Accounting

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    The risk culture in financial institutions needs fixing, but how?

The risk culture in financial institutions needs fixing, but how?

Canary Wharf Skyline, by David Iliff, under a CC-BY-SA-3.0 licence
In the aftermath of the financial crisis and other large scale corporate scandals, a large number of public inquires and documents written by regulators, consulting firms and professional associations drew attention to something that needs fixing: the risk culture of financial sector organisations (see, for example, publications by the International institute of Finance, the Financial […]

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    Measuring social impact is complicated and may create dysfunctional incentives

Measuring social impact is complicated and may create dysfunctional incentives

Home, by George Hodan, Public Domain
Increasingly, people who work for the good of humanity speak the language of business (G8, 2014). Social impact reporting has become best practice for many social enterprises, which use metrics such as ‘social return on investment’ as a means of quantifying their success. ‘Social impact’ can be seen as the social sector analogue of ‘profit’ in […]

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    Untied to economic fluctuations, insurers are less likely to generate systemic risks

Untied to economic fluctuations, insurers are less likely to generate systemic risks

In a nutshell, macroprudential regulation is made up of two building blocks: surveillance and supervision. Surveillance is concerned with identifying, assessing and monitoring the build-up of systemic risks, i.e., those regarding the financial stability of a country or region. Supervision is aimed at preventing, mitigating and managing systemic risks.

A key lesson from the recent global financial crisis is that […]

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    Should auditors be reviewed by peers or should the state do it?

Should auditors be reviewed by peers or should the state do it?

Financial reporting and auditing are vital elements for global capital markets. The confidence in the financial market’s efficiency is bolstered by the trust placed in auditing being able to operate as an external controlling function, something that has led to the audit profession being perceived as the “guardians of truth in markets”. However, concerns over the guardians’ trustworthiness are […]

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    Why airplanes take off and land safely despite all the risks

Why airplanes take off and land safely despite all the risks

You are sitting on an airplane, enjoying the end of a flight back home. The flight lands ok, the pilot and crew thank you for choosing airline X – persuasively saying that they look forward to seeing you again on board – the doors open ok and you can happily disembark the aircraft. It happens for thousands of flights […]

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    Reducing budget slack may lead managers to focus on the short term

Reducing budget slack may lead managers to focus on the short term

Every time I see corporate accounting irregularities in the news I recall how a key finding in my doctoral research some time ago has remained relevant. The research showed support for a spillover effect between slack resources and managerial time horizon. Kind of like a ‘whack-a-mole’ effect. Slack refers to securing more resources (such as during an organization’s annual […]

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    Have unified standards made financial reporting more comparable?

Have unified standards made financial reporting more comparable?

The mandatory adoption of International Financial Reporting Standards (IFRS) by European listed firms in 2005, accompanied by similar regulatory action worldwide, represents one of the most influential accounting rule changes in history. The switch from a diverse set of domestic financial reporting regulations to a common set of accounting standards has affected thousands of companies that differ in terms […]

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    Management control systems have evolved to address the need for innovation

Management control systems have evolved to address the need for innovation

Innovation is the adoption of an idea or behaviour pertaining to a product, service device system, policy or programme that is new to the adopting organisation. Innovation has been recognised as a significant aspect of corporate survival. This has become particularly apparent in recent years as firms are increasingly operating in highly competitive markets where technologies are constantly developing, […]

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    Community involvement lends legitimacy to firms’ social accounting

Community involvement lends legitimacy to firms’ social accounting

Social accounting is a broad term describing a range of company reports on community or wider stakeholder engagement. It is often viewed as a simple process of one-way communication as a company seeks to put forward an account of its social impact. It is less regulated in form than financial accounting, and its purpose is usually framed as winning […]

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    Institutions that settle market transactions need strong corporate governance

Institutions that settle market transactions need strong corporate governance

There have been a variety of systemically important banking issues making the headlines since the global recession of 2008, but the challenge to mitigating credit risk during settlement seems to be a constant frontrunner. This article discusses the importance of effective liquidity management, particularly from the sphere of timely payment settlement via financial market utilities (FMUs), defined as “multilateral systems that […]

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    Evidence suggests that firms set targets to avoid small losses

Evidence suggests that firms set targets to avoid small losses

The first picture shows the distribution of actual earnings in our study on target setting (see the study in brief box below) and replicates a well-established finding that reported earnings exhibit a ‘discontinuity at zero’ (meaning that there are disproportionally fewer firms with small losses compared to small profits), which one might surmise perhaps suggests that firms ‘manage’ earnings […]

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    While Bitcoin is virtual, the rewards and risks are very real

While Bitcoin is virtual, the rewards and risks are very real

Technology and finance have always gone together. So what’s new this time around? Virtual currencies are part of a broader tech revolution that is driving fundamental change in the global economy.

