Journal of Accounting and Economics 31 (2001) 309–319

Discussion of empirical research on

accounting choice
Jennifer Francis*
Fuqua School of Business, Duke University, Durham, NC 27708 USA

Abstract

This discussion considers four aspects of the survey paper on empirical accounting
choice research by Fields, Lys and Vincent: implications of the authors’ selection of an
expansive definition of accounting choice and their decision to classify this research by
managerial motives; implications of the authors’ decision to include implementation
decisions in their definition of accounting choice; implications of the authors’ call for
research on the consequences of accounting choice, including the costs of defective
accounting choices and the benefits of superior choices; implications of the authors’ call
for a reconsideration of research designs that explicitly consider groups of accounting
choices. r 2001 Elsevier Science B.V. All rights reserved.

JEL classification: M41

Keywords: Accounting choice; Accounting judgments and estimates; Accruals; Voluntary

disclosure

1. Introduction

Fields et al. (2000) (FLV) review empirical and analytical studies of

accounting choice published in the Journal of Accounting and Economics, the
Journal of Accounting Research and The Accounting Review in the 1990s. Their
paper extends reviews of pre-1990 studies of accounting choice (Lev and
Ohlson, 1982; Holthausen and Leftwich, 1983; Bernard, 1989; Dopuch, 1989;

*Tel.: +1-919-660-7817; fax: +1-919-660-7971.

E-mail address: jfrancis@duke.edu (J. Francis).

0165-4101/01/$ - see front matter r 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 5 - 4 1 0 1 ( 0 1 ) 0 0 0 1 7 - 9
310 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319

Watts and Zimmerman, 1990). My discussion reflects conference participants’

comments on the conference version of the paper as well as my own reading of
the revised paper. Conference discussion focussed on the problem of defining
accounting choice, the implications of FLV’s taxonomy for understanding
both the literature on accounting choice and the accounting choices available
to managers and the authors’ conclusions and recommendations. My
discussion considers these three topics, as well as some of the implications of
FLV’s recommendations for future research.

2. Defining accounting choice

The definition of accounting choice is important because it places boundaries

on the set of topics or phenomena to be studied. Just as the absence of an
agreed-upon definition of the object of study can hinder research (examples
include ‘‘earnings quality’’ and ‘‘earnings management’’), the use of an
ambiguous or overly expansive definition can lead to disputes about what has
been learned. FLV’s intentionally broad definition of accounting choice
encompasses ‘‘any decision whose primary purpose is to influence (either in
form or substance) the output of the accounting system’’.
FLV’s definition of accounting choice is expansive along several dimensions.
One is the nature of the decision maker. Interpreted literally, FLV’s definition
includes decisions made by managers, auditors, audit committee members and
perhaps even standard setting groups, particularly if the focus is on
implementation guidance (for example, the activities of the Emerging Issues
Task Force). Most accounting choice research does not include decision
makers other than managers among those responsible for making accounting
choices, so it seems likely that researchers have adopted the same restriction
implied in FLV’s discussion, which directs attention to accounting choices
made by managers. However, within their framework, managerial decisions
can be viewed as trading off incentives connected with others (such as
regulators or shareholders) who take an interest in, and make decisions
affecting, the outputs of the accounting system.
Expanding the scope of accounting choice to include decisions made by
decision makers, other than managers, suggests some possible research
opportunities. For example, we could examine auditors’ decision-making
processes when confronted with ambiguous accounting guidance or contentious
issues, and the role of audit committees in monitoring management’s selection
and implementation of accounting methods. Interpreted broadly, FLV’s
definition of accounting choice would suggest that we draw on, and encourage
more, related work in the auditing and corporate governance literatures.
A second dimension of expansiveness in FLV’s definition of accounting
choice is the nature of the choice. The definition includes: choices among
 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319 311

