Understanding and improving the language of business: How accounting and corporate reporting research can better serve business and society

Fülbier, Rolf Uwe; Sellhorn, Thorsten Article — Published Version Understanding and improving the language of business: How accounting and corporate reporting research can better serve business and society Journal of Business Economics Provided in Cooperation with: Springer Nature Suggested Citation: Fülbier, Rolf Uwe; Sellhorn, Thorsten (2023) : Understanding and improving the language of business: How accounting and corporate reporting research can better serve business and society, Journal of Business Economics, ISSN 1861-8928, Springer, Berlin, Heidelberg, Vol. 93, Iss. 6, pp. 1089-1124, https://doi.org/10.1007/s11573-023-01158-4 This Version is available at: https://hdl.handle.net/10419/305782 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) Journal of Business Economics (2023) 93:1089–1124 https://doi.org/10.1007/s11573-023-01158-4 1 3 ORIGINAL PAPER Understanding andimproving thelanguage ofbusiness: How accounting andcorporate reporting research can better serve business andsociety RolfUweFülbier1· ThorstenSellhorn2 Accepted: 29 March 2023 / Published online: 20 May 2023 © The Author(s) 2023, corrected publication 2023 Abstract Financial accounting, the core of corporate reporting, is often characterized as the ‘language of business’. Over the last roughly 100years, and using an evolving set of theories, methods, and data, scholarly work in this area has been contributing to our understanding of this language and how to improve it. This paper seeks, first, to characterize the field with a focus on its evolution in the German-speaking area, where, like elsewhere, normative research traditions interested in improving practice have been making way for positivist approaches that seek a detached understanding of ‘what is.’ Second, we discuss the changing users and institutional parameters that are reshaping corporate reporting, followed by our personal view of ‘wicked’ societal problems and challenges that corporate reporting might be able to help alleviate. Finally, we discuss directions in which research might evolve in order to address these issues, in order to make corporate reporting more useful for serving not only economic actors, but also society and the environment more broadly. Keywords Accounting research· Digital transformation· Research assessment· Sustainability reporting· Societal relevance· Transparency 1 Introduction Financial accounting as the centerpiece of corporate reporting has been dynamically evolving, shaped by changing business and social environments, in order to fulfill changing objectives. Accounting research has been closely accompanying this * Rolf Uwe Fülbier rolf.uw[email protected] Thorsten Sellhorn sellhor[email protected] 1 Universität Bayreuth, Bayreuth, Germany 2 Ludwig-Maximilians-Universität München, Munich, Germany 1090 R.U.Fülbier, T.Sellhorn 1 3 development. It has helped to better understand and to improve financial accounting as the language of business. We discuss new challenges to financial accounting, which motivate research contributions in several respects. In particular, we address the question of how today’s challenges are forcing research to move forward if it wants to remain relevant for the further development of financial accounting and corporate reporting. The metaphor of financial accounting as ‘the language of business’ is ubiquitous.1 It implies that financial accounting is a communication device by which senders of information seek to make themselves understood to receivers, by being cooperative (Grice 1975), i.e., “accurate (maxim of truth) and complete (maxim of quantity), while communicating in ways that are relevant to the listener (maxim of relation) and as brief and clear as possible (maxim of manner)” (Bloomfield 2008, p. 434). Practiced in this way, corporate reporting enhances transparency (i.e., quality of information), which comprises disclosure, accuracy, and clarity.2 To the extent that the other elements of corporate reporting also follow this intent, the language metaphor extends to corporate reporting as a whole. In this paper, we view financial accounting as a subset of a wider corporate reporting, which includes monetized accounting numbers as well as (financial and sustainability-related) disclosures, and which firms use to inform their external capital providers and other stakeholders about their financial position, performance and enterprise value—as well as its environmental and social impacts. Drawing on Barker and Mayer (2021) and the ‘Group of Five’ prototype (CDP etal. 2020), Table1 describes the elements of corporate reporting. In terms of information systems (reflected in the columns), corporate reporting consists of financial accounting (i.e., primarily quantified information about the firm’s past transactions and events, expressed in monetary units) and disclosure (i.e., additional, complementary qualitative and quantitative as well as backward- and forward-looking information). Whereas accounting information is typically provided in the firm’s primary financial statements and notes, disclosure is often located in a supplementary management report, or management commentary. Taken together, a firm’s accounting and disclosure form its reporting. As the lines in Table1 indicate, another dimension of corporate reporting is its perspective. Financial accounting and value-relevant disclosure adopt a financial (exposure) materiality (or outside-in) perspective, concentrating uponthose transactions, events and expected future risks and opportunities that have the potential to materially affect enterprise value, and which are therefore relevant to financially oriented investors and other providers of capital. On the other hand, impact reporting takes an environmental-social (impact) materiality (or inside-out) perspective, focusing on those activities of the firm that have the potential to materially affect the environment or society, and which are therefore of interest to non-financially 1 For a critical discussion of its implications and limitations, see, for example, Bloomfield (2008). 2 According to Schnackenberg and Tomlinson (2016), disclosure of information describes the availability, accessibility, and visibility of information to receivers; accuracy of information describes the precision, reliability, and validity of the information disclosed by senders; and clarity of information describes the understandability and comprehensibility of the information to receivers. 