average. However, we find that this relation is driven primarily by the fair values of customer‐ and contract‐related intangible assets and that the fair values of other types of identifiable intangibles do not necessarily convey incremental decision‐useful information. Finally, we find that users appear to rely on the information conveyed by these disclosures, as evidenced by revisions to analysts' forecasts and changes in stock prices. Overall, our findings provide insight regarding the usefulness of current standards and users' reliance on fair values in business combinations.

Most fraud research in accounting has focused on controls rather than offenders' subjective experience, meaning that our understanding of motive in fraud (defined as linguistic devices employed to justify, interpret, or excuse actions) remains underexplored. This is particularly the case for employee fraud, which has been largely neglected relative to top management fraud or financial statement fraud. To provide a richer understanding of how fraud offenders make sense of their offending, we interviewed 30 serious employee fraud offenders to better investigate their typal vocabularies of motive. We focus on holistic narrative accounts to provide insights into the common justifications and excuses presented by employee fraud offenders. We develop a taxonomy of narrative constructions based on the explanatory locus of the accounts offered by offenders. We identify three common justifications, (1) inconsequentiality motives, (2) permission motives, and (3) unfair treatment motives, and three common excuses, (4) personal crisis motives, (5) addiction motives, and (6) appeasement motives. We draw implications for researching fraud, organizational control, and ethics in accounting education.

Lenders are reluctant to finance firms' innovation activities because such activities tend to be opaque, with a high likelihood of negative outcomes that could hamper loan repayment. We posit that public credit registries (PCRs), which play an important role in credit information sharing in many countries, can facilitate financing by reducing adverse selection and moral hazard and increasing bank competition. Using the staggered establishment of PCRs in different countries and an international firm–patent data set, we find that credit information sharing positively affects firm innovation, especially in firms that experience a larger increase in bank debt financing after the establishment of a PCR. This finding is consistent with the notion that credit information sharing promotes firm innovation by easing bank debt financing frictions. We also find a stronger effect in countries that experience a large increase in bank competition after the establishment of a PCR—consistent with increased bank competition serving as a channel through which credit information sharing facilitates bank debt financing, thereby generating a positive effect on firm innovation. The positive effect is more pronounced when the established PCR has features that promote credit information sharing. It is also more pronounced for opaque firms and firms in innovation‐intensive industries, indicating that credit information sharing helps to reduce financing frictions. Finally, we posit and find evidence that firm efficiency in transforming innovation inputs into outputs improves after the establishment of a PCR. Overall, our paper offers novel insights into how credit information sharing facilitates firm innovation.

Deferred compensation is often proposed as an instrument to prevent managerial myopia. However, empirical studies show that its practical use is limited when it comes to managerial retirement. We study the optimal design of accounting‐based deferred compensation for retiring managers. While deferred compensation is useful in establishing long‐term incentives, it causes contracting frictions in subsequent periods. Deferred bonuses of retiring managers imply inefficiently weak incentives for incoming managers. This down‐scaling effect renders deferred compensation less useful in providing long‐term incentives. We also find that the down‐scaling effect has implications for the desirability of accounting timeliness—that is, the timely recognition of future cash flows in current accounting earnings—from a stewardship perspective. If managers' long‐term actions are sufficiently important, higher timeliness can cause more myopic managerial incentives.