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assessment_2_project_report_s247926.pdf
Project Report Professional Practice Project
Balinder Nain S247926 Page 1
Assignment Cover Sheet
Student Name: Balinder Nain Student Number: S247926 School of Law and Business Charles Darwin University Casuarina NT 0909 Phone: (08) 8946 6830
Unit Name: Professional Practice Project Unit Code: CMA306
Lecturers Name: Roopali Mishra Assessment Title: Project Report Semester: 1 Year: 2015
Assignment 1 Due Date : 31/05/2015 Lodgement Date: 29/05/2015 Applied for Extension: No Lodgement Locations: (refer to specific lodgement requirements as set out by the lecturer) DO NOT LODGE BY FAX nor EMAIL nor at LECTURER’S OFFICE • The assignment must be lodged online via the Learnline Assignment Lodgement link on the Learnline site for this unit. Ensure
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KEEP A COPY Ensure you have a copy of the assignment lodged. If you have submitted assessment work electronically please make sure you have a backup copy. DECLARATION BY STUDENT I certify that this assignment is my own work, based on my own personal study and research, and that I have acknowledged all material and sources in the preparation of this assignment, whether they be books, articles reports, lecture notes, any other kind of document or personal communication. I also certify that this assignment has not previously been submitted for assessment in any other course or at any other time in the same course and that I have not copied in part or whole or otherwise plagiarised the work of other students and/or persons. I have read the University’s Academic and Scientific Misconduct Policy and understand its implications.* http://www.cdu.edu.au/governance/documents/3.3AcademicandScientificMisconduct_000.pdf Student Signature: B.Nain 29/05/2015. *By submitting this assignment and cover sheet electronically, in whatever form, you are deemed to have made the declaration set out above
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Table of contents Contents Page (s)
1. Background………………………………………………………………….3
2. Literature Review……………………………………………………………4
3. Research Question………………………………………………………….5
4. Hypothesis……………………………………………………………………5
5. Methodology………………………………………………………………….5
6. Analysis……………………………………………………………………….5
7. Result…………………….……………………………………………………6
8. Discussion of results….…..…………………………………………………6
9. Conclusion…………………………………………………………………….7
10. References……………………………………………………………………8
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Financial Reporting and Industrial Structure
Background
The elaboration of financial accounting disclosure policies was overlooked as a development initially. But once in place, it acquired logic and tends to be seen solution of every issue. Main purpose of disclosure policies is providing true and fair view about the firms, that investor can make appropriate decision. So multilayers of disclosures were induced but still user can’t get required information. Conversely, it has become overload in terms of both financial disclosure policies and it’s reporting for firms. So it raises important issues, which have wider significance. To be realistic, it is important to consider the objective of these regulations. It should be seen as a balancing of relevance between user and reporting firm rather than overload.
The issues arise here, what efforts the regulatory bodies like S.E.C and A.A.S.B are putting on place to provide better system. Yes, changes the laws and regulations can impact dramatically on the reporting firms, investors and overall on the market in which they operates. In Australia from last 40 years the ‘disclosure quality’ referred in terms of understandability, comparability and reliability are in place but on ground level these effects are thought to be negligible for reporting firms. For example the recent global financial crisis was an example of inappropriate regulations and/or rigorously imposed.
However, the behavior of the reporting firms has changed because its competitor as well as investor receives the produced information. In general one question need to be asked that what level of effect ‘accounting information disclosures’ on reporting firms in terms of tactic collusion, competition or even no effects. The argument about the financial disclosure, there are large degree of dissatisfaction evidence available in the industry. I have tried to explore the above issues based on available information in the market.
Literature review
No research is complete without the study of existing literature. Almost all research would benefits from some reference of different literatures. Before attainment of any conclusion or recommendation, lets see what view other peer papers are presenting on this topic.
Impact of information flows on reporting firms
Ball (Ball et. all 2003) showed doubt on positive effects of these disclosures on the market without the proper institutional infrastructures and would allied with less accounting flexibility to the reporting firms. Again Ball and Sivkumar (2006) suggested earning volatility could be increased timely recognition and quality disclosures. Even if there is absence of any regulation, firms are still making financial accounting disclosure in their own interest. Agency theory itself providing the need of disclosures, the propagation of positive news could add value to its mangers and firm.
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In today’s time, there is a notion that higher quality earning firms are more value relevance if they apply accounting standards. According to Ewert and Wagenhofer (2005) the quality earning is less opportunistic managerial decision rather than a faithful representation. Palmrose (Palmerose et al. 2004) examined by associating between firms reputation and quality disclosures. He further compared the disclosure hobbits of most admired fims (MA) with less admired forms (Non-MA) and concluded that stock market shows negative response if MA firm’s have wrong disclosures. Conversely, these firms also recover quickly assuming that MA firms are more concerned about their reputation and do more for damage control.
