Accounting report
Pouyan Mohammadi; hamideh asnaashari; MohammadHosien SafarZade
Abstract
The purpose of financial reporting is to present commercial realities. Meanwhile, there is growing concern about the complexities involved in financial reporting. To this end, the present study set out to explain the complexity pattern of financial reporting by drawing upon a grounded theory approach. ...
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The purpose of financial reporting is to present commercial realities. Meanwhile, there is growing concern about the complexities involved in financial reporting. To this end, the present study set out to explain the complexity pattern of financial reporting by drawing upon a grounded theory approach. The statistical population of the study includes 26 experts in the field of financial reporting. The data for the research were collected using semi-structured interviews. The findings identified the complexity of financial reporting as encompassing 12 causes: understanding the concept of complexity, preparers' knowledge, the company's capital structure, cooperation between institutions, the standard-setting body, the legislative body, the accounting standards, the structure of internal controls, the company's financial position, the company's board of directors, the auditors' skills, and the users' ability to identify it as causal conditions. Then, according to the contextual conditions (macro, industry, company, and reporting structure) and intervening conditions (informing practices, characteristics of the Chief Financial Officer, macro factors, and new technologies), several strategies (appropriate report format, appropriate standardization, application of laws and regulations, and empowerment of human resources and control structure) were developed. Afterward, the consequences, including outcomes at the macroeconomic level, expense reduction, company level, societal level, international level, and report level, were determined, and the final pattern was presented accordingly.IntroductionFinancial statements should contain sufficient detail to help users analyze and evaluate the company’s performance results and financial position in order to make informed economic decisions (Mutiso & Kamao, 2013). The complexity of financial statements indicates the increasing difficulty in understanding, interpreting, and predicting financial statements (Filzen & Peterson, 2015). Glassman (2006) states that the main concern regarding the complexity of financial reporting is that if financial statements are complex and distort business and economic reality, capital will be used inefficiently, resources will be misallocated, investors will pay a high opportunity cost by investing in companies with unrealistic values, customers and suppliers will make important and strategic business decisions based on a flawed picture of economic reality, creditors will not be able to price loans according to the real risk assumed, and employees will make employment, retirement, and investment decisions based on an incorrect view of the employer's financial outlook. Complexity in financial reporting has many negative consequences for users of financial reports. Given the increasing complexity of the business environment and consequently of financial reports, in such circumstances, users need understandable reports on which they can make informed decisions. Providing a comprehensive model of financial reporting complexity can help users of financial reports reduce the level of complexity they face. Therefore, the problem addressed in the present study is the lack of such a comprehensive model. The main questions that arise are: What are the complex areas of financial reporting? What factors cause financial reports to become complex? And what is the comprehensive model of financial reporting complexity?Research QuestionsWhat is the comprehensive model of factors affecting the complexity of financial reporting?Literature ReviewManagers may structure annual reports opportunistically and intentionally complicate financial reports in order to hide negative information from investors. When a company’s performance is poor, managers have an incentive to present information in an ambiguous manner, as the market may react slowly to information that is disclosed in a complex way. In other words, managers tend to obscure undesirable information by presenting complicated and ambiguous reports. In fact, they may attempt to conceal poor performance by increasing the volume of unnecessary information in annual financial reports. According to the management obfuscation hypothesis, managers present information they are reluctant to disclose in an ambiguous and incomplete manner to reduce the users' understanding of financial reports (Li, 2008). Existing accounting standards provide rules and guidelines on how companies should report. However, management still has discretion in deciding how to present financial information. Based on the opportunistic perspective of the positive accounting theory, managers choose the reporting method that suits their personal interests. As a result, they may publish financial information in a way that misleads investors (Pajuste et al., 2020). The Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), and the Securities and Exchange Commission (SEC) have all proposed projects to simplify and reduce the amount of information disclosed in financial reports. The