equally acceptable rules (what I term ‘‘hard’’ accounting choices, such as

selecting LIFO versus FIFO for inventory valuation or choosing between
straight line versus accelerated depreciation methods); judgments and estimates
required to implement generally accepted accounting rules (for example, the
estimated service life of long-lived assets or the estimated allowance for
uncollectable accounts); disclosure decisions (such as the amount of detail
provided in the description of accounting policies); timing decisions (such as
early or delayed adoption of a required accounting rule when flexibility in the
timing of adoption exists); lobbying activities (such as efforts to dissuade the
Financial Accounting Standards Board (FASB) from promulgating a rule
which would require the expensing of employee stock options); choices about
display (e.g., the selection of one statement, two statements or a section of
shareholders equity to display elements of other comprehensive income as
required by Statement of Financial Accounting Standards (SFAS) No. 130);
aggregation decisions (such as the extent to which components of income are
displayed as separate line items); classification decisions (e.g., the classification
of hybrid securities as equity versus debt); decisions to structure transactions in
certain ways to achieve a desired accounting outcome (for example, many
forms of off-balance sheet financing); and real production and investment
decisions (such as reducing expenditures on research and development or
advertising).
This definition of accounting choice covers a diverse set of activities
that affect accounting numbers. On the cash flow dimension, accounting
choice includes everything from real decisions (that is, decisions with direct
cash flow implications) whose accounting consequences are simply one
of several (possibly) second and third order outcomes, to accounting
decisions with no real effects (e.g., management’s allocation of an account-
ing acquisition premium between in-process research and development
technology which is immediately expensed and developed technology with a
service life of three years). Heterogeneity of accounting choice along the cash
flow dimension is particularly important because, as pointed out by FLV, the
motivation for a real decision may be unrelated to the accounting outcome
while the motivation for a purely accounting decision must be related to the
outcome.
Another dimension along which accounting choice, as defined by FLV,
displays significant heterogeneity is effects on income. While some choices have
both immediate and longer term income effects (e.g., the decision to extend
asset service lives), other choices (such as those involving aggregation and
classification) affect only components of income, period by period. This
distinction implies that some choices are intended to affect the over time
pattern of reported income (e.g., shifts in loan loss provisions); some are
intended to affect the components of income period by period (e.g., alleged
accounting manipulations in which costs that should be part of cost of goods
312 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319

sold are classified as marketing expenses)1 and some are intended to affect both
components and over-time patterns (e.g., special charges related to business
combinations which, inappropriately, include future operating expenses).
Presumably, the motivation for these choices differs just as the intended
outcome of the choices does.
FLV’s definition of accounting choice is silent on the matter of motivations.
As evidenced by the taxonomy introduced in Section 3 of their paper,
accounting choice can be driven by managerial self-interest, by a wish to
maximize the interests of shareholders, possibly at the expense of some other
contracting party, or by a wish to provide information. What is not clear is
whether motives are likely to be matched with choices, in the sense that only
certain choices can be used, or are best used, to achieve certain desired ends.
(I consider this issue in more detail in Section 5 of this discussion). While
FLV’s concerns about what they see as an inappropriately narrow focus on one
motivation at a time are certainly not misplaced, they are also exacerbated by
their decision to set the boundaries of accounting choice to encompass such a
broad array of choices and, by implication, motivations.

3. Consequences of FLV’s definition of accounting choice

FLV’s decision to adopt an expansive view of accounting choice has several

consequences for their paper. One consequence is that the demarcation
between accounting choice and related research areas (voluntary disclosure,
determinants of compensation, corporate governance) is not crisp. A second,
very positive consequence is that FLV provide broad coverage of an important
body of accounting research. By taking an expansive view of their topic, they
are able to summarize and critique a material portion of the accounting
research literature. Third, and perhaps most important for future research,
their view of accounting method choice encompasses choices made in
implementing accounting methods, in addition to choices among the methods
themselves. My own view is that implementation issues offer more
opportunities than do hard accounting choices for understanding the
motivations for and consequences of accounting choice.
Consideration of implementation decisions as key elements of accounting
choice seems consistent with the behavior of several groups that evaluate
financial reporting outcomes. For example, the Securities and Exchange
Commission (SEC), charged with oversight of the United States financial
reporting system, seems to focus more on implementation decisions than on
1
Some have argued that managers of enterprises whose gross margins are subject to particular
scrutiny have incentives to move expenses out of cost of goods sold and into items like marketing
expenses so that they do not enter the calculation of gross margin (MacDonald, 2000).
 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319 313

