usefulness of banks’ financial reports in a time of crisis evidence

8/10/2019 Usefulness of Banks Financial Reports in a Time of Crisis Evidence

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Usefulness of banks financial reports in a time of crisis: evidence

from corporate customers of banks in Finland

Siiri Sofia Antturi


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Table of contents

1. Introduction..........................................................................................3

2. iterature revie!.................................................................................."

2.1. Objectives of financial reporting.........................................................................7

2.2. The role of useful financial reporting in crisis....................................................8

2.2.1. Complexity and understandability................................................................8

2.2.2. eliability and relevance..............................................................................!

2.2." #air value accounting..................................................................................12

2.". #inancial regulation responses .........................................................................1$

2.$. Transparency and disclosure.............................................................................17

2.%. Conclusion.........................................................................................................1!

3. #esearc$ met$odolo%&.......................................................................21

". 1. esearch &pproach...........................................................................................21

".2. 'ata source........................................................................................................22

".". 'ata collection...................................................................................................22

".$. 'ata analysis......................................................................................................2$

".%. Conclusion.........................................................................................................2%

'. (ata presentation and anal&sis.........................................................2)

*. +onclusions and discussion................................................................',

". Appendi- ............................................................................................*1

(.1. )urvey *uestions ..............................................................................................%1

(.2. Closed *uestion results......................................................................................%"

(.". Open *uestion results........................................................................................%$

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1. Introduction

+o, has the usefulness of financial reports fared through the financial crisis- This is

the *uestion that this research aims to ans,er. This research ,ill discuss the charac

teristics of useful financial reports/ ho, they have come under *uestion during the fin

ancial crisis and ,hat remedies can be implemented. The research presents a survey

of "0 employees of corporate customers of bans in #inland and discusses their vie,s

of ho, the usefulness of financial reports has fared in the financial crisis.

The financial crisis is still on the minds of many as it has yet to pass in some coun

tries. ost recently 3ortugal has suffered greatly because of the fluctuations in the

financial ,orld. The crisis started in the 4.). ,hen sub prime mortgages started de

faulting due to falling house prices and rising interest rates. &s information about

these bad loans spread to investors/ credit marets fro5e/ ,hich in turn lead to a short

age in li*uidity. )everal financial institutions ,ere bailed out by governments and na

tionalised 6C 200!.

9n #inland the financial crisis hit the export industry most harshly. &s #inland:s busi

ness partners fell into depression/ so too did the trade bet,een the countries. &s a

country much reliant on exporting/ #inland has suffered in many ,ays during the fin

ancial crisis/ for example through greater unemployment. One of the reasons for the

do,nturn in exports ,as the poor availability of credit from bans ,hose solvency

and li*uidity had come under *uestion. 3erceived solvency and li*uidity in turn derive

from financial reports/ ,hich ,ere criticised as being unreliable. #inland has then

been affected by the same alleged shortcomings in reports even though the country:s

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financial sector benefited from its stable precrisis position and ,as less affected than

other countries: financial sectors 6#reyst;tter < attila 2011.

#inancial reporting in public companies in =urope is regulated through the 9nterna

tional #inancial eporting )tandards 69#)/ ,hich are developed by the 9nternational

&ccounting )tandards oard 69&). 9n the 4.). the similar standards are the 4.).

>enerally &ccepted &ccounting 3ractices 6>&&3/ ,hich are managed by the #inan

cial &ccounting )tandards oard 6#&). There is an ongoing process of conver

gence bet,een the t,o/ ,hich is promoted by the 4.). )ecurities and =xchange Com

mission 63,C 2010. ecause of the unity of the financial reporting standards/ the

changes that are made apply to almost the entire ,orld. The crisis has therefore af

fected financial reporting globally because it exposed problems in the system that

,hen rectified/ ,ill affect all those ,oring ,ith financial reports.

#inancial reporting for bans is the same as for other companies but ,hen an

economic do,nturn comes about ,hat happens ,ith bans can aggravate or even

cause a crisis 6Turner 2010. Therefore/ even though financial reporting standards and

objectives are common for most companies/ bans are at the centre of attention

because of their role in the event of a crisis. ecause of their central role in the crisis/

the research ,ill concentrate on the effects of the financial crisis on the usefulness of

bans? financial reports and/ in turn/ their effect on the confidence of their users.

9n the current crisis bans have certainly experienced a loss of trust. )apien5a and

@ingales 6200! studied the general public:s trust in financial marets in the 4.). and

concluded that the primary reason for a loss of trust is the decrease in stoc maret

valuations. 9n their study they presented respondents ,ith six options for determining

,hat the primary cause for the financial crisis ,as in their minds. "(A said manager:s

greed/ 11/2A ans,ered excessive government intervention/ 1(A said lac of

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oversight/ 1%A chose poor corporate governance/ 1%A ans,ered lac of regulation

and (/7A said global imbalances.

&ccording to research done by =rnst and Boung 62010 bans are continuously losing

customer trust. &ccording to the survey ,here 20 %00 global retail baning customers

,ere intervie,ed/ $$A of them stated that their confidence in the baning industry

had decreased in the last 12 months. ost of those surveyed 6%"A *uoted

macroeconomic factors as the reason for loss of confidence. rand strength/ image

and reputation ,ere mentioned as being ey factors in a satisfying bancustomer

relationship.

ecently >oldman)achs/ a company ,hich suffered a great deal during the financial

crisis/ reported that it ,ould introduce significantly more transparency in its financial

reporting 6appaport 2011. 9n the 4) the senate is discussing the role of auditing and

accounting/ and their contribution to the crisis 6omane 2011. #air value account

ing is still the subject of discussion as financial institutions have to rethin their fin

ances according to the ne, regulations 6an >aal 2011 and )alama 2011.

The contemporariness of the subject can also be seen in the list of references of aca

demic papers for this research as only a fe, of them are dated beyond the year 2007.

De, research is being constantly published and the effectiveness of ne, financial re

porting standards is being consistently evaluated.

The next chapter ,ill consist of literature on the subject matter and further establish

importance and diversity of the subject.

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2. iterature revie!

There are four parts to this literature revie,. #irst of all/ the objectives of financialreporting and the characteristics of useful reports are discussed in order to indicate

,hich aspects of financial reports should be looed at in more detail.

The second part establishes a lin bet,een the usefulness of financial reporting and

the financial crisis. Eey concepts of complexity and understandability as ,ell as

reliability and relevance are discussed here. The debate on fair value accounting plays

a strong part also as its effect on reliability and relevance has been a fairly

controversial subject.

Thirdly/ there is a discussion on the implications of financial reporting on regulation

reform. 9n order to access this discussion/ the reactions of several institutions and

regulatory bodies on the financial crisis are studied. )ince the actions of regulatory

bodies aim to heal the financial environment and promote trust in financial marets/ it

is important to study the areas ,here they have found problems and are ,oring to

improve standards.

9n the final part/ issues of transparency and disclosure are discussed. This is because

in the literature revie,ed these issues ,ere ,idely considered as providing possible

solutions to the problems that have surfaced.

