No Contest: Can Financial Reporting Standards Achieve Comparability in the Face of Financial Engineering

32 Pages Posted: 12 Nov 2019

See all articles by Erik Olson

Erik Olson

Yale University, School of Management

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: October 31, 2019

Abstract

By comparing the accounting of 10 transaction methods designed to achieve the same net economic effect for a firm borrowing a given amount of money, we show that these 10 methods, under the current financial reporting standards, have markedly different consequences for a firm’s financial reporting. It follows that agents (e.g., managers, auditors, shareholders, and regulators, etc.) with different interests in financial reports may employ different methods of achieving the same net economic result. Accounting regulators can only specify how preparers should account for a given transaction; regulators have little control over the transactions and instruments firms choose to use. The broad range of financial reporting consequences of a given economic transaction, with regard to financial engineering, points to the difficulty — and even virtual impossibility — of regulators achieving comparability and consistency among firms’ financial reports. Despite attempts at regulation and the voluminous GAAP regulations, we reveal that managers remain free to engineer their transactions to publish their firm’s desired (or engineered) financial reports since these accounting methods are largely reported inconsistently with no comparability.

Keywords: financial reporting standards, comparability, financial engineering, regulation

JEL Classification: G23, G28, M48

Suggested Citation

Olson, Erik and Sunder, Shyam, No Contest: Can Financial Reporting Standards Achieve Comparability in the Face of Financial Engineering (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3479338 or http://dx.doi.org/10.2139/ssrn.3479338

Erik Olson

Yale University, School of Management ( email )

New Haven, CT
United States

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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