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Qualitative Characteristics of Financial Reporting, Schemes and Mind Maps of Accounting

York St John UniversityAccounting

This empirical study evaluates the views and perceptions of external users about selected qualitative characteristics of corporate financial reports in.

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bg1
Qualitative
Characteristics
of Financial
Reporting
Dr. Md. Shamimul Hasan
Assistant Professor
Department of Business Administration
World University of Bangladesh, Dhaka
Dr. Syed Zabid Hossain
Professor of Accounting
Department of Accounting and Information Systems
University of Rajshahi, Rajshahi, Bangladesh
INTRODUCTION
Financial reporting is a system of communicating the
outcome of operational activities of a corporate entity
to its stakeholders. Corporate financial reporting plays
an important role to both the reporting entity and its
outside users. It provides information to assist present
and potential investors, creditors and other users in
assessing the amounts, timing, and uncertainly of
prospective cash receipts from dividends or interests
and the proceeds from sale, redemption, or maturity of
securities or loans (FASB:1978). Since disclosures are used
by external users in making their economic decisions,
it is expected that these should have some qualitative
characteristics. All over the world especially in developed
countries, many researches on this field have been done
to develop a sound financial reporting system. The
study group on the objective of financial statements
constituted by American Institute of Certified Public
Accountants (AICPA) has stressed certain qualitative
characteristics of information disclosed in the financial
statements. According to the Study Group “the qualitative
An Evaluation of Users’
Perception in Bangladesh
Dr. Shamsul Nahar Bin Abdullah
Professor of Accounting
Kulliyyah of Economics and Management Sciences
International Islamic University Malaysia
Kuala Lumpur, Malaysia
Abstract
This empirical study evaluates the views and
perceptions of external users about selected qualitative
characteristics of corporate financial reports in
Bangladesh. The selected qualitative characteristics
were predictive value, feedback value, timeliness,
verifiability, representational faithfulness, neutrality
and comparability. An opinion survey was conducted
on one hundred ninety external users specifically
shareholders, stockbrokers, bankers, academicians and
tax officers. The users’ perception about the qualitative
characteristics of corporate financial reporting is far
below the acceptable level and as such users have
a negative attitude towards disclosures of financial
reporting. The study suggests that Board of Directors
(representatives of the majority shareholders) should
try to resuscitate the confidence level of external users
through ensuring good corporate governance with
utmost sincerity and integrity. The BOD should also
ensure that financial statements reflect the true and
fair view of financial position, performance and the
state of affairs of the reporting entity. This research
may help policy makers, regulators, reporting entities,
academicians, stakeholders, and other interested
groups to endorse good corporate financial reporting
environment in Bangladesh.
Key Words: Qualitative Characteristics, Corporate
Financial Reporting, Bangladesh.
OTHER ARTICLES
23
The Pakistan Accountant | Jan-Mar 2014
pf3
pf4
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pf8
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Qualitative

Characteristics

of Financial

Reporting

 Dr. Md. Shamimul Hasan

Assistant Professor

Department of Business Administration

World University of Bangladesh, Dhaka

 Dr. Syed Zabid Hossain

Professor of Accounting

Department of Accounting and Information Systems

University of Rajshahi, Rajshahi, Bangladesh

INTRODUCTION

Financial reporting is a system of communicating the

outcome of operational activities of a corporate entity

to its stakeholders. Corporate financial reporting plays

an important role to both the reporting entity and its

outside users. It provides information to assist present

and potential investors, creditors and other users in

assessing the amounts, timing, and uncertainly of

prospective cash receipts from dividends or interests

and the proceeds from sale, redemption, or maturity of

securities or loans (FASB:1978). Since disclosures are used

by external users in making their economic decisions,

it is expected that these should have some qualitative

characteristics. All over the world especially in developed

countries, many researches on this field have been done

to develop a sound financial reporting system. The

study group on the objective of financial statements

constituted by American Institute of Certified Public

Accountants (AICPA) has stressed certain qualitative

characteristics of information disclosed in the financial

statements. According to the Study Group “the qualitative

An Evaluation of Users’