1091 1 3 Understanding andimproving thelanguage ofbusiness: How… Table 1 Elements of corporate reporting (drawing on Barker and Mayer 2021 and CDP etal. 2020) Information system perspective Accounting (mostly quantitative, past transactions and events) Disclosure (qualitative and quantitative, backward- and forward-looking) Reporting Financial Materiality (‘Exposure Materiality’) I—Financial Accounting Financial statements and notes prepared under Generally Accepted Accounting Principles (e.g., IFRS Accounting Standards) II—Value-relevant Disclosure Financial and non-financial disclosures, including on the firm’s exposure to sustainability matters that create or erode enterprise value (e.g., prepared under IFRS Sustainability Disclosure Standards, or under ESRS that adopt financial materiality) I + II = Financial Reporting Environmental-social Materiality (‘Impact Materiality’) III—Impact Accounting Monetized amounts of firms’ environmental and social impacts not captured in Financial Accounting (‘externalities’) IV—Impact Disclosure Financial and non-financial disclosures on the firm’s impacts on social and environmental value (e.g., prepared under ESRS that adopt impact materiality) III + IV = Impact Reporting Double Materiality (either or both) I + III = Sustainability Accounting II + IV = Sustainability Disclosure I + II + III + IV = Corporate Reporting 1092 R.U.Fülbier, T.Sellhorn 1 3 oriented capital providers as well as a broad range of other stakeholders. Taken together, we refer to the four quadrants of Table1 combined as corporate reporting, where quadrants I and III form the (mostly quantitative) accounting, which is increasingly complemented by disclosure (quadrants II and IV). We view corporate reporting research as having evolved to understand and improve the role of corporate reporting as a language that protects stakeholders (primarily providers of capital) by mitigating information asymmetries between corporate managers and these outside stakeholders, as well as among different groups of outside stakeholders (e.g., more versus less sophisticated investors). In terms of understanding (‘positive research’), landmark studies too numerous to mention here have sought to establish, theoretically and empirically, the determinants and consequences of corporate reporting behavior. However, earlier research focused—and in some research communities still does—on the conceptual and technical design of standards and on questions of their application. This type of analysis is often normative (prescriptive) in terms of its methodological and epistemological character, especially in that it seeks to improve future corporate reporting, rather than understand existing corporate reporting. Figure1 illuminates these interwoven areas of research. Thus, the institutional level of corporate reporting standards is one important determinant of behavior, just as a better understanding of behavior in turn helps to improve the standardization of corporate reporting. We start in Sect.2 by outlining these research traditions from a German-speak- ing perspective. Considering this historical development at the outset of the paper is important for recognizing the dynamic character of accounting and corporate reporting research, which does not (and must not) remain static, but requires further development in the face of changing conditions. Section3 describes recent (and not-so-recent) changes in corporate reporting that arguably provide an impetus for research to shift its focus. In Sect.4, we suggest directions and areas of focus for future corporate reporting research in order to render its insights more useful for addressing important societal problems. In doing so, we also draw on an informal survey of research priorities that we conducted with several senior practitioners and colleagues. Section5 concludes. 2 Where we comefrom 2.1 Improving andunderstanding: changing research patterns overtime Financial accounting research as the nucleus of corporate reporting research emerged more than 100years ago. In Germany and elsewhere in the world, accounting academics primarily developed normative guidelines for conceptualizing, designing and improving financial statements (e.g., Küpper and Mattessich 2005; Mattessich 2008; Fülbier and Gassen 2011; Biondi and Zambon 2013). Although double-entry-bookkeeping techniques have been used in practice for many hundreds of years (Previts etal. 2010; Sangster 2016), the increased need for standardized information, communicated via reliable and meaningful financial statements before and after the turn of the twentieth century, not only established financial accounting 1093 1 3 Understanding andimproving thelanguage ofbusiness: How… as an academic subject. This demand also motivated the normative-theoretical, qualitative-verbal research approach – apart from other supply-driven reasons that made statistically validated, quantitative and positivistic research less feasible in the early days of business administration in general. Especially, the Great Depression in the early 1930s increased the perception of financial accounting and reporting as a necessary and vital language of business that facilitates firm contract initiation and monitoring. Whereas in the Anglo-American world, the emphasis has been more on (equity-) market efficiency (Zeff 2013), in other parts, for example in Continental Europe, financial information primarily served legal and debt-contracting purposes (e.g., Fülbier and Klein 2015). However, one parallel was obvious: Accounting research was viewed as an applied science. Academics actively cooperated with regulators, authorities, and jurisdictions as well as preparers; they did so by providing prescriptive conceptual underpinnings and interpretations to support the further development and application of financial accounting standards and techniques. It is well-known that the ‘empirical turn’ in the U.S. at the end of the 1960s (esp. Benston 1967; Ball and Brown 1968; Beaver 1968) and the rise of Positive Accounting Theory in the 1970s (Watts and Zimmerman 1978, 1979, 1986, 1990), which was heavily contested (e.g., Tinker etal. 1982; Schreuder 1984; Whittington 1987; Sterling 1990; Boland and Gordon 1992; Mattessich 1995b), changed the situation. Since then, with increasing and nowadays arguably dominant importance, financial accounting research has been concerned with observable accounting behavior, its determinants and consequences, and the uncovering of cause-and-effect relationships. The research focus has moved away from standards and techniques, and the methodological approach changed to a pure positive science. Until today, databased, quantitative, hypothesis-driven and positivistic research approaches have benefited from improved data availability and data processing capacity since the 1960s, advances in (finance) theory, and the econometrically sophisticated Ph.D. education programs primarily in the English-speaking world. Chua (1986) once referred to this as “mainstream accounting research” (see also Fig.1), though this also suggests that other less dominant research streams exist, e.g., the more qualitative, conceptual, critical, interpretative or historical accounting research in the tradition of a social science with an interdisciplinary view that challenges the pure economic paradigm (Baker and Bettner 1997; Napier 2006). In the German-speaking accounting research community, a specific “deductivelegalistic” research approach survived for at least another 20years. Here, financial accounting was traditionally not designed primarily to assist (equity) capital markets by providing decision-useful information. Thus, there was also lower demand for empirical evidence about the value relevance and news content of accounting numbers from the perspective of shareholders. Due to the more tax-driven as well as profit-distribution focus of German GAAP, the research focus remained on standards and technical applications in practice (Busse von Colbe and Fülbier 2013; Fülbier and Gassen 2011). These approaches use stated accounting objectives to normatively 1094 R.U.Fülbier, T.Sellhorn 1 3 derive prescriptive solutions to open accounting issues.3 They also conceptually provided ex-ante support and ex-post analyses of new accounting regulations during the second half of the twentieth century.4 Typical research approaches involve(d) the ‘critical assessment’ of accounting requirements, i.e., their benchmarking to overarching concepts and principles.5 Such deductive-legalistic, normative accounting research fell out offavor in