We just posted the latest in our Big Question video series, featuring Booth professors Luigi Zingales and Haresh Sapra, joined by Scott Taub, former acting chief accountant at the Securities and Exchange Commission. It tackles the question of whether greater transparency in corporate reporting—forcing companies to disclose more information, more frequently—is necessarily a good thing, or whether it can prompt short-termism that actually harms shareholder value in the long term.
Sapra raises a great point about the desire of the public to force greater disclosure colliding with the inability of regulators to see the bigger picture. "One of the real problems since the financial crisis is audiences are just not well equipped to understand the type of risks that financial institutions are taking," he points out. "This is going in and verifying the numbers based on the model that they have without understanding what these risks that is the banks are taking on. We need to start understanding these risks."
Taub points out that that there is an "expectations gap" between what the public expects auditors to do (assess risks) and what they are actually required to do are (which does not include reporting on risks). This points to a bigger "expectations gap" between what regulators demand and how those demands affect how companies actually behave. "Accounting standards setters focus on capital allocation, more transparency, information for investor," Taub notes. "They do not and have not been asked to focus on how their actions affect companies’ actions."
No surprise then, that Zingales was left scratching his head about what accountant are actually supposed to do.