Using Academic Research for the Post-Implementation Review of Accounting Standards: A Note
We thank Mario Abela, Graeme Dean, Roland Königsgruber, Chris Nobes, Ken Peasnell, and participants at a workshop in the IAAER/KPMG research grant program ‘Informing the IASB Standard Setting Process’ in London for helpful comments. We gratefully acknowledge funding by the IAAER/KPMG research grant program.
Abstract
The IASB and the FASB discuss formal processes for a post-implementation review (PIR). This note contributes to this discussion in three ways. First, we argue that academics can, and should, play a significant role in a PIR. Second, we suggest a framework for empirical studies that are useful in a PIR, which enhances understandability of accounting research by standard setters. And third, we propose a process by which standard setters can take advantage of and embed academic research in a PIR.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are committed to conduct post-implementation reviews of their standards. The post-implementation review (PIR) constitutes the final step in the due process of standard setting. It analyses the effects of an accounting standard after it has become effective, including whether the standard meets its intended objective and works as anticipated, whether there are implementation issues, and whether the standard can, or should be, improved.
The Due Process Handbook for the IASB (IASC Foundation, 2008) requires that the IASB carry out a post-implementation review normally two years after implementation of a new or revised standard that significantly changes financial reporting. In April 2011, the IFRS Foundation emphasized the importance of a PIR to ensure consistent application of accounting standards and by proposing a more active involvement of the academic community to analyse the way accounting standards are operating (IFRS Foundation, 2011, C4, C6).The IASB is currently developing a general framework for PIRs which includes the following items: the objectives and scope, the sources of information necessary, the involvement of other organizations, and the role of public consultation and publication (see IASB, 2011c). In addition, it is performing a PIR of IFRS 8, Operating Segments, in which it attempts to learn about the process by doing it (IASB, 2012).
In the U.S., the Advisory Committee on Improvements to Financial Reporting to the SEC recommended a formalized post-adoption review of each significant new standard in 2008 (CIFR, 2008).1 It has led to a recent initiative of the Financial Accounting Foundation, the oversight body of the FASB, which recently released a document with a description of the process for PIR (FAF, 2012a) and a PIR on a narrow change of accounting for income tax uncertainties (FAF, 2012b).
The U.K. Accounting Standards Board and the European Financial Reporting Advisory Group (EFRAG) published a discussion paper in January 2011, which lays out proposals for a systematic process for an effects analysis (ASB/EFRAG, 2011). This process is applicable for pre-standard studies, but also for a PIR. More efforts are under way among other national accounting standard setters.
This note contributes to the development of a process for a PIR in three different ways. First, we argue that academics can, and should, play a significant role in a PIR. We review the commonly expressed reservations against academic research to inform standard setting and find that they do not apply—or at least apply less so—for research aiding a PIR. The main benefit of using academic research is that research for PIRs is a core competency of academics. Academic research is independent and it relies on a process in which scholars compete for ideas and publications, so it avoids monopoly concerns that would apply if the standard-setting institution were to undertake PIRs itself. Using academic research is a natural consequence of a desire for evidence-based standard setting in an ex post sense.
Second, we suggest that certain empirical studies should be useful in a PIR and should be part of almost any PIR. We discuss how the objectives of the Conceptual Framework translate into observable measures of earnings quality and report on insights which provide a theoretical basis for empirical studies that constitute a large body of capital markets research. Such a framework helps the standard setter to better understand and interpret empirical evidence. While the framework lays out research based on a well-accepted empirical methodology, many other methodologies can be useful. We do not claim that it is the only acceptable approach, but there are other methodologies that can prove useful.
Third, we make suggestions how empirical research can be embedded in the PIR process. We argue that a PIR should be the responsibility of an institution that is independent of the standard-setting body and that this institution should assist in collecting and making available empirical research that feeds into the questions considered in a PIR. While we acknowledge that each institution benefits from self-evaluation of its products and services, a PIR being a part of the formal due process should not coincide with self-evaluation of the standard-setting body.