Chairman of the FASB, Russell Golden, stated that “overly complex financial statements often hide important information that investors need to make appropriate decisions about capital allocation. A complex, opaque, and ambiguous standard also makes it difficult for preparers of financial statements to understand it, and even when an accounting procedure is clear, its use can be long, difficult, and costly” (Murphy, 2015).Research MethodologyThe present study is descriptive in terms of its fundamental purpose, descriptive in terms of data collection, and qualitative in nature, using the grounded theory method to analyze the data. Grounded theory refers to a theory derived from data that has been systematically collected and analyzed during the research process, involving a continuous back-and-forth between the data and emerging insights (Khanifar & Moslemi, 2019). This study develops and presents a comprehensive model of financial reporting complexity that includes causal factors, contextual factors, intervening factors, strategies, and consequences. It is also a cross-sectional study, as the interviews were conducted in 2024.Results and DiscussionThe findings showed that the financial reporting complexity model consists of 30 components. Causal factors affecting the complexity of financial reporting include understanding the concept of complexity, preparers' knowledge, the company's capital structure, cooperation between institutions, the standard-setting body, the legislative body, the accounting standards, the structure of internal controls, the company's financial position, the company's board of directors, the auditors' skill, and the users’ ability. Contextual conditions include the macro context, industry context, company context, and reporting structure context. Intervening conditions include informing practices, characteristics of the Chief Financial Officer, macro factors, and new technologies. Strategies to reduce the complexity of financial reporting include adopting an appropriate report format, appropriate standardization, application of laws and regulations, and empowerment of human resources and the control structure. Finally, the consequences, including the outcomes at the macroeconomic level, expense reduction, company level, societal level, international level, and report level, were identified, and the final model was presented accordingly.ConclusionGiven the lack of a uniform definition and understanding of the complexity of financial reports, this has been identified as one of the causal factors affecting the complexity of financial reports. The second causal component is the preparers’ knowledge of financial reports. The more specialized knowledge (in accounting and finance) and experience financial managers possess, the clearer and less complex the financial reports are. Financial managers with greater knowledge and experience tend to make more appropriate and understandable disclosures in financial reports. The third causal component is the company's capital structure. It is expected that private companies and those not accountable to a wide range of stakeholders will publish more complex financial reports. In contrast, companies that are accountable to various stakeholders are subject to greater scrutiny, encouraging preparers to produce more transparent reports. The fourth to seventh components include the lack of cooperation between different institutions, the standard-setting body, the legislative body, and the accounting standards, respectively. Cooperation among institutions involved in financial reporting can reduce complexity, by fostering a unified disclosure framework across all industries. In addition, some accounting standards and areas are inherently complex (ACCA, 2009), for example, Hedge Accounting (IAS39), Share-Based Payments (IFRS2), and Pension Accounting (IAS19). The eighth component is the structure of internal controls. Companies with strong and well-designed internal control systems tend to present more transparent financial reports. The ninth component is the company's overall financial situation. Companies facing unfavorable financial conditions may manipulate their reports to appear more stable. The tenth component is the company's board of directors. In companies where the board members possess relevant knowledge, education, and accounting experience, financial report monitoring is generally more effective. The eleventh component is the auditors' skills. Auditors with higher levels of education and expertise are expected to examine financial reports more rigorously and ensure compliance with disclosure guidelines and accounting standards. The twelfth component is the users’ ability. If users of financial reports have higher education and possess up-to-date knowledge in various fields, particularly in finance and accounting, they are more likely to understand and analyze financial reports effectively. As a result, the perceived complexity of the reports is reduced for them.
Accounting and various aspects of finance
Amir Moradi; hamideh asnaashari; Mohammad Hossein Rohban; Mohammad Arabmazar Yazdi; MohammadHosien SafarZade
Abstract
Design Science Research Methodology (DSRM) is a solution-oriented approach for conducting research that transcends mere understanding of existing situations, aiming to generate innovative and novel artifacts to realize desired outcomes. Despite its widespread use in other technical and managerial domains, ...