Perception in Bangladesh

 Dr. Shamsul Nahar Bin Abdullah

Professor of Accounting

Kulliyyah of Economics and Management Sciences

International Islamic University Malaysia

Kuala Lumpur, Malaysia

Abstract

This empirical study evaluates the views and

perceptions of external users about selected qualitative

characteristics of corporate financial reports in

Bangladesh. The selected qualitative characteristics

were predictive value, feedback value, timeliness,

verifiability, representational faithfulness, neutrality

and comparability. An opinion survey was conducted

on one hundred ninety external users specifically

shareholders, stockbrokers, bankers, academicians and

tax officers. The users’ perception about the qualitative

characteristics of corporate financial reporting is far

below the acceptable level and as such users have

a negative attitude towards disclosures of financial

reporting. The study suggests that Board of Directors

(representatives of the majority shareholders) should

try to resuscitate the confidence level of external users

through ensuring good corporate governance with

utmost sincerity and integrity. The BOD should also

ensure that financial statements reflect the true and

fair view of financial position, performance and the

state of affairs of the reporting entity. This research

may help policy makers, regulators, reporting entities,

academicians, stakeholders, and other interested

groups to endorse good corporate financial reporting

environment in Bangladesh.

Key Words: Qualitative Characteristics, Corporate

Financial Reporting, Bangladesh.

characteristics of financial statements, like objectives,

should be based largely upon the needs of the users of

the statements. Information is useless unless it is relevant

and material to a user’s decision. Information should be

as free as possible from any biases of the preparer. In

making decisions, users should understand not only the

information presented, but also should be able to assess

its reliability and compare it with information about

alternative opportunities and previous experience. In all

cases information is more useful if it stresses economic

substance rather than technical form” (Gupta: 1989).

Financial Accounting Standard Board (FASB) has defined

the qualitative characteristics of accounting information

that distinguish better (more useful) information from

inferior (less useful) information for decision making

purposes (FASB:1980). According to the hierarchy of

accounting information developed by Keiso, Weygandt

and Warfield (2004), qualitative characteristics have

been classified as primary quality and secondary

quality. Primary quality includes relevance and reliability

and secondary quality includes comparability and

consistency. Relevance includes predictive value,

feedback value, and timeliness, while reliability

includes verifiability, representational faithfulness

and neutrality. Theses qualitative characteristics of

accounting information have also been shown in the

conceptual framework for financial reporting developed

by Norby (1998). Wood (2005) discussed ten qualitative

characteristics of accounting information. They are

relevance, reliability, objectivity, ability to be understood,

comparability, realism, consistency, timeliness, economy

of presentation, and completeness.

The qualitative characteristics of financial reporting are

very much important to the external users in making

their economic decisions. The wave of accounting

scandals happened in recent times in the international

financial community has raised many criticisms about

the financial reporting quality (Agrawal and Chadha,

2005). Several prominent companies were involved in

accounting frauds, such as Enron, WorldCom, Marconi,

Parmalat, and many others, which have weakened

investors’ confidence on the management team and

on financial reports. The extensive failure of financial

disclosures has created a need for improving the

quality of financial information and for strengthening

the control of managers by setting up good

governance structures (Karamaou and Vafeas, 2005;

Beekes and Brown, 2006; Brown and Caylor, 2006; Firth

et al., 2007; Petra, 2007; Klai and Omri, 2011). Indeed,

financial information serves as a basis for investment

decisions of the capital market participants. It is

useful for shareholders, analysts, creditors, bankers,

portfolio managers, and regulators, since it assists to

determine the company’s past performance, predict its

future profitability and monitor the managers’ actions

(Bushman and Smith, 2001; 2003; Klai and Omri, 2011).