North-American ‘top journals’6 long ago—to an extent where mainstream researchers discriminate these approaches as being “unscientific” (Jensen 1976, p. 12; Watts 1977, p. 54) or senior scholars apparently feel compelled to apologize for creating the impression of doing normative work.7 Accounng/Reporng Behavior Determinants posive(what drives accounng behavior?) Consequences intended or unintended,real effects, posive(whatis the effect of accounng behavior?) Descripve Analysis posive(what is the accounng behavior?) Accounng/Reporng Design (standards, interpretaons, applicaons and techniques) Standard-based Analysis (Understanding and Improvement) a) normave (esp. interpretaon, standard seng proposal, further development) b) posive (descripon and explanaon/understanding of rulesand standard seng) Theory Empiricism Theory Empiricism Design as a determinant Feedback possible: a) complement posiveanalysis b) complement normave analysis (transfer an “is” into an “ought”) maertsniaM Understanding ) b ) Fig. 1 Focus of financial accounting/corporate reporting research 3 Mattessich’s (1995a, 1995b) notion of “conditionally normative” accounting research summarizes this approach. 4 These include the German Stock Corporation Law (Aktiengesetz) of 1965, the German transposition of the EU Accounting Directive by the Bilanzrichtliniengesetz of 1985, as well as the legislation introducing internationally recognized accounting standards around the turn of the millennium. 5 For example, Leffson (1964), Baetge (1970), Küting (1974) or Moxter (1974); with a focus on more specific accounting rules, see for example von Keitz (1997) on intangibles or Leippe (2002) on leases. 6 By ‘top’ or ‘top-tier’ journals, we refer to the academic journals that are held in highest regard by the leading academic institutions in a field and geographic area, as identified by widely used (and heavily criticized) journal rankings. In German-speaking accounting academia, for example, the VHB-JOUR- QUAL 3 lists three journals in the top category (“A + ”): The Accounting Review, Journal of Accounting and Economics, and Journal of Accounting Research. 7 Kothari, Ramanna, and Skinner (2010) review the positive theory of GAAP and discuss the extent to which existing GAAP is consistent with the theory. Whereas earlier draft versions had the unapologetically normative title “What should GAAP look like?” (e.g., Kothari, Ramanna, and Skinner 2009), the published version contains the following disclaimer: “In summarizing the implications of extant research for GAAP, we run the risk of being interpreted as making normative prescriptions. That is not our intent. Our analysis is primarily positive in that it simply summarizes conclusions from the literature about those properties of GAAP that best facilitate the efficient allocation of capital” (p. 249). In what follows in that section of the article, it becomes clear that Kothari etal.’s (2010) approach is best summarized as Mattessich’s (1995a, 1995b) “conditional-normative accounting methodology.” Here, the researcher refers not to his/her own value system but to an externally given objective that is provided, for example, by superior law, conceptual frameworks, or empirical evidence. This research is prescriptive-normative as well, although the authors do not seem to recognize or admit it. Needless to say, we see no need for scholars to distance themselves from either approach. 1095 1 3 Understanding andimproving thelanguage ofbusiness: How… Albeit with some delay, the empirical and positivist turn towards “mainstream accounting research” also became established in the German-speaking community since the 1990s. The internationalization of accounting regulation towards the acceptance of IAS/IFRS in the European Union might have been a stimulating factor that increased the demand for effects analyses. Substantial pressures in the German university system to align accounting research with international approaches may also have contributed (Fülbier and Gassen 2011; Busse von Colbe and Fülbier 2013; Fülbier and Ruhnke 2022). 2.2 Are we still making (the right kind of) progress? We are clearly not the first to voice our unease about something being amiss in (“mainstream”) corporate reporting research. Senior colleagues such as Anthony Hopwood (e.g., 2007), Joel Demski (e.g. 2007, 2008, and as early as Demski etal. 1991), Stephen Zeff (e.g., 1989), Robert Kaplan (e.g., 1984, 2011, 2019), Sudipta Basu (2012), Wolfgang Ballwieser (2019), or Shiva Rajgopal (2020) have long been lamenting the state of accounting research, diagnosing a self-referential academic system with a preponderance of formalism and “rigor,” as well as a lack of innovation, intellectual diversity, passion for the accounting craft, and usefulness in practice. However, a line of research has emerged that has contributed much to our understanding of accounting and corporate reporting. Becker etal. (2021), for example, document the positive impact of (some of the) IFRS-related research on academic as well as practitioners’ discourses, and on standard setting. Overall, since research targets different audiences, not everyone will find it equally relevant or understandable. Hence, it remains unclear whether non-academic constituents—for example standard setters with their need for relevant research (e.g., Beresford 1994; Beresford and Johnson 1995; Teixeira 2014)—have their needs addressed by the current research landscape (e.g., Fülbier etal. 2009; Becker etal. 2021, 194–200; Zeff 2021, with mixed evidence on this). Three anecdotes may illustrate our concern. First, Sir David Tweedie, the former IASB Chairman, once said in personal conversion to one of us that mainstream research has almost no impact on IFRS standard setting. Second, the German Federal Parliament (Bundestag) used to regularly consult business academics on accounting issues, but today legal scholars dominate parliamentary consultations. Third, the recent special section “International Accounting Policy Forum” in the 2022 issue of the journal Accounting and Business Research casts additional doubts on the usefulness of current accounting research for resolving longstanding standard-setting issues. On the other hand, it seems as if the shifts described above, which took place about 50years ago, have to some extent biased corporate reporting research, crowding non-mainstream approaches out of the outlets (in particular, academic journals) that largely determine academic careers in research-oriented universities. Although the turn to empirically more substantive research has generated many useful insights and initiated a meaningful new development at the time, it produced a negative side effect: a narrowing view of what is considered ‘good’ research. This bias relates to 1096 R.U.Fülbier, T.Sellhorn 1 3 the choice of methods, theories, and substantive topics. In terms of methods, empirical-archival approaches have come to dominate, as many bibliographical studies have documented (e.g., Oler etal. 2010; Fülbier etal. 2014). Our theories are largely economics-based, with the ‘burden of proof’ seemingly being on researchers when evoking other theories to explain phenomena of interest.8 Regarding the substantive topics studied and the research questions posed, we feel that understanding has come to be viewed as more valuable than improving. For instance, the common framing of empirical work as testing the determinants (causes) and/or consequences (effects) of phenomena of interest betrays a positivist interest in eliciting the empirical regularities (treated as ‘laws