The effect of IFRS for SMEs on the financial reporting environment of private firms: an exploratory interview study

I investigate how the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) contributes to the development of private firm financial reporting. I interview a sample of leading accounting experts from 24 jurisdictions around the globe to understand the role of private firm financial reporting and financial transparency in their jurisdiction as well as the importance of IFRS for SMEs. I find significant variation across jurisdictions in my sample and document that IFRS for SMEs predominantly influenced private firm financial reporting and transparency by serving as a blueprint for national regulatory reforms. In some jurisdictions, IFRS for SMEs has also been adopted as an optional reporting framework. Direct firm-level adoption of IFRS for SMEs has been low in these jurisdictions with the exception of South Africa where it seems to be used relatively widely. Based on my response data, I suggest some potential rationales for my findings and discuss potential reasons for the observed cross-jurisdiction variation in private firm financial transparency and IFRS for SMEs adoption.     

Charity performance reporting,regulatory approaches and standard-setting

Internationally, there are strong calls for charities’ formal annual reporting to include non-financial performance information. Without the international standards common in other sectors, national accounting standard-setters often regulate charities’ reporting. Lacking evidence on approaches to encouraging/mandating charity performance reporting, and the effectiveness of these approaches, we ask: “How have different jurisdictions responded to calls for increasing performance reporting?”We conduct a benchmarking study that indicates differences in current reporting practices between Australia, New Zealand, the United Kingdom and the United States. By discussing both current regimes and proposed projects, we develop and illustrate a typology of regulatory approaches to performance reporting. These range from command and control, where standard-setters mandate specific performance reporting standards, through to market regulation, where charities and/or sector bodies acting as regulatory entrepreneurs determine what is to be reported. Between these extremes, the typology describes new governance approaches, with standard-setters partnering and collaborating with other actors. These approaches lead to different requirements with potentially significant implications for performance accountability in the respective jurisdictions. We argue that our regulatory typology contributes useful insights for the many jurisdictions grappling with how to regulate their charity sector and encourage performance reporting.     

Assessing qualitative similarities between financial reporting frameworks using visualization and rules: COREP vs. pillar 3

Financial institutions are struggling with larger volume, more specific and greater frequency of regulatory reporting after the global financial crisis in 2008, especially those that need to report to multiple jurisdictions. To help to improve reporting efficiency, this paper aims to assess the existence of similarities between templates related to credit and counter party credit risk of COREP and Pillar 3 regulatory reporting frameworks by applying Correspondence Analysis and Association Rules Mining. Our results suggest a high degree of overlap between these reporting frameworks, more prominently the three business functions as Front office, Finance and Risk. These patterns can be used as guidance for financial institutions to reshape their reporting architecture.     

Risk disclosures on the second tier markets of the London Stock Exchange

The identification, management and disclosure of risks have been the subject of recent legislation, directives and reporting standards issued across a number of international jurisdictions. To inform the disclosure debate, this paper provides a detailed analysis of the risk warning disclosures of initial public offering (IPO) companies and the factors that drive such disclosures. We find that risk disclosures of IPO companies contain a greater proportion of forward‐looking information but a lower proportion of information on internal controls and risk management than the disclosures of listed companies. We find evidence that such disclosure has increased across time but that larger directors’ shareholdings are associated with a reduction in risk disclosure.     

Definition of the Reporting Entity

Harmonisation between Generally Accepted Accounting Principles and Government Finance Statistics is the highest priority for Australian public-sector reporting. This paper addresses the question of the reporting entity in a harmonised GAAP-GFS framework and discusses whether the GFS General Government Sector meets the criteria for the general-purpose reporting entity. The objective of harmonisation is to achieve an Australian accounting standard for a single set of government reports which are auditable and comparable between jurisdictions, and in which the outcome statements are directly comparable with the relevant budget statements. Since there is widespread interest in General Government Sector information by users, the sector is the obvious candidate for the government general-purpose reporting entity.     

