Recent Cass research suggests the need for more effective accounting oversight
22 January 2013
A research report by the Centre for Financial Analysis and Reporting Research (CeFARR) at Cass Business School highlights inconsistencies in IFRS compliance reflected in European listed companies' impairment reporting practices.
According to the report high-quality financial reporting practices and outcomes under International Financial Reporting Standards (IFRS) are more likely to be observed for companies operating in countries with stronger regulatory and institutional infrastructures.
This study of European listed companies focuses on the timeliness of impairment recognition for non-financial assets and the quality and extent of compliance with impairment-related disclosures required under IFRS.
Professor Peter Pope, Director of CeFARR at Cass Business School says:
"There is little doubt that consistent application of IFRS facilitates greater comparability and reporting transparency, and this can, in turn, lead to such capital market benefits as increased stock market liquidity and a lower cost of capital for firms. Findings reported in our study of impairment reporting, selected because it is a crucial aspect of financial reporting requiring estimates, assumptions and managerial discretion, show that there is considerable scope for improvement in the application of IFRS by some European listed companies. Until such improvements occur, the economic benefits claimed for harmonised financial reporting in this region and beyond may well remain elusive."
Principal findings from the report include:
- For a sample of over four thousand listed companies in Europe, the study finds that firms operating in strong institutional and enforcement settings recognize economic losses (impairments) in corporate earnings on a more timely basis than those based in jurisdictions where regulatory scrutiny is anticipated to be weaker.
- In a similar vein, for a sample of over three hundred European listed companies, a detailed survey of disclosures relating to impairments of non-current non-financial assets suggests that compliance with disclosure requirements is uneven and appears to be shaped by both the institutional environment of a country as well as company-specific factors such as the type of audit firm.
- Compliance with "high-effort" disclosure requirements requiring greater management involvement tends to be lower than compliance with "low-effort" disclosure requirements. The study reveals a tendency for excessive use of boilerplate disclosures to comply with IFRS.
Professor Peter Pope concludes:
"Our findings have implications for preparers, standard-setters and local regulatory bodies because they show that the level of IFRS compliance is uneven, at least in this important area of financial reporting. In our view, variability in financial reporting quality will restrict the benefits of IFRS adoption in Europe. If financial reporting is to play a full role in supporting economic progress and through increased capital flows and better informed capital markets, consistency in the application of IFRS must be improved."
A copy of the report is available here