Alstair (Alastair et. all 2011) found in his research ‘pacific accounting review’ that the good news firms making less disclosure as compared to bad new firms. They further concluded that analysts’ forecast dispersion was higher for bed news firms. On the other hand (Miller, 2002; Houston et al. 2010), managers make more disclosure during the good performance and vice-versa. Same paper suggests growth firms make less disclosure than value firms.
Standard setters like AASB (Australian Accounting Standard Board) and enforcement agencies like SEC (Security Exchange Commission) providing incentives to the firms for disclosures irrespective of their needs. The relevance of financial report disclosed by reporting firms have been analyzed by Abraham et al. (2012) in terms of qualitative manner. They emphasized about the particular reporting firms, like food industry should also disclose non-monetary standards to avoid risk disclosure.
Numerous experiments and studies showed that accounting disclosure policy enforces the reporting firms to integrate non-diagnostic information with other disclosure without knowing the information relevance according to Shelton (1999). He further suggested that irreverent information can affect up to the degree of extent at which the users make decisions. Sometime the investors also fail to make decision if the equivalent information presented in different way manners, and they are unable to detect the flow of information. So the state of investor can affect the share price of a particular firm (Hirashleirfer, Lee, 2001). However, the communication effectiveness purely depends upon user’s ability to read the financial report and its digestion.
Competition is a key risk for reporting firms and they are less inspired to provide voluntary information. On the behalf of available information, competitor potentially can make decision to enter the same segment of market, (Beretta and Bozzolan,2004). Beretta and Bozzolan, further explained about the disclosure risks across the different industries. Overall industrial sector has no found any impact of risk reporting on reporting firm. The notion about competition that increases the ownership cost appealed to disclose less information (Heavely and Palepu, 2004) but reality is totally apposite of it. According to Leuz (2004), the competitiveness increases the intensity of information disclosures. Berger and Hann (2005), derived the impression that competition may be driven from mutually beneficial disclosure not tacit collusion.
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Research question
What effect of financial accounting disclosure policy on the reporting firms? These policies have any real impact on the reporting firm or just becoming an overload for them.
Hypothesis
The issues faced by the reporting firms at day by day in financial market due the disclosure policies. To find out the reasons, effects and the solution of these accounting issues, following hypothesis are on place.
• Rolls of regulatory and enforcement agencies in implementation of financial accounting disclosure policies.
• Reporting firms are disclosing their information due to rigorous regulation rather than their self-impetus.
• The produced information is more expedient for competitor rather than its user.
• There is more competition between the reporting firms because of internal information disclosures.
Methodology
For the demographic review of this project, 12 recent journal articles selected and accessed through Charles Darwin University Library. Qualitative analysis is being done with the help of the study material, recommended by Mentor.
As an accounting graduate, the area of research should remain focused in the framework of accounting. Therefore, the suggested research topic, ‘financial reporting and industrial structure’ is more suitable and appropriate.
Due to limited sources this research has been done purely on the available secondary data using discretionary-based approach. According to Neuman,(2000), for text and data analysis, content analysis technic is considerable and appropriate due to documented (published text, journal articles etc.) data source. Hence, the documentary analysis methodology is suitable and proposed for this kind of research project ,Quilan, 2010 pp. 47 (methodological pyramid).
Analysis
This report aims to examine the real effect of financial standards on the financial and non- financial reporting firms. There is substantial level of effect on the reporting firms due to accounting disclosures. At what significant level, are these reporting firms getting benefits from these policies. Briefly our finding through the research shows the impact of disclosure policies on the firms with higher quality earning. This finding supports the view disclosure policies improve the information flow between firms, its users and market overall.
The reporting firms cost and quality would be increased due to information flow and hence could decrease its profit level. According to the agency theory, managers are acting upon self-interest, which discourages the information disclosures. Therefor, the conflict of interest could arise, monitoring need to be there.
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Result
This paper is about the qualitative analysis about the financial accounting disclosures. Finding shows that accounting regulatory bodies like IASB, AASB, SEC etc. have a significant effect on the reporting firms. These firms providing harmonization among firms across the different market and also reduce the possibilities of fraud.
The behavior of the reporting firms has been changed over the decade. Now firms are considering about the quality reporting which providing the value to the company in terms of goodwill and customer retention.
To disclose the private information (Voluntary information) along with the mandatory information, it increases the competition among the reporting firms. However, it can be seen mutual beneficial disclosures at large level.
Discussion of results
The financial accounting disclosures take place through the legislation, for example Security Exchange Commission working in conjunction with Corporation Act. 2001. Hence these reporting disclosures are seen more mandatory (overhead) rather than voluntary disclosures. The volume of these reporting standards are very high which increase the cost and lower down the profit, even for small reporting firms. For instance, for the sake of fairness all the firms are obliged to disclose all information without its usefulness to its users. According to Beretta and Bozzolan (2004), the regulation requires more disclosures in place for all, irrelevant to firm’s size. Most of small firms are making these disclosures just satisfy the mandatory requirements.