Financial reporting by charities: a matched case study analysis from four countries

This paper analyses financial reporting requirements applicable to charities in four jurisdictions—Australia; England; Ireland; New Zealand—using case study analysis which compares the actual financial statements of four charities operating in the same field and with similar levels of total income. The authors highlight common issues and implications in terms of the concepts underpinning not-for-profit organization (NPO) financial reporting and argue the case for harmonized international NPO accounting standards.     

New development: Churches and charity accounting

This article outlines the impact of the charity accounting regime on churches in the various legal jurisdictions of the UK. While churches have charitable status throughout the UK, historically they have not necessarily had to follow the normal requirements for charity financial reporting. But churches are now starting to submit accounts to regulators like other charities and the impact of this is considered.     

Australia's switch to international financial reporting standards: a perspective from account preparers

This study reports the findings of a structured telephone survey on adoption of international financial reporting standards (IFRS) from 60 firms drawn from among Australia's top 200 corporations. Although we find evidence of strong systematic variation in survey responses with factors such as firm size, industry background and expected impacts on financial performance, the general results indicate that many respondents have not been well prepared for the transition and are generally very sceptical about the claimed benefits of IFRS as enunciated in the government's Corporate Law Economic Reform Program. The results have implications to other international reporting jurisdictions, particularly the European Union, where adoption of IFRS is already underway.     

Using Google Trends to track the global interest in International Financial Reporting Standards: Evidence from big data

This study proposes a novel method for identifying international accounting differences under International Financial Reporting Standards (IFRS). Using Google Trends data extracted between January 2014 and August 2022, it creates an index, the Global IFRS/IAS Search Index (GISI), which comprises the search activities of 121 jurisdictions for 45 IFRS accounting standards. To assess its relative validity, I classify Nobes' (1983) 14 jurisdictions in addition to 20 OECD countries. The cluster analysis demonstrates that the GISI is a viable alternative for analyzing international differences under IFRS. The results indicate that incorporating big data could be beneficial for examining global accounting issues. A judgmental international classification of financial reporting practices     

Countries’ adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) – early empirical evidence

The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions. Despite the economic importance of non-publicly accountable entities, little is known about what factors influence countries' decisions to adopt IFRS for SMEs. In a unique sample of 128 countries, we find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for SMEs. We also provide evidence that in jurisdictions where full IFRS have been applied to private firms, the likelihood of adoption of IFRS for SMEs increases, suggesting that jurisdictions reduce the financial reporting burden on SMEs. Moreover, in line with prior literature, there is evidence that countries with a relatively low quality of governance institutions are more likely to adopt this new set of accounting standards. The results also hold under alternative measures and different estimation approaches. Overall, our results are helpful in understanding the worldwide diffusion of IFRS for SMEs. Standard setters and regulators might consider our study in the future development of accounting harmonisation of non-publicly accountable entities.     

Churches and charity regulation: 1993–2009

This article explores the impact of charity law and regulation on churches in the period 1993–2009 in the jurisdictions of England and Wales, Scotland, and Northern Ireland. In the past, churches have often escaped the full requirements of charity regulation on issues such as registration, reporting, and accountability to regulators. Many of these exemptions have been removed as a result of modernization of charity law throughout the UK, and the implications of these changes are explored both normatively and qualitatively.     

The Challenges Faced by Reporting Entities on Their Transition to International Financial Reporting Standards: A Qualitative Study

Abstract

This study explores the challenges of implementing International Financial Reporting Standards (IFRS) at the organisational level. Based on interviews with experts with aggregated experience relating to the transition projects of over 170 reporting entities, this paper highlights the main challenges in delivering a successful implementation of IFRS. The findings show that the problems faced in implementation include lack of education and training, securing executive-level support, identifying and responding to the wider business-related implications of the transition, and issues with capturing the necessary information for reporting under IFRS.This paper complements the existing literature and offers a qualitative alternative to considering the transition to IFRS, offering insight into the organisational context of IFRS implementation. These insights are useful not only from a historic perspective, but also for organisations and regulators in the many jurisdictions where IFRS is permitted but not required, where more reporting entities will voluntarily move to IFRS-based reporting in the future. More broadly, they are also applicable to the challenges faced in implementing new and significantly revised IFRSs.     

