Editorial: Evidence on APRA Proposals and Impact of COVID-19 on Expected Credit Loss Accounting

Abstract

The majority of papers in this issue were accepted prior to us becoming editors. We have, however, included two papers that we have recently accepted because we believe they provide timely insights into important and urgent contemporary issues. The first, Le et al. (2020), is effectively a submission on recent Australian Prudential and Regulatory Authority (APRA) proposals. The second paper, el Barnoussi et al. (2020), addresses the challenges banks face when applying expected credit loss models during the current COVID-19 crisis.

As noted in a previous editorial (Bradbury and Howieson 2019), we welcome papers that provide evidence on standard setting and regulatory proposals. In that editorial we outlined the submission we made to the Parliamentary Inquiry into Regulation of Auditing in Australia, using articles that had previously been published in the Australian Accounting Review (AAR). It was pleasing to see that papers published in AAR were mentioned in the draft Parliamentary report (see https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/RegulationofAuditing/Interim_Report). In a similar vein, the first paper in this issue (Le et al. 2020) provides evidence to inform APRA proposals to govern the design and oversight of remuneration arrangements.

Le et al. (2020) survey remuneration practices in large financial institutions, and especially the four large trading banks. They provide evidence on the use of non-GAAP earnings measures that are used in the determination of remuneration. Hence, the existing measures of financial performance used to determine senior executive compensation are not as objective as might be assumed.

We believe AAR is a natural ‘home’ for submissions made to policymakers’ proposals. We believe that such papers, even after the submission date, are relevant for publication in AAR, (1) to illustrate research impact, (2) to provide academic recognition for the authors, and (3) to generate further research and encourage academics to contribute to standard-setting and policy development processes by presenting the results to a wider audience.

To reiterate, we welcome theoretical and empirical research that addresses issues relevant to policymakers, especially on formal proposals. Papers can summarise prior research (e.g., Bradbury and Howieson 2019) or present new evidence (e.g., Le et al. 2020). We forewarn, however, that submissions need to be of high academic standards to meet the review process. We also note that there is a balance in presenting evidence and being an advocate for a particular position and we suggest that papers should faithfully represent the evidence.

el Barnoussi et al. (2020) is the first paper in AAR that addresses COVID-19-related issues. The paper points out that IFRS 9 and US ASC 326 are forward-looking standards that require entities’ expectations on future credit losses. At the current time, there are no signs that the COVID-19 pandemic will subside and therefore there is substantial uncertainty with regard to the economic consequences. This paper documents how conflicts of objectives between prudential and accounting regulators and the self-interest of financial institutions has again threatened the level playing field for financial reporting across banks worldwide.

Jackson (2020) provides empirical evidence from a sample of Bachelor degree graduates who completed their studies in accounting, banking and finance. The paper draws out recommendations for stakeholders on the trends in the employment of accounting and finance graduates and provides evidence for how these professions are progressing in managing diversity.

Davis (2020) presents a case study of Converting Preference Step Up Units. This is a recent financial product offered to Australian retail investors. The paper argues that the relatively simple design of this product hides inherent complexities, such that it is difficult to value the product or assess the risks involved. The paper examines critical questions of what motivates the product's design and considers implications for regulatory policy.

Chapple and Routledge (2020) is the only large-scale archival paper in this issue of the journal. It addresses the controversial and largely unanswered question as to whether board turnover is related to better outcomes for insolvent companies. The results suggest that board renewal is beneficial but is limited when voluntary administration involves large complex reorganisations. The results have implications for policymakers because they suggest, at least for large cases, it would be appropriate to amend Voluntary Administration legislation to provide for board continuity.