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Studying regulation 2

Continuing the interpretation of the null discussion! Last day was interpreting the null when one found a reaction to a disclosure. Today, the opposite.

Case 2. Managers do not react in real operations to a information disclosure that they knew but is new information to the market. You predict managers would react to the disclosure, but you found they did not. In other words you cannot reject the null. Beyond the danger of interpreting any null result, let’s ensure we understand the null hypothesis fully.

Embedded in the null is that the disclosure does not affect managers decisions. But there is more! Also embedded in the null is that the required disclosure was too vague, too hidden, too new to affect managers decisions. In other words the regulation did not really focus attention of either third parties or the managers themselves of the fact new information to the market is being disclosed.

That is, all disclosures are not created equal ( I thought we were well beyond the naive EMH world where any public disclosure of information no matter how vague and obscure must affect decisions due to market magic!). Hence another interpretation of the null is that nothing happened due to too weak of a disclosure regulation so that managers feel no difference in accountability due to the vague or hidden disclosure.

In both cases the policy prescriptions differ depending how you interpret the null. In last post’s Case 1, misunderstanding the null could cause you to recommend disclosure must happen or managers would not use the new information. Maybe they would not, but maybe they would. In Case 2, you could conclude disclosure is not effective, so get rid of the disclosure. But you cannot rule out that the regulatory invention was too weak , vague or unclear in it current form but higher quality disclosure could change managers actions. Hence, the another solution is more effective disclosure. The opposite of the first null conclusion! And again as in case 1, the researcher cannot tell the difference!

Studying regulation

A little geek talk about understands what the null hypothesis means in a couple of common research settings. One of my longer blog posts.

When an audit or financial accounting researcher studies a mandatory disclosure regulation it is important to think about what is the null. The alternative hypothesis is simple, there is a reaction to the disclosure.

Case 1. You find the disclosure of new information to both markets and to managers affects real operations of the firm. In other words the null is rejected. What did you reject?

The null is NOT no disclosure would not affect real operations. If the new information is insightful to managers, whether they disclose it or not, they might use it in their operating decisions. Hence, the null is that the disclosure of new information to both market and managers does not affect operating decisions, which is quite different from disclosure of new information to managers but not to the public means no effects on operating decisions! The problem is that without the disclosure-being made, or researcher inside access to the firm, is that the researcher cannot tell the difference between the two possible nulls! Read this slowly to fully appreciate the difference.

In Case 1, misunderstanding the null could cause you to recommend disclosure must happen or managers would not use the new information. Maybe they would not, but maybe they would still use it in managing! The problem is that the researcher without inside access can not tell unless the disclosure is made! Next day, what if you find no effect?

Press(ed) release(ed) by the AAA

The American Accounting Association press release bandwagon has hit again! A young author team eager for recognition of their work okays a press release that is a great overstatement of what they report in the actual article!

Why?

1. Incentives of the publicity person – get coverage in media. To heck with accuracy as long as it is correct from a 30000 foot level (a little less than 10000 m)

2. Incentives of author – recognition for research impact.

Result:

The most populist interpretation possible of the article’s results! Any nuance is lost! But it gets great coverage.

While it is tough to do, it is the responsibility of the academic authors to ensure that the conclusion they reached in the article is reflected in the press release! Using the old Nancy Regan quote, it is okay to Just Say No!

I have consistently advised the powers that be that their hiring an “expert” and then leaving it to the authors to deal with the PR guy will at some point lead to a great black eye for the AAA. It has not happened yet, but it will. You read it here first!

Is it ever okay to . . . ?

One question I get from time to time should start with “Is it okay to . . . .”

I think that most of the time those who ask know the answer, and are asking to make sure! These are the folks that I do not worry about, albeit I am at times surprised that they ask!

Today’s question is, “It ever okay to review or edit a paper that it can be plausibly argued you have a competing paper with whether in process or under review?”

The answer is clearly NO. ( if this troubles you please enroll in a remedial ethics course immediately and take no actions that involves others until you have complete it!). There are no ways to mitigate the conflict of interest in this setting.

Yet unfortunately as a senior faculty member I have seen enough cases at senior academic journals to know it occurs away too often. While I do not take such claims at face value I have been privileged enough that some show me the reviews and the editors letters that make it clear, on the balance of the probabilities ( the civil standard) and in some cases, beyond a reasonable doubt ( the criminal standard) that such things are occurring.

We need a process to report these folks that is open and transparent. Yes we need to allow for those who always blame others for their rejections ( and there a more than a few of those around), but we also need to police this scourge of accounting academica.

The Management accountants reign in Canada

Well, in addition to management accountant Alan Webb editing CAR, the CAAA announced the management accounting Professor Leslie Berger will take over as Editor in chief of CAR’s younger sibling, Accounting Perspectives!

Leslie is a junior version of Alan, not surprising since she was his doctoral student!

Leslie also dabbles in audit research and has been a mainstay of the new doctoral program at Wilfred Laurier University where she mentors several students.

Interesting thing about Waterloo the city?! Two doctoral programs in accounting just across the LRT tracks from each other. Must be something in the water (as there is no fluoride if I remember from my days there).

Congrats to Leslie! She is taking a big risk as a relatively new associate professor and I with her well! For more on Accounting Perspectives see

https://onlinelibrary.wiley.com/journal/19113838

On the Webb!

Well the CAAA finally made it official – Alan Webb of Waterloo is the Editor in chief of Contemporary Accounting Research elect!

Alan, a great management accounting scholar and current President of the MAS, ( but who has also dabbled in Audit research) is an excellent choice! Alan, like me, is a Maritime grounded no nonsense sort of guy! Unlike me, he has the political skill to deal with the CAAA Board, so he will do well.

After Mike Welker has worked so hard to restore CAR as being author friendly, it is good to see that in Alan we have another author friendly EIC. What do I mean by author friendly? Focus on service to authors rather than focusing on their own timetables. I can readily predict there will be no eight month waits between editor acceptance and EIC finalizing under Alan.

Good luck et bonne chance, Cher ami!

Climate science and accounting

What can Accounting and auditing do for climate science?

Not an easy question to answer. While there is a lot of CSR measurement related research going on in accounting, it is often from the investor point of view! But we are all in this together, and investors are not going to be able to isolate themselves from effects of climate that science interprets for us. Can CSR researchers move beyond this?

On the auditing side the answer may be a bit easier. We urgently need assurance that is credible over the various climate related reports that are regularly released and updated. There is a lot of skepticism about these reports, especially in the USA, and it appears to me that even compilation assurance about what is reported in the underlying academic climate research is needed. You often hear statistics like 97.x percentage of academic climate research says this. Those of us brought up in democracies are almost always wary of such high levels of consensus, but that is not true in science where much of it is based on 99.9999%. However, we need decision makers to act on this information and if there are doubts about its accuracy, assurance maybe the way to go.

Management accountants need to develop reporting systems in their firms that quantify’s the effects of various scenarios on operations and assets value. If a two foot rise in sea level is going to put half of your warehouse under water with a 90% probability, would it not be a good idea to plan for this rather than be surprised one day. You see many climate science models do not predict continuous gradual shifts but discontinuous large scale short timeframe shifts.

Anyhow things for us to think about and for younger researchers maybe even to act on.

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