This revie, also exposes gaps in the literature. The unstable environment during the

crisis caused changes in financial reporting of bans. This raises several *uestions as

to ho, this has affected client confidence. The literature does not address these

*uestions ade*uately. The revie, therefore gives a base for the upcoming survey

presented to corporate clients of bans.

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2.1. Objectives of financial reporting

The purpose of financial reporting is to provide users ,ith useful information ,hen

they mae decisions in the maret. &ccording to the 9#) #rame,or 69&) 3lus

2010/ there are limitations to financial reporting as other information is needed in

order to form a complete understanding of the position of a company. There are

certain characteristics that mae financial information useful and they are defined in

the frame,or. 4nderstandability is a component of financial reports/ ,hich maes

the information accessible and useful to users as ,ell as affects the achievement of the

ey characteristics. The ey *ualitative characteristics of financial reports/ according

to the 9#) frame,or/ are relevance and reliability. elevance means the extent to

,hich the information helps in the decision maing process of users through its

predictive and confirmatory value. Timeliness is an issue of relevance as it affects the

timeliness of the decisions made. eliability/ or other,ise referred to as

representational faithfulness/ is defined by the information?s ability to accurately

reflect the underlying economic phenomenon that it intends to represent. These

characteristics are almost universal as they are also a part of the frame,or of the

#inancial &ccounting )tandards oard so in addition to including the more than 100

countries that re*uire or allo, the 9#)/ the 4.). accounting standards have the same

objectives 6)=C 2008. 9f these characteristics are then expected of financial reports/

the perceived faltering of one or more could lead to a loss of confidence from the

user.

9t has been argued 6andyopadhyay et al. 2010 that relevance is favoured in ne,

accounting standards over reliability and fair value accounting has been said to

reinforce this distinction 6+effes and Orenstein 200%. The timeliness of financial

reporting has been brought to *uestion by iller and ahnson 6200!/ as they ,ould

have the reporting fre*uencies shortened. The complexity of financial instruments and

their valuation has spared debate about the understandability of financial reports/

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,hich has been under discussion by standardsetters for a ,hile

63rice,aterhouseCoopers 2008. Fhen so many of the characteristics have been

*uestioned in the last fe, years/ a change in the perceived usefulness of financial

reports is certainly possible.

2.2. The role of useful financial reporting in crisis

2.2.1. Complexity and understandability

Complexity in financial reports is not a ne, topic of discussion and has been debated

before the financial crisis. 9n 2008 the 9&) produced a discussion paper entitled

Reducing complexity in reporting financial instruments6Cairns 2008 that resulted in

9#) 7 and 9#) !/ ,ors in progress that aim to clarify the disclosures and

valuations of financial instruments and mae them more transparent 69&) 3lus 2011.

The development of 9#) ! is especially important as it determines ,hether financial

instruments should be valued at amortised cost or fair value.

&ccording to a survey by the Chartered 9nstitute of anagement &ccountants

6C9& of "%0 directors/ !0A thought that financial reports are unnecessarily

complex and !$A thought that the problem had been getting ,orse in the last five

years 6C9& 200!. The survey indicated that respondents ,ould rather have

financial reports be relevant and understandable than completely reliable. The notion

of principlesbased rather than rulesbased accounting/ is supported by both C9&

and the >lobal &ccounting &lliance and indicates that current financial reporting

standards are complex for both compilers and the endusers 6>&& 2008.

Turner 62010 argues that the complex financial instruments used by bans and their

valuation in the maret should mean that bans are different in their financial

reporting. The inherent complexity of financial instruments used by bans results in

an asymmetry in information bet,een buyers and sellers. +e mentions that the

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valuation of the problematic assets of bans and the standards used for their

measurement for different bans ,ere unclear and contributed to the decreasing

confidence in financial marets. Complexity affects understandability/ ,hich

contributes to the usefulness of financial reports. 9f the information is too complex for

a user/ it diminishes the usefulness of the report.

Complexity of financial reports is an important issue as it affects reliability/ relevance

and understandability. eliability is affected if the complexity of the reports means

that valuations do not reflect the real position of the institution.

elevance is affected if time used for adhering to all rules and giving maximum

disclosure means that reports are not timely or clear enough to help the decision

maing process of the user. 4nderstandability is affected if reports are too complex

for ordinary users and not clear in their output.

2.2.2. Reliability and relevance

The financial crisis and financial reporting are closely lined as the crisis ,as in

essence a crisis of li*uidity and credit 6Gangley 2010. Hoshua osner/ managing

director at >raham #isher < Co. in De, Bor saidI J9t?s not a li*uidity problem/ it?s a

valuation problemK/ capturing the essence of lining the financial crisis to financial

reporting 69vry 2008. aluations of complex financial instruments lead to

information asymmetries ,ithin the system ,hen assets ,ere first valued at a higher

price than ,as realistic and at a lo,er price ,hen the economy experienced a

do,nturn. #alling asset prices lead to li*uidity and credit problems for bans and the

financial problems of bans lead to the failure of other institutions 6Turner 2010.

&lso/ information asymmetries feed the uncertainty and imbalance in the system and

aggravate the initial problem. This problem is referred to as procyclicality 6Catarineu

abell/ Hacson < Tsomocos 200%. 9nvestors could not mae informed decisions in

the midst of the confusion about valuations. This is a problem of both reliability and

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relevance as financial reports that are not consistent and clear in their valuations

cannot give reliable information nor can they be relevant to decision maing. #legm

62008 says that relevance in financial reports re*uires for them to be reliable. +e

criticises the ,ay reliability has had to give ,ay for relevance/ especially through the

use of fair value accounting.

arth and Gandsman 62010 discuss the role of financial reporting by bans in the

financial crisis. They discuss such financial reporting features as fair values/ asset

securitisations/ derivatives and loan loss provisioning. They conclude that a lac of

transparency on derivative financial instruments and the pooling of debt resulted inproblems in determining the real financial position of a ban. 'etermining the real

position of a ban through financial reports is the ey to reliability/ ,hich in turn

affects the usefulness of the reports in decision maing.

iller and ahnson 6200! state that the role of financial reporting is Jto reveal the

truth honestly/ openly/ completely/ clearly/ unambiguously/ and ,ith sufficient

fre*uency to be timely.K They say that financial reporting should fulfil this role

before/ during and after a crisis. efore a crisis/ transparent financial reporting ,ould

give signs of trouble ahead and give a fore,arning to investors. 'uring a crisis/

financial reporting should provide information about ,here the problem areas are and

ho, future cash flo, prospects are affected. &ccording to iller and ahnson/ in the

recent crisis information flo,ed too slo,ly and ,as misinterpreted to indicate credit

riss of other debt instruments. &fter a crisis/ the role of financial reporting is to

signify ,hen the economy starts improving and by ho, much. 9n iller:s and

ahnson:s vie,/ this positive information should not be artificially created but should

reflect the actual situation. iller and ahnson 6200! also recommend that reporting

fre*uencies should be shortened as to provide information that is as up to date as

possible. Timeliness is related to the relevance of the reports as relevant information

has to be timely in order to be useful. iller and ahnson argue that financial

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information during the crisis ,as not available to decision maers early enough and

,as not useful to the decision maing process.

iller and ahnson re*uire both relevance and reliability of financial reports and say

that both aspects have failed in the crisis. Their point of vie, is in agreement ,ith

arth and Gandsman 62010/ ,ho vie, transparency and disclosure as being ey in

preventing crises.

