Why Accounting Reform Should Matter to Policymakers

It’s not often that accounting and the Constitution are talked about in the same sentence. But maybe they should be more often.

Speaking to an audience during the 2022 Journal of Accounting and Public Policy (JAPP) Conference hosted by the Accounting and Information Assurance Department at the University of Maryland’s Robert H. Smith School of Business on June 17, Christina Ho, board member of the Public Company Oversight Board (PCAOB), explained why accounting needs to be more relevant to policymakers and its role within a democracy.

Reflecting on her time as deputy assistant secretary of accounting policy at the U.S. Treasury, Ho described accounting’s important role in promoting foundational financial data that illustrates an organization’s overall health, drives effective business strategies and enables investors to make informed choices.

Ho also expressed accounting’s alignment with the preamble to the U.S. Constitution with its goal of helping establish justice and ensure domestic tranquility, providing for the common defense and promoting the general welfare.

“Honest accounting helps turn those phrases into reality decades after decade, generation after generation, because it facilitates transparency of a company's performance. It goes hand in hand with auditing, which facilitates investor trust,” said Ho during the event. “Trust is vital to maintaining highly efficient and effective capital markets, providing fair and transparent capital markets for investors to grow their wealth is part of the secure, the blessings of Liberty to ourselves in our prosperity.”

Accounting scandals, like those of Enron and WorldCom in 2002, conveyed the need for substantial auditing and financial regulation reform for public companies. In the years since, she said, it’s fair to say that strides have been made towards restoring public trust in the auditors of public companies. That’s evidenced in part by the continued growth of capital markets from a market cap of approximately $11 trillion in 2002 to over $60 trillion this year.

But recently, Ho said she’s been more focused on determining the most effective approach for new regulations. At times competition itself may be enough to incentivize businesses to roll out quality products and services. However, other times more intense scrutiny is required.

“The higher the level of trust required, the higher the degree of regulation that is warranted. Similarly, the public needs to trust that the capital markets are fair and transparent for them to be willing to invest their life savings,” said Ho. “Most importantly, public trust is the cornerstone of a functioning democracy and is crucial to maintaining political participation and social cohesion.”

Then there’s also the issue of whether current accounting standards and policies are capable of enduring the complexities of today’s business landscape with emerging technologies, said Ho. A higher degree of professional judgment is needed to help mitigate the potential financial effects of events like the COVID-19 pandemic, or other indirect effects of climate change and future wars.

Other issues within the profession include the growing need for real-time accounting and auditing, the increasing role of automation and the expanding scope of global transactions. All of these issues, Ho said, should be on the minds of policymakers as they attempt to ensure the continued participation of investors in the capital market system.

“When there is a lack of trust in the capital markets, this impacts the financial ecosystem and by extension the economy as a result, it is important for policymakers to continue to encourage and enforce ethical accounting practices and high quality and dependent audits to intrinsically protect investors,” said Ho.

This year’s conference marked the tenth in a continuing series of JAPP conferences rotating among the IE Business School in Spain, the London School of Economics (LSE), and the University of Maryland’s Robert H. Smith School of Business.

The event also commemorated JAPP’s 40th anniversary and explored topics related to the intersection of accounting with economics, political science and law.