accounting method choice. In particular, speeches by SEC commissioners and

staff do not focus on accounting method choice, but rather on implementation
decisions (see, for example, Levitt, 1998). Recent SEC Staff Accounting
Bulletins (SABs) also focus entirely on complex implementation issues of
materiality judgments (SAB No. 99), timing and amounts of restructuring
charges (SAB No. 100) and revenue recognition (SAB No. 101).
In their study of Accounting and Auditing Enforcement Releases (AAERs)
issued by the SEC during 1982–1989, Feroz et al. (1991) report that over 70%
of the AAERs in their sample resulted from implementation decisionsFpre-
mature revenue recognition and delayed inventory write-offs of inventory.
Similarly, Palmrose and Scholz’s (2000) analysis of restatements during 1995–
1999 finds that 44% involved purely technical implementation issues (e.g.,
restructuring charges, in-process research and development adjustments).
Another external evaluation metric of financial reporting outcomes is
allegations made in class action lawsuits alleging defective financial reporting.
In their analysis of the allegations made in 103 private securities class action
lawsuits during 1988–1991, Francis et al. (1994) find that the majority of
plaintiffs’ assertions about bad accounting choices relate to judgments
involving revenue recognition, inventory and other asset valuation, and loan
loss provisions; in only two cases did plaintiffs allege non-GAAP practices.2
The results of these studies have at least two implications which bear on
FLV’s discussion. First, they suggest that it is not choice of rules or treatments
within GAAP (such as LIFO versus FIFO) that shareholders, or parties
presumptively acting in the interests of shareholders, find troublesome; rather
it is the judgments that managers make in implementing GAAP that are
problematic. Thus, one implication is that researchers should focus less on
accounting method choice and more on implementation decisions. I elaborate
on this issue in Section 4.
The second implication of these studies pertains to FLV’s call for research on
the consequences of accounting choice. The research on AAER’s and class
action litigation bears directly on the costs of bad accounting implementations,
and suggests that quantifying the adverse effects of bad accounting (e.g.,
shareholder, bondholder and possibly taxpayer losses; increases in the cost of
capital or loss of access to the capital markets) might be an appropriate
extension of this literature. Arguably, managers and others are probably more
interested in direct and objective measures of the benefits of good accounting

2
St. Pierre and Anderson’s (1984) and Lys and Watts’ (1994) finding that overstatements of
assets and revenues are the most frequently alleged manipulations in their samples of lawsuits
against auditors is consistent with this conclusion. These studies do not, however, distinguish
between alleged manipulations due to non-GAAP practices versus those attributable to the exercise
of within-GAAP discretion.
314 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319

implementations. Identifying benefits has proven more difficult than identifying

costs (see, for example, Botosan, 1997).