Hames Turley 6200!/ C=O of =rnst < Boung/ sees the ey causes of the crisis being

too much leverage/ misuse of financial instruments/ bad loans/ unrealistic

expectations/ improper handling of ris and gaps in regulatory systems. +e states that

normal lending from bans ,ill not continue until statements of financial position are

sorted.

artin Taylor 6200! blamed baners for the crisis stating that bans paid out bonuses

that did not consist of actual cash but unrealised profits derived from Jbooing

revenuesK. >iving out cash that did not exist then led to a crisis in li*uidity. Taylor

concludes that the crisis ,as a result of the baners? inability to count. The same

concern about remuneration is repeated in a study conducted by =rnst and Boung

62011. The study sho,ed that executive remuneration ,as *uoted by 80A 64.) and

(!A 64.E. of intervie,ed retail ban customers as being one of the reasons for loss

of trust in bans. )till/ only $0A of the %00 surveyed senior executives in another

report by =rnst and Boung 62010 ans,ered that bonuses should be regulated and

capped. The study underlines the lac of reliability in financial reports and customer

trust in them. &ccording to Taylor/ the numbers produced in financial reports did not

reflect the real situation.

&dair Turner 62010 commented on artin Taylor?s article by saying that it ,as not

merely a criticism of baners but concerned accounting standards and their

application. +e agreed that executive remuneration ,ould have an effect on customer

confidence and the payment of large bonuses ,ould indicate a stable financial

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position ,hen/ in reality/ there ,ere no cash funds to give out. +e says that

accounting standards are designed to reflect a company?s position in a certain point of

time. This has caused some ban regulators and central bans to argue that bans are

different from other institutions and accounting standards should reflect that. Turner

argues that the current accounting standards for bans can intensify volatility. This

happens ,hen the use of the incurred loss model leads to overoptimistic results. This/

in turn/ leads to excessive lending and finally/ ,hen conditions are less favourable/

results in diminished assets and less lending.

2.2.3 Fair value accounting

& controversial argument that ,as raised during the financial crisis concerned the role

of fair value accounting in either causing or exacerbating the crisis. #air value

accounting ,as blamed for contributing negatively to the crisis in terms of the decline

of value in ban assets 6arth and Gandsman 2010. 'iscussion of the issues ,ith fair

value is relevant to this study because using fair value methods can be seen as a trade

off bet,een relevance and reliability. +istoric cost accounting could be seen as more

reliable as it relies on the purchase value of an asset ,hile fair valuation relies on

maret values that are apt to change 6+effes < Orenstein 200%.

9n the 4.). several parties/ including the &merican 9nternational >roup 9nc./ called for

the suspension of fair value policies stating that it forced companies to value assets at

much lo,er prices than their true value 6Festbroo 2008. & former #ederal 'eposit9nsurance Corporation chair/ Filliam 9saac/ blamed the )ecurities and =xchange

Commission in the 4.). for causing the crisis 6)opelsa 2008. 9n 2008 he stated that

fair value accounting rules baced up by the )=C destroyed %00 billion dollars of

ban capital by having the bans value assets at maret prices. 9n his opinion they

should not have been mared to maret. )teve #orbes 6200! agrees ,ith this vie, as

he criticised fair value policies for being inappropriate in illi*uid marets and

magnifying the fluctuations in the financing ,orld. +e said that most of the losses

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recorded by financial institutions had been boo losses and not actual losses and led to

bans being increasingly rigid about lending. #orbes said that the changes made to the

policies after complaints from bans ,ere merely JcosmeticK and did not fix the

actual problem. +e disagrees ,ith iller and ahnson 6200! in their statement that

financial reporting should happen at shorter intervals and says that reporting all

fluctuations is unnecessary.

Turner 62010 also discusses the role of martomaret accounting in aggravating the

decline of marets as rising values indicate higher profits and the bonuses paid out

from these apparent profits affect maret confidence. +e does not/ ho,ever/ placeblame on fair value accounting standards as/ in his vie,/ there are no relevant

alternatives for the valuation of derivative financial instruments.

iller and ahnson 6200! ,ould not place the blame on martomaret accounting

but encourage its use ,ith all assets and liabilities. Hames Turley 6200! agrees ,ith

iller and ahnson in his statement that the suspension of fair value accounting

measures ,ould be dangerous. +e also stands by globally uniform accounting

standards. arth and Gandsman 62010 come to the conclusion that fair value

accounting had little to no effect on the crisis but transparency and disclosure ,ere

insufficient for investors to mae informed decisions. anin 6200! believes that fair

value ,as not the cause of the crisis but only mirrors reality.

There is dissidence on ,hether fair value pertains more to reliability or to relevance or

e*ually to both. The arguments for and against are strong and it is clear that policy

maers ,ill be dealing ,ith critics of fair value in the future.

The )ecurities and =xchange Commission revie,ed fair value policies in an extensive

study and came to the conclusion that the policies should be improved but not

suspended. These suggested improvements concerned the use of fair value policies in

illi*uid and distressed marets 6)=C 2008.

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& survey conducted by the C#& institute 62008 revealed that 7!A of C#& 9nstitute

members ,orld,ide believed that fair value accounting measures improve

transparency and ris recognition. 9n addition to this/ the #inancial Crisis &dvisory

>roup 6200! report states that a major fact forgotten in the fair value debate is that in

most countries majority ban assets are valued based on historic cost. The report

states that the value of assets has been overstated as the complexity of offbalance

sheet standards has delayed the recognition of losses on loan portfolios. This is in

contrast to the argument that using fair value accounting leads to the overstatement of

losses.

)till/ a summary of feedbac received by the #&) in 2010 indicated that majority

did not support fair value for financial liabilities 6Orenstein 2010. These results

suggest that there is still a variety of differing opinions and total support for fair value

is a long ,ay off.

=ven though the debate on fair value accounting continues/ it is unliely that standard

setters ,ould abandon the policies. The 9&) and #&) have both voiced their

support for fair value but are in ,ors to improve the standards related to it 6#&)

200! and Gamoreaux 2011. Though fair value accounting has been ,idely supported

by policy maers/ it is possible that the recent discussion and *uestioning of the fair

value standards have changed the perception that the users of financial reports have of

the reliability of standards.

2.3. Financial regulation responses

9n the 4.E. the ritish aners: &ssociation published a ne, code for financial

reporting aiming to promote enhanced disclosure practices that ,as adopted by the

seven biggest lenders in the 4.E. in 2010 6Thomas 2010.

asel 999 is the third of the asel &ccords/ ,hich are issued by the asel Committeeon aning )upervision. The goal of the Committee is to improve the *uality of

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baning supervision ,orld,ide and the most recent accord discusses strengthening

ban transparency and disclosures. 3ublic disclosures mae up 3illar " of the accord.

