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Finance, risk and accounting perspectives editorial
Article Type: Guest editorial From: Journal of Applied Accounting Research, Volume 16, Issue 3.
This special issue is based upon relevant submissions from the 14th Finance, Risk and Accounting Perspectives conference that took place in Oxford in November 2014. The purpose of this annual conference is to bridge disciplinary as well as cultural boundaries in Finance, Risk and Accounting research. This conference thus aims to overcome the often self-imposed paradigmatic restrictions and reflexive isomorphisms of the individual fields, and invites fresh perspectives. Despite its methodological and disciplinary openness, it does so with a strong focus on academic rigour and robustness.
In this special issue, we have selected papers on their merits in discussing the broader context in which accounting takes place. It is the editor's strong belief that research progressively needs to be more aware of the dynamic interplay between context and theory – of the reciprocal processes that shape both – and thus context should be increasingly accounted for when displaying new findings in accounting. Much of what we present or teach as theory is based upon quantitative findings, holding true in certain environmental configurations, but often neglecting the dynamic of change and its context specificity.
One common context can be found in the topic of risk. Risk management as a broader discipline comprises several activities and can be viewed through a variety of theoretical lenses, from a very “functionalistic” perspective (Deetz, 1996) on identifying, evaluating and managing risk; through to a shareholder- or investor-specific perspective on reporting (Elshandidy et al., 2014; Abraham and Shrives, 2014; Elzahar and Hussainey, 2012; Miihkinen, 2012), with its fundamental underpinnings stemming from information asymmetry (Lambert et al., 2012) and principal agent settings (Wood and Wright, 2010). In this issue, risk is tackled from the perspective of whether voluntary risk disclosure actually increases the value of the corporation in developing countries, and continues the ongoing discussion in the journal of whether board characteristics influence the quality of risk disclosure (Michelon et al., 2015; Musa Mangena et al., 2014).
In this issue, Abdullah et al. specifically examine the effect of voluntary risk management disclosure (VRMD) (Elshandidy et al., 2014; Abraham and Shrives, 2014) on firm value (FV) on a sample of 395 firms listed on the main market in Malaysia. Adding to prior research by Miihkinen (2012), they find strong evidence, that even when controlled for – what they call “damaging” risk disclosure – VRMD has a positive correlation to the valuation of a firm in developing countries. Thus (so far rather reluctant) firms in this context are encouraged to implement better voluntary risk disclosure practices as this will increase their value (Alnasser, 2012). Understanding disclosure and structure in developing countries better will certainly remain a challenge for a while, but an undertaking that may be of high relevance (Samaha and Azzam, 2015). Their contribution also fits well with the journal's strategy to bring the context of developing countries to light, as, for example Khlif et al. (2015) have demonstrated in the case of Egypt, or Abraham et al. (2015) on Indian companies.
Looking at the very different context of Nordic countries, but connected by Miihkinen (2012) in their Finnish context, Martikainen et al. are looking at novel corporate governance-based determinants of risk disclosures (Joseph et al., 2014; Li, 2013) among index-listed Finnish companies. The focus of their study is on explaining the board's monitoring role in relation to corporate managers. Two characteristics of boards have so far not been addressed in the literature: non-executive board members' self-interested financial incentives, measured by their share or option ownership and annual compensation; and non-executive board members' competence, measured by their experience in the company and managerial capability (Desender et al., 2013). Their study can explain a large part of variation in narrative risk reporting based on these two characteristics and continue the discussion of board characteristics by Musa Mangena et al. (2014).
True to the inter-disciplinary approach, two papers in this issue take up pressing topics from finance, specifically the impact of the aftermath of the financial crisis (Hughes, 2014), and the phenomenon termed VUCA (Volatility, Uncertainty, Complexity and Ambiguity), which aims to summarize the environment which investors and businesses have to understand. As a result they find it increasingly harder to base their management decision making upon reliable and rational data (Bennett and Lemoine, 2014). While larger corporations look into new models and instruments such as big data analytics and try to improve their forecasting through a higher level of sophistication, entrepreneurs and smaller companies on the other side of the spectrum rather embrace virtues of bricolage and effectuation and try to deal with uncertainty in a refreshingly different way (Kusterer, 2016; Fisher, 2012). Hofer et al. are looking into this change and difference from a country-specific angle based on Austria, yet due to the similarities in the corporate landscape between Austrian and its neighbouring countries (e.g. Germany, Hungary, Slowenia, Slovakia or the Czech Republic), the findings provide insights for what is going on in much of a region that is often called “Mitteleuropa” (Kusterer, 2016). Their research also continues the discourse laid out recently by Aubert and Louhichi (2015).