of nature’) that characterize the role of corporate reporting in the economy. Much fewer top-tier publications appear to be dedicated to conceptual work intended to shape the practice of corporate reporting. It seems as if researchers find themselves in a vicious circle: Without statistically significant “evidence” on the effects of some reporting phenomenon (e.g., a certain sustainability reporting practice), they are hesitant to make suggestions regarding (improving) that practice – and the data needed to produce such evidence is typically unavailable unless the practice is implemented. It is also striking that some corporate reporting researchers primarily self-describe in terms of their preferred method-theory combinations (e.g., ‘I do experimental econ / game-theoretic modeling’), rather than the essential substantive questions they work on (e.g., ‘My research is dedicated to making corporate reporting an effective tool for nudging firms’ towards greater sustainability’). In consequence “manuscripts are the result of methods in search of questions, rather questions in search of methods” (Zeff 1983, p. 134). The authors cited at the beginning of this section blame a biased academic incentive system, often described as ‘publish or perish’. Indeed, the described shifts and biases in research approaches arguably reflect researchers’ personal cost–benefit considerations. First, if researchers seek to minimize costs to themselves, they will favor research approaches for which the supply-related ‘factors of production’ (e.g., expertise, theories, methods, and data) are available to them at low cost (i.e., time and money). For example, Ball and Brown (2014), in a personal retrospective on their seminal 1968 paper, describe how an ‘explosion’ of empirical research in accounting and finance was catalyzed by the appearance of useful theories (i.e., efficient markets and the Capital Asset Pricing Model, CAPM), data (the Chicago Center for Research into Securities Prices, CRSP), computer processing power, and methods (the event study method developed concurrently with Fama etal. 1969). As a result, Ray Ball, Philip Brown and their Chicago colleagues, as well as William Beaver, who pursued similar research interests at the time, became widely perceived as role models. True, they themselves did pursue an approach that was risky at the time, and the ‘happy ending’ could not have been anticipated. For example, the work 8 Interestingly, the Journal of Accounting and Economics (emphasis added to make a point) is more highly ranked in the U.S. than the journal Accounting, Organizations and Society, which aims “to publish high quality work which draws upon diverse methodologies and theoretical developments from across the social sciences” (www. journ als. elsev ier. com/ accou ntingorgan izati ons- and- socie ty). 1103 1 3 Understanding andimproving thelanguage ofbusiness: How… provide on the one hand a better understanding of estimates, forecasts, risks and opportunities, and, on the other, more individualized and stakeholder-specific access to useful information. 3.2.2 Information supply Technical aspects of information production and dissemination are changing due to progress in digitalization and automatization. We are currently experiencing dramatic and, for some industries and business models, disruptive changes in information technology. The exponential growth in data and its availability, the ever-improving information processing capacities and the still not fully foreseeable opportunities of artificial intelligence affect corporate accounting and reporting. At its core, accounting is about information—information that can now be generated as well as retrieved much more timely and comprehensively at ever lower cost, and perhaps with greater accuracy. Most likely, these trends, too, will change the entire infrastructure of corporate accounting, reporting and auditing—and will raise new research questions and opportunities. 3.3 Resultant need forchange incorporate reporting research priorities If researchers express their values, worldviews and priorities through the research questions they choose to address and the research approaches they select (e.g., Chua 1986), and if research presented at leading conferences (e.g., Fülbier etal. 2014), by leading scholars (e.g., Fülbier and Weller 2011) and published in leading journals (e.g., Oler etal. 2010) is any indication of the research being conducted in an academic field, corporate reporting researchers in the last 50years have largely cared about the efficient functioning of Western capital markets and, to a lesser extent, about holding the managers of public corporations accountable for the shareholder value created by their firms. In the process, we have learned much about information processing and firms’ information environments (e.g., reviews by Kothari 2001; Beyer etal. 2010; Blankespoor etal. 2020), accounting choice and earnings management (Fields etal. 2001), the role of financial intermediaries such as analysts (e.g., Brown etal. 2016, 2015), the determinants and consequences of accounting standards and behavior (e.g., Zeff 1978; Hagerman and Zmijewski 1979; Holthausen and Leftwich 1983; Ewert and Wagenhofer 2005; Ernstberger etal. 2012; Leuz and Wysocki 2016to name just a few in this immense literature), as well as other, related areas. These studies have largely relied on economic theories and empirical-archival methods or, less often, analytical models. As indicated earlier, these mainstream approaches with their focus on ex-post observable data appear to be faced with diminishing marginal utility in the light of the changes and challenges outlined above, as the parameters of financial as well as non-financial reporting as the language of business are changing dramatically. We now again see reasons that make a refocusing of research priorities and resources opportune—comparable to the beginnings of financial accounting regulation approximately 100years ago, or the factors that brought about the ‘empirical 1104 R.U.Fülbier, T.Sellhorn 1 3 revolution’ about 50years ago. We face the dramatic challenges and opportunities of digitalization, automation, social inequalities and—maybe the major task of the twenty-first century—environmental decline. Along with the natural sciences, the humanities, as well as the engineering, medical and formal sciences, business economics as part of the social sciences, and corporate reporting in particular, should contribute to answering these new questions. To us, this implies a visionary reinvention of the language of business. ‘Looking back’ at the status quo using research approaches that seek primarily to understand ‘what is’ remains useful, but might lose its dominant role17—at least, if we do not want to leave the further development of financial accounting (regulation) exclusively to policymakers and practitioners. ‘Looking ahead’ with the courage to propose scientifically sound, prescriptive solutions—in the tradition of design science and design regulation research (e.g., Hevner etal. 2004; Fülbier and Seitz 2021)—seems also important for improving the situation and offering solutions proactively. After all, research that limits itself to the ex-post assessment of existing practices and policy interventions has limited scope for contributing ex-ante insights that help develop effective practices and policies in the first place (e.g., Fülbier etal. 2009). In the long term, those limits will most likely have an impact on the academic market as well. With multiple crises wreaking havoc on academic