Transparency has therefore become an international mission for regulators 69)

2010.

9n the 2008 Fashington summit the >roup of 20 6>20 agreed that the financial crisis

,as caused by a poor understanding of ris and inade*uately coordinated

macroeconomic policies. One of their major goals ,as to strengthen transparency and

accountability. This ,ould be achieved through improving the reporting of complex

financial instruments and promoting full transparency in reporting the currentfinancial state of companies. They listed immediate actions that ,ould be in use by

arch 200! that included the bid for accounting standard setters to clarify guidance

for the valuation of securities and complex/ illi*uid financial instruments in distressed

marets. They also called for accounting standards setters to address the problems

,ith offbalance sheet vehicles and disclosure of complex financial instruments. They

also planned to develop the relationship of the 9nternational &ccounting )tandards

oard and relevant authorities in order to promote transparency and accountability of

international accounting standard development. edium term goals included better

regulation for the implementation of the ne, measures 6C 2008.

The 9&) has tacled problems ,ith valuations by maing amendments to 9#) 7

and ! that concern valuation and disclosure of derivative financial instruments 69&)

3lus 2011.

The #inancial Crisis &dvisory >roup 6#C&> that advises both the #&) and the

9&) brought out a report in 200! concerning their recommendations as to ,hat

should be done after the financial crisis 6#C&> 200!. They agreed ,ith other

institutions in that financial reporting should provide unbiased/ relevant and

transparent information about the state of a company and are based on *uality

accounting standards and efficient regulation. The #C&> state that this goal is reliant

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on globally converged financial reporting standards. They say that accounting

standards ,ere not the main problem in the financial crisis but that the crisis has

brought to light several problems that should be solved. The report identified four

major issues in accounting standardsI the complexity of fair value accounting policies/

the delayed recognition of losses deriving from financial instruments lie loans/ off

balance sheet financing structures/ and the complexity of reporting financial

instruments. The report says that even though accounting standards did not exacerbate

the crisis/ less complexity and more transparency could help restore confidence in

financial marets and promote overall stability and gro,th. The report also recognises

the limitations of financial reporting as only reflecting one point in time. The report

encourages using financial reports against a bacground of other information/ lie

industry trends and performance data/ in order to give the fullest vie, possible of the

current state of the company 6#C&> 200!.

9n a study by =rnst and Boung/ %00 senior executives in the financial services

industry in =urope and 4.). ,ere intervie,ed concerning their confidence to,ards

financial regulations 6=rnst and Boung 2010. "%A of those intervie,ed thought that

the current regulations ,ere enough to decrease the chance of another financial crisis.

The 4.E. and 4.). numbers ,ere lo,er ,ith 2%A and 1!A respectively. #urthermore/

only 1$A of respondents agreed that regulation at a global level is sufficient to

prevent a ne, crisis. Fhen ased ,hether regulations should be made globally

uniform/ 7!A agreed. This report indicates a strong mistrust in the po,er of

regulators to prevent another crisis.

This vie, is supported by Turley 6200! ,ho does not ,ant financial reporting to be

politici5ed. +e states that the role of accounting as promoting transparency/

consistency and comparability ,ould be under threat ,ere accounting standards made

into a political issue. +e agrees that there is room for reform but these reforms should

not be protectionist. 9t is difficult for accounting issues to not become a politicised as

the decisions made affect the economy in sometimes drastic ,ays.

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The reactions of the regulatory institutions and standard setters point to ,here the

problems lie and much emphasis seems to be placed on increased transparency and

disclosure as the solution. Therefore/ the issues are discussed in the next section.

2.4. Transparency and disclosure

earing in mind the earlier discussion/ the literature suggests that information

asymmetries lead to a lac of reliability in financial reports/ ,hich in turn affected the

usefulness of the reports. The regulation responses are aimed at restoring reliability

through increased transparency and disclosure. &s discussed later/ increased and

improved auditing practices have been suggested to improve transparency.

9n her speech for the #inancial =xecutives 9nternational:s 28th &nnual Current

#inancial eporting 9ssues Conference in De, Bor in 200!/ )=C Commissioner

Eathleen G. Casey 6200! saidI J#inancial stability depends upon maret confidenceL

and investor confidence/ in turn/ depends upon the transparency of financial

statements.K 9n addition/ Casey stated/ the role of financial reporting is to provide

investors ,ith useful information about the current state of the company so that they

are able to mae the informed decisions/ ,hich in turn promotes efficiency in the

maret. artin >ruell of aiffeisen 9nternational also said/ as *uoted by +egarty

6200!/ thatI JDo transparency/ no trustL no trust/ no creditL no credit/ no investmentL

no investment/ no gro,thM )o there is a simple logicI financial reporting is an

essential building bloc for financial intermediation/ foreign investment/ and

sustainable economic development.K

arth and )chipper 62008 define transparency in financial reporting as revealing the

economic position of a company in a ,ay that is clear to the reader. &ccording to this

definition/ transparency concerns the reliability and understandability of financial

reporting. They ,rite that research proves that improved transparency lo,ers the cost

of capital as information asymmetry is lo,ered.

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9t seems as though the idea of maximum transparency is thought of as a universally

beneficial concept. 9n his article Janing transparency and the robustness of the

baning systemK )olomon Tadesse 62010 examines the relationship of transparency

and the stability of the baning system. The definition of transparency that the an

for 9nternational )ettlements gives and Tadesse uses isI Jtransparency is the public

disclosure of reliable and timely information that enables users to mae an accurate

assessment of a ban?s financial condition and performance/ business activities/ ris

profile/ and ris management practices.K There are several reasons ,hy ban

transparency ,ould enhance ban performance and stability according to Tadesse. 9t

reduces ris taing/ losses ,ould be less costly as recovery from the crisis could be

*uicer. & big problem for bans during times of crisis is panic/ ,hich is said to

derive from information gaps bet,een bans and clients/ and the spreading of panic

through miscommunication. To prevent this/ clear and transparent reporting prevents

misinformation from permeating the system and inducing panic.

On the other hand/ Tadesse argues that full disclosure may also be misinterpreted as

indicating ,ider spread problems and lead to mistrust in financial marets. +e says

that this ambiguity of the usefulness of ban disclosure is reflected in the reluctance to

accept disclosure policies ,ithout *uestions. #or example/ in Hapan a move has been

to,ards less disclosure even though the Forld an and 9nternational onetary #und

encourage enhanced disclosure practices. )till/ a study by Dier and aumann 6200(/

as referenced by Tadesse/ exhibits that disclosure affects bans capital buffers/ ,hich

in turn affect ristaing. &nother study by Tadesse in 200( presented strong evidence

that transparency fortifies the baning system. Tadesse concludes by stating that

although is not the cure for the baning industry but the evidence suggests that it does

promote stability.

