Bio- and regenera- tive Medicine as an important growth Market

18 HHL RESEARCH REPORT 2012 finAnCE, ACCOunTing And CORPORATE gOvERnAnCE 19
cHair oF accounting and auditing
“the trust in
capital Markets must
be re-estab lished”
What is your motivation for supporting
the Chair in its research work?
Prof. Dr. Mark-Ken erdmann:
Having a close interaction between
theory and practice is beneficial
for both sides, especially due to the
increasing complexity of regulations .
While business practice may serve as
a source for research topics that are
not always obvious at first glance, the
academic environment provides outstanding
opportunities for managers
to remain up-to-date regarding current
developments and to assure a steady
transfer of state-of-the-art knowledge
into companies . In this respect, HHL
offers an excellent platform .
In what respect is research on
consolidation and other topics
being discussed at HHL relevant
for practice?
Prof. Dr. Mark-Ken erdmann:
The term “consolidation” is somewhat
restrictive since in the end
management needs to receive
information that is relevant for
steering their company . HHL is
well prepared in this respect .
The systematic integration of
accounting-related (Chair of
Accounting and Auditing) and
financial knowledge (Chair of
Financial Management) at the
Center for Financial Reporting and
Consolidation is the right approach,
especially since in practice “consolidation”
is increasingly driven by the
need to also solve valuation issues .
Prof. Dr.
Mark-Ken Erdmann
What are the challenges that theory
and practice have to face in this field?
Prof. Dr. Mark-Ken erdmann:
In my opinion, it is essential that theory
helps to solve practical problems in
a systematic and scientifically wellfounded
manner; and that business
practice implements the respective
solutions accordingly . Foremost the
trust in capital markets must be reestablished
sustainably . In the long run
this may only be achieved by - amongst
others - a close interaction of theory
and practice . Both theory and practice
are required to focus on the true essentials,
most importantly they need to
face the at least partly exaggerated
Anglo-American developments by
presenting alternative solutions .
the acquisition of another company .
It therefore is a pre-stage to preparing
consolidated financial statements . The
Chair‘s research focuses on management’s
role in the context of an acquisition
and its effects on the financial
statements . A current working paper
examines the link between management
compensation and the amount
of goodwill recognized as an asset in
the balance sheet . The key finding is
that the CEO’s short-term cash bonus
is a determinant of goodwill if it makes
up between 150 and 200 percent of his
or her fixed salary . This result implies
the following: Limiting the CEO’s
short-term bonus to 150 percent of its
fixed salary may help avoid excessive
goodwill accounting thus decreasing
the risk of future extraordinary losses
(impairments) .
With regard to regulations and procedures
the newly issued accounting
standards IFRS 10, 11 and 12 are of particular
importance . Those regulations
will alter reporting practice significantly
and will come into effect on January
1, 2013 . Research in this area critically
examines the new regulations based
on relevant theories of consolidated
accounts . It is analyzed whether the
new requirements satisfy the information
needs of stakeholders and whether
previously existing regulatory gaps
were closed by the new regulations .
In the course of the Chair’s research on
the impairment of assets, consequences
of mergers and acquisitions are examined
from an accounting perspective . In
this context it is important to consider
the regulations of IAS 36, which require
companies to regularly assess whether
the book value of an asset needs to be
written down extraordinarily . With
regard to mergers and acquisitions, the
intangible asset ‘goodwill’ requires
special attention . Goodwill is that part
of the purchase price that the acquirer
paid in excess of the current value
of acquired net assets . A worsened
economic outlook, negative industry
conditions or unfavorable management
decisions may require impairing capitalized
goodwill . In a recent research paper
the Chair examines determinants of
impairment decisions of listed companies
in Germany between 2004 and
2009 . In this context, the influence of
both economic factors and accounting
incentives on impairment decisions was
analyzed . It was found that management’s
desire to smooth earnings had a
significant influence on the respective
impairment decisions . Moreover, impairment
of intangible assets turned out
to be more likely in years in which there
was a change in management .