In this context, the objective of the study is to measure

users’ perception regarding the qualitative characteristics

of financial reporting according to the conceptual

framework for financial reporting, as suggested by Norby

RESEARCH MOTIVATION

Rationale: Measurement and analysis of users’

perception of financial reporting is a wide- ranging

and important area of accounting research especially

in Bangladesh because it is a developing one and uses’

here are not capable like users’ of developed countries

to analyze and understand financial reports. History

of accounting scandals like Enron, Sunbeam, and

WorldCom has damaged the image of financial reporting

and integrity of external auditors. A few literatures have

been found prior to the present study but they are not

enough for policy makers to understand the importance

of changing or introducing new policies for protecting

stakeholders’ interest. The degree of volatility of stock

price of Bangladesh capital market is too high. The

shedding of index by 600 points in five minutes in Dhaka

Stock Exchange (DSE) by crashing the market circuit

breaker limit of 225 points is an indicator of high volatility

(Khaled Hyder: 2011). In the history of Bangladesh capital

market was crushed two times. The first one was in

1996 and another was in 2011. The speculative bubble

was the main reason for crashing the capital market

in 1996 (ADB Report: 2005) and asset pricing bubble

was the main reason for crashing the capital market in

2011 (Hossain: 2011). Majority of the capital market

participants not only lost their original investment but

also lost their margin loan investment due to market price

manipulation. As a result, they have been suffering from

financial pressure especially for margin loan since 2011

due to lose of their repaying ability of margin loan. Most

of the cases, the merchant bank and brokerage house

forcefully sold the shares to recover the loan without

informing the investors. This unethical activity also hits

the investors’ confidence. The prediction of analysts,

experts, regulators, merchant bankers, policy makers,

and media reports did not work properly in the less

developed capital market in Bangladesh. Eventually, all

misdeeds or misstatements affect the level of confidence

of market participants on corporate financial reports.

According to a Chinese proverb, there is a golden formula

to follow three tactics in both a stock market and a casino

room if one must try his fate for quick money: the rules

of the game, the stakes, and the quitting time. Investors

in Bangladesh Stock Market who vandalized cars and

blocked roads out of frustrations perhaps ignored

any or all of the three tactics (Khan:2011). The bubble

of capital market in 2011 was created by using asset

pricing mechanism (Probe Committee Report: 2011).

Therefore, the qualitative characteristics of financial

reporting are now questionable in Bangladesh. The

idea of investigating users’ views and perception about

the qualitative characteristics of corporate financial

reporting was conceived from the above situation as they

are directly or indirectly affected if fraudulent financial

reports are produced.

Research Gap: There is hardly any study on external

users’ perception about the qualitative characteristics of

financial reporting in Bangladesh. Finding clue from this

gap the present study has been planned.

Primarily 280 respondents were selected from five groups. Of which 60 were bankers, 65 were shareholders, 45 were

stockbrokers, 55 were academicians and 55 were tax officers. But finally a total of 220 respondents responded to

the questionnaire. Of which 45 were bankers, 55 were shareholders, 45 were stockbrokers, 40 were academicians

and 35 were tax officers. Again, the responses of 30 respondents were rejected; of which 5 were bankers, 15 were

shareholders, 5 were stockbrokers and 5 were tax officers. None of response of academicians was rejected. At last,

190 respondents from five groups were valid for current study. Out of which 40 were bankers, 40 were shareholders,

40 were stockbrokers, 40 were academicians and 30 were tax officers. The opinions provided by them were used for

measuring users’ perception of corporate disclosures of financial reporting.

The sample size, number of actual respondents and the number of valid responses of each group and in total are

presented in the following table:

Table-1: Distribution of the Respondents’ Sample Size, Responses, Valid Responses

Respondents

Group

Sample

Size

Responses Responses Rejected Valid

Responses

Percent of

total valid

Number Percent Number percent Responses

Bankers 60 45 75 5 11 40 21

Shareholders 65 55 85 15 27 40 21

Stockbrokers 45 45 100 5 11 40 21

Academicians 55 40 73 0 40 21

Tax Officers 55 35 64 5 14 30 16

Total 280 220 79 30 64 190 100

Analysis of Data

Descriptive analysis such as frequencies, percentile analysis, mean, standard deviation, and co-efficient of variance

have been adopted. Empirical analysis such as Chi-square test and F test have also been done by using statistical

software SPSS in the current study in order to arrive at a concrete result.