institutions’ and government’s finances, the current, more method-driven research may end up facing drying-up funds if there is no ‘real impact’ on society (Sellhorn 2020). Similar concerns are being voiced in other social sciences, including psychology (e.g., Sternberg 2007). The funding issue seems crucial for getting researchers and universities to focus on socially relevant problems, at least in the long term. To a certain extent, the beginnings of this development are already visible today when we observe the increasing efforts of universities to build up teaching and research capacities in the field of sustainability. Sooner or later, there will be a reorientation of corporate reporting research, either through researchers’ own awareness, or due to funding constraints. In such research, a community of scholars will (hopefully) pursue whatever approaches they each practice best in the common, often interdisciplinary search for solutions—with whatever methodological and epistemological orientation, theories, data sources, econometric methods, and institutional settings turn out to be useful (Feyerabend’s 1993 ‘anything goes’). 4 How toget there In this chapter, we present some of the areas where we consider more issues-driven and applied research needed—research designed with the objective of contributing to important societal problems in mind. In order to base our assessments not only on our own personal judgment, we collected input from about two dozen senior 17 This dominance, by the way, was never justified from a philosophy-of-science perspective (Fülbier and Weller 2008). 1105 1 3 Understanding andimproving thelanguage ofbusiness: How… colleagues and high-level practitioners in the German speaking area.18 We realized that most of the received opinions converged in the direction outlined below—our original assessments were quite in line with this, and we feel, thus, more comfortable in expressing our thoughts. Since diagnosing problems and demanding more research on this or that are important but not enough, we also try, in all modesty, to propose possible paths towards concrete potential solutions. Since this chapter touches upon many broad and deep streams of literature, we may be excused for citing only sparingly and without any claim to representativeness or even completeness. Also, we adopt primarily a decision usefulness perspective, although we are well aware (and address it sporadically) that financial accounting in particular has evolved to serve other purposes, especially contracting, as well. 4.1 Improving financial accounting (standards) Financial accounting, in the form of standardized financial statements and notes, remains important for information purposes. However, there are long-standing accounting issues that seem to remain unresolved, at least by standard setters. Hombach and Sellhorn (2022, p. 543) consider an accounting issue resolved to the “degree to which the established accounting solution successfully reduces mapping uncertainty and undesired consequences”, where mapping uncertainty arises “typically on the part of preparers (and, to some extent, auditors), where it is not obvious how an economic transaction or event should be mapped into an entity’s financial reports.”19 Unresolved accounting issues often (re-)appear repeatedly during standard-setters’ agenda consultations and are the subject of persistent debate in corporate reporting literature. In this section, we selectively discuss the following issues, which we consider unresolved and likely to benefit from further research: (a) role of (traditional) financial statements, (b) intangibles, (c) business combinations, and (d) pollutant pricing mechanisms.20 Role and content of (traditional) financial statements: We still need a better conceptual understanding about the role of financial-statement-based content in reporting, firm contracting and management. This understanding is essential to advance and improve standard setting. Financial accounting figures and ratios are used for valuation purposes but also firm contracting, for example in debt covenants, as important indicators of financial position and performance. Trade-offs exist and are sometimes addressed as “unintended consequences” (e.g., Brüggemann etal. 2013). 18 We are grateful to those who responded and provided us with thought-provoking insights and opinions. 19 “On the one hand, it takes the form of compliance uncertainty about which among several potential accounting treatments for the accounting issue in question meet the requirements. On the other hand, in selecting from the set of permitted accounting treatments, preparer managers consider the uncertain ‘payoffs’ associated with each accounting treatment – which reflect the information needs and preferences of various stakeholders, as well as managers’ economic incentives, legitimacy and reputation concerns, compliance costs, and other objectives (outcome uncertainty)” Hombach and Sellhorn (2022, p. 3). 20 For more examples and an in-depth discussion of what constitutes an unresolved accounting issue, we refer the reader to Hombach and Sellhorn (2022) and Schipper (2022). 1106 R.U.Fülbier, T.Sellhorn 1 3 Accounting changes for better investor information trigger, for example, contractual or legal consequences, as long as ‘rolling GAAP’ is used in these contracts.21 Key figures and ratios also play a similar role in value-based management and executive compensation. Research has the potential to answer open questions for public and private firms in different institutional settings, for example, about the acceptance of financial information for reporting, contracting and management purposes, about their conceptual role, acceptance and effects—also with regard to historical cost as well as fair values (and their combined use)—and about the challenge of integrating non-financial indicators (see below). Another aspect of the very same problem is the accounting entity: Currently, financial statements in corporate reporting especially on capital markets abstract from the legal entity and focus on the economic entity, the group. However, from a broader stakeholder perspective, assets shifting within the group are possible with exploitation potential for some contract partners of some legal entities. Thus, a more intelligent interplay of group and legal entity accounting and reporting seems appropriate to capture these trade-offs. Against this background, we still do not know exactly what the content of the (traditional) financial statements should be. It is still an open question whether it is a reasonable objective (if only for investors) to reflect market capitalization in traditional financial statements. This is not only a question of normative research. Positive empirical research can also contribute. Do users find it important that net assets should reflect market capitalization? Research might help answer this question with regard to different stakeholder needs and institutional settings. An additional issue is the integration of forward-looking information. Although forward-looking information about the firm’s prospects does enter into the recognition and measurement of many classes of assets (e.g., receivables, intangible assets) and liabilities (e.g., provisions), financial accounting has been characterized as mostly backward-look- ing, whereas projects and forecasts are largely found in additional disclosures, e.g., within the German management report22 or the U.S. Management’s Discussion and Analysis (MD&A). To the extent that unpredictable disruptions and crises render