Further the mitigation of information between firms and outer world is a matter of concern. However, if the regulation does not take place, reports can be manipulated which mislead to its users. On the other hand excessive information about the reporting firms increases the possibilities of competitiveness. Sometime this competition can cause dramatic effect on firm’s profit. According to Leuz (2004) this competition can be solved through the mutual beneficial disclosure. The notion about the competition supports the fact that it leads toward the efficiency (Miller, 2002; Houston et al. 2010).Tacit collusion between firms show wrong pictures of reporting firms to the wider world, which may cause damage to the firm’s reputation, (Alastair et. all 2011). If there is any bed news circulating in the market about a particular firm, then this firm has to make all effort to control the negative effect of that news. By wrongdoing, reporting firms also come under the scrutiny of regulatory body, which also reduce the value of the firms and increases cost in overall.
Along with the profit and efficiency, if the firm reports its quality report voluntarily, it has a value added effect, Abraham et al. (2012). Triple bottom line reporting that is financial, social and environmental report shows the firm overall capacity and accountability toward its mission. The quality reporting in current environment seems to have a positive effect on the reporting firm and the same view also represented by Ewert and Wagenhofer (2005).
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Conclusion
The current problem for reporting firm in terms of financial regulation is cost and distress because of huge volume of regulations. But there is no universal solution on any problem that guarantees the desired outcomes. If the firms are considering to bear the cost and reporting risks, the financial reporting system improvement is possible. If they consider it an overhead then it is unlikely to change credulity and problem of current reporting system can be expected to increase and disclosure continue to grow.
On the other hand it is growing need to reform the current structure of disclosure and should minimize the unqualified transparency commitment. This kind of system improves the overall confidence of the reporting firms. Standard setter should also consider the necessity of disclosure, proportionate to the reporting firm, because one size does not fit to all. Over all information produced is somehow irreverent to majority of its users, so there should be a system in effect its user could view that only relevant information, this may reduce the overload of reporting disclosure for the reporting firms. Conclusively, these accounting disclosures have positive and significant effect on the reporting firm and also providing an ideal environment them to operate,
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References
Ashok,R, Ball, R & Joanna, W 2003, ‘Incentive versus Standards’,Journal of Accounting and Economics, vol. 36,pp. 235-270 viewed on 26 May 2015, via EMERALD.
Alastair, R & Poskitt, W, 2011,’The impact of New Zealand's disclosure reform on differential managerial disclosure behavior for good news versus bad news firms’, Pacific Accounting Review, vol. 23, no 4, pp. 224 – 261 viewed on 25 May 2015, via SCIENCE DIRECT.
Brian, M, Anil A 2006, ‘The interaction among disclosure, competition’, Journal of Accounting and Economics, vol. 43, pp. 321-339 viewed on 28 May 2015, via EMERALD.
Christina Quilan, 2011, Business Research Methods, Cengage Learning
Darrough, M 1993, ‘Disclosure policy and competition: Cournot vs. Bertrand’, The Accounting Review, vol. 68, pp. 534–561 viewed on 27 May 2015, via EMERALD.
Ekramy, S, Mokhtar & Howard M 2013,’Competition, corporate governance, ownership structure and risk reporting’, Managerial Auditing Journal, vol.28, no. 9, pp. 838 – 865 viewed on 26 May 2015, via EMERALD.
Esther, C, Elaine ,E &Sue W 2010,’An Historical review of quality in financial reporting in Australia,’ Pacific Accounting Review, Vol. 22, no. 2, pp.147 – 169 viewed on 23 May 2015 via EMERALD.
Haina, S, Jeong-Bon K 2012, ‘IFRS reporting, firm-specific information flows, and institutional environments: international evidence,’ Rev Account Stud, vol.17, pp. 474-517 viewed on 27 May 2015, via ACADEMIC ONE FILE.
Siew,T, David, H 2003, ‘ Limited attention, information disclosure and financial reporting,’ Journal of Accounting & Economics, vol. 36, pp. 337-386 viewed on 28 May 2015 via SCIENCE DIRECT.
Robert ,E, Verrecchia, Richard, L & Christian, L 2006, ‘Accounting Information, Disclosure, and the Cost of capital,’ Journal of Accounting Research, vol. 45, no. 2, pp. 385-420 viewed on 24 May 2015 via EMERALD. Robin, R, Pennington, A & Seaton, K 2012, ‘Internet financial reporting: The effects of information presentation format and content differences on investor decision making,’ Computers in Human Behavior, vol.28, pp.1178-1185 viewed on 24 May 2015 via EMERALD. Tom,S, Robert, E, Whaley, Jacqueline L, Birt, Chris, M & Bilson 2006, ‘Ownership, Competition and Financial Disclosure,’ Australian Journal of Management, vol. 31, no. 20, pp. 235-263 viewed on 28 May 2015 via SCIENCE DIRECT.
Thomas,C, Omer, Ying, C, Linda ,A & Myer 2012, ‘Does Company Reputation Matter for Financial Reporting Quality? Evidence from Restatements,’ Contemporary Accounting Research, vol 29 no.3, pp. 956-990 viewed on 25 May 2015 via EMERALD.