This contribution is also an excellent example that is based on a quantitative study, yet accepts the qualitative narration of the context between what they call “intention and reality”. The study finds that small and medium enterprises have been hit harder by market volatility, making it more difficult for them to predict sales quantities and commodity prices. Companies that supplement their qualitative techniques by sophisticated quantitative ones in a mixed method setting can expect less forecast bias and thus build a competitive advantage.
Moving on to the valuation in times of crises, Majercakova looks into the subject of fair value accounting. Fair value measurement has become pervasive to financial reporting over the last 20 years. Under fair value accounting, entities are obliged or permitted to measure particular assets and liabilities at their fair values as at the reporting dates. Fair value is a current market-based hypothetical value, however, this market value is not always directly observable (Mangena and Liu, 2014). The debate on usefulness of fair value accounting has arisen in connection with the financial crunch and economic crisis in the years 2007-2009. The opponents to fair value accounting claim that financial reporting based on fair value measurement has in fact accelerated the financial crisis and significantly worsened the impact on affected companies (Laux and Leuz, 2009a, b; Magnan 2009).
On the other hand, there are several important voices in the field in favour of fair value accounting (De Jager, 2014; Griffin, 2014). Majercakova's aim is to contribute to the ongoing debate whether fair value accounting played the role of a “messenger or contributor” (Magnan, 2009) in the recent financial crunch and subsequent economic recession, and to analyse the characteristics of fair value accounting from an economic point of view by examining and depicting the advantages and disadvantages connected to fair value. It is quite obvious and clear that this concept is far from being perfect and it seems very difficult to determine at the moment whether its contribution to the improvement of accounting is really beneficial (Laux and Leuz, 2009a). In fact, many relevant sources express their mixed views about the extent to which IFRS are becoming imbued with the current IASB/FASB fascination with fair value accounting (Schneider and Tran, 2015; Whittington, 2015; Lachmann et al., 2015). Although the fair value discussion thus seems to be far from over now, the current crisis provides an interesting setting to further explore these issues, understand them better, and hopefully urge responsible institutions to fix the imperfections within the system to make it work correctly and more effectively. Therefore Majercakova's contribution is timely and apt, as her paper revisits the big debates from 2009 (Laux and Leuz, 2009a) and find that despite some disadvantages revealed in the paper, fair value remains the best available basis for measuring certain elements of financial statements. The critique of fair value accounting is to some extent legitimate and corroborated in her contribution, however, she goes on to claim that its opponents do not offer any functional alternatives at the moment.
Whichever solution is followed, the limits of financial reporting as an information source will not be ignored in the field. When implementing financial reporting standards, all involved need to be aware that measurement in accounting is mostly a surrogate by its very nature, and part of the ongoing “financialization” of accounting (Müller, 2014; Wood and Wright, 2010).
The last paper in this issue looks into a rather novel direction, bridging cognition theory and reporting via graphical representations (diagrams, tables, graphs) (Falschlunger et al., 2015; Hirsch et al., 2015). With growing internationalization, enhanced sophistication of financial controls, and an ever stronger competition it is becoming harder for companies to find long-term investors. One trend for counterbalancing these challenges is a modified communication policy. Shareholders and other increasingly important stakeholders want a continuous flow of information without any surprises (positive or negative) that is easy to comprehend. One communication instrument that is of importance in this context is the annual report. It has gained in depth and length and it should be a trustworthy source of information to evaluate a company's performance (Hussainey and Al-Najjar, 2011). However, especially the unregulated part of the report is faced with accusations of using “impression management”, meaning that the companies try to influence the interpretation by stakeholders of the presented information in a favourable way (Musa Mangena et al., 2014; Leung et al., 2015).
Falschlunger et al. pick up this accusation and describe in their paper how companies use visual representations to influence a reader's opinion of the presented financial indicator. They argue that the use of visualizations is a widely accepted method in order to understand the growing amounts of information but also that visualizations tie up human resources and attract attention. In business communications visualizations are used in various ways because they come with well-known advantages: visualizations speak a unified language, they support the comprehension of large amounts of information, and they enhance the ability of humans to detect patterns, trends, and sequences. However, choosing the wrong visualization or designing these badly can also hinder efficient information acquisition and enhance the likelihood of biases in the decision-making process. According to the research of Falschlunger et al. graphs therefore also hold a high potential of being misused in order to make a company's performance look better than underlying trends would actually permit.
