Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of the Quality of Financial Reporting on Non-Financial Business Performance and the Role of Organizations Demographic' Attributes (Type, Size and Experience)

Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of the Quality of Financial Reporting on Non-Financial Business Performance and the Role of Organizations Demographic' Attributes (Type, Size and Experience)

Article excerpt

INTRODUCTION

Today, the necessity for producing quality financial report has received great attention over the world. Providing high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit and similar resource allocation decisions enhancing overall market efficiency (IASB, 2013). For corporate information to beneficial, IASB argues that a key prerequisite quality in financial reporting is the adherence to the objective and the qualitative characteristics of financial reporting information. Qualitative characteristics are the attributes that make financial information useful and consist of relevance, faithful representation, comparability, verifiability, timeliness and understandability. The main indicators of financial information quality from the perspective of the developers of accounting standards are relevance and reliability, which make information useful for decision makers (Nwaobia et al., 2016).

Many financial and accounting researchers have confirmed on the benefits and role of the quality of financial reporting (Jaballah et al., 2014, Chan-Jane and Chae-Jung, 2015), they also indicated that inadequate quality of financial reporting might negatively influence the business performance and economic decisions. This means that the financial reporting quality might determine managers' willingness for engaging in activities that are not valuable. For example, the financial reporting quality may facilitate better contracts to avoid investment efficiency. Furthermore, it can increase investors' ability to control the investment decisions. Therefore, it is expected that high-quality financial reporting reduce excessive and wasting investments (Biddle et al., 2009).

In fact, the link between financial reporting quality and financial business performance has been critically analysed and researched. Prior studies in these issues provide evidence that the quality of financial reporting is positively associated with the financial performance measures such as ROI, growth rate volume of investment, earning per share (Bolo and Hassani 2007, Klai and Omri, 2011). However, the contemporary literatures show conflicting findings (Daw and Teru, 2015). Furthermore, the choosing performance measures are still a major argumentative issue. Performance measurement system plays an important role in developing strategy, evaluating the achievement of organizational objectives and competitive advantages. Yet many stakeholders feel traditional financially oriented measures no longer work adequately. A recent survey of US financial services companies found most were not happy with their measurement systems (Hope et al., 2013, Ghosh and Wu 2012). They believed there was too much emphasis on financial measures such as earnings and accounting returns and little emphasis on drivers of value such as customer and employee satisfaction, innovation and quality. Inadequacies in financial performance measures have led to innovations ranging from non-financial indicators of "intangible assets" and "intellectual capital" to "balanced scorecards" of integrated financial and non-financial measures (Abdallah and Alnamri, 2015). Furthermore, several authors (Ghosh and Wu, 2012) indicated that although financial measures are important, they are not sufficient for a good performance evaluation system. The system should further include non-financial measures of performance. Kelly (2007) justifies this by indicating that firm value is developed through various activities that promote critical success factors. These factors include innovation, quality, productivity and customer satisfaction.

Unlike the traditional financial performance measure, the question is still an open whether the quality of financial reporting leads to systematic improvements in non-financial business performance measures or not. This study, therefore, has come to test empirically the proposed relationship between the quality of financial reporting and the non-financial business performance in a systematic approach and to find out whether business organizational demographic characteristics (type, size and experience) would have any impact on the quality of financial reporting. …

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