Walter Aerts

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.

Inertia in the Attributional Content of Annual Accounting Narratives

Narrative disclosures in annual reports reflect explanatory activities in which specific attribution patterns can be identified. Research on corporate attributional behaviour within the context of financial accounting narratives has documented this behaviour and evidenced significant preferences for certain kinds of explanations in particular circumstances. This kind of research typically relies on cross-sectional data. There exist few statistically validated conclusions regarding the character and consequences of such verbal behaviour over time. This paper reports on a study investigating the change in narrative explanation practices over time. In this longitudinal research special attention is given to the relative strength of consistency and inertial forces on the attributional behaviour in annual reports. It is argued that there are a variety of forces that make that the explanatory patterns in annual reports are likely to be very similar year after year. Reporting practices can be to a great extent unadaptive, in the sense that they become programmed through the development of habit, precedents, traditions and formalized procedures. This is not to say that reporting practices do not change, but that changes even in the way corporate outcomes and actions are explained, are expected to be modest. The purpose of the research was to determine the extent to which the attributional content and framing in annual narrative reports changed over a period of eight years, and whether these changes were related to certain organizational characteristics of the reporting companies conceptualized as potential sources of inertial forces. Overall the results confirm a significant degree of consistency in the attributional content of accounting narratives over time. Evidence of an inertial effect of company listing status and performance history was convincingly present as to the assertiveness aspects of attributional behaviour and as to the differential use of accounting language in the explanation of financial accounting outcomes.

Financial Performance Explanations and Institutional Setting

Abstract The aim of this study is to investigate whether country differences in the institutional setting for financial reporting affect the attributes of managers’ explanations of performance in management commentary reports. We include 172 listed companies from five industries (building materials, food processors, pharmaceuticals, biotechnology and retail) in the UK, Australia, the USA and Canada in 2003. We find significant country differences in attributional properties of performance explanations in management commentary reports. The US and Canadian companies are generally less assertive and less defensive in causal explanations offered compared to their counterparts in the UK and Australia. The North American companies are also more extensive and formal in their explanations, relying more heavily on technical‐accounting language. These tendencies are most pronounced in the USA, where the aggregate of private and public enforcement is greatest. Taken together, our evidence suggests that higher expected regulatory and litigation costs induce a more elaborative, but risk‐averse explanatory stance that may well reduce the overall incremental value of the explanations offered.