There are few instances in which ex post academic research influenced specific accounting standards. An example for a visible effect is the FASB's abandonment of SFAS 33 that required disclosures on inflation accounting information, for which it also relied on academic studies that showed that such information is not useful.2 However, more recently there has been a discussion of the declining relevance of academic research in standard setting with views from both academics and standard setters. For example, Schipper (1994) discusses qualities of policy-relevant research and the distinction to other research; Brown and Howieson (1998) consider relevant capital markets research; Fülbier et al. (2009) discuss a broader set of research relevant to standard setting; and Barth (2006, 2008) identifies a large set of opportunities for research that should be of interest to standard setters. Leisenring and Johnson (1994), Swieringa (1998), Singleton-Green (2010), Rutherford (2011) and others provide reasons why academic research may be less useful to standard setters and what standard setters demand from research they consider relevant. These papers discuss arguments on the broad issue of the practical relevance of academic research. We rely on them in our specific focus on the usefulness of academic research in the particular setting of PIRs.
Our focus is on international accounting standards issued by the IASB, but our arguments carry over to other standard setters that are organized similarly, in particular the FAF, which currently also works on a PIR process. Moreover, the IASB and the FASB jointly develop several standards, so they are facing many of the same issues in a PIR.
PURPOSE OF A POST-IMPLEMENTATION REVIEW
The Due Process Handbook for the IASB defines as the sixth stage of standard setting procedures after the issuance of an IFRS (IASC Foundation, 2008). One procedure is that the IASB consults with its constituencies and other standard-setting bodies to understand potential issues that arise in the application of a standard. The other procedure is a PIR of each new IFRS or major amendment, normally two years after implementation, mainly directed at understanding unexpected costs or implementation problems. The objectives of a PIR are to review contentious issues that the IASB came across during the previous due process stages, and to consider potential unexpected costs or implementation problems. The IASB staff develops its approach to a PIR based on a narrow scope of practical implementation concerns (IASB, 2011c). It does not focus on the more general issue of whether the standard achieves its underlying objective, that is, improves the decision usefulness of financial reporting. Moreover, it does not include any reference to academic research that might be helpful in assessing the effects of standards.3 Based on the comments it received during the consultation process that followed, the IASB staff now recognizes that a review of available academic research may be helpful, and it reconsiders the narrow scope of a PIR (IASB, 2012).
The PIR is related to other activities the IASB undertakes during the earlier stages of the due process because many issues that arise in this context are equally important in an ex post analysis. One such activity is an impact analysis, which helps the IASB understand the costs incurred by preparers and users and the benefits of better decision-making. The IASB has begun issuing Project Summary and Feedback Statement documents accompanying new or amended standards (e.g., for business combinations, IASB, 2008, which describe mainly feedback in the form of the IASB's reaction to respondents' concerns in the development stage of a standard. Recently, the IASB issued effects analyses on the new standards on consolidation (IASB, 2011a, 2011b). The effects analyses do mention academic research:
In the longer term, we encourage academic researchers to perform empirical research into the way in which our standards are incorporated into economic decisions. Some studies focus on the role of accounting information in the capital markets, thereby providing us with insights into how accounting information is incorporated into share prices. Other studies focus on how changes to IFRSs affect the behaviour of parties, such as management. We expect to consider relevant research as part of our post-implementation review. (IASB, 2011b, p. 2)
The analyses are purely qualitative, and the IASB states that quantifying costs and benefits is inherently difficult and there is a lack of well-established and reliable techniques for quantifying the costs and benefits (IASB, 2008, p. 13, 2011a, 2011b).4 However, this view seems to ignore the fact that certain aspects of the effects of accounting standards are measurable and are the subject of a broad academic literature.5
In the U.S., there have been several early attempts to study the effects of accounting standards. In 1977, the SEC published a report that considered the costs and benefits of corporate disclosure, using several sources of evidence (SEC, 1977). And the FASB initiated a series of research studies on the economic consequences of accounting standards in 1976 (see FASB, 1978), in which it commissioned work by academics to assess such consequences. This path eventually ended. The recent PIR process document (FAF, 2012a) highlights the potential usefulness of academic research in performing a PIR.
BENEFITS AND COSTS OF USING ACADEMIC RESEARCH
Our discussion about elements of a PIR suggests that an empirical analysis of capital market effects of accounting standards should be part of a PIR. A broader view of the effects of standards is appropriate and, indeed, imperative. The following discussion is based on arguments in the literature that consider the relevance and usefulness of academic research for standard setting in general, including Alexander(1981), Barth (2006, 2007, 2008), Brown and Howieson (1998), Fülbier et al. (2009), Schipper (1994, 2010), Singleton-Green (2010), and Swieringa (1998).