In their paper Falschlunger et al. conduct a large-scale longitudinal study that builds on prior research of impression management by focusing on visual representations only. They thereby answer the quest for more longitudinal studies and offer an extended focus while examining not only key financial variables but all variables depicted in annual reports. They analyse every single graph that is being used by the biggest 50 European companies in the fiscal years of 2006, 2009, and 2012 to gain insights into communication behaviour over time and compare their results with prior studies as well as other geographical regions. Noteworthy in this context is that the economic downturn is covered in the period of investigation, so the communication behaviour is observed in an extreme situation which influences results.
Their analysis finally comprises 4,683 graphs which are checked for the use of impression management in three ways: selectivity, graphical measurement distortion, and presentational enhancement. Results show that that topics displayed, and how they are presented, significantly change over time and that graphs are much more likely to exaggerate positive trends than to understate them, supporting the claim of the authors that graphical representations are used to unconsciously influence a readers impression of a company. Additionally, they found that longer time sequences almost exclusively depict favourable trends (86 per cent) and graphical measurement distortions are applied on purpose for both key financial variables as well as for non-key financial variables (30 per cent). Therefore the authors claim that the annual report is not always useful to inform investors in a trustworthy way, especially in the unregulated part.
Their novel approach shows the importance of inter-disciplinary research between accounting and the field of information visualization. Graphs are used on a broad scale, however, how they shape and influence human perception and information interpretation is vastly under researched (Vickers, 2014). The future research outlook of Falschlunger et al. addresses exactly this issue, calling for a model that predicts efficiency and effectiveness of information processing to enhance decision-making quality. If applied this model can on the one hand help companies in designing bias-free visualizations to present them to their stakeholders as well as on the other hand support stakeholders in examining the intent of companies to deceive them.
Summing up, this issue remains true to the intention of the guest editor to provide a multi-perspective spectrum of contributions to the field of accounting, connect to the ongoing discourse and demonstrate the broad scope of the Journal of Applied Accounting Research.
You are invited to enjoy the varied voices in this collation, be inspired by the inter-disciplinary approaches and to submit your own perspectives for a future issue.
Professor Othmar M. Lehner - Visiting Fellow, University of Oxford, Oxford, UK
Abraham, S. and Shrives, P.J. (2014), “Improving the relevance of risk factor disclosure in corporate annual reports”, The British Accounting Review, Vol. 46 No. 1, pp. 91-107
Abraham, S., Marston, C. and Jones, E. (2015), “Disclosure by Indian companies following corporate governance reform”, Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 114-137
Alnasser, S. (2012), “What has changed? The development of corporate governance in Malaysia”, The Journal of Risk Finance, Vol. 13 No. 3, pp. 269-276
Aubert, F. and Louhichi, W. (2015), “Analyst earnings forecast revision activity around profit warnings across four European countries”, Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 58-87
Bennett, N. and Lemoine, G.J. (2014), “What a difference a word makes: understanding threats to performance in a VUCA world”, Business Horizons, Vol. 57 No. 3, pp. 311-317
De Jager, P. (2014), “Fair value accounting, fragile bank balance sheets and crisis: a model”, Accounting, Organizations and Society, Vol. 39 No. 2, pp. 97-116
Deetz, S. (1996), “Describing differences in approaches to organization science: rethinking Burrell and Morgan and their legacy”, Organization Science, Vol. 7 No. 2, pp. 191-207
Desender, K.A., Aguilera, R.V., Crespi, R. and GarcÍa-cestona, M. (2013), “When does ownership matter? Board characteristics and behavior”, Strategic Management Journal, Vol. 34 No. 7, pp. 823-842
Elshandidy, T., Fraser, I. and Hussainey, K. (2014), “What drives mandatory and voluntary risk reporting variations across Germany, UK and US?”, The British Accounting Review, pp. 1-19
Elzahar, H. and Hussainey, K. (2012), “Determinants of narrative risk disclosures in UK interim reports”, The Journal of Risk Finance, Vol. 13 No. 2, pp. 133-147
