The paper entitled "Changes to Accounting Policies, Financial Reporting Quality and Guaranteed Loans during the Covid-19 Crisis” won the best paper award in the Accounting Information category of the Financial Markets and Corporate Governance Conference organized in April 2023 by the Deakin Business School, a reputable Australian institution.

The work aiming to understand the role of accounting policies during crisis times and their economic consequences is coauthored by Mircea Epure, Serra Húnter Associate Professor in the Department of Economics and Business at UPF and affiliated with the Barcelona School of Economics (BSE) and UPF-BSM, with Bruno Buchetti and Amedeo Pugliese, from the University of Padua (Italy).

The importance of accounting policy changes in a crisis

The study, which is part of the project "Comparative Analysis of the Effectiveness of COVID-19 Policies (COMPVID)” financed by ”la Caixa” Foundation (of which Mircea Epure is principal researcher), starts from the realization that changes to accounting policies introduced by governments to alleviate the effects of crises are becoming more frequent. Especially during the Covid-19 crisis, which did not stem from flawed economic fundamentals, governments altered accounting regulation assuming that such changes are cost-neutral.

Instead, the paper shows that accounting policy changes can affect resource allocation and generate costs to public finance, as well as diminish corporate transparency.

Reporting quality and relief mechanisms during the Covid-19 crisis: The case of Italy

The key event exploited in the paper is the sudden decision of the Italian government to extend the filing period of the 2019 financial statements by 60 days at the start of the Covid-19 crisis.

In addition to accounting regulation changes, the government provided firms with multiple types of relief mechanisms such as ample access to guaranteed loans (which did not require filing financial information) and employment, revenue or rental support (which required the filing of accounting data).

The authors predict that differently than in non-crisis periods, firms delayed the filing of financial information (1) to exercise reporting subjectivity, useful for obtaining relief mechanisms whose access was based on accounting information; and (2) because the costs of reduced timeliness are offset by the availability of guaranteed loans.

A sample of more than 600,000 SMEs with surprising results

The analysis is conducted on a highly representative sample of 601,993 privately held Italian SMEs filing their 2019 financial statements (economically unaffected by the pandemic) during 2020, both before and after the Covid-19 induced regulatory change.

“Our main result is that firms that delay filing access more guaranteed loans and lower their financial reporting quality,” argue the authors. According to their analysis, these firms decrease reporting quality especially in industries relying more on relief mechanisms such as guaranteed loans and extraordinary furlough (such as the Spanish ERTEs).

Firms with lower labor and rental costs before the crisis reduced their financial reporting quality in an arguably purposeful attempt to receive more financial aid

“Interestingly, firms increased accounting subjectivity especially when their pre-Covid-19 cost structure was not “compatible” with receiving government support,” state the authors. Accordingly, firms with lower labor and rental costs before the crisis reduced their financial reporting quality in an arguably purposeful attempt to receive more financial aid. The authors highlight that “overall, reporting subjectivity of late filers manifests through changes in income and expenses, reduced amortization charges, and increased capitalization of intangibles.”

A study relevant for policy makers

The work of Buchetti, Epure and Pugliese has implications for the design of policy interventions and the desirability of changes accounting regulation during a crisis. It shows that allowing firms to delay financial reporting during a crisis generates direct and indirect costs, which are usually disregarded by policy makers.

This is particularly true when accounting policy changes are accompanied by generous relief mechanisms, which can have micro firm-level effects that aggregate to substantial macroeconomic monetary costs (the large amount of relief mechanisms).

Finally, the authors conclude that changing accounting regulation during a crisis generates non-monetary macroeconomic effects such as lower corporate transparency with potential negative externalities on market transactions.

Referenced work: Buchetti, B., Epure, M. and Pugliese, A. (2023) “Changes to Accounting Policies, Financial Reporting Quality and Guaranteed Loans during the Covid-19 Crisis”, available at SSRN.

http://dx.doi.org/10.2139/ssrn.4489498