Academic research is generally characterized by the following properties: it is grounded in theory, it is innovative, applies a rigorous methodology, and is based on the current knowledge in the relevant field to gain new insights and advance our knowledge of real phenomena. The knowledge and application of rigorous research methods is a comparative advantage for scholars relative to standard setters and practitioners, who have different qualities. Therefore, research results are more reliable than the outcome of other processes. Reliability is an important requirement for a PIR that wants to weigh evidence on the effects of accounting standards.
There exists a competitive market for academic research in which individual researchers compete for attention and influence. A mechanism for quality assurance of academic work, mostly based on peer review, has developed, which is used, for example, in academic journals, conferences, promotion, performance evaluation, and competitive funding. This market helps the flow of new ideas and knowledge and provides incentives to be innovative. As such it is best equipped to take care of new questions, including the effects of standards.
Scholars are typically more neutral as to the potential outcome of the research than other parties because they usually have no vested interest. Their main incentives are to build their own and their institution's reputation, and the performance evaluation criteria are based on the quality of their research rather than on a particular outcome.6 Even if they have personal opinions, they usually argue for them based on evidence that can be understood and replicated. In some cases, academics may act as ‘policy entrepreneurs’ or ‘experts for hire’ (Swieringa, 1998) who perform research that serves a particular interest. One can even view the advancement of accounting theories as a market for excuses (Watts and Zimmerman, 1979). However, the academic market is likely to produce a broad range of different opinions, thus providing a balanced picture of approaches and results.
PIRs provide many opportunities to researchers. Researchers pick them up because they are always searching for relevant and interesting new research questions. It is unlikely that researchers ignore any important aspect of a standard that undergoes a PIR. And when this is the case, a reason is perhaps that the standard setter did not make clear the importance of that aspect in advance.
The cost of using academic research for a standard setter is low, as most academics' salaries and incentives are provided by other institutions which are interested in research output generally. For example, if the IASB is concerned about the cost of undertaking PIRs, using the academic research market appears to be a cost-effective means.
While standard setters and practitioners usually appreciate academic research, they nevertheless have strong reservations against using it in standard setting. One argument is that scholars are not interested in taking up the real questions that interest standard setters. Rather, they choose topics that promise a higher chance of publishing in leading journals, which may be narrow or specialist ones. We believe the fact that there exists academic research published in top journals that clearly takes up standard-setting questions speaks against this argument. Prima facie, effects studies for PIRs appear to contain less potential for innovation; however, it is likely that each such study has to deal with an abundance of design and data issues that are interesting per se.
Part of the view that academics seem to be not interested in standard-setting issues is that they usually want to stay away from normative conclusions. Standard setting ultimately redistributes wealth across affected parties. There is not much theory to help decide on such redistributions. In a PIR, however, the normative decisions have already been made, and the challenge is to measure the effects of a new accounting standard relative to its objectives and to the situation that prevailed before the standard became effective. At best, the research can find out reasons why a standard does not work as expected, for example, due to differences across jurisdictions.
Another argument is that academic research is more concerned with rigour than with relevance. This argument assumes a negative association between rigour and relevance, which need not be the case. Relevance concerns the research question and the results. Rigour requires an exact statement of the research question, the explicit mention of all assumptions and conditions upon which the research is based, and the limitations of the results. While researchers strive for more generality of the results, they try to avoid over-interpretation and undue generalization of the results of their research. Standard setters, on the other hand, demand results and insights that are conclusive, comprehensive, and robust. Specific results that are not sufficiently generalizable are of little help to their work. This reasoning ignores the difficulties of generalizations, if they can be made after all. Such a critique implicitly assumes that there are methods to produce comprehensive and robust evidence, but researchers are consistently unable to find or to apply them. However, this is extremely unlikely, given the high competitiveness of the market for academic research, as any researcher in possession of such methods could easily gain a high reputation by publishing results based on such techniques.
