Abstract
The purpose of this article is to examine the extent to which the clauses for the exclusion of subsidiaries from consolidation are used, in order to assess the degree of compliance with accounting regulation and the effectiveness of the statutory auditor as an enforcement mechanism in case of observed non-compliance. The presentation of consolidated financial statements by Portuguese companies was not regulated in detail before the implementation of the EU's Seventh Directive and the general obligation to prepare consolidated accounts had not applied to Portuguese companies until 1991. Regulators have been responsible for the endorsement of accounting rules and managers are responsible for the information disclosed by Portuguese companies regarding the scope of group accounting. In practice, the scope of consolidation depends on the judgment of makers and managers of the parent company. Auditors may play a key role in the process of guaranteeing the correct application of prevailing standards and thus encompassing the enforcement of accounting regulations and contributing to the quality of disclosed information. Our sample includes the consolidated financial statements of all the Portuguese companies listed in the Lisbon Stock Exchange on December 31st for the year 1999, to which the Official Accounting Plan is applicable. Our conclusion is that diversity exists among accounting practices regarding the adopted group concept and the use of the clauses for excluding subsidiaries from consolidation. The role of the auditors as enforcement actors seems to be minor, as we did find few qualifications in their audit reports in the cases of observed non-compliance with the accounting regulation.
Highlights
The purpose of this article is to examine Portuguese accounting practices regarding the scope of consolidation and the use of the clauses of exclusion of subsidiaries from the consolidation in order to assess the degree of compliance with accounting regulation
The purpose of this article is to examine the extent to which the clauses for the exclusion of subsidiaries from consolidation are used, in order to assess the degree of compliance with accounting regulation and the effectiveness of the statutory auditor as an enforcement mechanism in case of observed noncompliance
Auditors seem to play a minor role as enforcement actors, considering that we found few qualifications in their audit reports in the cases of observed non-compliance with the accounting regulation
Summary
The purpose of this article is to examine Portuguese accounting practices regarding the scope of consolidation and the use of the clauses of exclusion of subsidiaries from the consolidation in order to assess the degree of compliance with accounting regulation. The sources of consolidated reporting requirements include the Official Accounting Plan (POC-Plano Oficial de Contabilidade), the Commercial Business Law (CSC-Código das Sociedades Comerciais), the Commercial Registry Law and the Securities Market Law. Some recommendations by the Order of Registered Statutory Auditors (OROC- Ordem dos Revisores Oficiais de Contas) and instructions by the Stock Market Authority (CMVM-Comissão do Mercado de Valores Mobiliários) are relevant for group accounting reporting. To the best of our knowledge, this article is the first empirical study about the consolidated accounts presented by Portuguese listed groups and enforcement mechanisms for their presentation. It was carried out with a sample of non-financial Portuguese companies listed in the Lisbon Stock Exchange at the end of 1999
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