Abstract
<p class="Default">Fast changing environments, globalization, coupled with financial scandals, and the advance of information technologies made corporate risk a very central issue in management and accounting. Current governance codes require that management disclose in annual reports its responsibility for the adequacy of risk management and internal control systems and the disclosure of risk and uncertainties faced by companies are required by both governance codes and corporate reporting. This study seeks to capture risk disclosure patterns adopted by public Portuguese companies in interim reports and to investigate whether the audit quality may explain the observed risk disclosures practices. Manual content analysis has been carried out in the interim reports of 35 non-financial Portuguese firms ranked by decreasing market capitalization to create indexes of corporate risk disclosure, which have been used for observing the tone of disclosure and for testing an explanatory model with proxies of audit quality together with other explanatory variables widely used in disclosure research. Results point out that quantified risk disclosure prevails in interim reports and that firm’s risk disclosure policies are not influenced by auditor’s quality. This work contributes to academic and regulatory environments, filling the gap about risk disclosure in the interim report, identifying the nature of corporate risk disclosures, assessing the quality of risk information and updating research about determinants of risk disclosure in interim reports.</p>
Highlights
According to the IASB (2015) conceptual framework, the general objective of financial reporting is to provide useful information. To achieve this goal financial reporting must include information about risks and uncertainties faced by companies
In the last decades there was an increase of research about corporate risk disclosure (Abraham & Cox, 2007; Allini, Manes, Francesca, & Hussainey, 2016; Madrigal, Guzmán, & Guzmán, 2015; Linsley & Shrives, 2006; Oliveira, Rodrigues, & Craig, 2011); most of them conclude that risk information is not enough (Kravet & Muslu, 2013), triggering doubts about the quality and utility of disclosed risk information (Abraham & Shrives, 2014)
Main findings were that disclosures have been higher in number about non-financial risks, in grater quantity relating to past events, in a non-quantified manner, disclosing predominantly good news. Those findings lead to the conclusion that companies, having to comply with regulation or by an agency or legitimacy motivation, disclose boilerplate in the annual report, that is, risk information with few informational content (Dobler et al, 2011; ICAEW, 1997; Linsley & Shrives, 2006; Oliveira et al, 2011; Rajab & Schachler, 2009)
Summary
According to the IASB (2015) conceptual framework, the general objective of financial reporting is to provide useful information. Main findings were that disclosures have been higher in number about non-financial risks (as opposed to financial risks), in grater quantity relating to past events, in a non-quantified manner, disclosing predominantly good news Those findings lead to the conclusion that companies, having to comply with regulation or by an agency or legitimacy motivation, disclose boilerplate in the annual report, that is, risk information with few informational content (Dobler et al, 2011; ICAEW, 1997; Linsley & Shrives, 2006; Oliveira et al, 2011; Rajab & Schachler, 2009). One could expect that the quality of external auditors, who must to audit those risk management and internal control systems of companies in an ongoing basis and perform procedures to certify that annual financial statements are free from material misstatements, could be associated with risk disclosure indexes even in interim reporting, considering that reputational incentives exists for auditors to encourage clients to adopt sound financial reporting practices (Craswell & Taylor, 1992) which includes risk disclosure. The sample size (35 companies) is in line with some similar studies and is considered reasonable having in mind that manual content analysis is a huge time consumer technique (Beattie & Thomson, 2007)
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