Another observation is that academic research takes too long to be useful in the fast-paced work of standard setters. There is a trade-off between rigour and timeliness. However, in a PIR timeliness is not as important as in earlier stages of the standard-setting process. The two-year period for undertaking a PIR should be indicative, but should not be a deadline that must be met in any case.7
A major impediment to using academic research in standard setting is a communication gap (Singleton-Green, 2010). It is difficult for non-specialists in research to identify relevant high-quality research amongst the large volume of work. Moreover, research papers are difficult to comprehend. A high weight on rigour may impair readability. Standard setters may be lost in evaluating research that comes to contradictory conclusions. Even if they base their conclusions on a particular piece of research, they can never be sure whether there would be subsequent research that points out an error or an omitted argument that makes the previous research results invalid. For those reasons they may prefer to avoid reference to any specific research. Acquiring new knowledge is a trial-and-error process, so there is a built-in possibility that current knowledge turns out to be partially wrong or of limited scope. However, standard setters' reasoning is also based on current knowledge, which is subject to the same threat. Nevertheless, this is an important issue, which we address in the next section.
The potential difficulties and costs of using academic research are much lower for research used in a PIR than in other stages of standard setting. At that point, the new standard has become effective, so the main standard-setting decisions have been made. The PIR serves to evaluate these decisions. Such an evaluation should be based on as much evidence as one can gather. Scholars, being experts in research methodologies, are best qualified to take on this task. We do not negate that academic research can also play an important role in earlier stages of standard setting, but we argue that if this is the case, it holds even more strongly in a PIR.
Finally, it is not obvious what would be good alternatives to an evidence-based analysis in a PIR. While the standard setter should certainly use all information it can gather in the review, it is often left with questionnaires collecting opinions from its constituents. For example, the European Commission collected information about costs and benefits in the endorsement process of IFRS 8, Operating Segments. The questionnaire included questions like ‘Do you think that the cost/benefit balance of replacing IAS 14 by IFRS 8 is positive?’ or ‘Are you of the opinion that segment information based on the management approach provides greater accuracy for measuring individual segments and ultimately results in greater forecast precision than segment information based on IAS 14?’ Such questions are inherently difficult to answer by respondents to a questionnaire. Academic empirical studies are better suited to answer them.8
A FRAMEWORK FOR RESEARCH AIDING POST-IMPLEMENTATION REVIEWS
To address the concern that standard setters find it difficult to understand research, we briefly discuss empirical research that appears to be well suited for a PIR. This research includes reporting quality studies, which are very common in the empirical accounting literature and for which there exists a well-understood research design.9 This research is a useful part in a standardized PIR process. It can help standard setters to understand the economic effects of accounting standards and to use this output for a PIR.
We limit our discussion to earnings quality studies that are based on accounting variables and market prices. The reason is that recent theoretical research shows that earnings quality measures can be linked to the objectives in the standard setters' conceptual framework. While we believe such earnings quality analyses should be part of a PIR, this does not preclude many other types of academic work from being useful. We also note there are other effects of earnings reports on other capital market variables, such as bid–ask spreads, trading volume, cost of equity capital and debt capital, and excess returns of hedge portfolios; or effects on the properties of analyst forecasts. Earnings quality is an overarching concept, whereas several standards may have narrow applications that do not easily show up in earnings directly.
We deliberately do not consider research methodologies other than capital markets research for PIR. Such methodologies can be useful—for example, analytical, experimental, and qualitative empirical research—but we believe their strength lies particularly in ex ante research to inform standard setters in earlier stages of the development of accounting standards.10
Operationalization of the Objectives of Standards
According to the Conceptual Framework, the overarching objective of financial reporting is to provide information that is useful to capital providers in making decisions about providing resources to the entity (IASB, 2010, OB2). Chapter 3 of the Conceptual Framework defines the criteria for decision-useful information in the form of qualitative characteristics. Fundamental qualitative characteristics are relevance and faithful representation. Relevance includes a predictive or confirmatory value and is material information. Faithful representation includes information that is complete, neutral and free from error; enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability; and there is a cost constraint.11 It is generally difficult to operationalize these qualitative characteristics for an empirical measurement (Schipper, 2010, p. 321).12
The earnings quality literature is one area for which academic research has developed a variety of empirical measures that are associated with the qualitative characteristics. We next discuss how these measures can be derived from, and are related to, the decision-usefulness objective that follows from an information perspective (Barth, 2006). Ewert and Wagenhofer (2011) present a model that provides a theoretical underpinning for these links. They study a firm that reports earnings in a rational expectations equilibrium. Earnings are based on accounting information and private information by management, and management has some discretion in reporting earnings. They allow for private information of management and earnings manipulation. Conveying private information is a desirable feature of earnings, whereas earnings manipulation is generally undesirable.
