This volume, More Accounting Changes, is a revised and updated edition of Herz’s earlier work, reflecting: developments in financial reporting; global developments regarding the use of International Financial Reporting Standards; current efforts at disclosure modernization and simplification by the SEC and FASB; and more developments in the field.

Understanding Financial Accounts seeks to show how a range of questions on financial developments can be answered with the framework of financial accounts and balance sheets, by providing non-technical explanations illustrated with practical examples.

We investigate whether companies strategically change accounting estimates to manipulate earnings, as some claim (“opportunism” hypothesis), or whether these modifications represent changes in the underlying fundamentals of financially troubled or risky companies updating their priors about future expectations because of operational changes (“risk” hypothesis). Using audit fees, propensity to meet or beat earnings forecasts, and restatements as surrogates for managerial opportunism/bias, we find evidence consistent with the risk hypothesis and inconsistent with opportunism hypothesis. Further, consistent with the risk hypothesis, over the years prior to the estimate changes, companies are more prone to idiosyncratic risks such as going concern problems, misstatements, discontinued operations, corporate restructuring, charge-offs, and internal control problems. The lack of evidence supporting the opportunism hypothesis is not surprising because, under US GAAP, companies are required to disclose the “dollar effect” of an accounting estimate change on net income in their financial statements.