While the money is virtual, the rewards and the risks are very real. It boils down to this: how best to encourage financial innovation while regulating to protect consumers […]

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    An environmental disaster in Brazil raises highly problematic risk and regulation issues

An environmental disaster in Brazil raises highly problematic risk and regulation issues

The bursting of the dam in Mariana in the Brazilian state of Minas Gerais on 5 November 2015 has generated considerable headlines. The dam containing the tailings of the Fundão iron-ore mine caused at least 16 fatalities, displaced hundreds, disrupted water supplies and caused considerable environmental and ecological damage. It also had potential devastating economic and social impacts on […]

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    When managing risk, overconfident managers don’t always follow the fundamentals

When managing risk, overconfident managers don’t always follow the fundamentals

Why and how firms hedge has been an area of interest in corporate finance for a long time. The traditional notion of hedging is matching one risk with an opposing risk. Gains on the hedge offset the losses on the position otherwise exposed to price uncertainty, making the resulting cash flow volatility lower. The traditional theories of corporate risk […]

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    Friday timing plus social media multipliers may mean Paris attacks have more impacts on markets

Friday timing plus social media multipliers may mean Paris attacks have more impacts on markets

Until recently, the lamentations (right, wrong or simply irrational) of the world’s discontent were only a nuisance to the status-quo. The proliferation of social media, however, has facilitated the dissemination of irrational ideas. A notion which required generations to gain traction is now instantaneously impressed on the minds of numerous, ready and willing subjects throughout distant lands. As a […]

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    With manager performance metrics, the tricky question is how to reward long-term thinking

With manager performance metrics, the tricky question is how to reward long-term thinking

Some time ago I was asked to comment on a study that found that the use of accounting return measures and non-financial measures in bonus plans was associated with managers’ long-term focus. This suggests that proper performance measurement systems can affect managers’ horizon and alleviate myopia.
Myopia is indeed a pervasive issue in business, as the Kay Review suggests (amongst countless others). The blame is often squarely […]

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    Business groups manage credit risk by reshuffling resources amongst units

Business groups manage credit risk by reshuffling resources amongst units

Business groups constitute a common way for ultimate owners to exercise control over a large number of companies while containing their risk exposure to different parts of the business through limited liability. In countries with underdeveloped financial infrastructures, these groups overcome difficulties in accessing external finance by reshuffling funds within the corporate structure.

Group bankruptcies tend to be large (e.g., Global […]

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    Large EU banks have remained undercapitalised for long stretches of time

Large EU banks have remained undercapitalised for long stretches of time

The Basel Committee on Banking Supervision (BCBS) has designed complex rules for defining sufficient capital at internationally active financial institutions. Pillar II of the Basel Accord requires national supervisors to assure continuous compliance with capital standards, which require a minimum ratio of the book value of equity capital to a bank’s risky assets. An adequate Tier 1 capital ratio […]

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    Managers with a history of good results get more flexible performance targets

Managers with a history of good results get more flexible performance targets

Here is one diehard maxim of business: don’t overshoot your performance target this year, because before you know it the one for next year will be tougher yet. This is target ratcheting at work: when you do better than the established goal, your next objective will be even higher; but the converse is not true. If you do worse, the company will […]

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    Hollywood studios appear to plan sequels before they produce the original movie

Hollywood studios appear to plan sequels before they produce the original movie

The recent box office success of Jurassic World, the latest Jurassic Park sequel, reminded me of my study about the use of real options in the motion picture industry*, which examined the application of this accounting tool to movie sequels.

A real option is the right, but not the obligation, to undertake a business decision. More importantly, a real-options approach to […]