the time series of past events and transactions (and their accounting realizations) bad predictors of future events and transactions, the demand for new approaches to providing forward-looking information is increasing. One key feature of such disclosures is that they explicate the uncertainty inherent in the predictions, for example based on scenario analyses to assess the resilience of the entity. Since sophisticated scenario analysis and other forms of explicating uncertainty are currently relatively rare in corporate reporting, researchers can study how such techniques can most effectively help reduce information asymmetries and perceived uncertainty while at the same time providing a mechanism for credible signaling. Intangibles: For a long time, we have been trying to better integrate intangibles into the financial statements—especially the internally generated intangibles. To solve this eternal challenge of financial accounting is probably more important today than ever before to better capture the new value drivers in our knowledge- and 21 The difference between ‘rolling’ and ‘frozen GAAP’ is explained in Leftwich (1983). 22 For example, Krause, Ahmed, and Sellhorn (2017). 1107 1 3 Understanding andimproving thelanguage ofbusiness: How… technology-driven societies, for example usable data, data access options, own digital platforms and algorithms. Prior empirical research provides evidence that users of financial statements are asking for (useful) information in this regard (e.g., Lev 2001, 2019; Zambon and Marzo 2007; Wyatt 2008). Additional empirical research can deepen our understanding how this need for information varies across different stakeholder groups, different categories of intangibles, and different institutional settings. Moreover, conceptual research efforts in the tradition of “design regulation research” (Fülbier and Seitz 2021) are necessary to determine to what extent the recognition, measurement and disclosure of intangible resources need to change from current standards. Consequently, the IASB and EFRAG discuss a project on intangible assets with a comprehensive review of all aspects of IAS 38 to better reflect the increasing importance of those assets in accounting and corporate reporting (e.g., IASB 2022, EFRAG 2021). Richard Barker and Stephen Penman argue that the critical issue is not the intangible or tangible nature of a resource, but rather the uncertainty associated with its expected future cash flows. They argue that “conditions of uncertainty render both the balance sheet and the income statement ‘incomplete,’ yet complementary, with respect to the IASB’s objective of providing decision-useful information to investors” and “propose an income-statement approach to financial reporting that extends (and complements) the balance-sheet approach that is embedded already in the Framework, a ‘mixed’ approach” that conveys “information about uncertainty” (Barker etal. 2020, p. 324; see also Barker etal. 2021). Further research seems required to understand if we have a knowledge deficit or an implementation deficit here. Against the background of many past decades of discussions about intangibles (as just one example, refer to Lev and Gu 2016, also Zambon etal. 2020), it seems interesting to ask why standard setters seem to struggle with reforming the accounting for intangibles, what the societal harms of current rules are, as well as whether and how this stalemate may be resolved (Lev 2019). In line with prior considerations about the role of (traditional) financial statements, the possible inability of balance sheets to capture more comprehensively the firm’s market capitalization might foster a complementary solution, a kind of intangible capital statement. Prescriptive research and also practice have already suggested several alternatives in this regard, without resounding success, not to mention a standard for a new financial statement. Research might illuminate the reasons for inertia so far, it might additionally provide more guidance about the framework and possible content—financial or non-financial in nature. Suggested categories of intangibles (e.g. the seven intangible capitals by WGARIA 2005; partly based on Edvinsson and Malone 1997) could benefit from newer interpretations in terms of social capital, which might be part of human capital characterized by anti-discrimi- natory, equal, family-friendly and flexible working conditions, important for the new generations of employees or other aspects that reach, for example, into the area of process capital with compliance and governance conditions within a firm’s organization. The transition to the major topic of sustainability reporting seems fluid at this point. Business combinations: To improve goodwill accounting is a long-lasting challenge that touches not only the still controversial debate about the subsequent measurement of the acquired goodwill, where research is highly appreciated to move 1108 R.U.Fülbier, T.Sellhorn 1 3 forward on this path. Very much in line with the prior point, the recognition of intangibles (and other assets and liabilities) in M&A transactions is again an issue, from which goodwill results in consequence, either as full or partial goodwill. In their recent review of the related literature, Amel-Zadehet al. (2021) conclude that goodwill amounts, on average, are associated with the underlying economics of the combining firms but are also shaped by managerial incentives and institutional context. However, empirical-archival research alone is insufficient to assess whether current requirements provide for an optimal degree of discretion. Calling for more research in this area, Amel-Zadeh etal. (2021) advocate reproduction studies to test the generalizability of existing findings across contexts, and encourage standard setters to initiate quasi-experiments to generate causal evidence and to render policymaking more accountable. They further suggest that researchers make more use of behavioral theories and non-archival methods to elucidate the motives and interactions of decision-makers in goodwill accounting. Such research could aid the normative development of better conceptual guidelines to increase transparency about measurement parameters and additional assumptions. One particularly pertinent area in which greater transparency is needed relates to ex-ante forecasting and expost documenting the performance of business combinations by preparers. In this context, the IASB’s current discussion paper “Business Combinations— Disclosures, Goodwill and Impairment” (IASB 2020) proposes, among other things, improved disclosures about the subsequent performance of acquisitions, stating “that companies typically do not provide enough information to help investors understand the subsequent performance of an acquisition. Investors cannot assess whether management’s objectives for the acquisition are being met—for example, whether the synergies management expect from an acquisition are being realised” (para. 2.4). As Sellhorn (2021) points out, practitioners often argue (and understandably so) that the expected synergies underlying purchased goodwill can hardly be tracked over the long term; through integration and restructuring, the acquired goodwill is inextricably mixed with other values. Apparently, even after a short time subsequent to an acquisition, many companies can no longer tell whether a deal has actually generated the expected values. Research of any kind may help firms and standard setters devise and implement approaches to measuring and documenting the subsequent performance of acquisitions, to enhance transparency and accountability. Such approaches may also help resolve another long-standing conceptual issue: “Is goodwill an asset?”23 After all, where an acquirer cannot convincingly justify, in terms of expected future benefits, the purchase price paid in an acquisition, nor track the subsequent arrival of such benefits, the asset nature of the corresponding accrual ‘goodwill’ is in severe doubt (Sellhorn 2021). Pollutant pricing mechanisms: As summarized in Hombach and Sellhorn (2022), accounting issues related to pollutant pricing mechanisms such as carbon emissions trading schemes pertain to the resources and obligations arising from such schemes, especially where emission allowances are received free of charge (e.g., Bebbington and Larrinaga 2008). Since the IASB’s removal of its IFRIC 3 Emission Rights in 23 See, for example, Johnson and Petrone (1998) and Sellhorn (2004). 