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Design Science Research Methodology (DSRM) is a solution-oriented approach for conducting research that transcends mere understanding of existing situations, aiming to generate innovative and novel artifacts to realize desired outcomes. Despite its widespread use in other technical and managerial domains, and more than two decades since the first exploration of DSRM in accounting literature, its true potential went largely unrecognized until the recent years, when it gained unprecedented recognition from accounting researchers. In this pioneering research, we analyze trends, identify influential figures, and map the intellectual and conceptual landscape of accounting research related to DSRM. Utilizing co-word analysis, co-authorship techniques, as well as scientific mapping and word cloud visualization, we scrutinize 51 articles from journals indexed in the most recent Australian Business Deans Council (ABDC) list from 2023. Our findings reveal that more than half of the research output is concentrated in the four-year period spanning from 2020 to 2023, signaling a growing interest among accounting researchers in this methodology. The dominant subject areas in design science articles are audit and control, coupled with the integration of emerging technologies and data analytics techniques. The most cited work is Guido Geerts (2011) paper, "A design science research methodology and its application to accounting information systems research" with 140 citations in the Scopus database alone. The most prolific author, Miklos Vasarhelyi, has authored six articles and boasts the most scientific connections with other researchers in this field. The State University of New Jersey, USA, where Vasarhelyi is affiliated, stands as the most prolific institute with eight articles. Guido Geerts receives 177 references from his two articles, earning him the title of the most cited author in the realm of design science in accounting research, while the University of Delaware, where he is affiliated, is also the most cited university. Among countries contributing to this field, the United States leads with the highest number of productive articles and references, totaling 33 articles and 555 references. The International Journal of Accounting Information Systems has published the most articles (20) and received the most references (464). The findings of this research illuminate bibliographic factors, relationships, and thematic orientations within design science research in accounting. They inform researchers and policymakers about the current status and trajectory of this methodology, providing a foundation for the advancement of solution-oriented and applied research in the field of accounting. IntroductionApplied research that seeks solutions to practical issues cannot be pursued through natural science research methods as they aim to design and implement solutions to improve the current situation. For this purpose, the methodology of design science (Simon, 1996) was introduced. Although accounting is a practical field of knowledge, this methodology is less known and utilized in accounting, until the last five years, when it was embraced by accounting and auditing researchers. Thus, in this study, we investigate the bibliometric factors and trends in accounting research using the design science research methodology (DSRM) to answer the following questions:RQ1: What are the main topics of articles related to design science research methodology?RQ2: What are the emerging topics in design science research in accounting?RQ3: Which are the most cited articles, the most prolific authors, the most prolific universities, the most prolific journals, and the most prolific countries in DSRM in accounting?Literature reviewDSRM is a research methodology that focuses on problem-solving (March & Storey, 2008), and its purpose is to create and evaluate artifacts that are used to solve organizational problems through transforming the current state into a desired state (Hevner et al., 2004; March & Smith, 1995; March & Storey, 2008). Considering the focus of this science on problem-solving, the application of design science research can potentially reduce the existing gap between theory and practice (Aken, 2004, 2005; Romme, 2003). MethodologyBibliometric analysis is the application of quantitative techniques (e.g., citation analysis) to bibliometric data (e.g., publication and citation units) (Broadus, 1987; Pritchard, 1969). Researchers apply bibliometric analysis for various reasons, such as discovering emerging trends in the performance of articles and journals, collaboration patterns among authors and research components, and discovering the intellectual structure of a specific field in existing literature (Donthu et al., 2021).In this research, in the first step, the Scopus database was used due to the inclusion of more scientific documents than other databases (Echchakoui, 2020). Then, the relevant keywords were identified and selected, and by setting the query phrase, applying it to the Scopus database and performing the necessary filters, a total of 58 articles from the journals ranked in 2023 rankings by the Australian Business Deans Council (ABDC) were obtained. This number decreased to 51 articles as the basis of analysis after reviewing the content by the authors and discarding unrelated articles. In this research, the VOSviewer software (Eck & Waltman, 2021) was chosen for bibliographic data analysis and visualization. Also, the matplotlib and wordcloud