4. Implementation decisions versus method choice decisions

4.1. Responses to the recommendation that researchers focus on

implementation decisions

A focus on implementation decisions can take either an aggregated or a

disaggregated approach. The aggregated approach is perhaps best exemplified
by the significant body of work examining discretionary and non-discretionary
accruals. The disaggregated approach features a focus on individual account-
ing items known to require substantial managerial judgment and to have a
significant impact on reported profitability (e.g., loan loss reserves in banks
(Wahlen (1994), among others) and revisions of claim loss reserves among
property-casualty insurers, Petroni (1992)).
The aggregated approach has the advantage, in FLV’s framework, of
considering multiple choices or at least the aggregated outcomes of multiple
choices. The disadvantages of this approach, discussed in detail by FLV,
include limitations of models used to detect accrual manipulation and
limitations of the ability of the accruals approach to address the portfolio of
accounting choices that managers make.
The disaggregated approach has the potential advantage, in FLV’s frame-
work, of yielding precise directional predictions based on the researcher’s
understanding and analysis of how decision makers trade off the incentives
associated with the accounting object of study. The approach also has the
advantage of responding to FLV’s suggestion that researchers use their
accounting expertise to refine research designs on accounting choice. A good
example of the application of expertise and the disaggregated approach is
Miller and Skinner’s (1998) investigation of deferred tax assets. These authors
examine managers’ deferred tax valuation allowances to distinguish whether
these estimates are more consistent with the intent of SFAS No. 109 (an
implementation predicted by FLV’s information asymmetry motivation), with
loosening leverage-related constraints (an implementation predicted by FLV’s
agency cost motivation) or with income smoothing (an implementation
predicted by a variant of FLV’s information asymmetry motivation).
The disaggregated approach also has the disadvantage, in FLV’s framework,
of providing a piecemeal, one-choice-at-a-time analysis. I believe that FLV’s
assessment of this approachFas opposed to the way researchers have
implemented this approachFis unduly pessimistic. That is, I think the
disaggregated approach can be used to amass, one study at a time, a set of
empirical regularities that, taken together, provide a general set of results and
 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319 315

insights. However, since accounting researchers do not always make the effort
to articulate, carefully and thoroughly, the extent to which they believe their
results are generalizable and to provide a context for both their study and its
results from the existing literature, readers of this literature can easily come
away with the impression of a disjointed series of fragmented and inconclusive
studies.

4.2. Responses to the recommendation that researchers focus on choices among

accounting rules

FLV also suggest a re-consideration of research designs that explicitly

consider multiple accounting rules, along the lines of those used by Hagerman
and Zmijewski (1979) and Hagerman (1981). One recent study which takes
such an approach is Bowen et al.’s (2000) examination of inventory and
depreciation method choices in 1984, 1990 and 1996. They consider 19
explanatory variables drawn from two decades of research, and conclude that
the explanatory power of the variables, as a group, is 23–27%, with industry
membership adding another 5–10%. Bowen et al.’s conclusion is far less
pessimistic than FLV’s, in that they conclude, ‘‘Our analysis of the economic
determinants of accounting method choice demonstrates that considerable
progress has been made in the last 20 years.’’ Perhaps one reason for Bowen
et al.’s relatively more optimistic conclusion is their focus on the literature as a
whole (they choose their explanatory variables from those used in previous
research) and not on large and small inconsistencies among individual studies.
As US GAAP features relatively few free choice accounting alternatives, it is
possible that FLV’s suggestion for more research on choices among accounting
rules would be most effectively implemented in international settings. Some
International Accounting Standards (IAS), for example, explicitly offer both a
benchmark treatment and an allowed alternative. Consistent with the view that
research on the choices among allowed alternatives under IAS would be of
interest to external evaluators of financial reporting outcomes, an August 15,
1999 letter from SEC Chief Accountant Lynn Turner to the American
Accounting Association invited research on firm characteristics associated with
choices among the alternatives provided by IAS, and the frequency with which
these alternatives are chosen.3

5. Taxonomy of accounting choice literature

In the revised version of the paper, FLV separate studies of accounting

choice, based on the primary motivation for accounting choice examined by
3
This letter is available at the SEC’s website: www.sec.gov/news/extra/aaacall.htm
316 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319