RESULTS & DISCUSSIONS

Predictive Value of Accounting Information

Predictive value is concerned with the quality of information that assists users to increase the probability of correctly

forecasting the outcome of past or present economic events. Corporate financial reports must provide knowledge

concerning future events. Generally, users prefer those predictive values that facilitate them to take right decision at

right time. The following table reflects users’ opinion about the predictive value of accounting information included

in the corporate financial statements.

Table-2: Distribution of Users Perception on the Predictive Value of Accounting Information

Users f & %

Descriptive Statistics (^) F-value (Several mean test)

Frequency N Mean SD CV 5 4 3 2 1

Bank

F 4 17 3 13 3 40

Shareholders

F 9 19 2 9 1 40

Stock Brokers

F 10 25 1 4 0 40

Academicians

F 3 13 5 14 5 40

Tax Officers

F 3 9 4 14 0 30

Total

F 29 83 15 54 9 190

5 = More correctly predictive, 4 = correctly predictive, 3 = Neutral, 2 = Not correctly predictive, 1= Not correctly

predictive at all, f = Frequency. ** Significant at 1 percent level.

It is evident from above table that the mean score of opinions about the predictive value of accounting information is

more than four for stockbrokers’ and more than three for bankers, shareholders, and tax officers. Conversely, the mean

score of the academicians is less than three. The highest variation (CV 42.51 percent) exists within the academicians

and the lowest variation (CV 20.70 percent) within the stockbrokers. So as to examine the difference among the users

on this issue, the following hypothesis is formulated.

Ho: There is no significant difference of opinion among the users with regard to predictive value of information

furnished in corporate annual reports in Bangladesh.

The results of several mean tests (F-Value) show that there is significant variation among the respondents at one

percent level. Therefore, the null hypothesis is rejected. This situation suggests that the predictive value of accounting

information in Bangladesh is not upheld properly by the reporting entities.

Feedback Value of Accounting Information

Feedback value means the quality of information that enables users to confirm or correct prior expectations. It is

not possible to predict future trend of business without evaluating its past activities. So, feedback value is extremely

important in case of relevance. Information can affect a decision by conforming or correcting the decision makers’

earlier expectation. Users cannot take right decision if the information does not bear feedback value. The following

table shows users’ perception about feedback value of information in the corporate financial statements.

Table-3: Users Opinion towards Feedback Value of Accounting Information

Users

f

&

%

Descriptive Statistics F-value (Several mean test)

Frequency N Mean SD CV 5 4 3 2 1

Bank

f 6 17 6 8 3 40 3.38 1.19 35.

Shareholders

f 2 17 3 12 6 40 2.93 1.25 42. % 5 43 8 30 15 100

Stock Brokers

f 5 17 4 12 2 40 3.28 1.18 35. % 13 43 10 30 5 100

Academicians

f 7 20 5 6 2 40 3.60 1.10 30. % 18 50 13 15 5 100

Tax Officers

f 5 15 5 5 0 30 3.67 0.96 26. % 17 50 17 17 0 100

Total

f 25 86 23 43 13 190 3.35 1.17 34. % 13 45 12 23 7 100

5 = Maintain high feed back value, 4 = Maintain feed back value, 3 = Neutral, 2 = Not maintain feed back value,

1 = Not maintain feed back value at all, f = frequency. ** Significant at 1 percent level.

The mean score of opinions of all user groups is less than four which indicates that the users are unable to predict

future trend of operating activities of the reporting entity appropriately. Variation level among the respondents’

opinion within the groups is dissimilar. The highest CV is for shareholders (42.68 percent) and the lowest for tax

officers (CV 26.15 percent). With the intention of examining the difference among the users on this issue, the following

hypothesis is formulated.

