b'controlling for known predictors of recessions, such as theMore practically, our findings could aid in recession predic- Research Spotlight:yield curve spread and stock market returns. Our measuretion, a notoriously difficult task. We can see this with theAccounting Insights from the Trulaske College also predicts whether two-year-ahead GDP growth will becurrent U.S. economy: there is a lot of disagreement about below trend.whether the U.S. will enter a recession during 2023. To theof BusinessSEPTEMBER 19, 2023So what?extent that regulators, companies and consumers want to prepare for an economic downturn, our findings are important.High-quality accounting information is important for theand unconditional conservatism in intricate accounting esti-functioning of the economy. While prior research has exam- What do we predict in the current environment?BY KEVIN REAPEmates, to understanding the ripple effects of stakeholder ined the consequences of accounting fraud at the individualWe are observing an elevated level of aggregate misreportingThe faculty of the Trulaske College of Business School ofgovernance on earnings transparency and, finally, shedding firm level, no one has previously aggregated the data to comeand the probability of recession in 2023 is higher than it wasAccountancy are at the forefront of addressing some of thelight on the evolving landscape of audit practices in the age up with an economy-wide measure of financial misreporting.for 2022. Although no model is a crystal ball, we predict themost pressing concerns in contemporary accounting. Theirof data and analytics. An important takeaway from our study is that accountingU.S. will not enter a recession in 2023, but has likely enteredmost recent explorations span a gamut of topics, from fraud also matters at the macro-level of the economy.a two-year period of slower economic growth at the enddissecting the nuanced dynamics between client importanceEmployee Voice, Manager-employee Alliance of 2022.and Financial Reporting OpacityIn the evolving landscape of stakeholder When SEC is challenged, CEOs noticegovernance, understanding the dynamics between various stakeholders in a firm that after the court case, CEOs and CFOs were often actingbecomes pivotal. Professor Inder Khuranas COLUMBIA, Mo.In 2005, Siebel Systems, Inc., a Cali- In 2009, after businesses saw the SECs resumption of Regmore relaxed in their body language when talking to theresearch dives deep into this intricate web, fornia software company, challenged an enforcement actionFD enforcement, they started behaving more cautiously inanalysts. This sent the message that when a CFO or CEOexamining the implications of strength-taken by the Security and Exchange Commission (SEC) thattheir private meetings.acts either excited or deflated about the outlook of the busi- Inder Khurana ening employee voice in firms and its found the business had violated the Regulation Fair Disclo- Every quarter, publicly traded businesses must report theirness, they were more likely to tip off the analyst or privateimpact on financial reporting. sure (Reg FD)a regulation implemented to prevent busi- gains and losses to the public. However, the reporting processinvestor through their demeaner.Leveraging staggered employment protection laws (EPLs) nesses from giving key analysts and investors insiderdoesnt necessarily end there. Businesses also can meetThat began to change in 2009 after the SEC filed a Regacross 26 countries, Khuranas findings in a coauthored study information. The Siebel case went to the federal court markingprivately with potential investors and analysts with the legalFD action against American Commercial Lines. In that case,are striking: managers, when confronted with stronger EPLs, the only court case under Reg FD, and the enforcement actionstipulation that they only share the same information theya CFO for the company sent an email to analysts stating thetend to report more opaque earnings. Delving into the under-was eventually dismissed by the judge in favor of Siebel.do with the public. The issue is CEOs and CFOs are some- companys earnings would likely be less than what waslying mechanisms, the research illustrates how these laws Now, new research at the University of Missouri showstimes tempted to build stronger relationships with thesepublicly forecasted a few days earlier. Ultimately, the SECfoster a unique manager-employee alliance. This alliance is the impact of that landmark decision and how future decisionspotential investors and analysts because they often have moredecided the company cooperated enough with its investi- characterized by reciprocal benefits, in which strengthening involving the SEC could have a profound impact on the wayresources than members of the general public to influencegation to not impose a punishment.employees power nudges managers to align with them, chief executive officers (CEOs) and chief financial officersthe success of the business. At times, that motivating factorKyung said his research can be used to help people antic- leading to mutual benefits. In the wake of such alliances, there (CFOs) communicate with investors and analysts, includingcan lead to businesses feeling the need to share exclusiveipate business and market reactions after landmark regula- is a noticeable uptick in earnings opacity, which diminishes the amount of information they share in a private setting.insider information with the private investors and analysts.tory rulings.institutionalshareholdersmonitoringcapabilities. Hoyoun Kyung, an assistant professor in the Trulaske CollegeIn 2005, the SEC accused Siebel Systems of using bodyAnother example nearly occurred in 2021 when the SECKhuranas study contributes substantially to the accounting of Business, and his team of co-authors found the courtslanguage to tip off private investors to an upswing in businessaccused AT&T of leaking details about its smartphones toliterature by being among the first to illuminate how a manag-ruling sent the message to CEOs and CFOs that they couldafter reporting losses and a negative outlook to the public.investor relations executives. AT&T challenged the decisioner-employee alliance can influence financial reporting be more relaxed in their private interactions with analystsBut after Siebel Systems challenged the punishment, thein circuit court. The judge rejected AT&Ts plea for dismissalbehavior. While previously explored in the context of firm and investors and potentially share more information thanjudicial system disagreed with the SECs determination. Thebut didnt rule in favor of the SEC either due to lack ofacquisitions and restructuring, such alliances are shown in they shared with the public.court then ruled that the SEC was being too aggressive forproven intent. Ultimately, AT&T agreed to pay more thanthis research to have broader implications, impacting finan-That attitude prevailed among CEOs and CFOs until 2009punishing the software company over body language.$6 million in a settlement, the biggest payout for this typecial reporting at large. This alliance-driven opacity in earnings when the SEC filed another Reg FD violation, this timeKyung, who is also an accountancy alumni faculty scholar,of regulatory punishment ever.impedes institutional shareholder oversight and hinders their against American Commercial Lines. Eventually, the SECanalyzed changes in stock market responses to analyst earn- We dont know what the outcome of the AT&T v. SECability to make timely portfolio adjustments in response to settled out of court with the company, but the case was enoughings forecasts and stock recommendations before and aftertrial wouldve been, but its possible that if this judge werestringent EPLs. to reestablish the Reg FD as a law that businesses need tothe Siebel court case, comparing the information to contentto side with AT&T, we might see a similar impact to theAt its core, the study delves into the objectives that respect. of analyst reports. He noticed a significant increase in the2005 decision, Kyung said. Its likely that at some point,managers grapple with while making financial reporting deci-In his study, Kyung found that the effectiveness of the Reganalyst output informativeness indicating increased infor- someone can challenge the SEC again, and this researchsions. It underscores the often conflicting interests of share-FD depends on the perception of the SECs ability to enforcemation sharing by managers to analysts in private meetings.can help people understand how businesses will respond.holders and employees, and how managers navigate these the regulation.He then surveyed securities lawyers who were working with Managers private communications with analysts: Thewaters. The research suggests that when employees wield It doesnt matter that the regulation is there; if you cantbusinesses around the time of the 2005 court case and askedeffect of SEC v. Siebel Systems Inc. was published insignificant power to sway managers private interests, enforce it, the market is going to take advantage, Kyung said.them what was happening to create this change. He discoveredContemporary Accounting Research.managers may be incentivized to form alliances with 18 School of Accountancy2023 Newsmagazine 19'