Accounting Research Center garners $1 million gift

2/12/2007 - Kellogg School accounting experts now have another number to crunch thanks to a $1 million gift from Ernst & Young that will support the Accounting Research Center.

Since 1978, the Accounting Research Center has played a strong role in facilitating and disseminating Kellogg accounting scholarship.
This new gift will continue that mission by creating the “Ernst & Young Research for Leadership through Innovation and Value Enrichment” initiative (“E&Y:LIVE”), an effort that will enable Kellogg to support research and the development of curricula in a range of areas that are key to the future of financial information. Specific areas being supported are internal reporting and its effect on decision making, governance and management control systems, risk assessment and management, financial reporting and auditing.

In his introductory remarks, the outgoing director of the Accounting Research Center, Bala Balachandran, noted the relationship between Ernst & Young and the Kellogg School. The J.L. Kellogg Distinguished Professor of Accounting Information and Management recalled that the firm’s retired deputy chairman, Roger Nelson, was instrumental in establishing an initial fund to support various Kellogg conferences and summer research support. Balachandran, who headed ARC from 1985-2006, also cited the Ernst & Young’s commitment to creating an endowment in 1999 that has now produced a total of $1 million to support Kellogg accounting scholarship. In addition, the company has helped redesign and teach the Kellogg course LEAP (Learning through Experience and Action Program), which provides Kellogg students with hands-on consulting experience. The firm has also been active in Kellogg executive education by its partners leadership program, a one-week advanced management curriculum for the company’s partners.

To celebrate this relationship and the million-dollar milestone, the Kellogg School organized an afternoon conference Feb. 9 that examined the challenges and opportunities facing the financial reporting system. Participants included distinguished accounting academicians and practitioners who offered frank observations about their discipline.

Harry Kraemer Jr., clinical professor of management and strategy and former chairman and CEO of Baxter International Inc., provided a corporate perspective on the challenges facing the accounting profession. He highlighted the need for members of the profession to provide leadership, as well as institutional knowledge, and to emphasize their organizations’ social responsibilities. Thomas Lys, the Eric L. Kohler Professor of Accounting Information and Management, examined the current debate on whether accounting standards should be based on principles or on rules. The Kellogg professor’s presentation gave examples from this debate and showed that the Securities and Exchange Commission’s actions are driven by perceived violations of principles rather than rules. Principles-based accounting places demands on the accounting profession that echoed those described by Professor Kraemer. Accountants must be both knowledgeable and capable of exercising judgment and leadership.

The principal speaker at the conference was James S. Turley, chairman and CEO of Ernst & Young, one of the world’s largest professional firms. Trial by fire, he said, is painful but can prove “galvanizing and uplifting” for those who survive the test.

In the wake of U.S. accounting scandals five years ago, the accountancy and professional services industry “took a lot of shots … and deserved to take a lot of shots” from investors and financial analysts, as well as from the government and public, said Turley.

“We hadn’t been doing our job as effectively as we could have,” he said.

Turley said companies such as his — part of the “Big 4” international accountancy firms that include Deloitte & Touche, KPMG and PricewaterhouseCoopers — had been “arrogant” and had not always listened to important constituents. Today, however, Turley said the industry has learned valuable lessons that have made the profession much stronger at a time when international financial markets demand a foundation of trust to ensure investment and economic growth worldwide.

“We learned that what we do is very important, said Turley, whose presentation was part of a program that provided a holistic perspective on the financial reporting system by including the perspectives of academics, corporate executives and members of the professional services industry. Today, he said, firms such as his listen to a much broader group, including academicians, the media, analysts, the regulatory community.

The “unprecedented scrutiny” of recent years has impressed upon practitioners just how relevant their contribution is to ensuring investor confidence, said Turley.

Looking to the future, Turley said that firms such as his will only remain relevant if the product they provide “continues to generate meaningful information to investors. If not, then we are in trouble.”

The key to relevancy, he indicated, involves identifying and understanding investors’ needs to ensure the financial reporting model is delivering the necessary value. Part of the challenge will entail working to make reporting standards more uniform—no simple task given a global economy. The U.S., for instance, relies upon Generally Accepted Accounting Principles (GAAP), while some 100 other countries use International Financial Reporting Standards (IFRS).

“You have got to get consistent execution” with respect to these standards, said Turley, adding that Ernst & Young is investing “millions and millions of dollars” to do this. “Getting convergence of IFRS is very important,” he said. “Fundamentally important.”

Turley also said it was critical to develop convergence around auditing standards and the regulatory framework.

Longer-term issues that concern the industry, he said, include educating the public to understand better what firms like Ernst & Young can deliver with respect to fraud detection. But he also said the firms must “do a lot more to enhance fraud detection.” Doing so may involve considerable discussion among practitioners and academics about what kind of reporting model will prove best in a global context.

“The financial reporting model was built for a different time, a time of less complexity, less globalization and less technology,” Turley said. He indicated that many questions remained to be answered, including those pertaining to the frequency with which corporate reports were delivered. Do investors want quarterly reports, as is the case in the United States today, or do they want semiannual reports, as is the case in the United Kingdom? Or will the future result in more frequent reporting. In the latter case, more timely information “certainly won’t be audited … but unfiltered.”

“How do you deliver the right information to meet all the different investor needs?” asked Turley. “We don’t know right now.”

Such questions hold many implications, he added, including for how schools such as Kellogg train its accounting students.

But despite the uncertainties confronting accounting professionals, some elements of the future are predictable, said Turley. Professional quality and integrity will remain essential.

“The biggest client in Chicago, the biggest client in North America, is not more important than the commitment to integrity,” he said.

Professor Robert Magee, new director of the Kellogg School’s Accounting Research Center, closed the conference by noting the long-established interactions between Ernst & Young and the faculty. The Keith I. DeLashmutt Distinguished Professor of Accounting Information and Management thanked the people of Ernst & Young and the Ernst & Young Foundation for their generous support.

“The resources provided by E&Y:LIVE will enable our faculty to address many of the issues we discussed today, both in research and in curriculum development,” he said.