Document Type : Research Paper
Authors
1 Ph.D candidate of Accounting, Shahid Beheshti University, Tehran, Iran
2 Assistant Professor of Accounting, Faculty of Management and Accounting, Shahid Beheshti university.Tehran, Iran
3 Assistant Professor of Accounting, Shahid Beheshti University, Tehran, Iran.
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. 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.
Introduction
Financial 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 Questions
What is the comprehensive model of factors affecting the complexity of financial reporting?
Literature Review
Managers 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 Methodology
The 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 Discussion
The 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.
Conclusion
Given 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.
Keywords
Main Subjects
- A Plain English Handbook (1998). How to create clear SEC disclosure documents. U.S. Securities and Exchange Commission. Retrieved July 5, 10:55, (2023) from: https://www.sec.gov/pdf/handbook.pdf.
- Adelberg, H. (1979). A methodology for measuring the understandability of financial report messages. Journal of Accounting Research, 17(2), 565-592. https://doi.org/10.2307/2490519.
- Alrazi, B., & Mat Husin, N. (2021). Chief financial officers’ international experience and corporate reporting quality: Evidence from Malaysia. Global Business and Management Research: An International Journal, 13(4s), 1091-1111.
- Australian Government Financial Reporting Council. (2012). Retrieved from https://frc.gov.au/sites/frc.gov.au/files/2015/09/Findings_from_the_managing_complexity_consultation_process.pdf.
- Awdish, D. H., et al. (2024). Analysis of the relationship between financial reporting complexity and earnings management practices - A field study in a sample of private commercial banks operating in Dohuk Governorate. Tikrit Journal of Administrative and Economic Sciences, 20(65), Part (2), 18-39. https://doi.org/10.25130/tjaes.20.65.2.2.
- Baik, B., Johnson, M. F., Kim, K., & Yu, K. (2023). Organization complexity, financial reporting complexity, and firms’ information environment. Available at SSRN: https://ssrn.com/abstract=4413814 or http://dx.doi.org/10.2139/ssrn.4413814.
- Barth, M. E., Konchitchki, Y., & Landsman, W. R. (2013). Cost of capital and earnings transparency. Journal of Accounting and Economics, 55, 206–224. https://doi.org/10.2139/ssrn.1348245.
- Bloomfield, R. J. (2002). The “incomplete revelation hypothesis” and financial reporting. Accounting Horizons, 16(3), 233-243. https://doi.org/10.2308/acch.2002.16.3.233.
- Bonsall, S. B., et al. (2017). A plain English measure of financial reporting readability. Journal of Accounting and Economics, 63(2–3), 329-357. https://doi.org/10.1016/j.jacceco.2017.03.002.
- Bonsall, S. B., Leone, A. J., & Miller, B. P. (2015). A plain English measure of financial reporting readability. Retrieved March 21, 2021, 10:22 from https://pdfs.semanticscholar.org/2d81/238b25f9cb7ec635592cfbb19ac82366d808.pdf. https://doi.org/10.1016/j.jacceco.2017.03.002.
- Call, A. C., et al. (2017). Employee quality and financial reporting outcomes. Journal of Accounting and Economics, 64(1), 123-149. https://doi.org/10.1016/j.jacceco.2017.06.003.
- Chychyla, R., Leone, A. J., & Minutti-Meza, M. (2019). Complexity of financial reporting standards and accounting expertise. Journal of Accounting and Economics, 67(1), 226-253. https://doi.org/10.1016/j.jacceco.2018.09.005.
- Complexity in financial reporting. (2009). ACCA Members Survey, The Association of Chartered Certified Accountants. Retrieved July 25, 07:45, (2023) from: https://graduate.accaglobal.com/content/dam/acca/global/PDF-technical/financial_reporting/tech-ms-com.pdf.
- Davis, J. G., & Garcia-Cestona, M. (2023). Financial reporting quality and the effects of CFO gender and board gender diversity. Journal of Financial Reporting and Accounting, 21(2), 384-400. https://doi.org/10.1108/JFRA-12-2020-0360.
- Dou, Y., Hope, O.-K., Thomas, W. B., & Zou, Y. (2018). Block holder exit threats and financial reporting quality. Journal of Contemporary Accounting Research, 35(2), 1004-1028. https://doi.org/10.1111/1911-3846.12404.
- Ezat, A. N. (2019). The impact of corporate governance structure on the readability of board of directors’ reports in the Egyptian environment. Retrieved from https://abj.journals.ekb.eg/article_126565.html. https://doi.org/10.21608/abj.2019.126565.
- FASB. (2014). Retrieved from https://www.fasb.org/page/getarticle?uid=fasb_NewsRelease06-10 14(Simplification)Body_0228221200&isPrintView=true.
- Filzen, J. J., & Peterson, K. (2015). Financial statement complexity and meeting analysts’ expectations. Contemporary Accounting Research, 32(4), 1560–1594. https://doi.org/10.1111/1911-3846.12135.
