Skip to main content

Principles & topics

Our core principles

Accounting research that matters

The CFRA uses rigorous methods to address research questions of practical relevance to financial reporting and auditing. It produces new insights and serves as a hub, communicating research insights to practitioners and research interests to academia. Practitioners include corporate decision makers and preparers, auditors, advisors, regulators, and the investment community as well as society-at-large to the extent that it is interested in corporate transparency.

 

International network and reach

Building on the ESMT approach, the CFRA is a genuinely international activity. The academics involved in CFRA have a strong international network, and the corporate partners of the CFRA are global organizations. This is crucial because financial reporting and auditing has developed from a mostly legalistic affair to a key component of international corporate governance. Its link to corporate communication and business intelligence is evolving, implying that it is a central building block to corporate transparency and sound decision-making. These activities know no national borders.

 

Cooperative action

The CFRA cooperates with related institutions to reach its objectives. Its members participate in initiatives like the European Accounting Association, the American Accounting Association, Accountancy Europe, the Schmalenbach-Gesellschaft für Betriebswirtschaftslehre, the academic panel of the European Financial Reporting Advisory Group, and the Ausschuss Unternehmenrechnung of the Verein für Socialpolitik, among many others. We maintain close research links with leading universities around the world. Joining forces with these and other institutions we can significantly contribute to the development of financial reporting and auditing.

CFRA Imagery: Right on the money
Right on the money

Corporate jets and private meetings with investors

Brian Bushee (The Wharton School), Joseph Gerakos (The Tuck School of Business at Dartmouth) and Lian Fen Lee (Boston College Carroll School of Management)

Our topics

  • Natural language processing in financial markets

    Analysis of qualitative information has a long tradition in computer science (Natural Language Processing – NLP) and linguistics (corpus linguistics). The analysis of language ‍(spoken and written) can provide powerful insights in studying economic consequences, and methods applied only recently started to gain traction in accounting and finance. Estimates suggest that 90% of all available data created in the last 10 years, 80% of which in a business context, is qualitative/unstructured.

     

    Literature in accounting and finance has only scratched the surface of textual analysis capabilities, and reliance on basic NLP techniques is primarily involving “bag-of-words” methods and make little use of corpus methods. Estimates say that in accounting and finance the state of affairs is significantly behind developments in computational linguistics and machine learning. Surprisingly little is known about how corporate disclosures interact with alternative information sources to influence investor behavior. Recently, however, hedge funds have started to make more and more use of textual analysis for trading purposes, which makes it even more important for corporations to use language strategically.

     

    The amount of corporate information is increasing exponentially and most of it is non-numerical data, such as texts, images and video. Regulatory innovations in the area of financial and non-financial reporting require corporations to provide rich information not only on their financial activities but also on their corporate governance, as well as their environmental and their social activities. Information provided by financial analysts, the media but also by users of social networks add to the mix.

     

    How does this new informational landscape shape corporate transparency? Are financial markets still capable to siphon through all this data, pricing firms correctly? How do institutional investors deal with these questions? Is regulatory intervention needed? These where the motivating questions for the Center for Financial Reporting and Auditing at ESMT Berlin to organize a one-day workshop on natural language processing in financial markets.

     

  • Entrepreneurial accounting

    In an increasingly regulated corporate world, accounting has become an extensive subject that is vital for companies, but in which only specialists hold sufficient expertise. Start-up firms enjoy exemptions from many regulatory requirements, but still need to implement accounting systems early on in their lifecycle and as they grow. 

     

    We aim to investigate the venturing environment, where accounting systems have not yet been established or formalized, or are in the development process. Different actors with a different degree of accounting expertise influence therefore the emerging design of accounting systems that is needed not only to comply with regulatory requirements (e.g. taxation), but also for internal decision-making. This knowledge disparity leads to a significant expertise asymmetry in the start-up’s environment, potentially provoking power games that can hinder the core business and therefore the growth of the company. 

     

    Entrepreneurial accounting research is relevant for society in broader terms, because the European (and worldwide) venture market is constantly growing, increasingly contributing to national economies. It provides valuable insights in how to facilitate start-ups’ compliance with regulation, while also identifying areas where entrepreneurs may be relieved from requirements. Hence, our research is also policy-relevant in that it can help inform legislators on how to create an enabling entrepreneurial economy.

     

  • Narrative disclosures

    Narrative disclosures represent a large part of companies’ overall financial communications with investors. Textual commentaries are meant to help to clarify issues that can be obscured by complex accounting methods and footnote disclosures. In addition, narratives summarize corporate strategy, contextualize results, explain governance arrangements, describe corporate social responsibility policy, and provide forward looking information for investors. Recent academic linguistic research has made great progress in measuring the quality and tone of company narratives, and has documented various ways in which narratives have affected overall financial reporting quality, for better or (sometimes) for worse.

  • Transparency and trust - the new auditor reporting model

    The requirements governing auditor reporting have recently been substantially enlarged. A recent EU Regulation of 16 April 2014 among other things requires a description of the most significant assessed risks of material misstatement in the financial statements, a summary of the auditor’s response to those risks, and, where relevant, key observations arising with respect to those risks. ISA 701 "Communicating key audit matters in the auditor’s report" was issued by the International Auditing and Assurance Standards Board (IAASB) in January 2015 and requires the auditor to discuss key audit matters. Such recent regulatory measures can have substantial influence over information flows both within the firm (between auditors, audit committees and firms’ supervisory boards) as well as over information in external financial reports, where care has to be exercised to ensure consistency. 

     

    Activities around this question would involve academics, preparers, auditors as well as representatives from the Federal Ministry of Justice and Consumer Protection, the EU and from the IAASB.  We would also draw on international experience---for example, the UK is approaching the third financial reporting period where similar requirements are in place, so it is helpful to draw on their experience.

     

  • Do pension obligations keep you awake at night?

    The current low interest rates have wide-reaching economic consequences for corporations. On the one hand, debtors can take advantage when financing or re-financing investments. On the other hand, low interest rates can put a severe burden on the financial position of an entity, not least because of the effect on pension liabilities, with various consequences. 

     

    More and more analysts and economists now assume that low interest rates will prevail for a long time despite the dangerous consequences they may entail. We believe it is worthwhile to elaborate on the matter from different perspectives. It is not simply an accounting issue or a matter for actuaries, but also involves many economic questions, financing challenges and tax implications. 

     

    We intend to have activities around this issue, both on the very practical accounting issues involved as well as the policy issues. This will naturally involve attendees from industry, accounting firms and the actuarial profession, but also from government, unions, and various national and international policy makers.

     

Contact CFRA

For all questions, write to us at

cfra@esmt.org