1109 1 3 Understanding andimproving thelanguage ofbusiness: How… 2005, over concerns about accounting mismatches, this issues in unregulated under IFRS, triggering calls for a standard-setting solution (e.g., Elfrink and Ellison 2009). One approach to providing evidence-based normative guidance on such issues is exemplified by Ertimur etal. (2020) who use publicly available data to simulate different conceptually derived possible accounting treatments, and then compare the value relevance of accounting summary measures under each method. 4.2 More targeted andefficient standard setting Many of the challenges in corporate reporting go along with standard-setting implications since policymakers (and forces influencing them) are often likely to be drivers or at least catalysts of these developments. Thus, the standard-setting process and environment also deserve more attention in research in order to better understand and to improve the language of business. Information needs of diverse stakeholder groups: If users do not retrieve corporate information based on their individual preferences (see this point discussed above) standard setters have to provide for standardized information that corresponds to the information demand of at least the aggregated major user groups. The better research is able to identify, disentangle and understand the group-specific information needs in different settings, the more suitable corporate reporting devices can be designed. This kind of research contributes to a more consistent means-end logic in corporate reporting standard setting. Balanced standard-setting participation of stakeholder groups: Better understanding the information needs of stakeholders goes along with more balanced participation and articulation of these groups in the standard-setting process. Prior research documents that users rarely participate, that preparers and auditors have an overall disproportionate influence, and other political forces (e.g., Sutton 1984; Gaa 1988; Saemann 1999; McLeay etal. 2000; Zeff 2002; Becker etal. 2021, 151–182). This imbalance creates a legitimacy problem for standard setters espousing decision usefulness as a core objective, as well as an information problem, to the extent that users’ information needs cannot be observed. In such cases, standard setters as well as preparers can do little but “construct” users information needs based on their own assumptions and private interests (Young 2006; Oberwallner etal. 2021). In order to get closer to understanding users’ needs, research might assist in solving the problem that the costs of accounting standards (incurred mostly by preparers) are immediate and easily measured, whereas the benefits to users, and hence also to preparers can appear distant and elusive. It seems worth discussing possible solutions, for example to involve researchers more intensively than before in standard-setting as advocates of users, due to their more neutral role, which is hopefully driven by research findings of all kinds, either from conceptual considerations or empirical evidence, rather than self-interest. Cost–benefit analysis of reporting standards and regulations: Every regulation in a liberal society with a market economy requires ex-ante justification. To accomplish this task in the field of corporate reporting, normative regulatory theory with reference, for example, to welfare- or microeconomics is useful for conducting 1110 R.U.Fülbier, T.Sellhorn 1 3 convincing cost–benefit analyses (Fülbier etal. 2009; Schipper 2010; with Feldhoff 1992; Fülbier 1998 as examples). These approaches describe an important interface between legal and economic research in the tradition of Posner (2014) and others who examine the economic effects of legal rules. Non-economic analyses from the natural or social sciences, also with reference to higher-level social values, for example in the context of sustainability (e.g., DesJardins 1998; Poff 2010; Steffen etal. 2015), can enrich these justifications in a more interdisciplinary way. Evidence-informed standard setting and policymaking require additional ex-post assessment against ex-ante objectives (Teixeira 2014; Fülbier etal. 2009). Hence, opportunities for standard setters and researchers to collaborate could include committing ex ante to a specific ex-post assessment in the context of Post-Implementa- tion Reviews (PIRs; e.g., Ewert and Wagenhofer 2012). This would imply specifying observable outcomes that reflect a standard’s objective, for example, a change in the number of consolidated subsidiaries around the adoption of IFRS 10 (e.g., Bedford etal. 2022) or in the number of reported operating segments upon the introduction of IFRS 8 (e.g., Moldovan 2014).24 Data availability could be secured by mandating that firms provide certain data in a way that is easily accessed by researchers (Leuz 2018). To generate even more direct causal evidence on the effects of new standards, standard setters and researchers together could devise formal field experiments by which some randomly selected treatment group of firms adopts (pilots) a new requirement before other firms (the control group) do. This suggestion may seem an academic’s ivory tower dream, but as Leuz (2018) documents, has several real-life precedents: “A good example is the Regulation SHO pilot programme that the SEC did on short sale restrictions (e.g., Li and Zhang 2015). Another example is the FINRA tick size pilot programme. I would encourage regulators to perform such pilot studies (with randomisation) more often” (p. 600). Commitments to transparent evidence-based standard setting, including systematic ex-post assessments, may also ease constituents’ concerns about regulatory overreach, since ineffective or inefficient requirements would be weeded out, with only those being retained that ‘survive’ ex-post cost–benefit analysis. One way to achieve this by giving new requirements an ‘expiry date’ whereby they are rescinded unless shown to be effective and efficient during ex-post assessment. For example, the current situation in the evolving field of mandatory sustainability and ESG reporting is characterized by multiple and massive efforts to standardize and regulate additional reporting requirements. Research might help to critically assess these efforts ex ante as well as ex post. The faster these regulations will be developed and deployed, the more important is ex-post assessment—the analysis of whether the regulation has successfully achieved the regulation objective (effectiveness) under cost–benefit considerations (efficiency). Moreover, if massive new non-financial information will be generated due to new sustainability requirements, some of which 24 The IASB has noted the former paper during its PIR, as evidenced by the respective literature review staff paper dated July 2021 (Agenda ref 7D), although it is not clear from public IASB documents whether and how its findings have shaped the IASB’s conclusions. 