IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/110220.html
   My bibliography  Save this paper

The financial reporting system - what is it?

Author

Listed:
  • Power, Michael

Abstract

This experimental essay constructs a conversation between systems thinking and financial reporting. First, general ideas of system and ecology are introduced and used to inform a review of three overlapping clusters of accounting research. Each of these clusters assumes and emphasises different system characteristics. Second, these characteristics are blended within the model of the financial reporting system as a risk cycle. Third, critical challenges in modelling the financial reporting system are considered, with a focus on the position of a financial reporting regulator. Finally, in a thought experiment, the perspective of a hypothetical non-executive director on the board of a regulator with system-wide responsibilities is adopted. The essay proposes some questions that such a director could expect a model of the financial reporting system would help to answer. Borrowing from ecology, it is argued that any model of the financial reporting system must: be as simple as possible without being too simple; be dynamic and focused on relationships rather than static entities; and embrace risk and uncertainty to avoid ‘illusions of control’.

Suggested Citation

  • Power, Michael, 2021. "The financial reporting system - what is it?," LSE Research Online Documents on Economics 110220, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:110220
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/110220/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Howard Davies & Maria Zhivitskaya, 2018. "Three Lines of Defence: A Robust Organising Framework, or Just Lines in the Sand?," Global Policy, London School of Economics and Political Science, vol. 9(S1), pages 34-42, June.
    2. Senge, Peter M. & Sterman, John D., 1992. "Systems thinking and organizational learning: Acting locally and thinking globally in the organization of the future," European Journal of Operational Research, Elsevier, vol. 59(1), pages 137-150, May.
    3. Nikolaus Hautsch & Julia Schaumburg & Melanie Schienle, 2015. "Financial Network Systemic Risk Contributions," Review of Finance, European Finance Association, vol. 19(2), pages 685-738.
    4. Cooper, David J. & Sherer, Michael J., 1984. "The value of corporate accounting reports: Arguments for a political economy of accounting," Accounting, Organizations and Society, Elsevier, vol. 9(3-4), pages 207-232, October.
    5. Leuz, Christian & Pfaff, Dieter & Hopwood, Anthony (ed.), 2004. "The Economics and Politics of Accounting: International Perspectives on Trends, Policy, and Practice," OUP Catalogue, Oxford University Press, number 9780199260621.
    6. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    7. Spira, Laura F. & Slinn, Judy, 2013. "The Cadbury Committee: A History," OUP Catalogue, Oxford University Press, number 9780199592197.
    8. Hood, Christopher & Rothstein, Henry & Baldwin, Robert, 2004. "The Government of Risk: Understanding Risk Regulation Regimes," OUP Catalogue, Oxford University Press, number 9780199270019.
    9. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
    10. Scott, John, 1988. "Social Network Analysis and Intercorporate Relations," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 23(1), pages 53-68, December.
    11. Michael Power, 2010. "Fair value accounting, financial economics and the transformation of reliability," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 197-210.
    12. Mennicken, Andrea, 2010. "From inspection to auditing: Audit and markets as linked ecologies," Accounting, Organizations and Society, Elsevier, vol. 35(3), pages 334-359, April.
    13. Kraakman, Reiner H, 1986. "Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 53-104, Spring.
    14. Lev, B & Ohlson, Ja, 1982. "Market-Based Empirical-Research In Accounting - A Review, Interpretation, And Extension," Journal of Accounting Research, Wiley Blackwell, vol. 20, pages 249-322.
    15. Gjesdal, F, 1981. "Accounting For Stewardship," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 208-231.
    16. Traian Dutia, 1995. "The restructuring of the system of accounting in Romania during the period of transition to the market economy," European Accounting Review, Taylor & Francis Journals, vol. 4(4), pages 739-748.
    17. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    18. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 353-385.
    19. Mennicken, Andrea, 2010. "From inspection to auditing: audit and markets as linked ecologies," LSE Research Online Documents on Economics 27054, London School of Economics and Political Science, LSE Library.
    20. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    21. Power, Michael, 2021. "Modelling the microfoundations of the audit society: organizations and the logic of the audit trail," LSE Research Online Documents on Economics 100243, London School of Economics and Political Science, LSE Library.
    22. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    23. Alexandra Hessling & Hanno Pahl, 2006. "The Global System of Finance," American Journal of Economics and Sociology, Wiley Blackwell, vol. 65(1), pages 189-218, January.
    24. Hines, Ruth D., 1988. "Financial accounting: In communicating reality, we construct reality," Accounting, Organizations and Society, Elsevier, vol. 13(3), pages 251-261, April.
