A Study of the Impact of Informational Complexity, Transparency and Stewardship on Decision Usefulness: The Users Perspective

Abstract

“Arguably, accounting is as much about communication as it is to do with measurement. No matter how effective the process of accounting quantification, its resultant data will be less than useful unless they are communicated adequately”. Raymond John Chambers

Calls for the reformation of financial reporting have exacerbated in recent years in light of a rapidly changing global investment climate and in the wake of a battered financial system. This study explored the interrelationships between informational complexity, transparency and stewardship on the usefulness of financial reporting. Empirical analyses was based on a survey of more than 650 executives to test hypotheses that informational complexity impairs judgment through decision-makers’ strategy selection; that transparency captures the timeliness, interpretation, and dissemination of financial reporting that leads to a more informed market; and that there is a stewardship demand to report on the control and use of resources by those accountable for their control and use.

The most interesting finding of this study was the lack of support for the connection between complexity, transparency and value relevance, even though prior research has found strong support for a relationship between these three constructs. However, it is clear that although considerable complexity can originate from the intricacy of commercial transactions and events themselves. The accounting for such transactions, by their very nature is complicated and is therefore beyond the control of standard setters. It is therefore imperative that we acknowledge and distinguish between two types of complexity in financial reporting, from the outset: that which is inescapable, due to the inherent complexity of certain transactions, and that which could be avoidable, having been brought about by accounting standards themselves.

Additionally, the impact of regulatory trust on decision usefulness was found to be significant, but negative. Can it be postulated that rapid changes in the economy, inadequacy of accounting regulation and other institutions creates a negative effect on the usefulness of accounting information?