Comment letters on annual reports: Evidence from an emerging market

This paper examines comment letters on firms’ annual reports in an emerging market. The literature primarily focuses on comment letters issued by the U.S. Securities and Exchange Commission (SEC), although many other market regulators also use SEC-style comment letters. Comment letters can potentially be very impactful in emerging markets due to weak institutions and low disclosure quality in these markets. Using comment letters in China from 2015 to 2019, I find that the market response to the receipt of comment letters is significantly negative and associated with the severity of the comment letters. The receipt (severity) of comment letters is associated with adverse regulatory consequences, CEO turnover, corrective actions to remedy financial reporting, and poor future financial performance in the propensity score matched sample (recipient sample). Overall disclosure quality in the post-review year does not increase, but some comment letter topics prompt topic-specific financial reporting changes.

The Development of Expected-Loss Methods of Accounting for Credit Losses: A Review with Analysis of Comment Letters

After the financial crisis of the late 2000s, concern about delayed credit-loss recognition under the incurred-loss method prompted the FASB and the IASB to develop expected-loss methods. We review the development of these methods, including through comment-letter analysis. Initially, the FASB recommended immediate full recognition of expected losses, including at day one, and the IASB recommended spreading the recognition of initially-expected losses across time. After unsuccessful attempts to converge based on proposals that partly reflected initial recommendations of each board, the boards eventually adopted different methods. We report that U.S. respondents largely opposed the FASB's final method, which required day-one recognition of all expected losses, and that non-U.S. respondents largely supported the IASB's final method, which required day-one recognition of 12-month expected losses. Day-one loss was controversial and impeded convergence. Our comment-letter analysis suggests that a day-one-loss-free more forward-looking incurred-loss method might provide a route to a more converged solution.

The Determinants and Consequences of Big 4 Lobbying Positions on Proposed Financial Accounting Standards

Despite the considerable participation of Big 4 accounting firms in accounting standard setting, there is no systematic evidence on what factors shape Big 4 support or opposition toward proposed accounting standards or whether their lobbying positions materially influence standards. Using textual features of Big 4 comment letters on FASB proposals, I find that Big 4 firms' lobbying positions reflect profit motives through support for standards that will generate more fees or are supported by their clients. Big 4 lobbying support is concentrated in proposals exhibiting both characteristics, with some evidence suggesting client agreement dominates fee-generating incentives. Big 4 lobbying positions are significantly associated with standard setting outcomes, both in isolation and relative to other FASB constituents, including financial statement users. Although I primarily focus on Big 4 accounting firms, results indicate the tone of comment letters submitted by users is unassociated with the standard setting outcomes measured in this study.