Ho: There is no significant difference of opinion among the users with regard to feedback value of information furnished

in corporate annual report in Bangladesh.

The results of several mean tests (F-Value) show that there is significant variation among the opinions of the

respondents at one percent level. So, the null hypothesis is rejected. Therefore, it can be concluded that the quality of

feedback value of accounting information in Bangladesh is not maintained properly by the reporting entities.

Timeliness of Accounting Information

Timeliness is an important quality of corporate financial reporting. Information must bear timeliness to treat as

relevant. Accounting information is capable of affecting a decision if it is available at the time the decision is made.

Timeliness alone cannot make information relevant, but information that is not timely is irrelevant. Timeliness of

accounting information is a major factor that can affect the decision making process. But, it is alleged that the

companies operating in Bangladesh do not maintain timeliness in disclosing their accounting information. In this

respect, the users were asked about the timeliness of accounting information and their opinions are presented in the

following table.

It is evident that only 6.84 percent respondents believe that the information is effectively verifiable and 35.79 percent

opine it is verifiable. As against this, 34 percent consider that the information is not verifiable and 8.42 alleged that

it is not verifiable at all. The mean score of opinions on verifiability of information for stockbrokers is above three, for

bankers is three, but for the remaining three groups is less than three. So as to examine the difference among the

users on this issue, the following hypothesis is formulated.

Ho: There is no significant difference of opinion among the users with regard to verifiability of information furnished in

corporate annual report in Bangladesh.

The results of several mean tests (F-Value) show that there is significant variation among opinions of the respondents

at one percent level. So, the null hypothesis is rejected. Therefore, it can be anticipated that the verifiability level of

accounting information provided in corporate financial report in Bangladesh is very low.

Representational Faithfulness of Accounting Information

Faithful representation of information in the financial reports increases its reliability. Accounting information must

be free from bias and incompleteness so that nothing substantial is left out. It is possible to achieve representational

faithfulness through confirming freedom from bias and bring completeness in disclosing accounting information.

The following table reflects users’ perception regarding faithfulness of corporate financial statements.

Table -6: Perceived Representational Faithfulness

Users f & %

Descriptive Statistics F-value (Several mean test)

Frequency N Mean SD CV 5 4 3 2 1

Bankers

F 4 14 6 11 5 40

Shareholders F^2 10 4 18 6 40 2.60 1.17 45. % 5 25 10 45 15 100

Stock Brokers F^7 21 2 10 0 40 3.63 1.05 29. % 17.5 52.5 5 25 0 100

Academicians F^0 16 5 16 3 40 2.85 1.05 36. % 0 40 12.5 40 7.5 100

Tax Officers

F 3 12 3 12 0 30

Total

F 16 73 20 67 14 190

5 = Very faithfully represent, 4 = faithfully represent, 3 = undecided, 2 = Unfaithfully represent,

1 = Highly unfaithfully represent, f = frequency. ** Significant at 1 percent level.

The above table reveals that 8.42 percent of the respondents believe that information is very faithful and 38.

percent believe it is faithful. Contrarily, none of the academicians think so. Again, 35 percent bankers, 25 percent

shareholders, 52.50 percent stockbrokers, 40 percent academicians, and 40 percent tax officers are in the opinion that

the information is faithfully presented. On the contrary, 27.50 percent bankers, 45 percent shareholders, 25 percent

stockbrokers, 40 percent academicians, and 40 percent of tax officers gave negative response. Even, some bankers,

shareholders, and academicians gave very negative responses. The number of undecided respondents in giving their

answer is also remarkable.

The mean score of users’ observation regarding representational faithfulness of information is more than three for

bankers, stockbrokers and tax officers, and below three for the rest two groups of respondents. The highest variation

(CV 45.09 percent) is existed in shareholders group and the lowest (CV 29.09 percent) in stockbrokers. In order to

examine the difference among the users on this issue, the following hypothesis is formulated.

