Similarly, a business that reports comparable financial statements over time gives investors the opportunity to review its financial results on a trend line, across multiple reporting periods. As an emerging economic country, China’s corporate equity is relatively concentrated, with the conflict of interests between major shareholders and small and medium-sized shareholders emerging as a predominant agency issue [74, 75]. The self-interest behavior of major shareholders can negatively impact economic transparency [76, 77], thereby potentially influencing the comparability of accounting information. The severity of the agency problem between major shareholders and small and medium-sized shareholders determines the extent of major shareholders’ encroachment on the interests of smaller shareholders. Consequently, major shareholders are more likely to exploit their power to undermine the quality of internal auditing and restrict its role in enhancing information transparency. When looking at financial statements from different firms and time periods, it is vital.
Industry Intel
Comparability is a quality of accounting information that addresses the usability of financial information. Information that is prepared using the same measurement techniques and reported in a similar fashion is considered comparable information because this information is similar and can be judged side by side other similar financial information. To ensure comparability, use standardized accounting practices and have strict closing processes. Better comparability leads to more accurate financial forecasts and wider analyst coverage. It lowers risk and borrowing costs, benefiting markets and stakeholders. The International Financial Reporting Standards (IFRS) stress comparability too.
- Despite techniques and standards to enhance comparability, challenges persist in achieving consistent financial reporting across entities.
- The International Accounting Standards Board (IASB) seeks to boost this through new principles.
- To ensure comparability, use standardized accounting practices and have strict closing processes.
- By adhering to standardized accounting principles and guidelines, companies can ensure their financial statements provide a consistent and accurate basis for comparison, helping investors, creditors, and other users make informed decisions.
- In Eq (1), Negi,t is represented as 1 if the quarterly stock return is negative, and 0 otherwise.
Global Comparability in Financial Reporting: What, Why, How, and When?
This approach is based on the belief that the internal audit function should encompass more than just financial audits and should receive strong backing from senior management. A broader scope of the internal audit function indicates greater corporate support [63]. Accounting standard setters and regulators seek greater comparability in financial reporting. GAAP has been significantly evolving over the years, but accounting standards are inherently complex. Credit agencies like Moody’s adjust financial statements, adding to the complexity of evaluating accounting treatments.
2 Internal audit quality, industry competition and accounting comparability
According to the above method, the comparability of accounting information between company i and other firms within the same industry is calculated. Subsequently, the calculated comparability value is sorted from largest to smallest, and the average CompAcct of all combinations is calculated as the dependent variable in the main regression of this paper. The larger the CompAcct, the stronger the comparability of accounting information.
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Financial statements of one accounting period must be comparable to another in order for the users to derive meaningful conclusions about the trends in an entity’s financial performance and position over time. Comparability of financial statements over different accounting periods can be ensured by the application of similar accountancy policies over a period of time. – Assume that company A uses the FIFO inventory using ‘itsdeductible’ to figure the value of donations method and company B uses the LIFO inventory method for valuing its inventory. All else being equal, company B’s financial statements would most likely show less income because of a higher cost of goods sold. In order to compare these statements properly, you must convert one of their inventory methods to match the other. Comparability is extremely important to the end users of financial statements.
Lin et al. (2019) [49] further compared the impact of Germany’s adoption and convergence on comparability, and found that both methods improved comparability. In addition, Dhole et al. (2023) [52] found that economic policy uncertainty would diminish the comparability of accounting information. Without comparability in financial reporting, it would be challenging to make such comparisons, as differences in accounting methods or presentation could lead to misleading conclusions.
Specifically, “IAModel” represents the organizational structure of the internal audit department, reflecting its operational mode. When the internal audit department operates under dual leadership, involving both the board of directors and the management, under the supervisory board, under the board of directors, or the audit committee, “IAModel” is assigned a value of 1. Conversely, if the internal audit department operates under the management or the finance department, “IAModel” is assigned a value of 0. This categorization is based on the premise that a higher affiliation of the internal audit department corresponds to an elevated organizational status, indicating increased independence, authority, and resources. Consequently, this facilitates the comprehensive execution of its functions [24].
This helps in creating ethical and sustainable corporate actions worldwide. The International Accounting Standards Board (IASB) seeks to boost this through new principles. This enhances the value of financial statements for users around the world.
The Office of Justice Programs supports this with resources for grantees. Their goal is to improve finance management, focusing on compliance and comparability. A study by Gross and Perotti in the Journal of Accounting Literature linked accounting standards with real outcomes. This approach connects theory with practical results, emphasizing the importance of harmonized accounting standards.
In summary, the evidence strongly supports aiming for high accounting comparability. This effort pays off not just in meeting rules but in significant economic benefits too. This insight helps in making investment choices, highlighting both opportunities and risks. The presentation of liabilities is different in both years, which is not appropriate as it does not ensure comparability of financial reports/statements. Changes to accounting policy must be accounted for retrospectively, i.e. amounts recognized in previous accounting periods are restated to account for the change in accounting policy.
However, it is important to note that some differences may still arise due to varying accounting methods, estimates, and judgments, as well as the inherent complexity of certain business transactions and financial instruments. To investigate the moderating effect of internal control, we utilized the DIB internal control rating index, denoted as InterCon, which reflects higher internal control quality. Ratings from AAA to D were assigned values from 8 to 1, respectively, and the interaction term InterCon×IAQ was included in model (6) for regression analysis.
