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Governance in the era of an information credibility crisis: what accountants should consider

A decade on from the 2008 financial crash, how has governance and transparency in accounting changed, and what challenges lie ahead?

A cavalier attitude to governance is widely held to be one of the main rocks on which the ship of international finance foundered during the global banking crisis of 2008. As Alan Jagolinzer, Professor of Financial Accounting and Head of the Accounting faculty subject group at Cambridge Judge Business School, prepares to help launch Cambridge’s new Master of Accounting (MAcc) degree, the recent and future trajectory of governance is never far from his mind.

“Many governance mechanisms have been called into question since the crash, including board structure, compensation incentives, and corporate policies. One of the most prominent governance issues highlighted was the need for better transparency regarding financial reporting. Financial reporting is central to good governance because it offers some transparency into corporate practice and feeds into areas like compensation. In the atmosphere pre-2008 it seems clear, for example, that financial and other institutions were not disclosing credible estimates of the losses associated with some of their riskier and harder-to-value assets.”

Efforts since to significantly improve reporting have included initiatives by the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) in London to make financial institutions estimate, and disclose in a more timely fashion, expected credit losses on their asset portfolios. This adds up to major change for companies – and their accountancy personnel, as Alan explains:

Professor Alan Jagolinzer

“This has big implications for many companies that hold these assets, likely inducing large asset write-downs in the period of the adoption of the new reporting standards. Accountants are going to be very busy and they’re going to have to be on top of the new rules.

“Although I don’t think there’s necessarily a connection to the bank crisis, there have also been major financial reporting changes that relate to accounting for insurance contracts and leases, to try to provide clearer insight into the nature of a company’s liabilities, for example. Likewise, there have been changes, particularly in the US, to try to provide more audit engagement context within corporate audit reports.”

Along with changes in regulations, one of the main challenges Alan predicts arising from the current environment is finding a way to “articulate the credibility of truly credible information”.

“We now live in a world where evidence-based research, standards-compliant reports, and even documented facts are challenged by people who want to spread disinformation or deflect attention away from what they’re doing. This potentially damages the perceived credibility of more-verifiable information released to the public. In the corporate environment, we see company managers regularly providing their own non-GAAP, and arguably less reliable, metrics – financial results that do not comply with the financial reporting standards – to stakeholders, perhaps because they don’t want stakeholders to focus on the potentially less flattering GAAP-compliant metrics. This can be problematic and potentially misleading, so it has caught the attention of market regulators and standard setters.”

Alan advises that all public-information-supply professions, like accounting and news agencies, need to think carefully about how to navigate this new environment where there are alternative broadcast mechanisms that allow people to disseminate false information or falsely attack the credibility of verifiable information. New practices may need to be considered:

“I think there is an emerging general need for information trust-enhancement mechanisms, such as third-party attestation services to news agencies. I also think that anyone who offers attestation services, including financial reporting audits, should consider general-public marketing campaigns to articulate why they should be trusted to offer unbiased assessment of information verification.”

As for key trends that a new Master of Accounting should be keeping in mind, Alan cites the increasing importance of data and the closely related requirement for strong client relationships.

“A key trend is reliance on data analytics to inform estimates and attestation. That’s one reason why the MAcc will focus heavily on how to process and draw inferences from data. A related issue is understanding how to gain access to informative data – which often requires interpersonal and negotiation skills. A vital element of the MAcc programme will be helping students develop excellent client engagement skills, so they leave better able to negotiate robust relationships and contracts, such as access to confidential, but highly useful, data.”

Alan also re-emphasises the dangers of growing public confusion about the credibility of information sources and explains how the MAcc will be a valuable source of credibility for candidates:

As stated, I predict that targeted disinformation and distraction campaigns to diminish trust in otherwise verifiable information will be another key trend. So, we have designed the MAcc to enhance students’ credibility by offering a cutting-edge real-world curriculum developed with global-expert advisors. Candidates will gain a lot from the combination of developing their technical and interpersonal skills and engaging closely with a network of globally credible experts in the field.

The Cambridge Master of Accounting degree launches in Autumn 2018. The part-time programme will be run by Cambridge Judge Business School and is designed to develop global leaders in financial information. You can find out more by exploring the Master of Accounting (MAcc) webpages or attending one of the information events and webinars running throughout the year.