Performance
Reporting
The research field of performance
reporting focuses on the presentation of
a company’s profits and losses . The
International Accounting Standards
Board (IASB) and the U .S . Financial
Accounting Standards Board (FASB) aim
to align and harmonize their respective
accounting standards IAS 1 “Presentation
of Financial State ments” and
SFAS 130 “Reporting Comprehensive
Income” during the course of their Joint
Financial Statement Presentation Pro -
ject . The presentation of income and
expenses in international financial
statements are to be improved in order
to meet users’ needs more adequately
than before . It is therefore essential to
critically examine the forthcoming
standard, also with regard to potential
management discretion .
The Chair’s current research examines
the extent to which German companies
use discretion in the course of accounting
for pension obligations and how this
affects the capital market . Discretion
may, among other things, be exercised
when estimating the life expectancy of
eligible employees and when making assumptions
on the company’s employee
structure as well as salary development .
Accounting for pension obligations is
frequently mentioned in the business
press, especially because these obligations
often make up a significant share
of a company‘s total liabilities .
Glossary
iFrS
International Financial Reporting Standards (IFRS)
comprise a conceptual framework and principlesbased
accounting standards issued by the International
Accounting Standards Board (IASB).
It is found that companies indeed
make use of the discretion provided by
the accounting standard for pension
obligations . The findings suggest that
companies with underfunded pension
obligations use discretion as a way to
achieve positive capital market reactions
(i .e . share price increases) . In
other words, if a listed company has
an underfunded pension plan, i .e . the
company has not saved enough capital
for future pension payments, it aims to
hide this fact in its financial statements
by using discretion such that the share
price at least does not decrease . These
findings are of particular relevance for
capital market research since it has not
yet been conclusively shown how discretion
in accounting standards affects
stock markets .
Standard Setting &
enforcement
The research field of standard setting
and enforcement deals with the emergence
of accounting regulations (standard
setting) on the one hand and the
legal enforcement of accounting standards
on the other .
The dissertation by Dr . Sebastian
Hoffmann entitled “Lobbying im
Rahmen der Entstehung von Rechnungslegungsnormen”
(“Lobbying in
the Context of Accounting Standard
Setting”), submitted in 2011, is at the
core of the Chair’s research on standard
setting . The nucleus of this dissertation
is a research paper on the work of the
technical staff of the International
Accounting Standards Board (IASB) .
It is shown that comments on regulatory
proposals that are sent by companies,
accountants, associations, etc . are
not consistently and comprehensively
evaluated by the IASB’s staff . In fact,
seemingly critical statements are underweighted
. Hence, the public cannot ob -
tain an accurate picture of the actual
statements and the opinions expressed
therein when reading the summary
of comments prepared by the IASB .
Moreover, by weighting the statements
without reservation or further explanation,
the IASB is at risk of not achieving
its own standards of transparency
and credibility . Both characteristics
are essen tial for this body since it is a
private regulatory authority and consequently
very much dependent on trust .
The IASB has been advised to change
its mode of publishing the summary of
comments received on proposals .
The sub-field of enforcement is of
particular relevance since there is a consistently
high number of German listed
companies publishing erroneous financial
statements . German capital marketoriented
companies, i .e those which
are either listed or have issued bonds
that are traded on a stock exchange,
are subject to accounting enforcement
by the “accounting police” . This
institution is formed by the German
Financial Reporting Enforcement Panel
(DPR), as well as the Federal Financial
Supervisory Authority (BaFin) . Both
dr. Sebastian Hoffmann
Assistant Professor, Chair of Accounting
and Auditing
bodies investigate audited financial
statements of companies, i .e . they perform
a second review of the statements .
Through its research, the Chair aims to
inform companies about procedures
and problems which are inherent to the
German enforcement system . Moreover,
policies and best practices are developed
which may assist companies in
avoiding erroneous financial statements .
In cooperation with Dr . Oliver Beyhs
(KPMG Berlin) the Chair published an
“Enforcement Guide”, which not only
familiarizes companies with the procedural
and legal aspects of the enforcement
system, but also system atically
discusses previous financial statement
errors identified by DPR and BaFin . The
guide may thus help companies avoid
erroneous financial reporting and not
be punished as “accounting criminals”
by public announcement .
The findings suggest
that companies
with underfunded
pension
obligations use
discretion as a way
to achieve positive
capital market
reactions.