Evaluating the Implementation of a Mandatory Dual Reporting System: The Case of Indonesian Local Government

Informative and transparent financial information in the public sector is crucial for improving public sector management and eradicating corruption. Given this, Indonesia has reformed its public sector accounting, reporting and accountability systems by implementing a dual reporting system known as ‘cash towards accrual’, following similar reforms in developed countries. Drawing on the experience of five local governments (districts) in Indonesia, this study finds that the implementation of the dual reporting system has helped local governments to produce transparent and informative reports. However, the accrual‐based contents of the dual reports produced by the new reporting system are underused for decision making. In addition, there has been a significant increase in costs associated with the implementation of the new accounting regime in the jurisdictions studied. The study also finds that the ability of the users to use information generated by the new accounting system is more important than just a legal and mandatory requirement to use the new system.     

Investor protection,cross-listing and accounting quality

Using 42,808 firm-year observations from 32 countries around the world, we investigate whether cross-listing in the US is associated with better accounting quality, and whether investor protection moderates the effect of cross-listing on accounting quality. Our main results show firms that are cross-listed in the US exhibit more timely reporting of losses, greater tendency to manage earnings downward, and more value relevance of accounting numbers as compared to their domestic counterparts. Cross-listed firms originating from high investor protection jurisdictions, particularly in high anti-director rights and common law countries, exhibit greater tendency to recognise a more timely reporting of losses and to manage earnings downward but exhibit lower value relevance of earnings as compared to cross-listed firms domiciled in low anti-director rights and non-common law countries. These results suggest that the strength of investor protection in home country plays an important role in determining the quality of accounting numbers of cross-listed firms.     

Determinants of the voluntary adoption of digital reporting by small private companies to Companies House: Evidence from the UK

This study examines the factors that influence the voluntary adoption of the digital reporting of the statutory accounts and returns to the company registry (Companies House) by small private companies in the UK. We analyse survey data from 343 members of the Association of Chartered Certified Accountants working in small companies or in practices with small company clients in the UK. The data is examined using statistical methods, mainly PLS-SEM. Our results show the following factors positively influence the voluntary adoption of digital reporting by small private companies: the relative advantage from standardisation benefits, the company's technology competence and support from top management. We also provide evidence that the complexity of the company's accounting system and technology costs inversely influence this voluntary adoption. The study contributes to the emerging literature by expanding our understanding of how the standardisation of financial information flows benefits small private companies. The results should be of interest to small companies and their accountants, regulators in the UK and other jurisdictions planning digital reporting initiatives or seeking to reduce administrative burdens on smaller entities.     

The effect of internal control and risk management regulation on earnings quality: Evidence from Germany

We investigate the impact of mandatory internal control and risk management (ICRM) reform on earnings-based attributes of accounting quality in Germany. Although prior studies examine changes in accounting quality under SOX Sections 302 and 404, there is scant evidence of the accounting quality effects of ICRM reform in foreign jurisdictions. Such evidence is warranted given the ongoing global policy debate of ICRM reform in the post-SOX era. We extend existing research by examining changes in earnings quality following the 1998 German legislation on control and transparency (KTG). The KTG regime provides a unique setting in which the regulatory scope extends beyond internal control over financial reporting (ICFR) to include broad business and enterprise risk control. Using both a differences and difference-in-differences research design, we find that German firms experience an increase in timely loss recognition and a decrease in earnings smoothing after KTG. We also find some evidence of a decrease in loss avoidance behavior. Additional analyses show that the sensitivity of capital investment efficiency to earnings quality increases in the German market after KTG, suggesting that earnings quality effects of mandatory ICRM reform has positive consequences for capital resource allocation. Together, our results are consistent with the achievement of one of the intended outcomes of ICRM regulation—increased accounting quality through effective ICRM systems.     