- Final report of the advisory committee on improvements to financial reporting to the United States Securities and Exchange Commission. (2008).
- Glassman, C. A. (2006). Complexity in financial reporting and disclosure regulation. Remarks before the 25th Annual USC Leventhal School of Accounting SEC and Financial Reporting Institute Conference, Pasadena, California. Retrieved from https://www.sec.gov/news/speech/2006/spch060806cag.htm.
- Hennink, M. M., et al. (2017). Code saturation versus meaning saturation: How many interviews are enough? Qualitative Health Research, 27(4), 591–608. https://doi.org/10.1177/1049732316665344.
- Hrazdil, K., et al. (2023). Top executive gender diversity and financial reporting quality. Journal of Contemporary Accounting & Economics, 19(2). https://doi.org/10.1016/j.jcae.2023.100363.
- Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R², and crash risk. Journal of Financial Economics, 94(1), 67–86. https://doi.org/10.1016/j.jfineco.2008.10.003.
- Kuzey, C., et al. (2023). Financial distress and corporate transparency/opacity: The role of firm visibility. International Review of Economics & Finance, 88, 766-798. https://doi.org/10.1016/j.iref.2023.07.019.
- Lawrence, A. (2013). Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), 130–147. https://doi.org/10.1016/j.jacceco.2013.05.001.
- Lesmy, D., Muchnik, L., & Mugerman, Y. (2019). Do you read me? Temporal trends in the language complexity of financial reporting. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3469073. https://doi.org/10.2139/ssrn.3469073.
- Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45, 221–247. https://doi.org/10.1016/j.jacceco.2008.02.003.
- Murphy, M. L. (2015). Will simpler also be better? Journal of Accountancy. Retrieved September 29, 2021, 12:11 from https://www.journalofaccountancy.com/issues/2015/apr/financial-reporting-auditing-complexity.html.
- Mutiso, A., & Kamao, C. (2013). Factors influencing complexity in financial report preparation: Evidence from the banking sector in Kenya. Journal of Economics and Business Research, 1, 219-236.
- Nel, H. (2020). Research methods for Ph.D. and master’s degree studies. Retrieved from https://www.intgrty.co.za/tag/selective-coding/.
- Ngo, D. N. P., & Nguyen, C. V. (2024). Does the CEO’s financial and accounting expertise affect the financial reporting quality? Evidence from an emerging economy. Journal of Financial Reporting and Accounting, 22(3). https://doi.org/10.1108/JFRA-09-2021-0301/full/html.
- O’Gorman, T. W. (2001). A comparison of the F-Test, Friedman’s Test, and several aligned rank tests for the analysis of randomized complete blocks. Journal of Agricultural, Biological, and Environmental Statistics, 6(3), 367-378. https://doi.org/10.1198/108571101317096578.
- Pajuste, A., Poriete, E., & Novickis, R. (2020). Management reporting complexity and earnings management: Evidence from the Baltic markets. Baltic Journal of Management, 16(1), 47-69. https://doi.org/10.1108/BJM-01-2020-0019.
- Parker, C., Scott, S., & Geddes, A. (2019). Snowball sampling. SAGE Research Methods Foundations. Retrieved from https://eprints.glos.ac.uk/6781/.
- Peterson, K. (2012). Accounting complexity, misreporting, and the consequences of misreporting. Review of Accounting Studies, 17, 72–95. https://doi.org/10.1007/s11142-011-9164-5.
- Pirdal, B., & Colak, H. (2023). The link between fiscal transparency and macroeconomic dynamics. 37th International Public Finance Conference, 142-146.
- Rajabalizadeh, J. (2023). CEO overconfidence and financial reporting complexity: Evidence from textual analysis. Management Decision, 61(13), 356-385. https://doi.org/10.1108/MD-06-2023-1033.
- Rakhman, F. (2009). Earnings quality and CFO financial expertise. Ph.D. Dissertation. Retrieved from https://hdl.handle.net/11244/7141.
- Reducing unnecessary complexity in financial reporting. (FASB, 2021). Retrieved October 8, 12:11, (2021) from https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168965945&pf=true.
- Rotberg, B. (2016). The effect of culture on IFRS implementation and financial reporting quality. Master Thesis Economics.
- Schrödl, N., & Klein, C. (2011). IFRS and the complexity hurdle. The Illinois International Journal of Accounting Symposium. Retrieved September 27, 2021, 10:34 from https://pages.business.illinois.edu/zimmerman/wp-content/uploads/sites/56/2015/08/Schrodl_Klein-Paper.pdf.
- SEC Advisory Committee on Improvements to Financial Reporting. (2008). Retrieved October 3, 2021, 10:23 from https://www.sec.gov/news/press/2008/2008-166.htm.