9nterestingly/ Turner 62010 does not believe that full disclosure and transparency

,ould be the ans,er to preventing another crisis but states that implementing those

measures ,ould serve to increase volatility. +e concludes by saying that bans are

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different as their do,nfall can be the cause of a financial crisis instead of just a

conse*uence and accounting standards should be adjusted so that there is not just one

,ay of valuation for assets but different options for different situations.

Turley 6200! recommends that the )arbanesOxley act be enforced outside the 4.).

and advises on the establishment of an independent regulatory authority to loo over

public company audits.

The notion of auditing playing a part in increasing confidence in financial marets is

supported by a report from the 9nstitute of Chartered &ccountants in =ngland and

Fales 9C&=F 62010. The 9nstitute suggested that more information about the role of

auditing in bans ,ould Jincrease the value placed on audit and thereby increase

maret confidence.K The report states that as ban reporting has come under criticism

during the financial crisis/ it should be the starting point for any improvements. The

problem/ as the report says/ is not necessarily in the amount of information given by

bans in their reporting but the format in ,hich the information is given. is

information is not openly accessible to nonexpert readers and according to the report

investors ,ere concerned that ris statements provided by ban directors may not

reflect the ,hole truth and ,ould benefit from an auditor revie,ing them. & study by

&nderson/ ansi and eeb 6200$ substantiates this vie, as they found that

independent audit committees can positively affect the reliability of financial

reporting.

Though there are counterarguments to the benefits of transparency and disclosure/

the regulation responses indicate that improved transparency is a shared goal of policy

maers.

2.5. Conclusion

The purpose of the literature revie, ,as to shed light on the research *uestion and

give bacground for the issues related to it. 9t established a lin bet,een financial

reporting and the financial crisis/ demonstrated the public considerations related to

1!


20/56

financial reporting reform and described some solutions to the problem of usefulness

in financial reports.

The next section ,ill concentrate on the methodology used in primary research in

order to find the ans,er to the specific *uestion about customer perception of

usefulness in bans: financial reports.

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3. #esearc$ met$odolo%&

3. 1. esearch !pproach

Nuantitative research has been chosen over *ualitative research as the data used ,ill

be numerical and the research has a specific focus of substantiating or contradicting

the hypothesis 6'enscombe 2007. The hypothesis is developed after having revie,ed

the literature. 9n this case the literature indicates that the ans,er to the research

*uestion isI JBes/ perceptions of the usefulness of bans? financial reports has

changed as a result of the financial crisisK The literature also indicates a reason for the

loss of confidence being the lac of ade*uate transparency in financial reporting. The

hypothesis/ therefore/ isI JThere has been a loss of confidence in the usefulness of

financial reporting of bans after the financial crisis because of a lac of sufficient

transparency.K The primary research tests this hypothesis in the #innish business

environment and gives direction to future research and discussion.

9n financing/ *uantitative research is more common/ though *ualitative research has

been gaining stature 6Cassell/ uehrins < )ymon 200(. The benefits of *uantitative

research are that it allo,s the researcher to concentrate on a chosen fe, issues that

have been brought up in the literature revie, and it is more generalisable and

objective than *ualitative research. The benefits of using a survey to obtain

*uantitative data are that ans,ers ,ill be easy to codify and easy to analyse. The

disadvantage is that *ualitative data ,ould give a deeper loo into the subject instead

of just ans,ering the specific research *uestion. 9n the case of this research/

*uantitative methods have been chosen because the research *uestion is one that

needs a simple ans,er that either supports or contradicts the literature revie,.

Though *ualitative research ,ould give more depth to the research/ *uantitative

methods can also include open *uestions/ ,hich in the case of this research/ are adept

21


22/56

at giving depth and allo, exploring the issues more ,idely. The research also taes

an empirical outloo as the information is sought out instead of being set.

3.2. "ata source

The data source is corporate customers of publicly listed bans in #inland and more

specifically those employees ,ho ,or ,ith financial reports. This focus group ,as

primarily chosen because the *uestion re*uires a certain level of technical

understanding in order to be ans,ered in a useful ,ay. The chosen employees deal

,ith the issues presented in this dissertation first hand and that it ,hy they are the

appropriate group to ans,er the survey *uestions. &ll publicly listed companies in

#inland are re*uired to use the 9nternational #inancial eporting )tandards and are

therefore subject to the same definitions of financial reporting usefulness.

The sample ,as chosen at random from a list of personal contacts. 4sing personal

contacts allo,s for a better response rate/ ,hich ,as important in conducting this

study. The respondents are from different types of companies/ both small and large

and from different industries/ and are customers of different bans.

The important issue is to have an ade*uate amount of ans,ers for the research to be

useful. Taing into consideration time and money/ the sample si5e is relatively small

but it is ade*uate as it fulfils its purpose in supporting or contradicting the hypothesis

and giving an indication of ,hat issues can be discussed in future research.

3.3. "ata collection

The data collection method is that of a survey. &ccording to 'enscombe 6200"/

surveys aim to give ,ide and inclusive coverage/ an objective that is common to the

*uantitative approach. )urveys are also inherently empirical as the ,ord itself

conveys the action of going out to find information.

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23/56

)mith 6200" outlines design and planning issues for surveys/ ,hich have been

discussed here in the context of this primary research. There are several issues to

consider ,hen formulating the *uestions lieI clarity/ relevance/ unambiguity and the

technical no,ledge needed. & short explanation of terms used in the survey is

provided in the email send to the respondents to enable maximum unambiguity. &s it

is important to as the right *uestions in order to get useful ans,ers/ all *uestions are

related to the literature revie,.

Fhat ind of survey is going to be used is the first consideration/ according to )mith

6200". Taing into consideration the limited resources of the researcher/ the chosenmethod is an internet survey sent via email. 9nternet surveys are *uic and easy to fill

in/ and are flexible and user friendly/ as they can be filled out at anytime and

any,here. The disadvantages of internet surveys are that respondents may submit

incomplete forms or may misinterpret the meaning of a *uestion as no immediate

consultation ,ith the researcher is possible. 9n this case/ an internet survey is the most

appropriate method as they are most convenient for the respondents ,ho are busy/

,oring people.

The next aspect to consider/ according to )mith 6200"/ is the respondents the survey

is going to target. 9n this case/ the respondents are employees of the corporate

customers of bans. ecause of the narro, focus of the study/ the respondents ,ere

contacted instead of randomly sought through advertising. This ensures that the

respondents are adept at ans,ering the *uestions.

The appropriate type of *uestions should be ased in order to solicit useful ans,ers/

says )mith 6200". 9n this research a mixture of different *uestion types are used so

that the most appropriate type of *uestion is used for the nature of the information

needed. Those *uestions that ,ill be featured in chart form are closed and those that

are exploratory and aimed maing use of the specific no,ledge of the respondents

are open.

2"


24/56

Dext/ the se*uence of the survey *uestions should be considered 6)mith 200". #or

this research/ there are only a fe, bacground *uestions in the beginning and the rest

are aimed at ans,ering the research *uestion and issues related to it.

The layout of the survey should be so that it is interesting and relevant for the

respondent and not too long. )mith 6200" recommends that a survey should not be

longer than four pages and should not tae more than 20 minutes. This survey has

been designed so that it is fast and easy to fill out as the respondents are busy people

,ho benefit from the simplicity of the survey.

