SUBMITTED TO

Sir Mubashir Hussain

DETERMINANTS OF FINANCIAL SUBMITTED BY

MUMTAZ AHMED ABBASI
REPORTING
ROLL NO1202 MBA 18
QUALITIES OR ATTRIBUTES OF SALMAN ASHRAF
FINANCIAL REPORTING ROLL NO 1221 MBA 18
 The Determinants of Financial Reporting

Financial report is a report in which all of the financial information of a firm is disclosed to all of
the stakeholders in order to inform them about financial performance and ongoing financial
conditions of the firm for a given time. The stakeholders include all the investors, creditors,
government, government agencies, public and all the firms/banks which offer or give debts to
the firm in order to run its business. A financial report is a last stage of an accounting process.
One of the salient characteristics of a good financial report is how accurate and authentic
information it provides to equity investors about expected cash flows of the company. In nutshell,
an efficient financial report provides complete and transparent information about financial issues
of a firm. Its purpose is to guide all the stakeholders, not to mislead them.
It is a core responsibility of the management of a company to form such a financial report which
contains the authentic and correct information of profits, losses and assets of the company. All
the information shared in a financial report is dependent on certain factors. These factors are
related to the efficiency and high quality of the financial report. These factors determine how
much quantity as well as how much quality a financial report will possess. These factors are

 Firm profitability
 Firm size
 Type of auditors
 Share dispersion
 Firm Leverage
 Board Composition
 Firm Liquidity

The researchers perform complex calculations in order to examine at what extent these factors
affect the financial report of a firm. They first make hypothesis about dependency of these factors
upon financial report and then perform statistical calculations in order to reject or accept their
hypothesis. They first take sample of some firms from a large population. During these
calculations and analyses, financial report quality is taken as a dependent variable while all other
above mentioned factors are taken as independent variables. The descriptive statistics is
performed and through complex statistical techniques, the researchers conclude the final
analysis. These analyses may differ from firm to firm and from different approaches of analysis.
Besides this, the qualitative data is also collected through the interview of the experts. The final
conclusion is drawn on these bases. However, here is a brief detail of how much each of these
factors affect the financial report and what dependency these factors have on the efficient and
quality level financial report.
Firm Profitability:
If a company has high profitability then it will persuade it to disclose the more financial
information to all stakeholders in order to improve its reputation and to avoid undervaluation of
its equity. It will induce a good impression of the company in public, thus ultimately resulting in
the good will of the company. Actually profitability is directly related to the efficiency of the
management of the company. If the management is performing the operation of a company more
effectively, the more profit the company will gain and the more financial information the company
will disclose.

Firm Size:
The firm size is related to the expansion of its business, the quantity of its total assets and its
influence over market. Bigger a firm in its size, the more political influence it will encounter as
well. The firm size can affect the financial report in both positive and negative manner. One
aspect is that bigger the firm is in its size, the more information it will disclose due to expansion
of its business and ongoing political influence. It will try to expand its business more diligently
and will set a well repute of its business. On the other hand, the firm size can also negatively
affect the financial report quality. According to a research, as the firm size and its total assets
increases, the quality of it financial information decreases. Anyhow firm size is a factor which
directly affects the quality of a financial report. The result can be varied among different firms,
sectors or even country wise.

Type of Auditors:
It is considered as one of the prime determinant of the high quality of financial report. A company
hires auditors to help them evaluating the internal control of the company. A good auditing system
can help a company to achieve its business goals more effectively and to keep it safe from fraud
and misuse of its assets. Auditors also suggest the way of efficient allocation of its resources,
thereby decreasing its capital cost. Professional, competent and well named auditors hired by a
company from a well-known auditing firm provide a big range of services. It will send a good
signal to investors and chances of big investments in company increase. A good company always
takes care in choosing the auditing firm because it is reflected in the quality of its financial report.
Through qualitative analysis, it is concluded that big companies choose well known auditing firms
and small companies will most probably choose auditing firms of low standards.
Share Dispersion:
When the shareholders of a company increase in number, the management is forced to disclose
more quality level information and sufficient data so that all shareholders may easily be informed
about ongoing financial conditions and affairs of the company. This is also due to the fact that
when there are many shareholders, there is a strict monitoring of the management which compels
them to do efficient work. All the shareholders are equipped with different competencies,
knowledge and experience. So due to this they demand more accuracy and authenticity in
information. Because of this fact, it is concluded that increased number of shareholders result in
increased quality of financial report. This conclusion is drawn from quantitative analysis as well
as qualitative analysis.

Firm Leverage:
The leverage is measured as the debts taken from banks or other firms in order to purchase more
assets for the company. An increased level of leverage may result in bankruptcy but it also
increases its profits. The firm uses leverages to finance its assets. According to quantitative
research, there is no significant impact of firm leverage to the financial report quality. However,
practically there is indifference in the opinions of the financial experts. Some practitioners say
that higher debt ratio results in more disclosure of the financial information because companies
reveal information to banks in order to get more loans. Some say that high leveraged companies
disclose some of their private information to non-shareholders which probably is not presented
in their final report. However it is anticipated that there is both a positive and negative
relationship in firm leverage and its financial report quality. Due to this, this determinant should
must also be taken into account.

