21st century scandals: towards a risk approach to financial reporting scandals

Financial reporting scandals in the 21^st century have been followed by many changes in the regulatory framework of financial reporting. While it is natural to ask for research evidence on the effectiveness of these changes in preventing new scandals, we discuss some of the difficulties in conducting this type of research as well as limitations of commonly used approaches. We argue as the central point of this paper that both research and regulation should be based on an explicit acceptance of a permanent risk of financial reporting failure, rather than working on the assumption that this risk can and should be ever further reduced. Acceptance of this point of view can turn what is currently a scattering of unconnected research efforts into a coherent research agenda with potentially high relevance. Facing the existence of permanent financial reporting risk leads to a series of interconnected questions including the measurement of this risk, both actual and as perceived by various stakeholder groups, communication and education concerning these risks, and mechanisms to share or transfer these risks.