Capital providers rationally anticipate the potential for earnings management and price the entity based on their conjectures. In equilibrium, there is always some earnings management, so that the market reaction is lower than it would be if there was no earnings management. Earnings quality in the setting of Ewert and Wagenhofer (2011) can be directly measured by the information content of the earnings reports. Earnings are of higher quality the more information they contain with respect to future cash flows of the entity, so that investors' uncertainty about the future cash flows reduces more strongly.13
With such an underlying economy, Ewert and Wagenhofer (2011) examine which of the many earnings quality measures that have been developed in the empirical literature are most consistent with the general objective. They assess accounting-based measures, including persistence, predictability, smoothness and discretionary accruals; and market-based measures, including value relevance and the earnings response coefficient.14 A main finding of their analysis is that value relevance and the earnings response coefficient generally capture the information content very well, which supports the many value relevance studies.
This discussion emphasizes the importance of defining the objective of the standard setter when carrying out a PIR. Decision usefulness to capital providers is a specific objective, but there exist other objectives that may lead to different conclusions about an accounting standard. For example, providing information that is useful for debt contracting may require different qualitative characteristics and then the measures that trace the information content may not be appropriate. Increasing social welfare may be yet another objective that calls for other different characteristics because providing (too) much information may have detrimental real effects, such as investment, although the information content of earnings increases in the capital market. A similar reasoning applies for objectives like financial stability. Sometimes, standards are crafted to avoid abuse, even if other entities are harmed by that standard. In an empirical study, abuse is likely to be limited to a few cases, and broad measures of earnings quality may only pick up the harmful effects on non-abuse entities.
Application Issues and Limitations
Although conceptually there are several measures that are consistent with the standard setter's objective, some issues arise in this research that potentially limit the interpretation of the empirical results.
It is applicable only to a standard that generates a significant and, hence, measurable change in the accounting practices of entities. There may be standards under review that did not affect earnings or earnings components (including asset and liability measurement) but are related to presentation or disclosure. The effects of new accounting standards depend on the way they are actually implemented. An empirical test is a joint test of the standard and of the institutional setting that enforces its application in practice. A longer time window helps disentangle one-time and ongoing effects, but it may include other institutional changes. For example, if several standards change at the same time, the effects cannot be disentangled.
The analysis of the effects of a new standard requires the determination of a period before the standard became effective and a period after it was applied. The empirical analysis compares the earnings quality in these two periods and attributes any difference to the change in the standard. Longer time windows include more observations and make empirical tests more efficient. Thus, a self-imposed requirement to carry out a PIR two years after a new standard became mandatory may be restrictive. This time period includes the effects of first-time adoption and may not be representative. Often, standards can be applied early, which have to be controlled in an empirical study. Moreover, several accounting-based measures require the availability of multi-period data.
A concern of a time-series analysis is that there are various changes in the institutional and economic environment and in the entities' operations over time. Francis et al. (2006) distinguish between innate and discretionary factors that determine earnings quality. Controlling for innate factors can help isolate the effects of the change in the accounting standard. Accounting standards shape the portrayal of entities' transactions and related events, but they also shape decisions made by the management of those entities, which therefore also constitute effects of standards.
Whether a PIR should include real effects or only ‘pure’ accounting effects is an open question. The Conceptual Framework (IASB, 2010) appears to consider ‘pure’ accounting effects when it formulates the qualitative characteristics. But the effects of the accounting standard are broader than that. ASB/EFRAG (2011) reviews arguments whether an effects analysis should include only microeconomic or also macroeconomic effects and suggests that both effects should be considered.15 Macroeconomic effects include external effects of financial reporting, particularly additional disclosures. Essentially, they are captured by value relevance as it is a market-based measure of earnings quality. Finally, empirical research cannot assess the opportunity cost of new standards because only the standard under review has in fact been implemented.
A POST-IMPLEMENTATION REVIEW PROCESS
In this section we consider ways that enable the standard setter to make effective use of empirical academic research in a PIR process. We believe the standard setter should not build up expertise and capabilities in an area that is the predominant competitive advantage of academics. Rather, academic research should be a constituting component of a PIR.
A fundamental issue is who is in charge of and responsible for the process. The Due Process Handbook for the IASB (IASC Foundation, 2008, para. 53) states that the IASB itself carries out a PIR, and the current view of the IASB (2012) is similar. The Trustees recently reconfirmed this view (IASB, 2012), arguing that a transparent and robust PIR process is sufficient to ensure independence. Indeed, the IASB is currently considering using a comment letter approach to PIRs. Similarly, ASB/EFRAG (2011) suggests that national standard setters may assist the IASB in that task. If a PIR is considered part of the management process of developing standards, this view is consistent.