Board Composition:
This determinant is related to independent and autonomous individuals in Board of Directors of
a company. The experts argue that presence of such members will result in more effective
decisions and it will be reflected in the financial report of the company. In this way, an
independent board of directors positively affects a financial report. On the other hand,
quantitative analysis shows that the independent BOD has no significant impact on the financial
report. But practically, considering a general overview, it is noted that independent BOD has a
positive impact on financial report quality to much extent.

Firm Liquidity:
Liquidity is the ease and speed with which an asset can be converted into cash. On the bases of
existing findings in literature, some experts argue that there is a relationship between the firm’s
liquidity and firm’s financial report. A study conducted shows a negative relationship between
these factors while quantitative research using statistical techniques finds no significant
relationship. However we can say this is light determinant and slightly affects the financial
report.
All of the above described factors determine the level of financial report that the management is
going to represent to the stakeholders. The extent to which these factors impact the financial
report may differs among different factors. But there is almost a slight contribution of every
factor in this regard and these factors must be considered. Taking into account these factors
while forming financial report will improve the accuracy, authenticity and credibility of the
financial report.

FINANCIAL REPORTS
It is a set of documents that is prepared by government agencies usually at the end of
accounting period. Basically it is the summary of financial reporting is summary of accounting
data for a specified period of time.

(Business dictionary , n.d.)

Qualities or Attributes of Financial Reporting

As we have studied in our course of financial accounting there are various attributes of financial
reporting but the most basic and the most reliable are

It should be understandable by all financial accountants

1. It should be Relevance
2. It should be Reliable
3. It should have Predictive value
4. It should have Feedback value
5. It should have qualitative characteristic of Timeliness
6. It should be Verifiable
7. It should be Neutral
8. It can be Comparable
9. It should represent Faithfulness
10. It should be Understandable
(Accounting Notes, n.d.)

RELEVANCE
Relevance is closely linked to the phenomena of useful information. The attribute of relevance
may help the user in decision making process. Generally the attribute of relevance in financial
reporting is of greater weight than other attributes. As it is stated in American Marketing
Association the definition of relevance as “The basic standard and the information must be
based upon it or the usefully associated with the desired financial report the company want to
acquire”.
Financial Accounting Standards Board elaborates the concept of relevance as
“Relevance Accounting Information acquired is capable of making difference in decision making
of financial accountant by helping them to forecast outcome of past, present and future scenario.
In today’s environment as the factor of complexity is increasing in the field of financial
accounting a common purpose of relevant financial report is that it fulfill needs of all users and
should be relevant. Relevance is a dominant criteria in making decision. So one of the most
important thing to remember is to determine financial user needs and provide them the
relevant financial report they require for effective decision making.

(Accounting Notes, n.d.)

RELAIBILTY
Another attribute of financial attribute is reliability. Basic purpose of reliability is to create
judgements about the financial position as well as the earning of a business in an organization.
Reliability is different for each item. Some of the items included in financial reports are more
reliable such as any financial information about plants and machinery may be less reliable then
financial information regarding current assets.
Attribute of Reliability rests upon the extent to which accounting information is verifiable and
represent Faithfull ness.
The concept of Reliability in accounting does not conclude a 100% reliable information. Non-
disclosure of information linked with financial information will misguide user. Sometimes most
reliable information may not be most vital for financial accountants for making economic
decisions. Basically its organization’s management responsibility to accurately report the
information which is reliable financial report and this goal is only achieved by management if it
is following generally accepted accounting principles, maintains effective account system and
internal controls and prepare accurate financial information on time.
Reliability will only suffer if new method is adopted to gain relevance. It is also difficult to
illustrate whether a loss or a gain in attribute of relevance or reliability is in financial report.
(Accounting Notes, n.d.)
Some of the basic summarized points of reliability that information reliable if:-

 It is free from biasness whether is systematic or deliberate

 It is free from any kind of error
 Within boundaries of materiality it is complete
 It is dependents upon users of financial reports to faithfully represent.

(croneri, 2015)

PREDICITIVE VALUE
Predictive value is primarily concerned with providing quality information to users to help
users to increase the accurately forecast of present or past economic events. In Corporate world
the financial reports should provide knowledge concerning. Generally, user prefer those
predictive value that facilitate in making accurately right decision at right time.
According to a survey stock brokers than for bankers, shareholders and tax officers.

(Abdullah, 2011)
FEED BACK VALUE
This attribute of financial reporting enables to users to confirm the past expectations made. It
is impossible to predict the future performance of business without knowing its past activities.
So in that case feedback value is extremely important attribute of financial reporting. Users are
unable to make right decision regarding financial reporting without knowing its feedback
value.