3.4. "ata analysis

ost of the *uantitative data consist of ans,ers to closed *uestions. Open ans,ers are

presented outside of the charts to add to the numerical data. any of the *uestions

mae use of the Giert scale/ ,hich is classed as ordinal data. The other type of data

used is nominal data/ ,hich concerns bacground *uestions.

'enscombe 62007 gives a guideline to the analysis of *uantitative data. The data is

first coded/ categorised and checed. Coding is used in order to facilitate the

computer analysis of data because the ans,ers are not in numerical form. &s this

research is *uite simple/ no complicated coding is necessary. &ccording to

'enscombe 62007/ the benefit of having simple ra, data is that it needs little

manipulation and the end result is therefore a faithful representation of the original

research. Coding is be used for the closed *uestions/ ,hich use the Giert scale. 9n

these cases/ letters are assigned for each ans,er possibility and the ans,ers are

submitted in letter form to =xcel. The small sample si5e allo,s the use of =xcel

instead of/ for example/ )3))/ ,hich is more suitable for analysing greater *uantities

of data.

Dext/ the initial analysis loos for obvious correlations in the ans,ers. )ome*uestions have more agreement ,hile others divide opinions. &t this stage/ those

2$


25/56

ans,ers that have a high level of agreement are taen into consideration ,hile the

reasons for divided ans,ers are looed at in the main analysis.

9n the main analysis/ the data is lined to the literature revie,. 9n this research/ as the

*uestions have been formulated according to the literature revie,/ the lins are easy

to mae. The main analysis consists of descriptive and inferential statistics/ meaning

that the data analysis presents variable fre*uencies and averages as ,ell as

considering the significance of the research as related to the literature revie, 6laxter/

+ughes < Tight 200(. The representation of the data involves creating charts and

figures and giving ,ritten explanations of the findings. Charts are created for closed*uestions ,hile the ,ritten explanations consist of analysis of the open *uestions and

the connections to the literature revie,. The representation is a summary of all the

data instead of concentrating on a chosen fe, ans,ers. This method of data analysis

is consistent ,ith *uantitative research as it presents findings in mostly numerical

form.

3.5. Conclusion

'ue to the small sample si5e and locality of the research/ it is not generali5able. The

research does not/ therefore/ give a definite ans,er to the research *uestion or

definitely disprove or validate the hypothesis but instead gives a situational vie, on

the issue discussed and leaves open the possibility of further research. &s the chosen

approach is *uantitative/ the research is broader than it is deep. & *ualitative research

,ould give a deeper description of the insights of the respondents ,hile *uantitative

research aims to ans,er the *uestion that the literature has posed.

&s the research is conducted in #inland/ the ans,ers may be different than ,hat they

,ould be in a country that ,as more severely affected by the financial crisis. The

research is therefore not fully representative of the ,orld. )till/ the 9nternational

#inancial eporting )tandards are common to all =uropean public companies and so

2%


26/56

the same rules apply to all publicly listed bans regardless of the level of impact of

the financial crisis and the research is valuable as it gives an indication of possible

problems in this area.

This chapter demonstrated the chosen methods and approaches to the research and

explained ,hy these particular methods ,ere chosen. 9n the next chapter/ the data

derived from the survey ,ill be presented and analysed according to the approach

stipulated in this chapter.

2(


27/56

'. (ata presentation and anal&sis

Out of "0 respondents/ 1$ ans,ered that they ,ere either managing directors/ or

deputy managing directors/ or C=O:s. #our of the respondents ,ere in sales/ three in

finance and the others ,ere a mix of different managers. 1%/ or half/ of the

respondents ,or at a company that employs less than %0 people/ ,hile six ,ored at

mediumsi5ed companies 6%02$! employees and ! ,ored at large companies 6over

2%0 employees.

Q. 3 How sever ely has the ban! whos e custom er your

company is! been a""ected by the "inancial crisis#

0 %20 %

53 %

27 %

To a great extent

Somew hat

Very little

Not at all

9n this chart is presented the greatest shortcoming of the research. Though this result

may be representative of the situation in #inland ,here fe,er bans ,ere seriously

affected by the crisis than/ for example/ in the 4E. The finance sector in #inland

benefited from its stable position prior to the crisis and ,as not affected by the same

factors that caused the crisis in the first place. 9t is not possible to generalise these

results and/ especially/ not possible to dra, conclusions about the effects of the crisis

27

To a great extent 0

Somewhat 6

Very little 16

Not at all 8


28/56

on the perceived usefulness of bans? financial reporting in countries in ,hich bans

,ere more affected. &s can be seen from the pie chart above/ 80A of the respondents

reported that their bans ,ere barely affected by the crisis and only 20A said that

their bans ,as some,hat affected. Of course the perception of the respondents is

affected by the reports that their ban ,ould give out and it is therefore *uestionable

,hether this result is representative of the reality. )till/ as the research aims to find

out the perceptions of bans? corporate customers/ the perceived reality is more

important than the statistics.

This is in contrast ,ith the literature revie, ,here problems have been discussed that

have risen from the dismal situation of bans in the financial crisis. Fere there no

such pressure put on the system/ regulators may not have been made a,are of the

existing problems. The problems that have been more extremely experienced by other

countries than #inland/ radiate to the #innish system especially as most companies use

the 9#) and business is increasingly global.

28


29/56

Q.$ % have becom e les s con"ident in the use "ulness o"

ban&s "inancial reports as a res ult o" the crisis.

10 %

37 %

30 %

23 %

0 %Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

This chart presents the core *uestion of the survey. &lmost half of the respondents

said that they have not become less confident ,hile only 2"A deemed that they have

become less confident. This result contradicts the literature revie, as the literature

pointed to several problems that had been found ,ithin the system and even those

,ho believed that financial reporting ,as not the cause of the financial crisis/

admitted that there is plenty of room for improvement. )till/ the literature revie, only

discusses the opinions of experts and regulators ,hile this study involves the opinions

of regular corporate customers ,ho may be less a,are of problems in the system as it

is not their duty to correct them. Fere the regulatory bodies ased this *uestion/ the

responses could be more divided as it is noted in the literature revie, that there are

those ,ho are calling for a financial reporting reform ,hile others are content ,ith

only minor t,eas.

& third of the respondents on this *uestion did not s,ay either ,ay but many of those

,ho had ans,ered neither agree nor disagree ans,ered the same on other *uestions or

agreed ,ith most statements ,hile very fe, disagreed ,ith statements. Those ,ho

2!

Strongly disagree 3

Disagree 11Neither agree nor disagree !

gree 7

Strongly agree 0


30/56

strongly disagreed on this *uestion predictably also thought of financial reports as

reliable/ relevant and understandable.

Those ,ho disagreed sho,ed consistency in the rest of their ans,ers. They agreed

that financial reports gave reliable and relevant information/ and that increased

transparency and independent auditing committees ,ould enhance the usefulness of

financial reports. There ,as some variation in opinions on understandability and fair

value accounting but even ,ith those *uestions/ the majority agreed ,ith the

statements.

