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Gaining a deeper understanding of financial reporting and advanced accounting issues

Professor Moïse Louisy-Louis teaches international accounting and finance to EDHEC’s MSc in Accounting & Finance students. He previously worked as an event-driven analyst and was affiliated to a brokerage house, advising institutional clients on large European and US mergers and acquisitions (M&A) deals.

Reading time :
16 Mar 2023
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What can you tell us about your field of research?

Although I have an accounting background, I have always been interested in the link between accounting and corporate finance. Simply put, I could say that accounting is about measuring, gathering, and presenting data on business performance, whereas corporate finance deals with the decision-making process associated with how to finance the business. Consequently, I have research interest in topics ranging from financial reporting rules (pure accounting) to the concept of leverage (a corporate finance topic that focuses on companies’ use of financial debt with a view to enhancing returns). For instance, I am currently working on several projects, including the topic of intellectual capital (especially intangible liabilities), in order to evaluate how it creates value for companies. I am also working on a project that examines speed of adjustment (or SOA), the idea that companies should theoretically carry a target level of debt. If not, researchers want to understand the factors that influence change towards such a target. My research is quantitative, mainly based on the data provided in annual reports. 

 

Before teaching, you had some experience of working with M&A. How do you bring this experience to bear in the classroom?

Indeed, after completing an MBA, I started my career as an equity analyst in the hedge-fund industry, where my company focused on the energy, oil, banking and pharmaceutical sectors. Later, and after earning a PhD, I took on the role of ‘event-driven analyst’ and was affiliated to a brokerage house, advising institutional clients on large European and US M&A deals. There, I conducted thorough fundamental analysis of M&A events.

I definitely share my work experience with my students. I seek to emphasise hard facts and skills, such as identifying relevant information or computing/interpreting useful metrics or ratios, but I also insist on soft skills, such as the type of mindset and attitude students need to exhibit as they consider career opportunities in those industries.

Indeed, I had the opportunity to design and teach an elective called “merger arbitrage” for master’s students. This module helps showcase the role of an event-driven analyst, introducing students to a sophisticated niche market of the investment industry and instilling interest in the job. I have also written a case study on this material that could help fellow colleagues to disseminate these concepts in their classes. It’s entitled Merger Arbitrage: A Private Investigator’s Mindset. The case introduces students to merger arbitrage, an investment strategy that has gained in visibility since the 1980s due to impressive returns that appear uncorrelated to equity markets. The case pursues two underlying objectives. First, it describes the theoretical and practical principles that define merger arbitrage through a discussion of relevant literature and a set of user-friendly examples that are extensively documented and commented on. Second, the case is structured so as to stimulate students’ interest in the industry through the role of the event-driven analyst. The case, therefore, describes details of the routine process analysts use when performing an in-depth review of a deal’s rationale, payoff potential, and completion risk.

 

What’s your teaching style?

I want my class to be interactive. To capture students’ attention, I walk and talk and spice up my classes with a lot of real-life examples, or make-up stories to describe complex accounting topics. Students enjoy the fact that I can mix practice and theory. And, I try to remember the names of each student!        

 

Is there a must-read for students before attending your course?

There is no specific must-read for students, because the international accounting course is designed to address a set of specific accounting issues or concepts that may influence investors’ or creditors’ perception of corporate performance. These issues or concepts range from industry-specific financial ratio analysis to the accounting treatment of deferred tax items or research and development (R&D).

In addition, the course is designed for master’s students who have typically been exposed to accounting/auditing in their undergraduate studies or had some work experience through internships or professional immersion.

 

Are there prerequisites to your course?

Yes! To grasp the course’s fundamentals, students should obviously have mastered the principles of both financial accounting (the preparation of the main financial statements being the most obvious element) and corporate finance (the time value of money and an understanding of equity and debt instruments). Some understanding of how financial markets function is also quite useful.

 

What are the main concepts the students will review in this course?

By taking this course, students will acquire a deep understanding of the mechanisms that underlie the preparation of financial statements, including governance issues relating to the accounting-standard process. They will understand the strengths and weaknesses that characterise the preparation of financial statements. They will evaluate corporate financial performance through the use of relevant financial statement analysis tools and methods, including ratio analysis, with the perspective of understanding the dynamics and trends that characterise certain industries. They will also understand and incorporate the impact of complex accounting items, such as goodwill (or badwill), R&D, deferred tax items, off-balance-sheet items, and the like, into a review of corporate financial performance.

 

Will students work on business cases?

Yes! Business cases help students explore challenging real-life issues while remaining in a safe classroom environment. For instance, the “Dollar General bids for Family Dollar” case is quite interesting, because it invites students to review hard accounting data in the midst of a three-party M&A situation dating back to 2015 in the US retail market. In addition, students need to go beyond the accounting data and question the deal’s rationale, consider the historical context and competitive landscape, assess the impact of human behaviour (in particular, the behaviour of key protagonists, such as CEOs), and explore concepts such as the fiduciary duties of boards of directors (a topic that is rarely discussed in accounting courses).

 

Does sustainable finance have an impact on accounting?

My first instinct would be to say “definitely”! However, this may not be the correct question. Sustainable finance is a very broad, ambitious, and pressing topic given the profound changes that are impacting our lives. Corporations, non-governmental organisations, governments, and individuals around the globe are striving to find ways to make our way of living more sustainable. As previously mentioned, accounting is about gathering, measuring, and presenting data in order to support the decision-making process. Therefore, the correct question is whether accounting can help sustainable finance be deployed and reach its goal. Today, the answer is probably “no”, as traditional accounting has not been designed to accommodate the needs of sustainable finance. To give you an example on a similar topic, circular accounting is a fairly recent branch of accounting that seeks to identify, measure and report dimensions that are fundamental to the circular economy. For example, the circular economy promotes the recycling of products and, therefore, breaks away from the traditional linear model in which consumers purchase, consume, and bin. Traditional accounting can help assess the value of such disposable products. However, traditional accounting does not know how to assess the value of products that can be recycled multiple times or that can be leased (in theory, indefinitely) or marketed through product-as-a-service (or PaaS, an approach inspired by the software-as-a-service (Saas) model used in the software industry). In addition, product recycling is expected to have positive impacts on society and the environment and such benefits are typically non-quantitative. Circular accounting is being developed to address these limitations (in particular, the integrated profit and loss account and multi-capital balance sheet are being developed to help capture those difficult-to-value benefits).

 

What do you expect your students to have mastered on completion of your course in terms of knowledge and skills?

Broadly speaking, the international accounting course is primarily designed to give students a deeper understanding of financial reporting and certain advanced accounting issues. The first objective is to provide students with a practical understanding of the mechanics of financial reporting, as prescribed by the International Financial Reporting Standards (IAS/IFRS). The second objective of the course is to provide students with a wide range of practical tools for analysing financial statements from the perspective of business valuation, while addressing certain advanced accounting issues that may influence the decision-making process (especially for investors and creditors).

More specifically, we explore and discuss the limitations of financial statements and the fact that accounting rules give companies certain leeway in their choice of accounting methods, assumptions, etc. This renders the job of investors and creditors more difficult, as comparison between companies or across industries is impeded.

It’s also essential that students develop a critical mindset to go beyond the numbers, to investigate, to think about the impact of M&A on jobs, products, the supply chain, etc.   

 

 

 

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