    25. Correia, Maria M., 2014. "Political connections and SEC enforcement," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 241-262.
    26. Tinker, Tony & Neimark, Marilyn, 1987. "The role of annual reports in gender and class contradictions at general motors: 1917-1976," Accounting, Organizations and Society, Elsevier, vol. 12(1), pages 71-88, January.
    27. Morgan,Mary S., 2012. "The World in the Model," Cambridge Books, Cambridge University Press, number 9781107002975.
    28. Ball, Ray & Robin, Ashok & Wu, Joanna Shuang, 2003. "Incentives versus standards: properties of accounting income in four East Asian countries," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 235-270, December.
    29. Tinker, Tony, 1991. "The accountant as partisan," Accounting, Organizations and Society, Elsevier, vol. 16(3), pages 297-310.
    30. Humphrey, Christopher & Loft, Anne & Woods, Margaret, 2009. "The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 810-825, August.
    31. Christian Leuz, 2010. "Different approaches to corporate reporting regulation: How jurisdictions differ and why," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 229-256.
    32. Morgan,Mary S., 2012. "The World in the Model," Cambridge Books, Cambridge University Press, number 9780521176194.
    33. Sebastian Botzem, 2012. "The Politics of Accounting Regulation," Books, Edward Elgar Publishing, number 13992.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    2. Rolf Uwe Fülbier & Joerg‐Markus Hitz & Thorsten Sellhorn, 2009. "Relevance of Academic Research and Researchers' Role in the IASB's Financial Reporting Standard Setting," Abacus, Accounting Foundation, University of Sydney, vol. 45(4), pages 455-492, December.
    3. Anna Samsonova-Taddei, 2013. "Social Relations and the Differential Local Impact of Global Standards: The Case of International Standards on Auditing," Abacus, Accounting Foundation, University of Sydney, vol. 49(4), pages 506-538, December.
    4. Iatridis, George, 2010. "International Financial Reporting Standards and the quality of financial statement information," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 193-204, June.
    5. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    6. Kothari, S.P. & Ramanna, Karthik & Skinner, Douglas J., 2010. "Implications for GAAP from an analysis of positive research in accounting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 246-286, December.
    7. Christoph Kuhner & Christoph Pelger, 2015. "On the Relationship of Stewardship and Valuation—An Analytical Viewpoint," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 379-411, September.
    8. Oehr, Tim-Frederik & Zimmermann, Jochen, 2012. "Accounting and the welfare state: The missing link," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(2), pages 134-152.
    9. Smith-Lacroix, Jean-Hubert & Durocher, Sylvain & Gendron, Yves, 2012. "The erosion of jurisdiction: Auditing in a market value accounting regime," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(1), pages 36-53.
    10. Erb, Carsten & Pelger, Christoph, 2015. "“Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting," Accounting, Organizations and Society, Elsevier, vol. 40(C), pages 13-40.
    11. Hu, Jinshuai & Kim, Jeong-Bon, 2019. "The relative usefulness of cash flows versus accrual earnings for CEO turnover decisions across countries: The role of investor protection," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 34(C), pages 91-107.
    12. Horvat Robert & Korošec Bojana, 2015. "The Role of Accounting in a Society: Only a techn(olog)ical solution for the problem of economic measurement or also a tool of social ideology?," Naše gospodarstvo/Our economy, Sciendo, vol. 61(4), pages 32-40, August.
    13. Houcine, Asma, 2017. "The effect of financial reporting quality on corporate investment efficiency: Evidence from the Tunisian stock market," Research in International Business and Finance, Elsevier, vol. 42(C), pages 321-337.
    14. Alberto Quagli & Corrado Lagazio & Paola Ramassa, 2021. "From enforcement to financial reporting controls (FRCs): a country-level composite indicator," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(2), pages 397-427, June.
    15. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    16. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    17. Asokan Anandarajan & Bill Francis & Iftekhar Hasan & Kose John, 2011. "Value relevance of banks: global evidence," Review of Quantitative Finance and Accounting, Springer, vol. 36(1), pages 33-55, January.
    18. Mehrpouya, Afshin & Salles-Djelic, Marie-Laure, 2019. "Seeing like the market; exploring the mutual rise of transparency and accounting in transnational economic and market governance," Accounting, Organizations and Society, Elsevier, vol. 76(C), pages 12-31.
    19. Zhang, Eagle & Andrew, Jane, 2016. "Rethinking China: Discourse, convergence and fair value accounting," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 36(C), pages 1-21.
    20. Boubaker, Sabri & Labégorre, Florence, 2008. "Ownership structure, corporate governance and analyst following: A study of French listed firms," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 961-976, June.

    More about this item

    Keywords

    ecology; financial reporting; risk regulation; risk cycle; systems theory; systems thinking; Taylor & Francis deal;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:110220. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.