(Abdullah, 2011)

TIMELINESS
Timeliness means timely conveying the information to decision makers before it loses
influencing decision capacity. If the information is not timely available the financial report
become no longer valuable for the valuable for the future action.
There is degree in term of time lines attribute of financial reporting. Some reports should be
prepared quickly for example takeover bid or strike, In other cases such as preparing business
reports takes time but a longer delay to them may influence the factor of relevance.
(Accounting Notes, n.d.)
The survey conducted to economic decision makers that 32.11% stock brokers and 13.68
percent companies consider delivering financial report to their decision maker timely and only
11.58% companies are too late in disclosing their information.(croneri, 2015)

VERIFIABILITY
The attribute of verifiability contributes to perspective of usefulness of accounting information
for the purpose of verification to provide a significant level of assurance that accounting
measure should represent what is meant to represent. It does not guarantee the sustainability
of the method adopted.
However some it does give assurance and reliability of the measurement rule adopted whatever
rule is applied. In this process of verifiability enhances and influences the consensus about
measurement.
The Accounting Principles Board of USA defines it as
“Verifiable financial accounting reporting offers result that would be considerably replicated by
self-governing measures using the identical measurement technique”.
(Accounting Notes, n.d.)
It is reported in Pakistan only 6.84 % financial users believes information should be effectively
verifiable, 35.79% harangue it is verifiable. Whereas 34.2% economic user believe that is not
verifiable.
(Abdullah, 2011)

COMPARABILITY
In external financial reporting case, the information is provided in such a way in corporate
financial statement which help users in effective decision making which in terms of definition
means comparison among the alternatives. This attribute will help the users in determining the
strength, weakness and prospects between two different time periods of two same or different
firms.
In Pakistan highest means score 2.73 is of tax officers which believes financial reporting to be
comparable followed by stock brokers having mean score of 2.68 and then shareholders so on.
(Abdullah, 2011)
It also helps in determining trends in financial performance and financial position in financial
reporting. In addition to help users in making comparisons such comparable financial report
should be prepared and presented in such a way that enables the end users to distinguish and
assess similarities in, differences between nature and effects of transactions and other events
taking place over different reporting time. This is achieved through accounting policies of
consistency and disclosure.
(croneri, 2015)

NEUTRALITY
The attribute of neutrality in financial reporting is defined as information should not be
selected which show biasness to one of the interested party over another. In the absence of
neutrality information is not able to meet users need. (Abdullah, 2011)
Information in neutrality is free from systematic and deliberate biasness. Therefore the
financial reporting should not be containing biasness towards any specific user or group of
users. On other hand neutrality also don’t mean without purpose nor does it mean that
financial reports should not influence human behavior. For an accounting standard to be
neutral it does not mean treating every one alike. However it means a standard should require a
reduced amount of disclosure from a small business firm than it does from a large firm without
having its personal neutrality questioned.
A survey indicated approximately 48% respondents indicated that financial reporting should be
neutral and 40% indicated that it should be partially neutral and only 12% user indicated that it
should not be neutral.
(croneri, 2015) (Accounting Notes, n.d.) (Abdullah, 2011)
REPRESENT FAITHFULLNESS
Faithfull ness attribute enhances the reliability of financial reporting. Financial Reporting
should be free from factor of biasness and incompleteness so that nothing important is left out.
Represent Faithfull ness attribute in financial reporting is achieved by freedom from bias and
bringing completeness in revealing accounting information. (Abdullah, 2011)
Any event or a transaction faithfully represented in financial statements if the way it is
measured and recognized in those statement resemble closely to the effect of that transaction or
event. (croneri, 2015)
Faithfull representation comprises recognizing of all rights and obligations that are linked to
transaction or event giving larger weight those transaction which are likely a commercial effect
in exercise, then accounting for and presenting the transaction that imitate commercial effect
in a way that reflect its substance. A series of transactions or events that achieves its complete
commercial effect will often be viewed as an entire in order to be accounted for in accordance
with its substance. (croneri, 2015)
A survey indicated that in Pakistan 52.50% stock brokers, 40% academia’s, 40% tax officers
have the opinion that the information is faithfully presented. (Abdullah, 2011)

UNDERSTANDABILITY
Accounting report should be presented in a clear fashion so that its end users can comprehend
and easily interpret its meaning.
A. The accounting reports are understandable will depend upon:-
B. The way in which transactions or the events are classified and aggregated
C. The way in which the reports are presented
D. The user’s capabilities. They should possess sufficient knowledge of business accounting
and economic activities and should be studying with rational assiduousness.
(croneri, 2015)
REFERENCES
References
Abdullah, D. M. (2011). Qualitative Characterstics of financial reporting. An Evaluation of Users, 9.

Accounting Notes. (n.d.). Retrieved from [Link]

[Link]
accounting-information/5409

Business dictionary . (n.d.). Retrieved from [Link]:

[Link]

croneri. (2015). Retrieved from [Link]: [Link]