libraries in Python programming language were used for drawing wordcloud, and Microsoft Excel software was used for drawing trend charts.ResultsOur findings reveal that approximately half of the research output is concentrated in the four-year period from 2020 to 2023. The dominant subject areas in design science articles are audit and control, coupled with the integration of emerging technologies and data analytics techniques. The most cited work is Geerts (2011) paper, ‘A design science research methodology and its application to accounting information systems research’ with 140 citations in the Scopus database alone. The most prolific author, Miklos Vasarhelyi, has authored six articles and boasts the most scientific connections with other researchers in this field. The State University of New Jersey, USA, where Vasarhelyi works, stands as the most prolific institute with eight articles. Geerts (2011) receives 177 references from his two articles, earning him the title of the most cited author in the realm of design science in accounting research, while the University of Delaware, where he is affiliated, is also the most cited university. Among countries contributing to this field, the United States leads with the highest number of productive articles and references, totaling 33 articles and 555 references. The International Journal of Accounting Information Systems has published the most articles (20) and received the most references (464).DiscussionThe recently observed surge in publications indicates a growing interest among accounting researchers in this methodology. However, auditing literature hosts more DSR research (nearly half) than financial accounting and other branches. According to co-word analysis results, the design of auditing artifacts based on emerging technology is the predominant research trend, pursued by researchers to enhance audit quality and integrate emerging technologies into the auditing practice. These trends suggest an increasing emphasis on advanced audit and tech research in the future, with a focus on robotic process automation, analytics, and machine learning. In terms of actors at the levels of author, institution, and country, dominance lies with American contributors. Notably, journals that accept DSR papers are primarily technology-related, and mainstream accounting journals, such as The Accounting Review, have not yet embraced this research paradigm.ConclusionThis is the first attempt in accounting literature to conduct a bibliometric study on the research method known as DSR. Given the practical nature of accounting and the criticisms of low practical relevance of accounting research, scholars in the field have turned to DSR in recent years to undertake problem-solving inquiries through the design and evaluation of artifacts. Prospective researchers can benefit from examining seminal and highly cited papers and exploring current hot topics identified by this study to become acquainted with applying this research methodology and selecting trending topics for further inquiries.
Accounting report
Mohammad Soleymani; Mohammad Arabmazar Yazdi; MohammadHosien SafarZade; Javad Shekarkhah
Abstract
This study aims to investigate how a change in the accounting method of calculating bank loan loss provisions affects financial reporting quality of banks. In doing so, the current theoretical literature on the topic of the research has been described and the conflicting arguments in the previous research ...
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This study aims to investigate how a change in the accounting method of calculating bank loan loss provisions affects financial reporting quality of banks. In doing so, the current theoretical literature on the topic of the research has been described and the conflicting arguments in the previous research have been expressed. Subsequently, using the transfer matrix method, loan loss reserves have been calculated for a sample of 17 banks, assuming that the method approved by international accounting standards (expected credit loss model) has been applied. Then, the research variables’ data, spanning from 2017 to 2021, was collected and analyzed under two assumptions: employing the current method and using the expected credit loss model. Then, the research hypothesis was tested using the least squares method. The results of the research show that the relationship between the change in the reporting system and discretionary accruals as an indicator of the financial reporting quality is negative and significant. Therefore, a change in the current accounting methods used for the calculation of loan loss reserves causes reduction in discretionary accruals and improvement of financial reporting quality. On the other hand, the results of this research show that large banks are more interested in using discretionary accruals and applying profit management than small banks, which can be caused by the "political costs theory". IntroductionThe quality of financial reports remains an important issue, garnering serious attention from regulators, professional accountants and other users of financial information. This is due to the irreplaceable role of financial reporting quality in reducing agency problems and information asymmetry (Anto & Yusran, 2023). In the banking system, the method used for calculating loan loss reserves is one of the most important factors affecting the quality of financial reporting. This is because the loan loss provision, typically the largest bank accrual, is highly correlated with