However, standard setting is more important than that. From a governance perspective, the standard setter should be responsible for achieving its ultimate objective, which is improving financial reporting. A PIR should therefore include such a broader perspective. For example, the Financial Accounting Foundation (FAF) views a PIR as a part of its overseeing the FASB and the Governmental Accounting Standards Board (GASB) and establishes a PIR process carried out by a dedicated PIR team that is independent of the two boards (FAF, 2012a).The members of the PIR team are drawn from the staff of the two boards and should not have been involved in the standard that is subject to a PIR. Moreover, the team is also independent from the trustees' influence. With that organization the FAF attempts to take advantage of staff expertise, but also to strengthen independence.
The fact that a PIR is an essential part of the due process suggests that it should be more than a normal routine in the operations of the IASB, namely, an evaluation of the output of the standard setter. The due process should provide accountability to the IASB's constituents. Therefore, the independence of the PIR process from the standard setter is an essential feature. As in other instances, self-reviews are subject to vested interests, such as an ex post justification of the standard setter's own previous decisions.16 Independence is enhanced by using academic research in this process. Competition on the academic market and its built-in quality controls serve as a mechanism for independent analyses. This view does not preclude the standard setter from performing an internal review of its works. Indeed, we believe that most of the arguments we discuss are applicable to any evidence-based review process.
We next sketch a process for the institution that is responsible for the PIR to use empirical research in the review. Notwithstanding the fact that academic accounting research is basically very responsive to the issues raised in the agenda of the IASB, we believe it is essential to provide a structure for incorporating this research into the PIR process because there will be time constraints for the completion of a PIR. First, academics should be made aware that there is a demand for academic studies of the effects of certain standards. The PIR will ultimately be a standardized process, so it is easy to anticipate. The program of PIRs and their intended time of completion should be communicated on the institution's website after the pronouncement of the relevant standard. Empirical research that is in line with the objectives of a PIR (see particularly our framework above) could be collected on that website so as to give a picture of the efforts that have been undertaken to research the effects. A benefit of using the Internet is that the information can be easily spread around the world and the academic market has become more global.
An editorial board (independent from the standard setter) with a small number of academics should be charged with reviewing the submitted research before it is included on the institution's website. This review would not be a full review as for a journal, but would be similar to inclusion of a paper in a working paper series. This fast-track review does not interact with the normal review processes of academic journals, which may sometimes take up to several years before a paper is accepted for publication. What we have in mind is a parallel process where papers that speak to the standard setters' themes are submitted both to the PIR-website and to academic journals for publication. This open process bypasses the standard setter selecting research that is supportive of the reviewed standard relative to research that arrives at less positive conclusions. Moreover, it is preferable to a commissioning of research by the standard setter, as the selection of the researcher may already be based on priors held as to the results.17
Whenever the institution in charge of the PIR decides that it wants to finalize the PIR and a report, it considers the evidence gathered by the research and includes the results of the academic papers in the report. This, of course, would not preclude later studies refining the earlier work, for example, because they are based on more data or use an advanced research design. We believe that this guided process would produce sufficient interest among researchers and sufficient research to base the PIR on it. Indeed, while it is useful to have a time schedule for a PIR in place, the two-year period for the ex post analysis can only be an interim stage of a potentially more continuous process. Again, academic research is likely to continue if the issues in the standard cannot be ascertained to a sufficient degree.
CONCLUSIONS
The IASB and the FASB have recently begun designing formal processes for post-implementation reviews (PIR) as the final stage in the development of a new or significantly revised standard. This note contributes to this discussion in three ways. First, we argue that academics can, and should, play a significant role in a PIR. Academic research is particularly well suited to address issues that are important in a PIR, and if there are reservations about the relevance and usefulness of academic research for standard setting these reservations apply to a PIR the least. Second, we suggest that, and how, earnings quality studies are useful in a PIR. The reason is that they are consistent with the objective of standards, to improve the information content of financial reporting. This addresses the communication gap between standard setters and academics. And third, we propose how a PIR process can embed academic research. We suggest that it should be the responsibility of an institution independent of the standard setters and we sketch a process to assist in collecting and making available empirical research that feeds into the questions in a PIR.
