Accounting faculty named to FASB research initiative

The Financial Accounting Standards Board (FASB) has named two UW Business School faculty members to its new seven-member Financial Accounting Standards Research Initiative (FASRI). Shiva Rajgopal, the Herbert Whitten Professor of Accounting, has joined the initiative’s survey research team. Frank Hodge, an assistant professor of accounting and a Lane A. Daley Faculty Fellow, has joined the experimental research team.

"The fact that the FASB has invited two of our professors to serve on this important research initiative speaks volumes about the quality and reputation of the UW Business School’s faculty," says Dean James Jiambalvo. "It’s a testament to research that is rigorous, relevant and immediately applicable to the economy."

Both Rajgopal and Hodge see their appointments as an honor and, more importantly, an opportunity – to investigate the ramifications of financial standards before they are even implemented, and then to share their findings with the policy makers themselves.

"Accounting researchers are trained to be objective. We tend to shy away from policy making, but rather produce papers on the results of policy that the policy makers can digest if they choose to," says Rajgopal. "This is an opportunity to influence policy with our research."

"Before FASB implements a standard," Hodge adds, "we can show them some potential effects."

To do so, the members of the new proactive research group will explore financial accounting’s fundamental questions (such as, what do users want from financial statements?) and major debates (historical cost vs. fair value on income statements, for instance).

Hodge and Rajgopal believe the benefits of this partnership will go both ways. In addition to offering the researchers a privileged "sneak preview" of potential standards, the FASB also will provide invaluable access to financial professionals for their studies.

"For surveys and experiments, we always have trouble getting participants who actually reflect the subject pool that we want to look at (in my case, individual investors)," Hodge says. "So often we use MBA students as proxies. Getting access to financial professionals is a huge benefit of this partnership."

Financial professionals and industry itself should feel a far larger benefit. Accounting policy can have unintended and far-reaching consequences. Hodge points to the Sarbanes Oxley Act, hastily passed by Congress in 2002, as a cautionary tale. The legislation’s requirement that firms invest considerable resources on internal controls is likely one reason why young firms are choosing not to go public or to list on foreign exchanges.

Another example is the recently enacted FASB standard that requires firms to expense all stock options. A common misperception was that this requirement would cause firms to decrease executive-level compensation. "However," Hodge explains, "many firms ended up simply cutting the number of options granted to lower-level employees, while leaving the number of options granted to senior executives virtually unchanged."

Hodge and Rajgopal hope that their research input will help the FASB anticipate such unintended consequences and shape more effective, efficient financial policy. "For the first time, the FASB is inviting us into the process, to collaborate on the ideas and use the data to help set standards," Hodge says.

"We don’t know if the FASRI will succeed or fail," Rajgopal says, "but it’s an interesting experiment."

Adds Hodge: "I see very little downside and huge potential upside."