Falschlunger, L., Treiblmaier, H., Lehner, O. and Grabmann, E. (2015), “Cognitive differences and their impact on information perception: an empirical study combining survey and eye tracking data”, in Davis, F.D., Riedl, R., Brocke, J.v., Léger, P.-M. and Randolph, A.B. (Eds), Information Systems and Neuroscience, Springer International Publishing, Heidelberg, pp. 137-144
Fisher, G. (2012), “Effectuation, causation, and bricolage: a behavioral comparison of emerging theories in entrepreneurship research”, Entrepreneurship Theory and Practice, Vol. 36 No. 5, pp. 1019-1051
Griffin, J.B. (2014), “The effects of uncertainty and disclosure on auditors' fair value materiality decisions”, Journal of Accounting Research, Vol. 52 No. 5, pp. 1165-1193
Hirsch, B., Seubert, A., Sohn, M. and Mundy, J. (2015), “Visualisation of data in management accounting reports: how supplementary graphs improve every-day management judgments”, Journal of Applied Accounting Research, Vol. 16 No. 2, pp. 221-239
Hughes, T. (2014), “After the music stopped: the financial crisis, the response, and the work ahead”, Quantitative Finance, Vol. 14 No. 9, pp. 1513-1515
Hussainey, K. and Al-Najjar, B. (2011), “Future-oriented narrative reporting: determinants and use”, Journal of Applied Accounting Research, Vol. 12 No. 2, pp. 123-138
Joseph, J., Ocasio, W. and McDonnell, M.-H. (2014), “The structural elaboration of board independence: executive power, institutional logics, and the adoption of CEO-only board structures in US corporate governance”, Academy of Management Journal, Vol. 57 No. 6, pp. 1834-1858
Khlif, H., Samaha, K. and Azzam, I. (2015), “Disclosure, ownership structure, earnings announcement lag and cost of equity capital in emerging markets: the case of the Egyptian stock exchange”, Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 28-57
Kusterer, F. (2016), “Mittelstand and decision-oriented controlling”, in Mack, O., Khare, A., Krämer, A. and Burgartz, T. (Eds), Managing in a VUCA World, Springer International Publishing, Heidelberg, pp. 169-174
Lachmann, M., Stefani, U. and Wöhrmann, A. (2015), “Fair value accounting for liabilities: presentation format of credit risk changes and individual information processing”, Accounting, Organizations and Society, Vol. 41, pp. 21-38
Lambert, R.A., Leuz, C. and Verrecchia, R.E. (2012), “Information asymmetry, information precision, and the cost of capital”, Review of Finance, Vol. 16 No. 1, pp. 1-29
Laux, C. and Leuz, C. (2009a), “The crisis of fair-value accounting: making sense of the recent debate”, Accounting, Organizations and Society, Vol. 34 No. 6, pp. 826-834
Laux, C. and Leuz, C. (2009b), Did Fair-Value Accounting Contribute to the Financial Crisis?, National Bureau of Economic Research, No. w15515, Washington, DC
Leung, S., Parker, L. and Courtis, J. (2015), “Impression management through minimal narrative disclosure in annual reports”, The British Accounting Review, Vol. 47 No. 3, pp. 275-289
Li, H. (2013), “Corporate risk and corporate governance: another view”, Managerial Finance, Vol. 39 No. 3, pp. 204-227
Magnan, M.L. (2009), “Fair value accounting and the financial crisis: messenger or contributor?”, Accounting Perspectives, Vol. 8 No. 3, pp. 189-213
Mangena, M. and Liu, J. (2014), “Accounting for value and governance”, Journal of Applied Accounting Research, Vol. 15 No. 3, pp. 1-5
Michelon, G., Bozzolan, S. and Beretta, S. (2015), “Board monitoring and internal control system disclosure in different regulatory environments”, Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 138-164
Miihkinen, A. (2012), “What drives quality of firm risk disclosure?: the impact of a national disclosure standard and reporting incentives under IFRS”, The International Journal of Accounting, Vol. 47 No. 4, pp. 437-468
Müller, J. (2014), “An accounting revolution? The financialisation of standard setting”, Critical Perspectives on Accounting, Vol. 25 No. 7, pp. 539-557
Musa Mangena, P., Jia Liu, D., Tauringana, V. and Mangena, M. (2014), “Board structure and supplementary commentary on the primary financial statements”, Journal of Applied Accounting Research, Vol. 15 No. 3, pp. 273-290
Samaha, K. and Azzam, I. (2015), “Disclosure, ownership structure, earnings announcement lag and cost of equity capital in emerging markets”, Journal of Applied Accounting Research, Vol. 16 No. 1, pp. 28-57
Schneider, F. and Tran, D.H. (2015), “On the relation between the fair value option and bid-ask spreads: descriptive evidence on the recognition of credit risk changes under IFRS”, Journal of Business Economics, pp. 1-33 (in press)
Vickers, D. (2014), Decision Processes in Visual Perception, Academic Press, London
Whittington, G. (2015), “Fair value and IFRS”, in Jones, S. (Ed.), The Routledge Companion to Financial Accounting Theory, Routledge, London, pp. 217-235
Wood, G. and Wright, M. (2010), “Wayward agents, dominant elite, or reflection of internal diversity? A critique of Folkman, Froud, Johal and Williams on financialisation and financial intermediaries”, Business History, Vol. 52 No. 7, pp. 1048-1067