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Quality of business reporting
The quality of business reporting in CARs affects the integrity of the information being communicated to stakeholders. One of the most important implications of CARs is that they determine the flow of capital, because “if investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere” (King, 2002a:9). The business information contained in these financial statements must therefore be adjudged trustworthy and of superior quality before an investor will decide to invest. Quality is a crucial issue when offering the business information compiled for the benefit of stakeholders.
There are some practical constraints to note that still ensure quality information in business reporting, but that may reduce costs. AICPA (1994:54-57) lists the following constraints:
• Business reporting should exclude information outside management’s expertise or for which management is not the best source. That is, business reporting should include only company-specific information that is within management’s expertise to provide (AICPA, 1994:54-57). The business disclosures in CARs should therefore be entity related and generated by the DIS and the MFIS using accounting practices to screen entity-specific information.
• Management should not be required to report information that would harm a company’s competitive position significantly (AICPA, 1994:54-57). The information disclosed in CARs must therefore strike a balance between the need to inform and the need to safeguard information that might be to the disadvantage of the entity involved when competing with other entities (Visser, 1978:394). Balanced quality disclosures are therefore essential.
• Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast for themselves a company’s financial future (AICPA, 1994:54-57). Belkaoui (2004:365) states the following in this regard: “The user, rather than the accountant, transforms the event into accounting information suitable to the user’s own individual decision model.” The preparers of CARs therefore provide information and leave the task of transforming and using that information to the users as they deem fit. Future-orientated information is important and could be disclosed in the discretionary sections of CARs: information should be provided that assists the users in forecasting a company’s financial future. As this type of information is difficult for auditors to express an opinion on, it would not be included in the statutory reporting section of CARs.
• Other than for the financial statements, management need only report the information it knows. That is, management should be under no obligation to gather information it does not have, or need, to manage the business (AICPA, 1994:54-57). What does the information that management knows consist of? Is it merely information on the past or also information about the future? To decrease uncertainty, accountants produce an ever-increasing amount of future-orientated information (Gouws & Van der Poll, 2004:106).
The qualitative objectives of financial accounting
Belkaoui (2004:166) summarises the qualitative objectives of statutory information generated by accounting principles in CARs to include relevance, understandability, verifiability, neutrality, timeliness, comparability and completeness. This is in line with the qualitative characteristics given in table 4.5. In the IASB Framework (IASB, 2005: para.24-46) a description is given of the qualitative characteristics that make the information provided in the statutory section of CARs useful to users. The four principal qualitative characteristics are understandability, relevance, reliability and comparability. As far as the understandability characteristic is concerned it must be borne in mind by the preparers of CARs that the accounting information will not always be understandable to users owing to its complexity. As far as the relevance characteristic is concerned, preparers of CARs should note that the more relevant the information is, the less reliable it may be, that is, information obtained (and audited) further back in the past is more reliable than recent (not yet audited) information that is more relevant. In CARs the statutory information created by GAAP would be more reliable, while the discretionary information created by discretionary accounting practices would be less reliable. A balance must therefore be struck between relevant and reliable information. Preparers of CARs should be aware that as far as the comparability characteristic is concerned, comparability is impossible without recognising the contextual/initial conditions, for example the inputs and the processes. This is catered for by the discretionary information system (DIS), which gives the contextual information. It is important to disclose information about the various inputs and processes of the accounting and financial information presented (Gouws & Lucouw, 1999:105), as given by the discretionary information section of CARs, as it is important to give sufficient indication of the changes in forces, processes and capabilities that determine the numbers (outputs). Only then is comparability possible, as the statutory section of CARs seldom informs users about how the results were achieved. The aspects of inputs, processes and outputs will be furher tested in the questionnaire for users (chapter 10) as follows: statement 5: Narrative disclosures in CARs are more understandable than numbers and ratios. For a balance between the benefit and cost characteristic, AICPA (1994:53) asserts that this characteristic should help to ensure that only information truly needed is included in business reporting and then only information that can be provided at an acceptable cost. Foster (1986:38) states: “A common argument presented against disclosure is the cost incurred when competitors use the disclosure to their own advantage.” However entities in industry have a rich network of information sources on what their competitors are doing (OECD, 2006:18). It would therefore be difficult to support an argument that increased disclosure of many items in financial reports as this, would result in a major competitive disadvantage (Foster, 1986:38). The benefit versus cost characteristic therefore also acts as a filter that reduces the information that is eventually disclosed. CARs comply with this requirement as business information in CARs that is not useful or comprehensible is discarded or replaced, which helps to balance benefit and cost. AICPA (1994:91) is of the opinion that standard setters should search for and eliminate less relevant disclosures in this regard.
In the above section, the quality features of statutory financial information as prescribed in the framework with which the MFIS in CARs is involved have been identified. The following section deals with the quality aspects that apply to the discretionary information section, that is, that involved in the DIS in CARs.