Incentives for risk reporting — A discretionary disclosure and cheap talk approach

This paper adopts and reviews discretionary disclosure and cheap talk models to analyze risk reporting incentives and their relation to regulation. Given its inherent discretion, risk reporting depends on disclosure incentives. To assess these incentives the analytical models consider risk reporting as an endogenous feature, thereby providing a benchmark to discuss regulatory attempts. Particularly, discretionary disclosure models refer to verified disclosure, e.g., on risk factors or risk management, whereas cheap talk models refer to unverified disclosure, like managerial forecasts on the impact of risk factors. This provides an analytically-based framework for discussion. Unlike prior literature, which focuses on disclosure cost, I argue that uncertainty of information endowment and issues of credible communication can explain restricted risk reporting observed empirically. Linking regulatory attempts to these restrictions implies that regulation may mitigate the incentives-driven restrictions to some extent, but can have adverse effects on risk reporting. I particularly discuss the link between effective risk monitoring and the precision of risk reporting; the ex post assessment and usefulness of managerial forecasts on impacts of risk factors; the claimed decreasing cost of capital by mandatory risk reporting; and the threat of self-fulfilling prophecies. While the discussion has implications for both specific risk reporting requirements and empirical research, overall results suggest that we should not overestimate the informativeness of risk reporting even in a regulated environment.     

Exploring effectiveness of entity actions to eliminate modern slavery risk – Early Australian evidence

The need for entities to eliminate the unethical and illegal practice of modern slavery in their operations and supply chains has led different jurisdictions to require large entities to report on how they assess the effectiveness of actions taken. In Australia, to build awareness of practices for internal and external stakeholders, the Australian Modern Slavery Act 2018 (Cth) mandates annual reporting in modern slavery statements and provides guidance as to how effectiveness of actions might be reported on. Based on theories/frameworks/models from literature addressing organisational effectiveness, an inductive analysis is conducted on the first 255 modern slavery statements published on the Australian Modern Slavery Register. Results indicate great diversity in approaches to reporting on effectiveness of actions, ranging from a total lack of reporting, through basic compliance, to going beyond compliance. The observations are used to develop a comprehensive framework for assessment of organisational effectiveness and an assessment of the extent to which current effectiveness theories/frameworks/models can guide future developments. The paper suggests adoption of the proposed framework can lead entities to improved transparency and validation of the effectiveness of their actions, as an important first step towards elimination of modern slavery in their supply chains.     

Harmonisation of Government Finance Statistics and Generally Accepted Accounting Principles

Harmonisation between the Australian accounting standards applicable to the public sector and Government Finance Statistics is the highest priority for Australian public-sector reporting. The objective of harmonisation is to achieve a standard for a single set of government reports which are auditable, comparable between jurisdictions, and in which the outcome statements are directly comparable with the relevant budget statements. The result will be an improvement in the quality, clarity and transparency of government financial statements, and will remove the source of confusion as to which set of financial reports presents a more reliable portrayal of financial results.     

The value of the PCAOB’s international audit oversight on U.S. listed foreign companies: Evidence from an initial enforcement breakdown

Using, as a natural experiment, the Public Company Accounting Oversight Board’s May 18, 2010, release stating that its oversight of certain foreign auditors had been denied, we examine investors’ early valuation of the PCAOB’s international audit oversight on U.S.-listed foreign companies. Comparing reactions for the release-exposed U.S.-listed foreign companies to reactions for other U.S.-listed foreign companies, we find a significant decline in the share values of the release-exposed companies. The decline is driven by companies with auditors from China; the on-list companies from the 19 on-list European jurisdictions do not experience significantly negative stock market reactions. Using difference-in-differences analyses of earnings response coefficients, abnormal stock returns and trading volumes surrounding earnings announcements, and analyst forecast dispersions, we find a decline in perceived financial reporting quality for the release-exposed foreign listings from China but not for the release-exposed companies from the 19 European jurisdictions—a finding in line with the results of the stock market reaction analyses. These results are consistent with the view that the PCAOB’s international inspection would create a net value for U.S.-listed companies from China.