banks' net income and represents the most prevalent accrual. Loan loss provisions are accruals of fundamental importance to bank performance, and they also reflect information asymmetry (Beatty & Liao, 2014).Despite the great importance of loan loss calculation method on banks’ financial reporting, few studies have examined the effectiveness of the current method used in Iranian banks. Additionally, research exploring the impact of changes in the loan loss calculation method on the quality of banks' financial reporting has been limited. Given this context, it becomes imperative to investigate the influence of this crucial variable on the quality of bank financial reporting. Conducting this research, particularly in Iran with its bank-oriented economy, can enhance the quality of financial reporting. This improvement would be achieved by selecting the optimal method for calculating loan loss reserves, thereby increasing the transparency of information in banks.Research Question(s)The main question of this research is as follows:Does the change in the bank loan loss reserves calculation method have a significant effect on the quality of banks financial reporting? Literature ReviewIn the current literature, two predominant views exist regarding the impact of changes in accounting methods on the quality of financial reporting. The first view posits that changing accounting methods, equated to adopting international accounting standards, enhances financial reporting quality. Conversely, the second view contends that there is either no relationship or a negative relationship between the adoption of new accounting methods and financial reporting quality. Mensah (2021) demonstrated a significant negative relationship between the use of new accounting methods and profit management, suggesting that methods endorsed by international accounting standards elevate the quality of companies’ financial reporting. This finding aligns with the conclusions of researchers like Nikhil et al. (2023), Ozili and Outa (2019), and Haapamakia (2018). On the contrary, Oppong & Bruce-Amartey (2022) examined the effects of new standards and corporate governance on accounting quality in Ghana, discovering that the implementation of new standards adversely impacts accounting quality. Similar conclusions were drawn by researchers like Suadiye (2017) and Campa & Donnelly (2016). MethodologyThis research employed a quantitative approach to examine the effect of changes in accounting methods on the quality of financial reporting. Initially, data was gathered using the current numbers of the financial statements of selected banks. Subsequently, the loan loss reserve calculation method was altered, and the research data was re-estimated using the new accounting method, aided by a transition matrix and the IFRS 9 formula. The research hypothesis was then tested using both datasets. The sample comprised data from 17 Iranian banks spanning the years 2017 to 2021. This data was collected using the Rahavard Novin database, the banks' financial statements, and analyzed using SPSS version 27 and EViews version 10 software, employing the least squares regression method. ResultsThe research findings reveal a significant negative relationship (at a significance level of 0.000) between the financial reporting system and discretionary accruals. This outcome suggests that a change in the method of calculating bank loan loss reserves, coupled with the adoption of a new method, leads to a decrease in discretionary accruals and in banks' earnings management practices. Additionally, the research indicates that the relationship between discretionary accruals and cash flow from operating activities, banks' profitability, and financial leverage is significantly negative. In contrast, the relationship between discretionary accruals and bank size is positive and significant. However, there appears to be no significant relationship between growth rate and asset turnover with discretionary accruals at the 5% significance level. DiscussionThe results of this research show that adopting the expected loss method, as opposed to the current method used in Iranian banks for calculating loan loss reserves, enhances the transparency of bank information and improves the quality of financial reporting. By reducing discretionary accruals, the new reporting system encourages banks to utilize fewer accruals, likely leading to a decrease in the use of profit management methods. Consequently, the adoption of IFRS in Iranian banks positively impacts the industry and its stakeholders. Furthermore, the research reveals that larger banks tend to employ discretionary accruals and engage in profit management more than smaller banks, a phenomenon potentially explained by the "political cost theory". ConclusionThe relationship between the quality of financial reporting and changes in bank loan loss reserves is positive and significant. Thus, the research hypothesis is confirmed, supporting the perspective of the first group (as discussed in the Literature Review section) in the context of Iranian banks. Based on these findings, it is recommended that the central bank mandate banks to disclose their reserves using the expected credit loss method as an initial step. Subsequently, banks whose reserves significantly deviate from the amounts calculated according to IFRS standards should be compelled to adjust their reserves over several years. This gradual approach aims to align the current reserves more closely with those calculated using the expected credit loss method.