CHAPTER 1 INTRODUCTION AND PROBLEM STATEMENT
1.1 INTRODUCTION
1.2 A VISUAL OVERVIEW OF THE THESIS
1.3 PROBLEM STATEMENT AND IMPORTANCE OF THE STUDY
1.4 HYPOTHESIS OF THE STUDY
1.5 RESEARCH OBJECTIVES AND SCOPE
1.6 RESEARCH METHODOLOGY
1.7 WHO MAY BENEFIT FROM THE STUDY?
1.8 LIST OF DEFINITIONS USED
1.9 LIST OF ABBREVIATIONS AND ACRONYMS USED
1.10 DEMARCATION OF CHAPTERS
CHAPTER 2 CARs IN CONTEXT
2.1 INTRODUCTION
2.2 CARs: A HISTORICAL PERSPECTIVE
2.3 THE SYSTEMS RESPONSIBLE FOR DISCLOSURES IN CARs
2.4 DISCLOSURE OF INFORMATION
2.5 SUMMARY AND CONCLUSION
CHAPTER 3 SUBPROCESSES RESPONSIBLE FOR CARs
3.1 INTRODUCTION
3.2 USERS’ NEEDS
3.3 THE SYSTEMS AND FACTORS AFFECTING DISCLOSURES IN CARs
3.4 INNOVATION
3.5 REPORTING IN CARs
3.6 SUMMARY AND CONCLUSION
CHAPTER 4
QUALITY ISSUES IN CARs
4.1 INTRODUCTION
4.2 QUALITY OF BUSINESS REPORTING
4.3 THE FILTERING PROCESS
4.4 THE QUALITATIVE OBJECTIVES OF FINANCIAL ACCOUNTING
4.5 QUALITY OBJECTIVES OF DISCRETIONARY DISCLOSURES
4.6 BALANCED SCORECARD APPROACH
4.7 FURTHER DEVELOPMENT OF DISCRETIONARY DISCLOSURES
4.8 FOCUS ON ETHICS
4.9 SUMMARY AND CONCLUSION
CHAPTER 5 THE BUSINESS COMMUNICATION POTENTIAL OF CARs
5.1 INTRODUCTION
5.2 THE PROCESS OF COMMUNICATION
5.3 THE CARs COMMUNICATION SYSTEM
5.4 SUMMARY AND CONCLUSION
CHAPTER 6 DECISION USEFULNESS
6.1 INTRODUCTION
6.2 USER NEEDS DRIVE REPORTING
6.3 USERS’ INTERPRETATION PROCESS
6.4 CARs AS AN INSTRUMENT IN DECISION MAKING
6.5 INFORMATION AND PERCEPTION
6.6 THE ROLE OF CARs IN THE ENABLEMENT OF USERS
6.7 SUMMARY AND CONCLUSION
CHAPTER 7 RESEARCH METHODOLOGY
7.1 INTRODUCTION
7.2 LITERATURE REVIEW
7.3 CONTENT ANALYSIS
7.4 QUESTIONNAIRES
7.5 SUMMARY
CHAPTER 8 RESEARCH RESULTS: CONTENT ANALYSIS OF CARs
8.1 INTRODUCTION
8.2 THE CONTENT ANALYSIS USED
8.3 THE COMPANIES ANALYSED
8.4 MANDATORY INFORMATION VERSUS DISCRETIONARY INFORMATION
8.5 THE ESCALATION OF MANDATORY INFORMATION
8.6 THE ESCALATION OF DISCRETIONARY INFORMATION
8.7 SUMMARY AND CONCLUSION
CHAPTER 9 RESEARCH RESULTS: QUESTIONNAIRES FOR PREPARERS
9.1 INTRODUCTION
9.2 QUESTIONNAIRE FOR THE PREPARERS OF CARs
9.3 SUMMARY AND CONCLUSION
CHAPTER 10 RESEARCH RESULTS: QUESTIONNAIRES FOR USERS
10.1 INTRODUCTION
10.2 QUESTIONNAIRE TO THE USERS OF CARs
10.3 SUMMARY AND CONCLUSION
CHAPTER 11 RESEARCH RESULTS: QUESTIONNAIRES FOR DESIGNERS
11.1 INTRODUCTION
11.2 QUESTIONNAIRE FOR THE DESIGNERS OF CARs
11.3 SUMMARY AND CONCLUSION
CHAPTER 12 CONCLUSIONS AND RECOMMENDATIONS
12.1 INTRODUCTION
12.2 RESEARCH PROBLEM, QUESTIONS AND FINDINGS
12.3 SUMMARY OF RESEARCH FINDINGS
12.4 SUMMARY AND CONCLUSION
12.5 RECOMMENDATIONS
12.6 CONTRIBUTIONS OF THIS SUDY TO THE ACCOUNTING SCIENCES