1111 1 3 Understanding andimproving thelanguage ofbusiness: How… serve changing stakeholder information needs, the more ‘traditional’ reporting requirements should be reviewed and, if necessary, reduced or eliminated. Last, but not least, and linked to the previous point, we need more evidence on and (conceptual/theoretical) understanding of the alleged problem of ‘information overload.’ In times of digitalization and big data, is it really true that more information causes more costs, for preparers including proprietary costs (Verrecchia 1983), and especially to users? What constitutes the information overload? Research might assist here in better understanding the information production by preparers as well as its acquisition and processing by users. The more traditional understanding that users read and digest all the given information might be challenged by a different processing model, where users, using intelligent search strategies, access only certain selected information and expect a great(er) amount of detail there. Admittedly, many of the above suggestions are not new (e.g., Fülbier et al. 2009; Ewert and Wagenhofer 2012; Leuz 2018). However, the question remains why these insights have triggered so few changes in real-life standard setting. Economic theory typically suspects that the issue lies with the incentives of the actors involved. Clearly, corporate reporting standard setting and policymaking are shaped by constituent lobbying—as indicated above. Therefore, the challenge for academic research is not only to provide conceptual and empirical insights to standard setters and policymakers, but also conduct further research into the factors that promote or hinder the ‘translation’ of such insights into actual standards and policies. A rather new strand of literature also highlights the political influence of special interests and ideology on reporting regulation (e.g., Bischof etal. 2020; Becker etal. 2021, 151–182). Here, too, more evidence is needed, especially in the rather new context of sustainability reporting. 4.3 Making targeted transparency regulation effective andefficient Legitimacy of targeted transparency: Corporate reporting is more or less globally regulated and standardized at the national or supranational levels – primarily with a view towards allocation efficiency and capital provider protection. However, the current discussion about sustainability reporting might introduce a different logic: Targeted transparency regulation. Introduced above, targeted transparency regulation uses reporting requirements to promote policy objectives, and as such represents one among several types of policy interventions that vary in the extent to which they interfere with the market mechanism.25 Here, corporate reporting becomes 25 For example, when it comes to combatting the carbon emissions that underlie the climate crisis, three regulatory instruments are available: (1) command-and-control regulation, i.e., requirements (e.g., for home owners to install solar panels) and bans (e.g., of coal-fired power plants, or combustion engines in cars) supplemented with fines or other penalties for violation; (2) financial incentives, such as a carbon tax or a carbon-emissions trading scheme, which harness the market mechanism to achieve emissions reductions more efficiently, i.e., where they are least costly to achieve; and (3) targeted transparency regulation, such as mandatory, audited and enforced public disclosure of carbon emissions and other ESG information – the idea being that forcing firms to disclose their climate-related impact and exposure will unleash responses from shareholders and other stakeholders that will discipline firms to cut emissions. 1112 R.U.Fülbier, T.Sellhorn 1 3 more political in nature: The regulator has a ‘steering function’ in mind, driven by a political agenda. Guiding corporate decisions in a particular direction seems more important than providing (neutral) information to support decision-making in whatever direction. Is targeted transparency regulation a legitimate regulatory instrument for fostering policy objectives? If research will contribute in this regard, more investment seems necessary to better understand the role of corporate reporting as a means to an end. Is this really a new challenge for research or quite similar to current and prior times where information flows to capital markets have been justified (also by researchers) with reference to the market efficiency doctrine? This includes an economic analysis of alternative instruments to foster the corporate incentives for a more ESG-compliant behavior. At the meta level, an additional political and philosophy-of-science debate seems inevitable: To what extent do research and researchers want to serve politics and politicians (one could also say “society”) – either by developing instruments for a given political agenda (i.e., conditionally normative; Mattessich 1995a, 1995b) or by proposing their own normative agendas (purely normative)?26 Although the sustainability goals may seem unquestionable to many (and, to the extent they are the subject of international accords like the Paris Agreement, in fact are legally binding), this might not be true for sub-goals or entirely different objectives, including ideology-driven ones. However, this discussion is linked again to the one about value judgments in science, which has not been settled even after more than 100years (Fülbier and Weller 2008). Causal mechanism of targeted transparency: If targeted transparency regulation is viewed as legitimate, it is helpful to conduct ex-post studies of targeted transparency regulation already implemented (e.g., Christensen etal. 2017; for a review, refer to Hombach and Sellhorn 2019). There is also a need for more ex-ante research that helps with the normative design of effective and efficient policy interventions (Fülbier etal. 2009). Such research needs to unpack the causal chain of mandatory public disclosure, stakeholder actions, and firms’ adaptive responses that underlies the ‘targeted transparency action cycle’ (Fung etal. 2007; Weil etal. 2013). As discussed in Hombach and Sellhorn (2019), the effectiveness of such requirements hinges on stakeholder pressure facilitated by previously private information, for example about a firm’s environmental externalities, forced into the open and exposed to public scrutiny. This causal mechanism consists of several links, all of which can be characterized by individuals and their responses to new information. Some expect (or hope) that increased transparency can be part of the solution to some of the ESG issues the world is facing. Research of all kinds needs to further ‘unpack’ these links to provide insights into ways of making targeted transparency more effective and efficient towards this end. Establishing impact accounting: We are in the middle of a societal debate about how best to achieve sustainable development (hereinafter exemplified by net-zero GHG emissions, or the Paris Agreement’s 1.5° goal). Climate change and other 26 Joachim Gassen, for example, talked recently at the Ruhr-University Bochum about this issue; he used the pointed title: “Should accountants change the world? 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