- Shannon, C. E. (1948). A mathematical theory of communication. The Bell System Technical Journal, 27, 379–422. https://doi.org/10.1002/j.1538-7305.1948.tb01338.x.
- Sharawi, H. (2023). The impact of CEO attributes on financial reporting quality in Egypt: The moderating role of board ownership. Retrieved from https://www.researchgate.net/publication/374848170. https://doi.org/10.2139/ssrn.5092555.
- Shauki, E. R., & Oktavini, E. (2022). Earnings management and annual report readability: The moderating effect of female directors. International Journal of Financial Studies, 10(3), 73. https://doi.org/10.3390/ijfs10030073.
- Singh, M., et al. (2015). Addressing financial reporting complexity: Investor perspectives. Retrieved October 2, 2021, 05:33 from https://www.cfainstitute.org/en/advocacy/policy-positions/addressing-financial-reporting-complexity-investor-perspectives.
- Siregar, S. V., & Harahap, S. N. (2024). Financial reporting complexities: Association with accounting expertise of board and audit committee. The Journal of Corporate Accounting and Finance, 35(1), 203-217. https://doi.org/10.1002/jcaf.22658.
- Soroushyar, A. (2023). Auditor characteristics and the financial reporting quality: The moderating role of the client business strategy. Asian Journal of Accounting Research, 8(1), 27-40. https://doi.org/10.1108/AJAR-01-2022-0020.
- www.fasb.org
- www.ifrs.org
- Yu, X., & Zhao, L. (2024). Textual disclosure complexity and analysts’ weighting of information. Journal of Contemporary Accounting & Economics, 20(1). https://doi.org/10.1016/j.jcae.2023.100395.
- Alvani, M., et al. (2015). Qualitative research methodology in management: A comprehensive approach. Tehran: Safar Publishing. [In Persian]
- Delbari, S. A., & Davodi, S. A. (2013). The application of analytical hierarchy process (AHP) technique in the ranking of tourist attraction evaluation indicators. Research in Its Operations and Applications, 9(2), 57-79. [In Persian]
- Faghfour Maghrebi, Y., et al. (2021). The effect of language sentiment, readability, and information processing style (sophistication) on investors’ judgment: Experimental evidence. Empirical Studies in Financial Accounting, 17(65), 1-35. https://doi.org/10.22054/qjma.2020.47931.2080.
- Kazemiolum, M., et al. (2020). The impact of annual report readability on the audit engagement risk measures. Accounting and Auditing Review, 27(2), 202-230. [In Persian]. https://doi.org/10.22059/acctgrev.2020.299740.1008366.
- Khanifar, H., & Muslimi, N. (2018). Fundamentals of qualitative research methods (1st ed.). Negah Danesh Publications. [In Persian]
- Khoshtinat, M., & Roohnia, M. (2005). Color graphics and task complexity in multivariate decision making. Empirical Studies in Financial Accounting, 3(11), 177-207. [In Persian].
- Mehrani, K. (1995). The impact of culture on accounting. Accounting Reviews, 4(14-15), 87-114. [In Persian]. https://doi.org/20.1001.1.26458020.1374.4.2.6.1.
- Mohsenpour, M. (2011). Evaluation of qualitative data. Journal of Student Research Committee of Sabzevar University of Medical Sciences, 16(3), 50-55. [In Persian].
- Parvareh, Y., et al. (2023). Providing a model to measure the transparency of financial reporting with an emphasis on economic conditions, audit quality, and companies’ performance. Journal of Audit Science, 23(90), 91-119. [In Persian].
- Razavi Khosroshahi, S. M., et al. (2023). Presenting a model for companies’ complexity and its consequences. Accounting and Auditing Researches, 14(56), 99-116. [In Persian]. https://doi.org/10.22034/IAAR.2022.168267.
- Sadegh Nezhad Naeini, M. (2024). The role of transparency in preventing economic crimes. Encyclopedia of Economic Law. https://doi.org/10.22067/economlaw.2024.86561.1346. [In Persian]
- Salehi, A., et al. (2017). Investigating the impact of the complexity of accounting information on the delay in submitting audited financial statements and information asymmetry, emphasizing the role of audit quality. Financial Accounting Knowledge, 4(3), 87-116. [In Persian]
- Strauss, A., & Corbin, J. (2006). Principles of qualitative research methodology. (R. Rahmat-Pour & R. Aleh, Trans.). Tehran: Publishing House of Human Sciences and Cultural Studies. [In Persian].
- Varahrami, V., & Mohammadi, P. (2020). Effects of the collaboration period of chief executive officer and internal audit director on financial reporting complexity. Journal of Empirical Research in Accounting, 10(3), 213-234. [In Persian]. https://doi.org/10.22051/jera.2019.21518.2132.
- Yousefi Asl, F., et al. (2015). Designing a financial reporting transparency model. Journal of Empirical Research in Accounting, 4(4), 1-38. [In Persian]. https://doi.org/10.22051/jera.2015.1892.