Those ,ho disagreed ,ere more varied in their opinions. There ,as far more

disagreement regarding relevance/ reliability and understandability but the vote ,as

still roughly half and half. )o even those ,ho had lost some confidence in the

usefulness of financial reports deemed that the reports ,ere not lacing in all areas.

Only t,o respondents replied that financial reports have not given relevant/ reliable or

understandable information.

The literature revie, indicated that several aspects of useful financial reports have

suffered during the financial crisis/ especially in the baning sector. 9n order for

financial reports to be useful they should be reliable/ relevant and understandable. To

elaborate on the core *uestion/ the follo,ing *uestions concerned these aspects.

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Q.' (ans& "inancial reports have given relevant

in"ormation during the "inancial crisis.

0 %

23 %

27 %

50 %

0 %

Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

The divide in this *uestion ,as *uite clear. +alf agreed that financial reports have

given relevant information during the financial crisis. & *uarter of the respondents

neither agreed nor disagreed/ ,hich could mean that they had no opinion on the

*uestion or thought that financial reports ,ere on the borderline of relevant and not

relevant. &nother *uarter disagreed ,ith the statement.

elevance in financial reports allo,s users to mae *uic and informed decisions/

,hich for these respondents ,ould mean the ability to prepare for receiving less credit

from their bans and arrange their processes accordingly. Those ,ho disagreed on

this *uestion referred to the lac of information received from their bans and the

inability to mae decisions based on the information that ,as given. 9nterestingly/

those ,ho disagreed on the *uestion ,ere unhappy ,ith the information that the ban

gave out after their investments had suffered instead of financial reports alerting to the

possible problem before it happened so that it could be predicted. 9t seems then that

"1

Strongly disagree 0

Disagree 7

Neither agree nor disagree 8

gree 15

Strongly agree 0


32/56

the bans of these respondents did not give out information that ,as not timely

enough or did not have predictive valueI both components of relevant financial

reports. &ssuming that those ,ho ans,ered that their ban has not suffered during the

financial crisis also ans,ered that they thought of financial reports as relevant/ their

confidence may not derive from actual relevance but the fact that they had nothing to

be ,orried about.

&ccording to iller and ahnson 6200!/ as discussed in the literature revie,/

financial reports did not give timely and useful information during the financial crisis

as they ,ere not transparent enough. iller and ahnson deemed that financial

reports did not give information that could be used early enough to mae decisions.

&dditionally/ according to Turner 62010 the complexity of financial instruments

build the information gap bet,een institutions and those ,ho use their financial

reports/ maing it hard to use them in decision maing. The results are contradictory

to these statements.

"2


33/56

Q.) (ans& "inancial reports have given re liable

in"ormation during the "inancial crisis.

0 %

20 %

20 %60 %

0 %

Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

)urprisingly/ (0A thought that financial reports have given reliable information

during the crisis/ ,hich is slightly more than those ,ho thought that reports are

relevant. &ccording to these respondents then reliability has not suffered for relevance

and both aspects are acceptable in their current state/ even though the literature revie,

indicated a possible tradeoff bet,een relevance and reliability especially in the use of

fair value accounting 6+effes < Orenstein 200%.

eliability refers to the extent to ,hich the financial reports reflect the financial

position of the ban. Those respondents ,ho disagreed on this *uestion ans,ered that

the lac of information/ its partiality and its poor accessibility affected the reliability

of the financial reports.

&s discussed ,ith the *uestion on relevance/ it is possible that those ,hose bans

,ere not affected by the crisis deem the financial reports to be reliable because they

had no reason to believe other,ise as their assets did not come under threat. Their

""

Strongly disagree 0

Disagree 6


gree 18

Strongly agree 0


34/56

bans may still have underlying problems but the corporate customers are not alerted

to them unless they have assets that have suffered as a result of the financial crisis.

arth and Gandsman 62010 stated that lac of transparency in financial reports during

the financial crisis/ especially concerning derivative financial instruments/ made it

hard for users to determine the real value of assets. Turner 62010 and Taylor 6200!

agreed that the accounting standards of the time produced overoptimistic or

unnecessarily negative results and bans ,ere in some cases doling out money that

they did not have in reality.

Fith such strong arguments to criticise the reliability of financial reports/ it is

surprising that so many of the respondents found reports to give reliable information.

Q. 1* (an&s "inancial repor ts are curre ntly su""iciently

unders tandable and accessible to the us er.

7 %

30 %

13 %

"7 %

3 %Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

This *uestion divided opinions most drastically. Fhile $7A thought that financial

reports are sufficiently understandable and accessible to users/ "7A ,ere unhappy

,ith these factors. Those ,ho disagreed stated that financial reports are only

"$

Strongly disagree 2Disagree !

Neither agree nor disagree "

gree 1"

Strongly agree 1


35/56

accessible to experts but not to regular shareholders or customers. &ccording to the

respondents/ financial reports are for professionals and cannot be understood by those

,ho have not had training. One respondent also said that the ban does not offer any

help ,ith understanding their reports.

These vie,s are supported by the literature revie,. any of the contributors

discussed in the literature revie, ,ere of the opinion that the complexity of financial

reports/ especially in the valuation of problematic financial instruments/ results in

information asymmetry ,hich in turn affects the ability of users to mae informed

decisions 6iller and ahnson 200!/ Turner 2010 and C9& 200!. The surveys of

C9& 6200! and >&& 62008 indicated that great dissatisfaction exists concerning

the complexity of financial reports and the effect it has on relevance.

)till it is surprising that yet again so many of the respondents thought that financial

reports are sufficiently understandable and accessible in their current state ,hen !0A

of those surveyed by C9& in 200! thought that they are too complex. The difference

may derive from the fact that those intervie,ed by C9& ,ere from a variety of

corporations ,hile these respondents ,ere only ased about the financial reports of

bans. The result may also be affected because the results are from #inland only ,hile

the C9& results ,ere global. The results point to #innish users of financial reports

being more satisfied ,ith their understandability and less affected by their

complexity.

"%


36/56

Q. 12 Fair value accounting produces reliable values "or

assets.

3 %10 %

37 %

"7 %

3 %

Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

#air value accounting is an issue that has been ,idely discussed especially as the

financial crisis spared debate about ,hether fair value is the best valuation method

for assets. ost respondents ans,ered that fair value produces reliable values for

assets ,hile a notable amount 6"7A neither disagreed nor agreed ,ith the statement/

,hich could mean that they either had no opinion on the matter or did not have

enough information about the subject. Those ,ho ans,ered that financial reports have

given reliable/ relevant and understandable information ,ere also mostly of the

opinion that fair value accounting is a reliable valuation method. One respondent/ ,ho

disagreed/ ans,ered that even though fair value may be the best method at the

moment/ it is still not free of Jjudgement/ estimates and assumptionsK. &nother

respondent ,as of the same opinion as they ans,ered that fair value can be defined in

many ,ays.

