The effect of corporate governance, auditor choice and global activities on EU company disclosures of estimates and judgments

Abstract

Following the 2005 EU adoption of IFRS, several studies noted that some companies omitted a separate disclosure of key judgments and estimation uncertainty within the notes to the financial statements, and other companies limited their separate disclosure to boilerplate narrative. We determine if the choice of specific Big-4 audit firm and the independent variables included in the international financial reporting literature associated with voluntary disclosure are related to the decision to include a separate disclosure of judgments and estimates that provides more than boilerplate narrative. We also test if these independent variables affect the qualitative characteristics of the separate disclosures. We find that several of our independent variables are significant in the decision to make a disclosure that contains more than boilerplate, and affect the length and content of the separate disclosure. These findings add to the literature by identifying factors that influence discretionary disclosure. Our study also contributes to the current financial statement disclosure discussion among standard setters and regulators by detailing the format and content of disclosures among a sample of EU companies. This is an important area of inquiry, given that prior research finds that the way information is displayed affects how that information is actually used.