On the use of accounting logic as an explanatory category in narrative accounting disclosures

Abstract

This paper explores the relative use of performance explanations in terms of the internal logic of the financial accounting model, relating (intermediary) accounting effects and categories (accounting explanations) in annual report narratives. Different communicative aspects of accounting explanations are discussed and lead us to qualify accounting explanations as implicitly defensive in nature. The notion of accounting bias, as a tendency to explain negative performances more in technical accounting terms and positive performances more in strict cause-effect terminology, is introduced. The empirical study examines the presence of accounting bias in annual reports and investigates, from an impression management perspective, the impact of three organizational factors (public exposure, short-term profitability, stability of performances) on the use of accounting explanations.