"(

Strongly disagree 1

Disagree 3Neither agree nor disagree 11

gree 1"

Strongly agree 1


37/56

This demonstrates the problem that has been on the minds of regulatorsI ho, to define

fair value especially in a distressed maret- The 9#) is ,oring on improving both

disclosures and valuations of financial instruments 69&) 3lus 2011. &ccording to

+effes and Orenstein 6200% fair value accounting can exacerbate the difference

bet,een reliability and relevance. This vie, is shared by Erum,iede 62008 and

#legm 62008 ,ho do not thin that fair value accounting gives reliable results. )till/

these results indicate a relatively strong trust in the reliability of fair value accounting

and support the decision of policy maers to not suspend fair value practices.

Q. 1$ (ans& "inancial reports w ould be m ore use "ul i"

they were more transparent.0 %

0 %

7 %

80 %

13 %

Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

& relatively surprising result ,as the almost uniform ans,ers to ,hether financial

reports ,ould be more useful if the ,ere more transparent. Taing into consideration

that a large part of the respondents already thought of financial reports as useful/ this

could be seen as contradictory. The results seem contradictory especially as almost

half of the respondents thought of financial reports as understandable and accessible

"7

Strongly disagree 0

Disagree 0


gree 2"

Strongly agree "


38/56

to users and the goal of increased transparency ,ould be to improve these aspects.

The other possibility is that even though financial reports are seen as useful as they

are/ they could still be improved.

These results reflect that transparency is not seen as a bad thing/ or even a

controversial issue/ but is seen to contribute positively to the usefulness of financial

reports. This ,as the dominant opinion in the literature revie,ed/ too. arth and

)chipper 62008/ as ,ell as Casey 6200!/ believe that the benefits of transparency are

clear and it should be at the forefront ,hen discussing financial reporting reform.

Though the literature revie, presented oppositions/ lie those of Tadesse 62010 and

Turner 62010/ to full disclosure and transparency on grounds that it may increase

volatility/ the majority opinion seems to be that transparency is an important factor in

financial report usefulness.

"8


39/56

Q. 1' +he us e o" indepe ndent auditing comm ittees

w ould increase transparency in "inancial reports.

0 %

7 %

1" %

65 %

1" %

Strongly disagree

Disagree

Neither agree nor

disagree

gree

Strongly agree

The last *uestion involved the proposed solution to increasing transparency.

&ccording to the literature revie,/ setting up an independent auditing committee

could increase transparency in baning as evidenced by &nderson/ ansi and eed

6200$. Though most respondents agreed that independent auditing committees ,ould

increase transparency/ some respondents disagreed and expressed concerns over the

effects of increased bureaucracy. This concern is understandable/ as the

implementation of the 9#) in #inland is already a costly and timeconsuming

process even ,ithout another regulatory body looing over the implementation of

standards.

"!

Strongly disagree 0

Disagree 2Neither agree nor disagree "

gree 1!

Strongly agree "


40/56

*. +onclusions and discussion

The financial crisis exposed the financing ,orld to a great deal of criticism ,ith bans

at the forefront. Though the surface issues are better no,n/ lie those of li*uidity/

the crisis also uncovered problems ,ithin the financial reporting system. The basics

of useful financial reports ,ere brought under *uestion and many ,ere disappointed

in their performance in a distressed maret. #inancial reports ,ere critici5ed for not

giving relevant or reliable information in addition to being inaccessible to nonex

perts. The valuation of problematic assets has also been ,idely discussed as many

have criticised the appropriateness of fair value in the valuation of derivative financial

instruments and distressed assets.

The regulatory responses indicated that the problems ,ithin financial reporting stand

ards had come to the attention of regulators and the responses gave a good indication

of ,here the most serious problems are. The regulators have agreed that that major

problems ,ere due to a lac of transparency and that improvements in financial re

porting standards ,ould involve increasing transparency and clarity.

Transparency is seen by several experts as being the cornerstone to useful financial

reporting and this is also demonstrated in the survey results as most respondents

ans,ered that improved transparency ,ould increase the usefulness of financial re

ports.

&ccording to the survey results most of the respondents ,ere confident in the useful

ness of ban:s financial reports. ost respondents thought that bans: financial reports

have given relevant/ reliable and understandable information/ ,ith the most disagree

ment on the understandability. &s indicated in the literature revie, some respondents

$0


41/56

had strong opinions about the poor understandability of reports and thought that they

,ere accessible only to experts. The respondents also gave their support to the estab

lishment of an independent auditing committee/ a vie, ,hich ,as supported by the

literature revie,.

'uring the research there ,ere several problems. The subject had to be changed sev

eral times as the instructions given in the #innish school and the =nglish school ,ere

very different. )econdly/ the subject of this research re*uires some technical no,

ledge of accounting/ ,hich made it a difficult tas for a student ,ith not much prior

no,ledge on accounting. The process involved learning ,hile researching and this

made the ,hole experience very educational. The next problem ,as to find enough

respondents to conduct a useful research. =ven though surveying corporate customers

in =ngland ,ould have produced different results/ for practical reasons the results

,ere easier to collect from #inland considering the time frame and other resources.

'espite these difficulties/ the research ,as successful and the survey gave relevant

and interesting results.

&s the survey results have been derived from #inland/ a country ,hich ,as less af

fected by the financial crisis/ they are not generalisable or universal. &lso because of

the restrictions on length/ the literature is not discussed as deeply as it could be. There

are several more examples of the arguments presented in the discussion but they have

simply not fit into this research. That is ,hy future research to expand on this one is

important.

There are several issues that future research could concentrate on based on this re

search. 9t is important to monitor the progress of the improvements that are being

made to financial reporting standards and the reactions of the users to them. 9f users

$1


42/56

do not perceive bans: financial reports as useful/ it can affect the relationship and the

trust bet,een the ban and its customers. 9t is therefore in the best interest of the

bans to create trusting and transparent relationship ,ith their customers in order to

maintain a successful business. The future research should then aim to find out on a

larger scale ho, the changes have been received and ,hat ind of effect they have

had on the users of the financial reports. The research should be conducted globally

and several types of users should be intervie,ed from small business o,ners to ac

countants. 9t ,ould be especially useful to intervie, accountants as they have a

uni*ue outloo into the issues discussed and deal ,ith them daily.

9n addition to monitoring the reactions to the changes/ since the issue of fair value ac

counting has brought on so much controversy/ future research could attempt to find an

alternative to both fair value accounting and historical cost accounting. &s ,ell as re

searching issues related to fair value accounting/ the possibility of an independent

auditing committee can be further examined since research has already sho,n some

of the benefits of an increased role for auditing.

=ven though the financial crisis is clearly not over in some countries/ financial

reporting is on the mend. This research has illuminated the problems that have come

to light as a result of the financial crisis/ the regulatory responses to the problems and

the possible solutions to the problems as ,ell as the opinions of "0 employees of

corporate customers of bans in #inland. The research ,ill hopefully give ideas and

bacground information for further studies and highlight the issues that should be

monitored in times to come/ ,hich ,ill hopefully decrease the chance of another

crisis coming to pass.

$2


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