University of Missouri

Oct. 8, 2024

The faculty of the School of Accountancy at the University of Missouri’s Robert J. Trulaske, Sr. College of Business are at the forefront of addressing some of the most pressing concerns in contemporary accounting.

Ongoing study examines why new standard isn’t delivering as expected 

The main purpose of an auditor’s report is to provide an independent opinion as to whether a company’s financial statements are fairly represented in all material respects. The independent auditor’s role is especially valuable to capital market participants who use financial statements to make important decisions, such as whether to invest in a company or lend it money. 

So, there was much anticipation in 2017 when the Public Company Accounting Oversight Board (PCAOB) implemented a new standard aimed at making audit reports more transparent and useful to stakeholders.  

However, the new standard isn’t translating into useful information for those who need it.

“This has become just another part of the audit report that doesn’t change very much. So, investors don’t find it that useful,” said Keith Czerney, an associate professor of accounting.

Ongoing research by Czerney and Daun Jang of California State University-Sacramento is trying to understand why the standard has not made the audit report more informative.

The standard – known as Auditing Standard 3101 or AS 3101 – requires auditors to provide unique insights into the audit process by identifying “critical audit matters” or CAMs and reporting on how they were addressed. 

So far, Czerney and Jang have found that although auditors do appear to be selecting topics involving especially challenging, subjective or complex auditor judgment as CAMs, the number of CAMs selected has been fewer than anticipated and the quality of the CAM disclosures is inconsistent.

Czerney and Jang’s study, “An Examination of Critical Audit Matter Disclosure Quality,” was presented at the International Symposium on Audit Research in Boston. 

New research finds volatility in tax reserves is early indicator of corporate tax risk

Stakeholders are always searching for innovative methods to pinpoint companies with elevated tax risk. In 2007, the Financial Accounting Standards Board (FASB) introduced a new standard to streamline this process. Enter FIN 48: a regulatory framework that mandates companies to disclose unrecognized tax benefits (UTBs). These UTBs act as reserves for tax positions that might face challenges from tax authorities. The idea was straightforward — the higher the UTBs, the higher the tax risk.

However, reality has defied expectations. The standard hasn't functioned as intended.

Now, new research by Stevie Neuman, associate professor of accountancy, and Jane Z. Song, assistant professor of accountancy, has found it’s the volatility in UTB additions – not their amount – over time that provides stakeholders with a clearer and earlier indication of changes in a firm’s tax strategies and associated risks. While the research is ongoing, their findings provide evidence that UTB volatility conveys a unique early signal about the uncertainty and risk of the tax positions underlying a firm’s tax strategy. 

“What we think the volatility represents is a change in a company’s tax strategies or changes in their positions over time that could suggest some kind of underlying risk they are taking,” Song said. “Volatility appears to be a stronger signal of uncertainty and risk than just the amount itself.” 

Neuman and Song’s study, “What Does the Volatility of Tax Reserves Signal about Firms’ Tax Positions?”, was reviewed by participants at the 2023 National Tax Association Annual Conference.