The Reliability of Corporate Quarterly Financial Reports in Malaysia: Post-MASB 26 Evidence

Abstract

This study examines the reliability of the quarterly reports of Malaysian listed companies after the Malaysian Accounting Standard Board (MASB) issued a standard on interim reporting, MASB 26 Interim Reporting in 2002. MASB 26 requires companies to adopt the discrete method in reporting most of the transactions. In particular, this study focuses on the reporting of exceptional items (EIs) in the quarterly reports, and is an extension of the study conducted in 2001 by Ku Ismail and Chandler (2005). This paper argues that the reports are more likely to be reliable if the discrete method is practiced. If the discrete method is applied, companies are less likely to defer the reporting of EIs to the final quarter, and thus, the incidence of EIs in all the four quarters is equally likely (i.e. not being lumped in the fourth quarter as a tool to “settle-up”). An examination of the 2003 quarterly reports of 91 companies reveals that half of the incidence of EIs is reported in the final quarter. The percentage is not significantly lower than those of the previous study. This indicates that MASB 26 fails to enhance the reliability of the quarterly reports as far as the EIs are concerned. In addition, this study indicates that the EIs reported in the fourth quarter are more likely to be negative than positive. Further, we find that companies that defer the recognition of EIs are more likely to be those listed on the Second Board rather than on the Main Board of Bursa Malaysia. With the recent convergence of accounting standards whereby many countries have adopted FRSs in totality, including a standard on interim reporting, the present research findings act as a basis for similar research in other emerging economies.

Keywords: Quarterly reports, MASB 26, Reliability of interim reports, Earnings management, Exceptional items

JEL Classification: M41