Opening the “black box”

JournalofAppliedAccountingResearchEmeraldArticle:Openingtheblackbox:HowinternalreportingsystemscontributetothequalityoffinancialdisclosureFlorenceCavéliusArticleinformation:Tocitethisdocument:FlorenceCavélius,(2011),Openingtheblackbox:Howinternalreportingsystemscontributetothequalityoffinancialdisclosure,JournalofAppliedAccountingResearch,Vol.12Iss:3pp.187-211Permanentlinktothisdocument::06-12-2012References:Thisdocumentcontainsreferencesto46otherdocumentsTocopythisdocument:[e-mail]wnloaded425timessince2011.*AccesstothisdocumentwasgrantedthroughanEmeraldsubscriptionprovidedbyTAIZHOUUNIVERSITYForAuthors:Ifyouwouldliketowriteforthis,oranyotherEmeraldpublication,thenpleaseuseourEmeraldforAuthorsservice.Informationabouthowtochoosewhichpublicationtowriteforandsubmissionguidelinesareavailableforall.Pleasevisit(COPE)andalsoworkswithPorticoandtheLOCKSSinitiativefordigitalarchivepreservation.*Relatedcontentanddownloadinformationcorrectattimeofdownload.Openingthe“blackbox”HowinternalreportingsystemscontributetothequalityoffinancialdisclosureFlorenceCave´liusESSECBusinessSchool,Cergy,FranceAbstractPurpose–Institutionalinvestorsusetheinformationdisclosedbylistedcompaniestoanalyzetheperformanceoftheirinvestments.Thepurposeofthispaperistoopenthe“blackbox”oftheconstructionoffinancialdisclosurebyanalyzingtheinternalreportingsystemsoffirmswithreferencetotheinformationdisclosed.Design/methodology/approach–Usingindexes,thequalityofthefinancialdisclosureandtheinternalreportingsystemsaremeasured,andanalyzedwithaviewtofindingsomelinksbetweenthem.Itisexpectedthatthequalityofdisclosureisdependentonthequalityoftheinternalreporting.Findings–Complexinteractionsbetweeninternalreportingandfinancialdisclosurearerevealed,whichleadstotheidentificationofatypologyofpractices.Thedependenceoftherelationshipmaybetroubledbythewillingnessofthefirmtocommunicate,orbytheinternalmethodsofcontrol.Accordingtothevariouscases,differentlevelsofusefulnessoftheinformationfortheinvestorareexpected.Originality/value–Thispaperisafirstattempttoanalyseinformationdisclosedbyfirmswithregardstotheinternalinformationattheirdisposal.KeywordsFinancialreporting,Disclosure,Financialcommunication,Qualityofinformation,Publicandprivatedisclosure,IndexesPapertypeResearchpaper1.IntroductionInstitutionalinvestorsusetheinformationdisclosedbylistedcompaniestounderstandthestrategicandoperationalkeyfactorsexplainingtheirperformance(Ecclesetal.,2001).Thisinformationhastopossessanumberoffeaturesorqualitiesthatareessentialtoinvestorsinordertoensureitsusefulness.FollowingtheaccountingharmonizationinEurope,in2005,whichrequiresallEU-listedcompaniestoadoptinternationalaccountingstandards(IAS/IFRS),commissionregulationsmustassesswhethertheapplicationofaccountingstandardsinfinancialstatementsoffersatrueandfairviewofthefinancialpositionandperformanceofacompany.Thecommissionmustcheckwhetherthefinancialinformationmeetthecriteriaof“understandability,relevance,reliabilityandcomparability”inordertomakeeconomicdecisionsandassessthestewardshipofmanagement(Article3,RegulationNo.1606/2002).Infact,theserequirementshavebeenlaidoutbyinternationalregulations(IASB,1111,IAS1)intermsofthefollowingcriteria:representativenessorfairview(theinformationaccuratelyreflectstheeconomicrealityofthecompany),substanceoverform,reliability(theinformationisexemptfromfaultorerror),relevance(itallowstheinvestorstomakedecisions)includingtimelinessorThecurrentissueandfulltextarchiveofthisjournalisavailableat´(AFC)fortheirhelpfulcommentsonanearlierversionofthepaper.187Openingthe“blackbox”accessibility(theinformationreachesitsdestinationinduetime),intelligibility,comparability.Whilemanyresearchershavestudiedthequalityandthevalueofdisclosedinformation(CopelandandFredericks,1968;Vickrey,1985;ChowandWong-Boren,1987;Cooke,1989;Bradbury,1992;Raffournier,1995),asfarasweareaware,noonehastriedtounderstandhowthisinformationwasputtogetherwithinthecompany.Theinformationcomesfrominternalfinancialandmanagerialaccountingsystems,especiallyfromthecompany’sinternalreporting.Toensurethequalityofdisclosure,theinformationshouldnecessarilybepartofthereportingsystemandincludetherequiredqualities.BushmanandSmith(2001)thus