the research: agency costs, information asymmetries and third party contract-
ing. The authors use this classification scheme because they believe that ‘‘there
are greater similarities among the problems and their solutions within each
category than there are across categories’’ (page 3). I agree that FLV’s
taxonomy provides a useful organizing mechanism for an apparently diverse
literature. The authors’ rationale for their choice of taxonomy led me to expect,
however, that they would synthesize and evaluate the results of research studies
within a given category to judge the weight of the evidence. I was surprised,
therefore, that the authors did not provide more aggressive interpretations
about what we learn from a set of studies addressing any single motivation, and
instead expressed reservations about the lack of explicit consideration of other
motivations. In addition, while they provide separate summaries of studies that
focus on a single motivation and studies that consider multiple motivations,
FLV do not discuss what are the key features that distinguish the two types of
research (e.g., nature of research question, research designs, data availability).
Since an understanding as to why some researchers have succeeded in
considering multiple motivations or trade-offs while others have not is missing,
it is not clear how best to respond to FLV’s call for more ambitious treatments
of motivations.
The revised version of the paper contains a one-way classification scheme
based only on motive. In the previous conference version of the paper, FLV
suggested a two-way partitioning of the accounting choice literature research
based on both motivation and the type of choice examined. FLV’s definition of
accounting choice and their conclusions about the lack of research examining
portfolios of accounting choices suggest that they believe that the motive for
selecting among the types of accounting choices is an important and interesting
question. For example, are certain types of accounting choices the best or even
perhaps the only way to achieve certain motives?
In the conference discussion, participants asked whether in the absence of a
specific context, the authors could rank managers’ preferences about the types
of accounting choice? By ranking, participants meant ordering, ex-ante, the
forms of accounting choice from most to least effective in achieving the desired
objective, taking account of the possibility that the most direct and simple
choices may not be the most successful if shareholders, regulators or third
party contractors can easily see through or unravel these decisions. That is,
while switching from LIFO to FIFO might achieve a desired financial reporting
result quickly, the visibility of a change in a hard accounting choice may make
such decisions less successful at achieving an outcome that requires some
degree of financial reporting opaqueness.
The over-riding conference sentiment was that, in the absence of a decision
context, no such ranking was possible and that even with a context, informed
and reasonable persons might disagree with which type of accounting choice
would be most preferred. Notwithstanding such disagreements, participants
 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319 317

seemed to agree that research that used some industry context or institutional
knowledge to refine the research designFfor example, by focussing attention
on a specific type of accounting choiceFwas more likely to improve our
understanding of the economic determinants and consequences of accounting
choice.4 Examples of studies that use context to isolate a particular motivation
for or consequence of accounting choice include Jones’ (1991) study of income-
decreasing accrual manipulations by firms seeking import relief, the Beatty
et al. (1995) and Collins et al. (1995) papers on earnings management by banks,
and Bartov’s (1993) analysis of asset sales. Examples of studies that use
institutional knowledge to refine a research design include McNichols and
Wilson’s (1988) analysis of the provision for bad debts and Francis et al.’s
(1996) examination of asset write-offs conditional on the differential flexibility
in measuring and recognizing asset values provided under GAAP.

6. FLV’s conclusions

FLV conclude that there has been, at best, modest progress in understanding
the motivations for and consequences of accounting choice, with the rate of
progress slowing in the last decade. They have three major concerns. First,
studies fail to provide direct evidence of the implications of accounting choice;
in particular, the authors call for more evidence on the costs and benefits of
alternatives. Second, researchers inappropriately examine one choice, or
motivation for choice, to the exclusion of others. Third, researchers have
made limited progress in improving research designs and methods.
It is hard to argue with these criticisms, particularly, since the authors
support them with detailed discussions from the literature. However, I do not
interpret FLV’s criticisms of the accounting choice literature as a negative
signal about this research area. In my view, their critique should be read not as
a list of shortcomings and faults but rather as a thoroughly supported and
insightful discussion of pointers to research opportunities. This is particularly
true in cases, such as the discussion of multiple motivations, where the authors
describe approaches taken by researchers to address one of their concerns.
Turning now to the authors’ specific recommendations, it is again hard to
argue with the statement that accounting choice research would benefit from
better theoretical models. A second recommendation, that researchers use
more and deeper accounting expertise in designing studies, seems not only
particularly relevant for the accounting choice literature, but also requires the
researcher to balance the benefits of accounting specificity (which implies
studying one decision at a time) against the benefits of broad measures (which
4
Research on earnings management reached a similar conclusion. See, for example, Guay et al.
(1996) and Dechow et al. (1995).
318 J. Francis / Journal of Accounting and Economics 31 (2001) 309–319

implies studying the aggregate outcomes of many decisions). Perhaps the most
intriguing of the recommendations is the suggestion that researchers attempt to
calculate, ex post, the benefits or costs of accounting choices. While research
based on motivations links ex ante or expected benefits to choice, it is certainly
of interest to learn whether the choices had the desired effects.

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