Ho: There is no significant difference of opinion among the users relating to representational faithfulness of information

furnished in corporate annual report in Bangladesh.

The results of several mean tests (F-Value) show that there is significant variation of opinions among the respondents

at one percent level. So, the null hypothesis is rejected. Therefore, it can be concluded that the representational

faithfulness of accounting information is not maintained properly by the reporting entities in Bangladesh.

Neutrality of Accounting Information

Neutrality means that information should not be selected to favour one set of interested parties over another.

Without neutrality, information cannot meet users need. Users’ opinions on the neutrality of accounting information

are provided in the following table:

Table-7: Users Perception towards Neutrality Level of Accounting Information

Users

f &

%

Descriptive Statistics (^) F-value (Several Frequency (^) N Mean SD CV mean test) 5 4 3 2 1

Bankers F^2 19 3 11 5 40 3.05 1.22 39.

Shareholders

F 0 12 2 13 13 40

Stock Brokers F^6 23 2 9 0 40 3.65 1.00 27. % 15 57.5 5 22.5 0 100

Academicians F^0 12 9 14 5 40 2.70 1.04 38. % 0 30 22.5 35 12.5 100

Tax Officers

F 4 13 7 3 3 30

Total F^12 79 23 50 26 190 3.01 1.22 40. % 6.32 41.58 12.11 26.32 13.68 100

5 = Highly neutral, 4 = Neutral, 3 = Undecided, 2 = Partial, 1 = Highly partial, f = frequency.

** Significant at 1 percent level

Above table reveals that about 48 percent respondents believe that the information included in corporate financial

statements are highly neutrally or neutral. As against this, about 40 percent respondents believe it is partially neutral

or highly partial, while around 12 percent is undecided. Even some bankers, shareholders, academicians, and tax

officers think the information is not neutrally presented at all.

The mean score of the users’ opinion regarding the neutrality level of accounting information furnished in corporate

financial statements is more than three for bankers, stock brokers, and tax officers, and below three for shareholders

and academicians. To examine the difference among the users on this issue the following hypothesis is formulated.

Ho: There is no significant difference of opinion among the users pertaining to the neutrality level of information

furnished in corporate annual report in Bangladesh.

The results of several mean tests (F-Value) show that there is significant variation of opinions among the respondents

at one percent level. So, the null hypothesis is rejected. Therefore, it can be concluded that the quality of financial

reporting in terms of neutrality of accounting information is not maintained properly by the reporting entities in

Bangladesh.

Comparability of Accounting Information

In case of external financial reporting, information is provided in the corporate financial statements in such a way

that can aid users in making decisions, which by definition involve comparison between alternatives. It is expected

that the information will facilitate the users to determine the relative financial strengths, weaknesses and prospects

between two different periods of the same firm or between two different firms in the same industry. Users’ opinions

regarding this issue are shown in the following table.

Table-8: Users Opinions on Comparability of Accounting Information

Types of Comparability

Bank SH SB ACAD TO Total F – Value

Inter firm Comparability

N 40 40 40 40 30

Mean (^) 2.25 2.58 2.68 1.73 2.73 2. SD (^) 1.17 1.18 1.04 0.75 1.14 1. CV (^52 46 39 43 42 )

Inter period Comparability

Mean (^) 3.50 2.8 3.43 4.15 3.43 3. SD (^) 1.28 1.42 1.41 0.80 1.25 1.34 2. CV (^) 36.57 50.71 41.17 19.28 36.44 39.

Table 8 shows that the mean score is the highest (2.73) for tax officers, followed by stockbrokers (2.68), shareholders

(2.58), bankers (2.25) and academicians (1.73) in case of inter firm comparability. Users’ responses are less scattered (SD

0.75) for academicians and more scattered (SD 1.18) for shareholders. Again highest variation (CV 52 percent) is existed