Accountants "answer business questions with accounting tools. I think that is a much better description of what accountants do than 'we do math.'

The dramatic and rapid failure of Enron and other large corporations in 2001 affected people around the world. For Assistant Professor of Management Stacy Mastrolia, then a comptroller for a large firm, it triggered a mid-career change of plans.

As one corporation after another was brought down by questionable accounting practices, Mastrolia was responsible for the integrity of her company down to the last salesperson. "I was neck deep in all of those concerns," she says.

As Congress brought accounting under government regulation with the passage of the Sarbanes-Oxley Act of 2002, Mastrolia felt a sea change in her profession — but not in her job. The accounting field was undergoing wholesale transformation, while her job was limited to figuring out the least expensive way to comply with the new regulations. Disenchanted, she left the industry and pursued a career in higher education.

Today, Mastrolia's research focuses on one basic question: Does regulation work?

So far, she says, the answer is mixed. In one study, she found that after the passage of Sarbanes-Oxley, the most aggressive — or questionable — accounting practices did become less common. However, so did the most conservative practices. "It seems that if you've been good the last year or two, you are likely to be less good," she says. "If you've been bad the last year or two, you are likely to rein it in a little bit."

In contrast, in Italy, where corporate governance was weaker to begin with, Mastrolia and her colleague Giorgio Gotti, at the University of Massachusetts-Boston, found that country-level legislation that enhances corporate governance can provide an alternative signal of financial reporting quality.  "I would argue that those kinds of low shareholder-protection countries would have the biggest bang for the buck," she says. "They have so much ground to make up, that with that legislation, those reforms did result in improved financial reporting quality."

A loophole for some foreign-owned corporations listed on the U.S. stock exchange provided a third viewpoint on the effectiveness of government regulation. Most U.S.-listed corporations are required to comply with Securities and Exchange Commission rules, including a requirement to provide financial statements in English and according to U.S. reporting formats. Some corporations, however, can apply for an exemption.

In keeping with the conventional accounting wisdom that transparency leads to better practices, Mastrolia and Gotti found that reporting by companies bound by SEC rules was less aggressive than the exempt companies. In this case, investors seemed to recognize the difference because they invested preferentially in the corporations held to the higher standards.

Given the influential role accounting practices can play in the financial world, Mastrolia is eager to introduce students to the field and dispel at least one common misconception. Accountants "answer business questions with accounting tools," she says. "I think that is a much better description of what accountants do than 'we do math.'"

Posted Sept. 22, 2009

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